Carl Pon, co-managing partner of Vicenti, Lloyd & Stutzman LLP, a business consulting and CPA firm based in Glendora, has some sage advice on this subject. He likens running a business based on historical financial statements to driving a car by looking through the rear-view mirror.
“Best practices provide a way for a business to get information on a real-time basis so that it can react and take corrective action when it’s needed, rather than 30 days or 45 days later,” he says. Smart Business talked to Pon about the importance of having a sound financial management plan in place and the potential pitfalls to avoid.
What common mistakes do businesses make with financial management?
I think they fall into three main categories. If we focus on growing the company, I see companies that grow their business without giving enough consideration to the impact the growth will have on the capital that they need.
I also see it happening without consideration of the impact that it will have on the financial systems that the company needs. The third category is growing without considering the impact on the people who will be needed to support that growth.
How can those become business killers if they’re not corrected?
The No. 1 way they can become business killers is that you can literally grow a company out of cash. A company may be extremely profitable, but if they manage to grow themselves in such a way that they run out of cash, the game is over.
What are some ideas for putting a company’s financial management techniques back on the right path?
The first thing would be to develop processes and systems for projecting and managing cash flows. Another critical part of that is to have a process in place for managing the key creditor relationships that the business has with its key bankers.
What advice would you give a CEO who’s charged with restructuring the company’s financial management processes and communicating it within the company?
I’d say it’s to communicate it early and often because the communication will need to be very repetitive especially if the company is perceived to be in some sort of a crisis mode or going through a restructure.
If this is the case, one of the most critical things is to help the employees understand what the issue is, and second, what the company’s plan is for dealing with those issues. This way, they can see that the management both understands the problem and has a plan developed that should be successful in solving the issues.
What are the advantages of being a disciplined company?
One of the main advantages I see, other than making it easier for the CEO to sleep at night, is that it increases the likelihood that a company can increase both its top line and its bottom line at the same time.
By the top line, I mean the revenue or sales line. Sometimes in the interest of having a significant increase in sales or revenue, companies will embark on policies or procedures that don’t help their long-term profitability. Often, you see companies that go off on a growth spurt and the byproduct of that growth spurt is that bottom line profitability will decline at the same time that total sales are increasing.
How distracting has Sarbanes-Oxley been for public companies dealing with these issues?
It’s been fairly distracting, or at least time-consuming, for public companies to deal with Sarbanes-Oxley. New systems have had to be developed, there has been a lot of interaction with the audit firms, and there are consultants who have been documenting internal controls and other types of methods for reducing fraud.
I recall reading that even for a small publicly traded company, the cost of Sarbanes-Oxley and all of the other auditor and consulting compliances is about $2 million a year. For a $20 million-a-year company or even a $100 million-a-year company, that’s a pretty good chunk of the bottom line. Privately owned companies have not faced the same distractions. Sarbanes-Oxley has really been pretty irrelevant for privately owned companies.
Who should be involved in the process of developing best practices and why?
I believe it should start with the CEO and CFO. They are the ones that have the greatest insight into the business as a whole.
Also, one of the issues with best practices is they should be driven by the strategy of the business and the key values that the business is designed to give to its customers. What is a best practice, for say, a Wal-Mart-type business would not be the same necessarily for a Nordstrom-type business. If the business is not large enough to have a full-time CFO, then an outside CPA or accounting firm should get involved to help identify what the best practices are.
Carl Pon is co-managing partner of Vicenti, Lloyd & Stutzman LLP, a business consulting and CPA firm based in Glendora, Calif. Reach him at (626) 857-7300 ext. 258 or CPon@VLSLLP.com.