Is the Flight Attendant Flying the Plane?

Mismatching Financial Skills Causes Many Businesses to Crash

In today’s article we’ll present a common flaw in thinking that occurs at many small businesses.

The first time we meet with a business owner to review their accounting & financial matters, we have an informal “needs analysis” discussion. A variety of common issues come up in these discussions — cash flow, lending relationships, profitability, clarity/accuracy of financial reports, to name a few. Most business owners are experiencing one or more of these issues, but they don’t all share the same problems. It’s generally a combination of a few different things.

Except for one.

Before we share it with you, here’s a couple of questions:

  • Would you hire the office manager from your brokerage firm to oversee your investment portfolio?
  • Would it be sufficient to use a paralegal to provide counsel on important legal issues?
  • Would you be comfortable if the nurse or hospital intern performed your surgery?
  • On your next business trip, would it be OK if the flight attendant took over the cockpit controls and flew the plane?

These sound like ridiculous questions, right? But consider this all-too-common, real life business example.

The owner of an $8 million dollar business was explaining how the company was struggling. Cash was tight, margins were thin, and the bank was giving them pressure. As we talked more, he mentioned that the person responsible for accounting at his company was transferred into the position — from Human Resources. Why? Because they “needed somebody” and this person had some prior experience years ago working in accounts payable.

The One Common Problem

The one issue that many small businesses have in common is this: the primary financial person in charge of overseeing the owner’s biggest investment (i.e., the company) is in most cases a bookkeeper with little or no formal training and no real experience in accounting beyond day-to-day transaction processing. And often times, even that is hit-and-miss.

The financial oversight of a multi-million dollar business is done–intentionally or unintentionally–by a clerical bookkeeper.

How is this real life situation any different from the “ridiculous” questions above?

Mission Impossible?

Most businesses today operate with a Mission Statement. A typical mission statement might read something like this:

  • “We strive to be the recognized leader in the ________ industry.”
  • “To be the premier provider of ________ products.”

A lot of lip service is given to mission statements these days, so let’s view our bookkeeper situation through the lens of the mission statement:

Do “industry leaders” or “premier providers”. . .

  • Use financial statements that are inconsistent and inaccurate from month to month?
  • Wait 3-5 weeks after month-end just to get their inaccurate financial statements?
  • Operate without a budget, or projection, or any written plan?
  • Have uncertainty as to whether or not they’re going to make payroll next week?
  • Rely on clerical people to assist them in building value in their business because it’s “cheaper”?

Obviously, not every business can be the industry leader. . . and not every business wants to be. But if we substitute the words “Well run businesses” for “Industry Leaders” in the above set of questions, the answers are the same.

It’s going to be very difficult to be the leader in any industry if you don’t know more about your numbers than your competitors know about theirs. And you’re not going to get there by relying on a clerical bookkeeper.

And, it’s not the bookkeeper’s fault. They were hired to be a bookkeeper. Not a financial advisor. Not a Controller. Not a CFO.

A Critical Competency

To build value in your business it is critical to know your key numbers inside and out. It is critical to know what happened (past), what is happening (present), and what is likely to happen (future). . . and plan accordingly. Without this critical competency, you’re merely “hoping” things are going to work out.

If you’re not planning you’re hoping. And as the old expression goes, “Hope is not a strategy”.

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Todd Rammler

Todd Rammler is the President and founder of Michigan CFO Associates.  Todd is a Certified Management Accountant (CMA), and holds an MS in Accounting from Walsh College (cum laude), and a BBA in Finance from Western Michigan University.

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