Don’t Take the First Dime!

Guest blog by Martin Hilker, Consulting CFO

Working with small, privately held clients is rewarding due to the variety of opportunities and challenges we face and our ability to implement change in a relatively short time frame.

Having worked with many different businesses over the years, we occasionally come across a business owner who’s willing to resort to questionable (and sometimes, illegal) measures to borrow more funds from their bank than they are entitled to – by way of falsifying financial statements, aged accounts receivable reports, inventory reports or borrowing base certificates.

To paraphrase an old saying — “Don’t take the first dime!” — advice rings as true now as ever. If the foundation of your business is hard work, honesty and integrity, good things like profits, continuity and a healthy company culture will typically follow.

Some of the techniques we’ve seen include the following:

  • Pulling ahead progress billings in the accounting system (but not actually sending the invoices to the customer);
  • Overestimating the percentage-of-completion on jobs, thereby pulling revenue ahead;
  • Moving cost of goods sold invoices ahead a month or more (when using percentage-of-completion accounting), showing a rosier picture than reality;
  • Growing inventory (and therefore reducing overhead expenses) by applying unreasonably high burden rates.

The reasons are varied, but the mindset is similar and includes the following:

  • The Bank is the evil
  • The notion that “the Bank will lend you an umbrella when the sun is shining, but wants it back when it starts raining”.

The justifications are varied, but may include the following:

  • It’s just a timing difference
  • The Bank can’t handle the bad news without overreacting
  • Profits will improve
  • A big contract will come in any day now
  • No one will notice
  • It’s “water under the bridge”
  • The Company will shut down if we don’t do this

To which we reply:

  • It’s NOT just a timing difference, it’s Fraud!
  • The Bank can handle it if you notify them up-front with a reasonable and well thought out plan of fixing the issues that are causing profits to erode
  • Profits will not improve, unless you take a proactive approach and work diligently generating more and more profitable revenues, cutting costs and generally eliminating all forms of waste.
  • The big contract will likely not come in on your timeline.
  • People go to jail every day for committing fraud. How would you feel if the fraud you were committing was transparent to your family members? Would you still do it?
  • It’s not “water under the bridge” because you must continue to cover-up what you’ve done, so no one finds out.
  • The Company will eventually shut down unless you do the hard work of continuously looking for and implementing ways of improving your business.

Commitments to hard work, honesty and integrity are not easy in the face of adversity. But usually those commitments will produce long-lasting positive results that you can be proud of. In the end, resorting to shortcuts and committing fraud doesn’t pay off. So, take to heart the old saying “Don’t Take the First Dime” as one of your guiding principles and the results will be worth it – and will keep you out of an orange jump suit … unless you like that sort of thing.

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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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