In the last year, our fractional CFO team has worked with six distributors that came to us on the verge of bankruptcy.
You might be surprised to learn that all would likely be considered “successful” with annual sales that averaged over $5 million. All had reached a situation where they were about to run out of cash with payroll and vendor payments were in immediate jeopardy. Some common warning signs emerged as we worked to help these owners save their business and get back on track.
Should You Trust Your Financial Statements?
First, all distributors had financial statements that did not reflect the current reality of their business. They didn’t just have a few errors in the books, but the P&L and balance sheet had significant mistakes that rendered the financial statements untrustworthy and useless to the owner. Do you trust your financial statements? Should you?
Often, we see distributors grow sales, reach that next level or two and now they have a much more complicated business with online stores, client-owned and house-owned inventory, in-house decorating, commission sales reps, multiple locations, etc. And frequently, the person in charge of the financials is the same bookkeeper they started with 15 years ago when sales were only $1 million and business was simple. Has your business outgrown your bookkeeper?
Randy Conley
President, Promo Consulting
Bookkeepers are great at the transactional parts of your operations, such as invoicing, A/R, A/P, even payroll and sales tax remittances with proper training. But they typically don’t have accounting degrees, nor do they understand debits and credits let alone financial statements.
Controllers are charged with making sure the numbers are accurate – getting the expenses into the right general ledger accounts and making sure bank accounts, credit cards and all G/L accounts are reconciled monthly which at least provides accurate financial statements.
CFOs provide oversight of the finance department and provide strategic insights into what the financial statements are telling us – budgets, cash flow forecasts, margin analysis, EBITDA vs Net Income, inventory turns, capital requirements for growth strategies, etc. And in most mid-sized distributors, it’s common for the head of the finance team to act like both the controller and CFO while progressive distributors are moving their bookkeeping teams offshore to keep costs down.
‘False Sense Of Security’
Let’s clarify the commonly mistaken role of your certified public accountant.
Most distributor owners don’t think they have any financial issues because their CPA would tell them if there was a problem. But that is typically false and if you read your CPA’s engagement letter, it clearly states that all they are doing is filing your taxes based purely on the information you provide. No review, no audits. They don’t really understand our industry or your business and almost certainly don’t know your ERP system that feeds your general ledger.
Don’t be lulled into a false sense of security.
Second, almost all struggling distributors were way behind when it came to closing month ends. Owners need timely information to make sound business decisions. Well-managed distributors often establish a standard monthly financial review meeting often in the last week of each month.
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They expect their finance team to close the previous month and provide financial statements prior to this meeting. This provides structure and accountability for your finance team and results in consistent performance that enables the business to make decisions with the relevant financial information. Does your finance team have a deliverable deadline each month?
The combination of inaccurate information and lack of timeliness leaves owners to rely on non-financial KPIs, such as sales, to gauge performance. While sales are often a good indicator, owners frequently underestimate the impact on cash flow of consistently missing your sales targets. Sales-oriented owners are optimistic and expect the next big new client or large sale to be right around the corner, but while you’re waiting for this to happen, you might be bleeding cash.
Without accurate and timely financial information, reaching a cash flow crisis moment can catch you by surprise.
If you question the numbers in your financial statements and are frequently behind in closing your month ends, it might be time to consider adding some higher-level talent to your finance team. Getting accurate and timely financials and making sure you have someone who really knows accounting and the merch industry can help keep your growing distributorship financially healthy.
Of the six distributors that were on the verge of failing, one failed, one has successfully bounced back and four have made the necessary tough decisions and are trying hard to recover.
As an entrepreneur with over 40 years of promo experience, Randy Conley has built his own successful distributorship, been an executive at a leading industry SaaS provider and worked with some of the top distributors in the industry as a consultant. He’s currently president of Promo Consulting, which is focused on helping distributors do better.
