Where The Hell Is My Cash?

Fractional CFO Services in Action to Improve Cash Flow

We recently had a small business client who has been working hard in his company for ten years, and he had one thing on his mind. 

“Where the hell is my cash?” he asked. “I’m working 70 hours a week – I’ve got to make more money!”

He was profitable and had been growing sales for years. But money was still tight, and like most small business owners, he was not making as much as he wanted. When clients took too long to pay, he would have to loan money into the business to cover payroll. The need for continuous investment in new equipment kept cash needs high. 

Also like most small businesses, he did not have a controller or CFO – with only 8 or 9 employees and $2 million in sales, he just didn’t think he could afford the price tag of an experienced CFO and didn’t see the need anyway. Accounting was just an expense, and he had an outsourced bookkeeper and his sister kind of handling that stuff anyway. 

We had a couple of long heart-to-heart conversations and talked about both his long- and short-term goals. He was thinking of selling and retiring in 5-10 years – plenty of time to keep growing sales and getting his business transition ready. But at its current level of profitability, the business was not worth much to an outside investor.

He also didn’t want to keep having to work 50,60, or 70 hours a week. We agreed to see if part-time CFO services could help him out. We looked into the state of his business finances, and he started to realize that accounting and finance weren’t just about compliance and making sure debits and credits balance out – it could be a way to uncover significant profit potential in the business.

What Did We Find Out? 

We know that low profits could only come from a few major sources.  

• Giving away free services and products – not as a promotion, but due to poor accounting controls. 
• Not building in enough margin on sales of services and products so that your profits are just too low to cover costs. 
• He could be billing everything properly, with good margins, but just not have enough customers to be at a break-even point.  
• Expenses could be too high given the gross profit in the business.  
• Cash could also be drained out of the business by having problems with payment terms, or through paying for equipment or loans. These don’t show up 100% as expenses on the P&L so if managed poorly, your books can make a profit – with taxes due, to boot – but not enough cash to live on.

Lost Revenue – Mis-Billings

We decided to start by reviewing his invoices since there was a chance we could immediately increase profitability by finding things that were being given away for free. Some of our client’s services were based on purchasing software from a vendor and re-selling it. We decided to review the most recent vendor invoice and what did we find on the very first invoice we reviewed? The vendor had increased prices months ago! Without a controller or CFO in the business, no one had noticed it. The service was being sold to the customer for hundreds of dollars less than it cost. Plus, without billing for it properly there was no chance to make a margin. This one error cost the client around $6,000 per year in the last profits! With over one hundred customers, the potential for other quick fixes to boost profits looked good.

Lost Revenue – Unassigned Costs

On a second round of invoice reviews, we found around $600,000 per year in direct purchases for clients that were not properly assigned to customers in the accounting system. With re-sold products not identified to a specific customer, there was no real way to tie costs to customers, and so no way to tell what kind of margin he was making – or if the items had even been billed out at all. A spot check of the prior month’s direct purchases found components that the company had purchased, for a specific customer, which were inadvertently left off the bill.  Again, not only is the company eating the cost, but is losing out on the opportunity to have a profit margin as well.  

At even a 5% error rate, that means the company was eating $30,000 per year of customer costs; with a desired 50% profit margin on those items, it is $60,000 per year of lost profits!

With these errors found on the first 5 or 6 invoices reviewed, you can bet the issues are rampant, and they go a long way towards answering the question, “Where the hell is my cash?”

Lost revenue – Time Tracking

Since many of our client’s customers were on a fixed-fee basis, time tracking for his employees was not enforced. After all, the client’s fixed fee basis meant you couldn’t bill for time spent anyway, right?  While this is a business operations issue more than strict accounting, it is something a Fractional CFO should look at. With 5 production employees billing out at $150 per hour, if his employees performed even a single hour of work per month on a service or project that was not covered by the fixed fee, it resulted in $9,000 of lost profits for the year.  If the number is more like one hour per week, it adds up to $39,000 of lost profits per year!

Again, it denies the business owner the ability to know which clients are overserviced (and in need of fee increases or scope reduction) and which clients are underserviced (and thus at risk of being dissatisfied and leaving).  

Low Margins

In addition to actual billing mistakes resulting in free services and products, this client offered bundled services. But while each component of his bundle came with a cost, these were not identified in the accounting system.  

With these flaws, more profits were allowed to leak out of the business, and out of the owner’s pocket. For services that were sold individually, his margins were pretty good.  However, with the bundled services, without accurate accounting, there was no good way to tell on a customer-by-customer basis what the actual profit margins were.  

These are not just “accounting problems.”  They mean the business owner literally cannot know which of his clients are profitable and which are not!  

Expenses

In this example, expenses were not a major issue. However, problems did exist. These included personal fees and expenses for employees mistakenly getting paid by the company, and certain other expenses that were just on autopay for years without getting caught.  Again, thousands of dollars per year in lost profits. 

With a bookkeeper just classifying expenses and purchases that have already occurred, and no controller or CFO in the picture, no one was catching these lost profits.  

Conclusion

When a business is small an owner or president can stay on top of everything personally.  As it begins to scale, however, this becomes increasingly untenable.  Small errors compound over time, leading to larger and larger lost opportunities.  In our client’s case, in an industry with 8-10% profit margins, errors such as those uncovered here can eat up half or more of expected profits.  

Investing in your business by partnering with a Fractional CFO to plug those leaks and keep your hard-earned profits in the building could be one of the best investments you’ll ever make!

Wouldn’t you rather be asking how to invest your cash than wondering where it has all gone?

Marshall Advisors LLC is a full-service business advisory firm, specializing in bringing big-company knowledge and practices to small businesses to improve profitability and cash flow. We offer services including:

• Controllership services
• Spend Management / Cost Reduction
• Financial Analysis and Benchmarking
• Forecasting and Budgeting
• Risk Management / Insurance Advisory
• Capital Markets
• Management Consulting
• Bookkeeping

Book an appointment now, or contact our team to find out how we can help you!