In business, as in life, there are “good” surprises and there are “bad” surprises. Winning an unexpected award is good. Discovering that you’re not in compliance with an important regulation is not.
Over the years I’ve seen that many undesirable situations arise because of poor planning, inadequate oversight and controls, and so forth. For example:
Your reported earnings require significant downward adjustments. This is often caused by under-accruing for vacation or holiday pay, bad debts, or your self-insurance reserve. This can happen when (a) someone is cooking the books, or (b) the person handling your financials does not have the expertise to get it right.
• The value of your inventory is grossly overstated. Sometimes this is caused by not having a reliable perpetual inventory system (see “5 Signs that You Need Better Financial Controls”). In many industries, obsolescence is a big issue. Electronics that were fully sellable two years ago at full price may be fairly worthless now. Your financials need to reflect this.
• Your strategic plan did not adequately plan for your growth. Now you’ve got a huge order that you can’t fulfill or you’re sitting on the sidelines watching your competitors take advantage of new market opportunities that you can’t, because you don’t have the resources to do so.
• You’re blindsided by technical obsolescence issues. You failed to plan for the fact that many aspects of your business can be affected by technological changes. For example, obsolete IT systems can become unreliable or inadequate, resulting in a significant negative impact on your operations. Your product and/or product delivery system can become obsolete. If you were selling music via CDs and didn’t see the MP3s coming—or were relying on MP3s and didn’t see the streaming paradigm coming—your sales would take quite a hit.
• You’re losing money on every sale. You could be buying something for $110 and selling it for $105, thinking that you bought it at $90. How can this happen? Not issuing purchase orders can do it. A manufacturer that is using cost accounting standards can also incur this result. Quite often, your actual numbers for raw materials, labor, overhead, etc., turn out to be higher than the standards upon which your cost numbers are based.
Need help ensuring that you’ve got the right people and systems in place to avoid these types of unpleasant surprises? Give me a call. As your part-time CFO, I have the expertise you need.