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How to identify and strengthen weakness in a Finance Function
63 Plays10 months ago
Julie Wilkinson is an accountant on a mission to save the world from failed acquisitions. Her firm, Wilkinson Accounting Solutions, works on business acquisitions between £1m and £20m turnover and also actively acquires other accounting firms to scale its own operations.
In this episode of the First-time Founders Podcast, Julie gives Rob an ‘idiots guide’ to what a good small business finance function should look like and discusses the perils for exiting (and acquiring) entrepreneurs who don’t build adequate strength in this area.
Interested viewers can reach Julie via https://www.linkedin.com/in/juliewilkinson-accounting/ or julie.wilkinson@wilkinsonaccountingsolutions.co.uk (also check out her 'Understanding Accounting Lingo' course here: https://wilkinsonaccountingsolutions.co.uk/masterclass/understanding-accounting-lingo/) and Rob (https://www.linkedin.com/in/robertliddiard/) at Rob@mission-group.co.uk (or to book some free time with Rob, visit https://www.eosworldwide.com/rob-liddiard). Alternatively, if you’d prefer Rob to send you a free copy of Traction (the book by Gino Wickman which explains The Entrepreneurial Operating System) just complete the form here: https://www.eosworldwide.com/traction-giveaway?implementer_email=rob.liddiard@eosworldwide.com
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Transcript
Introduction to First Time Founders Podcast
00:00:00
Speaker
Hello, welcome to another episode of the First Time Founders podcast, the show where we talk about how to start a business from nothing and grow it into something meaningful. I'm Rob Lydiard. I was the co-founding CEO of a software business called Yapster that was acquired in 2022.
Rob Lydiard's Role in Entrepreneurial Operating Systems
00:00:14
Speaker
I'm now a professional implementer of the entrepreneurial operating system or EOS, which means I work with entrepreneurs and entrepreneurial leadership teams to help them get more of what they want from their business, typically aligning around the vision and how they're actually going to get there in quarterly increments. executing with more discipline and accountability and improving team health, because we can be just a little bit chaotic in startup and scale up land. That's my day job in my spare time. I love speaking to entrepreneurs and entrepreneurial people and advisors about the first time founder journey and what those of us have done it learned along the way.
Meet Julie Wilkinson: SMB Finance Expert
00:00:46
Speaker
Today, I'm speaking to Julie Wilkinson, the founder of Wilkinson Accounting Solutions. Julie specializes in SMB finance and working with founders, owners,
00:00:55
Speaker
um to to improve the financial sophistication of their businesses, usually with a view to exit planning. She also works with acquisition entrepreneurs, so people buying businesses, often from founders and owner operators, um to understand the value of assets when quite often the finances of of the potential target company has not necessarily been managed all that well, which means that it can be a bit murky as to what the value of the thing you're trying to buy is. So I think this will be a really interesting episode for those of you that are on the side of the fence of of building a business that you created or trying to scale one that you acquired or on the other side where you're looking to grow your business or get into entrepreneurship by acquisition. In either case, I cannot stress enough how important it is that you delegate, you don't abdicate finance.
00:01:42
Speaker
If you don't have the skills yourself, you need to partner with someone um that does. I would suggest that Julie might be a good candidate to have a conversation with and if you get value out of this episode, which I'm sure most of you will. So without further ado, I give you Julie Wilkinson.
The Power of Delegating Financial Responsibilities
00:02:01
Speaker
Julie, welcome to the First Time Founders podcast. Thank you for doing this. No, that's right. Thank you for having me on. Oh, it's my honor. You're a LinkedIn celebrity. Now, I've even i've even done your course. i'm I'm fanboying here. Oh, well, that's nice to know. I had to do your course because I was, ah I should in theory know the fundamentals of of startup and acquisition finance having in theory done both, but um but but I did learn a thing or two actually doing your course. So for those listening, Judy runs a business called and Wilkinson Accounting Solutions, which Judy, you can talk more about, but you just recently have done some
00:02:37
Speaker
content on demand, haven't you, for acquisition entrepreneurs and
Julie's Journey: From Corporate to SMB Accounting
00:02:40
Speaker
founders? And you very kindly sent me the link so that I could do it in preparation for this podcast. And that was really helpful. So no thank you for that. I keep seeing you everywhere now. Yeah, it's like when you buy a new car, isn't it? You know, and then you've never seen the car before and then you see them on the road all the time. You probably get fed up with me. not at Not at all. So do would you would you mind giving folks just ah um a sense of like how you became a kind of... what how Do you describe yourself as an acquisition accountant? But what is it how do you describe your niche within the accounting world and how did you get into it?
00:03:11
Speaker
Yeah, well, my background is I'm a chartered management accountant by trade. So I came from corporate background. I studied for seven years. I didn't go to university. I just started, I just trained my way up through corporate. I worked in corporate probably for about 20 years and I worked in probably every finance department you can work in in a corporate business. Anyway, To cut a long story short, the reason I started Walkerson Accounting is my last corporate job. I worked for a 250 million retail company and I did a project where I integrated three entities into the group entity. One of those entities was a family-run business. That was probably my first insight into ah um an SME family-run business because I'd obviously always worked for the big ah like corporate group companies, not really the smaller companies.
00:03:56
Speaker
And well, to say it was poorly ran is probably hopeful, but it was a good company. you know And obviously it was already, and I was thinking, wow, if this company is part of a group and they're struggling, what does the average business owner do? Because obviously I didn't really know that much about the business world in general. I didn't come from that and that entrepreneurship world. So I did a survey and I asked 20 businesses between 50,000 turnover and 20 million. ah what their accountants did and 100% only sold their accounts once a year. And I was like, oh my word, I've found this. I mean, I know corporate businesses aren't always around that well, but they do have good structure and nothing would ever happen without a sign off. So maybe it's overkill. But to then go the opposite way, I thought this was quite strange.
Julie's Unique Accounting Skills and Business Growth
00:04:39
Speaker
So then I so ah then i spoke to 20 different accounting firms and I asked them what they offered.
00:04:46
Speaker
I got told you can't sell management accounts, businesses don't value it. ah It's hard to get them to understand the value, which I can see. But when I delved a bit into what they saw as consultancy or month end or management accounts, whatever you want to call it, What they were telling me was a month end isn't what I knew a month end to be because I had business partnered across all areas of a supply chain for years. Being that finance business partner for directors and actually working with directors in corporates is similar to working with business owners because they have similar problems that they have to overcome in terms of their budget management and things.
00:05:24
Speaker
And a yeah, so what I came to realize is I had a skill set that they didn't have, not necessarily how I knew how to sell, but because you can't teach experience. And a lot of these accounting practices, I think, are quite siloed in their experience. You know, they've kind of stolen the clients and set up themselves or only worked in practice. So they're quite siloed in their niche, whereas I had, you know, 20 years experience of working in every department in finance, and very commercially astute as well, which I think a lot of accountants, because I'm not saying all of them are like that, but I think a large majority, because I could tell from the survey I did. So anyway, that was the reason I started the business, Wilkinson and Cowan Solutions, because I felt like actually, the service level was quite poor and how in Cowan.
00:06:08
Speaker
And what I've seen over the years since I've had it for the last four years has been quite astonishing actually. um But ah yeah, and then acquisitions came along because, and well, obviously I'd been involved in this, i linking it into the group, I suppose, in my corporate world. And and I just got involved with some brokers and did some consultancy for them and sort of realize, actually, you know, I could really help in this sort of industry, because what I came to realize was investors and acquirers actually had similar problems, if not worse, because they were trying to analyze these businesses that had no information. And yeah, so I thought, well, why not do both? And here we are today. It's an amazing, amazing niche. And as you know, i I went from lawyer to first time founder, made a complete mess of being a first time CEO for about five of the eight years.
00:06:58
Speaker
fortunately eventually learned learned what i was doing But I would say only quite late in the journey did I become, did I start delegating rather than abdicating finance and then having gone through the act the the being acquired journey, um I'm now really excited about crossing the fence and being on the other side. And I think a lot of people that have been on my trajectory, starting something from day one, doing the hard yards of scaling it up to still quite small, um actually are interested in moving over into the acquisition arena for the same reason, right? We've all learned to operate in pretty much the hardest environment you can, creating something from nothing. So the the fact that your business, your practice crosses both sides, I think is fascinating and should be fascinating to the people that listen to this pod. So before we start talking about being an acquirer,
00:07:40
Speaker
Can you just roughly describe what what a not crap finance function looks like for an entrepreneurial business? And let's say fairly small. So between half a million in in revenue up to, let's say, let's say three million in revenue, software and services type business like what, what would you be pleasantly surprised to see if you walked in with me saying, Julia, I'd like to sell my business in the next year or two.
Essentials of a Well-Functioning Finance Department
00:08:05
Speaker
Can you give it a once over? Can you have a look and tu tap like tell me what you think? So I think one of the problems that SMEs face is they need a quite a range of different skill sets in finance. And it can be quite expensive to get that skill set. So it's sometimes hard to find the right type of per like type of skill that you need. So let me just take you back to a corporate world. So if you're in a corporate world, there'd be different finance roles. You would have a purchase ledger clerk, which you could argue is sort of like a bookkeeper role.
00:08:33
Speaker
You would have a management accountant, which would be doing your month's end. You would have a financial accountant, which would be typically managing your, sort of your accounting principles, your tax returns, working with the auditors and things like that. Often you'd have a treasurer, which would be banking and cashflow, which very complicated businesses, obviously that role could be independent. Generally, you'd have a commercial finance team, so they'd be focusing a lot on your commercial, so your project profitability service, productability, profit customer profitability. um Then you'd have and and usually a finance business partner, which would then
00:09:11
Speaker
connect supply chains in different departments with the finance team, then obviously you'd have your senior roles and in some corporates you might have a FD, CFO and yeah you know you might have a cfo and finance director and even financial controller. So in a corporate world they would be all your roles. Now realistically they do all bring a skill set to an SME business but obviously an SME can't afford that level of staffing. So how do you then get those skills in your business and I hope so Basically, you need a good bookkeeper qualified. All these people try to do their own bookkeeping, using the wife, using the husband. Fine if they're qualified, if they're not, don't use them. Try and use your admin staff because they also do the invoicing.
00:09:56
Speaker
You need a qualified bookkeeper that is good at balance sheet reconciliation, that can manage your day-to-day finance and help you start implementing the basis of the month end. i think Because a lot of people say, oh, we don't need the accrual's principle, you can just manipulate numbers. The fact is, you can't have a business without the accrual's principle. If you choose to manipulate it, obviously you can, but you can also choose not to manipulate it and to just say, oh, I can't, you you don't use it. It's kind of just like an excuse, you know, you should be using it, but you need to be using it correctly. And you need somebody that can help if you do that. And I would say that would be your bookkeeper. Then people will have a year end accountant. And so to just just to be clear, because I think a lot of people listen to this may be as ignorant as I was. Yeah, I don't want to gloss over it. Your point there is if the inputs are wrong or miscategorized, everything else you try and do after that is fucked, right?
00:10:46
Speaker
Yeah. Because me, so for, I mean, I can give hundreds of examples, but like for example, people just go, oh, it's easy. I linked my bank to zero or to QuickBooks or whatever system you're using. Correct. But then how you categorize. So even just things are simple as payroll. The amount of times I see that everyone's put their payroll to their balance sheet. not to their profit and loss. Honestly, I've seen it as bad. Probably in a business that's about 3 million turnover, probably way over a million of payroll sitting on their balance sheet is a liability because nobody's ever but done the backup. So who's pushing that button? So there's one push in the button, but then there's two check in, have I pushed the button correctly. And the check in is the blu bit you need the push in, I suppose, to get anyone could be trained to do the check in is the important bit.
00:11:33
Speaker
And in the example you just gave, it means you don't really understand, well not don't really, you don't understand the profitability of your business, right? And therefore on the nor can an outsider. And so you corrected that, you're guessing at the financial health of the business. Yeah, because if the thing is, the balance sheet's the most important part of the accounts in effect, because if the balance sheet's right, the rest of the accounts are typically right. When the balance sheet's wrong, you have no understanding whether your profit and loss is actually right, because that would mean the the basics of bookkeeping is every every transaction has two sides. It has a debit and a credit, meaning look ah ah like a payment in or a payment out and another side to that entry.
00:12:11
Speaker
And typically one side would be balance sheet, one side would be P and&L. Often and people are putting both sides to balance sheet, but balance sheets accumulate and should get released over time to the profit loss because every i balance sheet item effectively would probably become a P&L at some point. There are some in intricate things over that which I'm not going to go into because that's more complex accounting but you know in general transactions that move. So for example you would have a stock item that would be a balance sheet, you would then sell that stock item so it'd come out of stock move into debtors because now someone sold it.
00:12:47
Speaker
Your customer would then pay for that invoice, so then they it would move from debtors to bank. So that would be your balance sheet. But behind there, there'd be P and&L transactions, like when does it come to sale? When does it move from stock to cost to sale? And things like that. They're your accounting principles behind the basis of accounting. And that is not as simple as just pushing the bank button. Yeah, no, but thank you so much for expanding on that. That's super helpful, because I really don't think people get that. And again, it's why I would recommend people do your course. Okay, so we need a decent need a decent bookkeeper, because if we put shit in, we're going to get shit out. um Then you talked about like, you got the year end piece, right? cause You need to make your statutory obligations.
00:13:24
Speaker
Yeah, so, you know, statutory accounts are still valid. And I know there's all this talk, but like you can submit your own return. um AI is nowhere near, generally AI in accounting is probably 18 months to two years behind current tax laws. So although I'm, I think it will pick up in time, probably the next five years, five to 10 years, it's nowhere near there at the minute. And to then say, oh, I can push my own button through zero or QuickBooks. Well, There's so many adjustments you often have to do from your reporting profit, which is your financial statements to your taxable profits. It isn't actually possible to do that in zero and QuickBooks. Well, I use QuickBooks. I don't use zero as much. I think that's not physically possible to do this. shit I'm not saying you can push the button because you can do those adjustments, but it's not physically possible unless you know how to do it. So you do need a good statutory accountant. What you need to make so understand is what who what roles are both your bookkeeper and your accountant playing.
00:14:18
Speaker
Right. What will typically happen is people have a poor bookkeeper, not always the bookkeeper's fault, nor the business owner's fault, because they've chosen the wrong person, but however you want to see it. and Now you're talking about language. Yeah. If they get the trial balance, which is what you typically do. So normally you'd be sending your account and even access to your system or you'd maybe send them the trial balance, profit and loss and balance sheet, whatever you send. They won't, if you've got a bookkeeper, they won't typically reconcile it. I find that a bit strange. Alpha, we wouldn't do a set of accounts without reconciling. We would always do a top level reconciliation. And I think that is one of the things we probably do. But that is typical industry average or from what I see. So the problem is, if know what so if they don't reconcile it, it's because they're expecting the bookkeeper should be doing that role. Because theoretically, the bookkeeper should be reconciling.
00:15:06
Speaker
So therefore, years go by where the integrity is never checked. And this is how people accumulate large, unreconciled balances on their balance sheet. And this ist this is small and big businesses. I saw a business once. It was about 100,000 sales a year. And they'd reported about 50,000 profit yearly for about three years. um which is a pretty high net margin 50% anyway, you know, if you actually did research into industry average, you can kind of tell if it looks sensible or not, just from doing a bit of checks. Anyway, long story short is we checked the balance sheet, three years worth of credit cards hadn't been put in, 160,000 pounds of cost. So all three years profit wiped out just because no check the balance sheet.
00:15:48
Speaker
And small businesses of 100,000 sales a year go, oh, these sort of problems won't happen to me. Well, they do, and they happen very quickly. And unfortunately, they um and it can be big problems, because it doesn't really matter the size. Like, would you want that? Would you want to think you've made three years worth of profit and actually you've made none? Julie, can I ask you a quick question? It's a dumb question, but I bet people listen to thinking it. How is it that in a situation like that, they don't run out of money? It's because cash is different to your statements, right? Like, cause I think a lot, a lot of entrepreneurs will be thinking is, well, Julie, if I've got enough money in my bank, yeah keep going. Manana, like I've got so many problems. Like I'm on fire in so many areas that if I don't, so if I don't put out those other fires, I'm definitely going to be dead. And for as long as I've got enough cash in my bank, I feel like the accounting problem can wait. I don't agree with that, but I think that that would be the kind of the argument that's put up. Um, is it because you can basically,
00:16:44
Speaker
You can keep going a really long time, actually, like without being financially well run until you try and realize value from the asset. And then the factor of countering a mess does become a real problem. Yeah, well, I think the thing is sometimes, you know, um sometimes it's a bit of luck, I think, as well with it. and So the reason, now this is why people got into trouble in Covid, because people tend to have problems when they do something different. If your business trades at a similar level every year, you get to a point where your cash sustains, the reality is it probably will keep sustaining, probably.
00:17:18
Speaker
It's when they want to grow, invest, want to get funding, or something happens in the market that changes, that's when they come. And that's why people struggle in COVID. Because what typically happens is they're using other people's money. So for example, so if you go back to the scenario, for instance, where they didn't make any profit, What they had done is paid £8,000 in taxes but they hadn't paid the £8,000 they had it on a payment plan because they didn't have the money. They didn't have the money because they didn't actually earn it but you can get a payment plan so you might not know that you don't have the money because once the payment plan's in place if you're not tracking it you kind of forget what you owed if you see what I mean.
00:17:53
Speaker
Totally. Or in my world, in my world, they'll presale software licenses, right? So they'll take take the cash from presales, they'll sit on the balance sheet, but they'll spend it before they've actually deployed the service. does It doesn't sit on the balance sheet. Often it won't be sitting on the balance sheet, it'll be sitting in the here now because people don't understand the difference between cash and revenue. ah So that's the problem. So yeah, so when COVID hit, a lot of people have problems because sales dropped potentially because of the, so and because you'd already used all of the cash money, you then didn't have money for taxes because you'd actually used the tax money. So that is what's typically happening. People are taking VAT money and the corporation tax money, because obviously sometimes it can be, you know, that's usually what, three months before you pay it. You know, if you're clever at how you invoice,
00:18:35
Speaker
corporation tax, you know, up to 18 months after. So you can be collecting that money in, you can be spending that money. ah When your next tax bill comes round, you've probably got the current year's money, but you might always be a year behind, but never know it. So when you come to do something different, that's when you hit the problem. So that's when people tend to find it. So at the end of the day, if you've always managed to sustain in your businesses trading similar, and you don't want to change that model, I'm not saying you shouldn't get your finances looked at, but I'm not also saying you can't sustain it, you probably can. Well, are you sustaining it and trading, ah fully trading effectively? Probably not.
Risks of Poor Financial Management in SMBs
00:19:10
Speaker
um And that's where people should want to get to because then you don't have the same problems. Now, you know, it can be good cash flow strategies to manage your taxes and things like that. I'm not saying there's a massive problem in trading like that because businesses do go up and down in cash, but it's the problem is when you don't know.
00:19:25
Speaker
That, but that's a, I've never heard anyone articulate it like that, but it really makes sense. So the next time an entrepreneur rolls their eyes at me and says, look, I've got other problems. I don't need to get my shit together from a finance seat perspective. it it the As you were talking, the metaphor that was in my head is like, um, like heart problems. You can build up from cholesterol and things, you know, where you can, you can be like, Hey, like I eat, all I eat is double hamburgers with cheese and bacon every day. And look, I'm fine. And then one day they just dropped dead, right? Because you're not fine. It's just that what you can see on the surface looks ostensibly the same as somebody that's taking care of themselves. I guess it's the corporate equivalent of that, right? And so that's a really helpful framework, I think, for for founders. And for you to say, you might it might be luck that your business is sustaining itself because you found a rhythm. But if you try and grow, exit, or run into problems, that unhealthiness
00:20:22
Speaker
is almost certainly going to come to the surface because there's structural dysfunction. Thank you. There is no, it will, you know, if your business model changes or your market change or your market changes, uh, which is why you need some risk planning as well. Okay. So, right. So we've got bookkeeping, got year end, we've got to get out of statues. We've done our reconciliations. So, and you've actually, where you started was all of those, in like the ridiculous number of roles that you'd rely on in a corporate. Yeah. in in ah in a good quality SMB that you've gone into, let's say it was mine, you'd be looking for a bookkeeper, someone doing year-end. Which could be the same, a firm, potentially. that could So like for instance, our firm does bookkeeping and accounts, that could actually be useful. So I would say then we start talking about when do you bring on a CFO, finance director, whatever role you want to say. you know In a corporate world, you might have three or four different roles. The reality is you want one skilled CFO now.
00:21:16
Speaker
My bear bug with CFOs, because I obviously think a CFO is important, but I think businesses have to be realistic. A CFO, so in big corporate work, when you've got a CFO being paid way over £100,000 a year, there'll be some CFOs that have never even looked at a financial system. I know those CFOs, I've seen them, because they've never had to, because they've had 50 staff below them doing all the detail work. They're really general managers, right? They're leaders. Yeah, they're leaders. They're strategic. Now that's what a CFO should be. It should be a strategic finance leader. And I do believe that SME needs it. Probably on a part time, you know, consultancy basis, maybe a couple of days, probably until, I'd say probably when you get circa 10 million, you might be thinking maybe you at least want a part time SD CFO. But probably up to that point, you can probably cope with a couple of days a month, a couple of days a week, whatever, depending on how fast you want to grow. But
00:22:09
Speaker
The CFO won't be of any use unless you have these lower level roles. Sometimes the problem with the lower level roles like the bookkeeper is the bookkeeper might not be might not have the experience to actually implement the infrastructure needed did to make their role efficient because they've never had that experience. So then you start saying, well, who does it? I don't think the CFO is the right person. My experience has seen CFOs in SMEs. They're often too top level. Either you need someone that's going to get their hands down, that's going to know how to process a journal, that knows how to run a month end process. So either, I would say if you're sub 5 million, you might want to look at employing a finance manager. Finance managers are a good interim solution to CFOs because
00:22:56
Speaker
They're a lot cheaper, so you can get a good finance manager probably for $55,000 a year, maybe $50,000 a year, which is pretty good. And they generally are fully qualified, and they generally have done it in other jobs, so their hands-on, and they can do, and they can be a really good support for a bookkeeper, so it wouldn't replace a bookkeeper. You'd still want your bookkeeper, because the finance manager would be different. ah But the finance manager could not be as strategic as the CFO because they haven't done that role. So I think if you have a good bookkeeper, sub 5 million finance manager, if you're below that, I would say a financial consultant, then to come in and help you implement the month end processes to support and train the bookkeeper.
00:23:38
Speaker
ah so that that bookkeeper can do the job or you'll know whether it whether they can or they can't and you resolve the situation. So they're the roles, bookkeeper, finance manager slash consultant, ah your accountant and your CFO. And theoretically, your bookkeeper and your accountant could be the same ah person because you know the finance manager, we work with internal teams on an outsourced basis. So you it can be part outsourced and part internal. Can you help me picture from ah from a ah founder perspective, what when you talk about your month end processes and stuff, like yeah what what what would the finance manager set up and do that a non-financially literate founder would
Strategic Financial Management and Reporting Cycles
00:24:18
Speaker
understand? What was the CEO? would i How would I be interacting with that person? What would I be seeing if they were doing their job well?
00:24:24
Speaker
Okay, so ah fight basic, there is a reporting cycle that should be happening in the business. And I think the Fseme's business, they might go, I'm too small for reporting. No one's too small for reporting. Fine. You might not need a 50 page essay, but you should have basic reports. So the reporting cycle would look like they should have a yearly budget. which needs to be at least 12 months in detail and i think people should be going at least three years out top level for their own sanity for their own visualization because the purpose of a business owner is their own long-term journey and they do need to know
00:25:00
Speaker
Can I realistically get there on my organic growth path? Often no is the answer, is the reality and that is why then people bring in acquisitions. So people wanting to exit will do acquisitions to spearhead the growth for various reasons. So the the budget is important. and you might call it a forecast, whatever you want to call it, but ultimately at least a 12 month plan and it has and it should be a business plan and a financial plan. So the business plan would tend tend to look at who, how and why. The financial plan would look at how do we achieve it financially, you know, what do I need to sell it at and things like that and they do need to go handin hand in hand.
00:25:39
Speaker
Now that's where, you know, your finance manager should be doing that. I would say that might be too complicated for a bookkeeper in general. and Unless your bookkeeper is part finance manager, that could be possible, but there might be too, if you as you grow, that might be become too much for one person. um So then you'd have that, which would lead into a cash flow. So you'd have your cash flow reporting. So you have your long-term cash flows. Then you off the back of that, you'd build your sort of 12 to 15-week short-term cash flow. That should be run every single week. um And I do think if you've got a finance person utilise them, the owner doesn't need to be preparing it. The finance, I have a team, my team repair my cash flow. I don't prepare my own cash flow. I look at it, but I don't prepare it. um And actually you should have people, if you want to really dedicate, people should be doing all the doing.
00:26:28
Speaker
you should just be getting the report at the end as the owner or investor, whatever you call yourself to see what final decisions to be made. Yes, no, go with that, don't go with that, whatever. But if you're doing too much of the work, then you're too involved, I think. That is mega helpful. So just to play that back for people that um In but my network, and a lot of people that listen to this, when people that run on the entrepreneur operating system, we talk about the process of running the company, we talk about the six components of the OS, and then one of them is the process component of which we have core processes. You just described, in my opinion, the textbook accounting core process, and the drivers of at least the finance part of the weekly scorecard.
00:27:09
Speaker
So, for folks, so you didn't miss, and I almost, if you're listening to this, wind it back and listen to what Julie just said again, because um when we do your 10-year target, your three-year picture and your one-year plan, we ask you for revenue, profit and measurables. You're visualising where you need to be in three short years, one year one year for your 10-year to not be nonsense. If you just make that up in the session room, you may get there. That's not the same as partnering with a finance person using your finance core processes so that when we're in the leadership team and we're saying, where are we going to be in three years? Are we on track? Those numbers are real and substantive, and they're backed up by thoughtful business analysis where you've thought about your available resources, your growth rate, historic growth rates. do we oh do we have the Do we have the availability of capital to get there? And then are we are we tracking against that?
00:27:56
Speaker
month to month, week to week, which is then flows through to your scorecard. Thank you, Julia. It's amazing, actually, how rarely people explain that in granular detail. And of course, as first time founders, I mean, I raised four million quid and started a business in the software sector, having just been a lawyer that went into biz dev, like I wasn't qualified to be a CEO other than starting the business. And I'm not uncommon. And so you have people running these businesses raising millions of pounds of capital, and they don't know what a financial cycle looks like. They have no idea. So hearing you talk in these terms I think is super useful. yeah Brilliant, so okay. So you've got the cash flow, so you've got the 12-week cash flow, which is your weekly, which I think should form part of your trading meeting. Obviously you might want to restrict how many people see the bank and the cash flow, but that doesn't mean the fundamental targets aren't cascaded. So I did a cash flow webinar actually. I agree.
00:28:46
Speaker
What is the operational involvement into the cash flow? So what is the accountability of the operation for which often closes the deals for the money to come in versus what does the, ah you know, so the ops team will know, I'm going to finish these five projects, but they might not know what customer terms are they on, what payment terms are they on. And if they do know, they're too involved. So this is where get your teams to do the right things in the processes and not be worried about everything because they shouldn't need to, you should have the right people doing the right thing. Oh my God, you're you're so right. And sorry, just to articulate that, just to reinforce that, folks. um So in my personal scorecard for my little practice, I do a 13 week rolling forecast that Judy's recommending. And my weekly measurable is I have a minimum cash balance that I expect to see. um And the number that goes in, my practice manager, she puts the the lowest my cash is predicted to be in any week over a 13 week horizon. So I can see if it drops below
00:29:41
Speaker
my acceptable cash floor, which is like my margin of safety. And if it drops below, it's in red as a measurable. So when we do our weekly meeting, it goes on the issues list as an off track measurable. And then to Julie's point, we go through and we look at what operational levers can we pull to get our cash back into a safe position. um That's awesome, Julie. Thank you. yeah So then you get to month end. So month end really, I mean, month end is quite, you know, so people, you might hear the term three day clothes, five day clothes. What that effectively means is so if you go back to a corporate vision, a five to 10 day clothes would mean that a board pack could be produced at the end of it and given to the board of directors.
00:30:22
Speaker
Uh, I think business owners are board of directors in their own right. They're an investor, whether that's in cash time or whatever they've put into their business. And they should be trying to build up to this board pack. Um, it doesn't need to be war and peace, but it's more about, so then to understand well how, what the business is and it's who builds that information. So a month end timetable would be things like who's doing accruals and prepayments. So going back to your thing, your thing that you said earlier about taking money in advance. Like software prepayments. Yeah, software prepayments. um You know, yeah, you could be getting, you know, people paying yearly memberships up front and things like that. You know, sort of prepaid income. That's really important, actually, because when you said the fact that you said it goes on the balance sheet, I mean, maybe you learned that from my course, Rob, I don't know. but take it by but I don't know, but knowing it should be on the balance sheet is a really important thing because obviously that that is going to be the differentiation between what's the sale and what's income in advance because the reason you put it to the balance sheet is if you had to refund somebody
00:31:24
Speaker
and you'd already put it to the P&L as an example as a sale, you could be overstating for quite a long period of time and quite high volumes of money potentially if you've you know if you've got a larger business that's doing this. So that's what your finance team should be doing. Your finance team should be doing your month-end process to look at all these. Now the bookkeeper would start it because obviously the bookkeeper is the one that sees the money in and out of the bank. But the finance manager or your finance consultant or whoever you've got helping you do the month end, would then review those things to make sure ah they've missed that transaction. or the So I had Christine and Judith on my podcast when we talked about corporate governance. And Christine worked with a company that was actually nearly five million pounds in debt. And they had no idea because some because the culture was poor and somebody was hiding invoices in the drawer.
00:32:17
Speaker
Oh my god. so if the So this is where your accrual concepts come in because the fact that your invoices haven't been paid doesn't mean they shouldn't be in your ledges because you should be accruing them. But how can you accrue them if nobody knows about them? so the fact that So if nobody knows about them, then your process is poor, isn't it? Because that means nobody's got a visual. You don't know who your suppliers are. You don't know what your contracts are because why would you have invoices that people don't know about? Right. So that is what a month end process is. It's somebody and that's why it's good to have your budget. Because if you have your budget and you say these are my 35 overheads and these are what they are, then somebody doing the month end can check up the month end. Oh, here you go. We said it was going to be these 35 overheads and actually you've only got 20 invoices. So where are the 15?
00:33:05
Speaker
15 invoices could equate to probably tens or 20 thousands of pounds. They're not in your P&L now. So that month's P&L was overstated by 20,000 pounds. You're like, oh great, look what profit I make. You didn't make the profit, you just haven't put the invoices in. But what happens is that accumulates over a period of months, even potentially years, yeah because people go, well supply won't chase money. I can absolutely guarantee you big suppliers will not chase money. or double count, money which I've seen as well. um you know Even smaller companies sometimes don't chase their debt and have no idea because what you're actually saying is you rely on that company to have good bookkeeping. Well, how do you know the company you're buying off has good bookkeeping and knows what you've paid? So the cycle continues for everybody. But the fact is you've got to be in control of your own business at the end of the day. So that is how you do it. And that's why your budgets are important and why your finance team should be involved.
00:33:56
Speaker
Because do you think a business owner has actually got time to go and do those sorts of that level of analysis? No, but have i they haven't.
Delegating vs. Abdicating Financial Responsibilities
00:34:05
Speaker
And I talk about the difference between abdicating and delegating, like the most dangerous advice, in my opinion, that's given to founders is hire great people and get out of their way. Well, firstly, they don't know if they've hired great people or not. But when you abdicate a function, even if you're spending a lot of money on that function, if it's not being done well, one day that's going to come back to you as the CEO and it might, it's going to come back with interest. ah funra And so understanding on a granular level how this needs to be done even if then you outsource it is so unbelievably important in finance more than
00:34:39
Speaker
more than anywhere else that's an incredible articulation and julie um' i'll put your contact details in the show now i mean there's loads more i want to ask you if you're willing to yeah yeah yeah definitely yeah and you uh when a new client engages with you i'm assuming part of understanding this and mapping out how you're going to take them on that finance process transformation is part of the initial consulting service is it before you go into yes It is. And I think because I think we have to be sensible as well and do it in stages, you know, so we do have clients on our books that where we just do bookkeeping attacks, because sometimes, you know, finance isn't the only department in the world. And I understand that there are other key important roles that people have to follow. So what often why people will come to us is is we can start with the basics, and we can bolt on the consultancy as we go along, you know, um if a business is already a bit bigger,
00:35:27
Speaker
you know maybe over half a million a million and they want to assess it. We do like a financial controls health check. ah Because what we're talking about here is a controls is corporate governance. Corporate governance is effectively the processes you have in place to safeguard your business. That is what it is. And and finance, the reason finance I think is so important isn't the only department that's important. Obviously, you need sales and marketing and things like that. But the reason finance is so important, because ultimately, every decision a business makes will touch its finances. Yeah, totally. ah Either in cash time or profit. um And that is why it's so important to have control over it, because the other people decision makers in the business probably won't be financially literate as such. And they might need, and that's why you need the CFO and the seniors finance teams to be able to work with those other department leaders to help them become financially literate.
00:36:16
Speaker
Because I've gone into businesses that have CFOs that are being paid £100,000 a year. And they've still got no month's end. ah We spent six, seven months fixing three years worth of transactions. um Not because the CFO isn't technically any good, but they're not close enough to the, there wasn't the right infrastructure in place for them to do their job. I see it all the time. And the founders often assume that the CFO is able to diagnose where the business is and what it needs and then take them on a journey to get there. and nobody ever talks about it. That's awesome. So Julia, okay, that's amazing. yeah I feel like we've gone pretty deep on what like a not shit finance function in a founder led small business looks like. You alluded earlier to the ah founder thinking of themselves as an investor. I've heard you previously talk about the kind of stages of entrepreneur and ownership. I think you describe it as kind of owner, operator, board member, passive investor. Can you just, and then we'll talk a bit about being an acquirer. Would you mind just talking people through that kind of three stage journey as you think about it?
00:37:17
Speaker
Yeah. So for me, owner operator is business owner does everything in their business, which typically is kind of like a startup person. Well, not actually, lots of advanced businesses. The owner still does something, but you know, you would start there probably and then build your way up. um Then you have board member where I would say, owner doesn't really do day-to-day work, but probably makes strategic decisions still. So things like they might still make the payment runs. ah They still decide, can we spend that? Can we spend this? They don't have people to do it. Passive investor would then be full leadership team in place. The investor has no direct management of that business day-to-day.
00:37:57
Speaker
probably they're set up a bit like a corporate firm now you know they might not have hundreds of shareholders but there's one share potentially it's one shareholder that just gets information from the leadership team. ah I would say probably everyone's dream if they're honest will be the passive investor because why wouldn't you want to be there? but that is a hard cycle to get to. To get from owner operator to passive investor is hard. And I do think if you want to get there, you have to adopt corporate governance mindsets. People will roll their eyes and say, corporates are overkill, they're not ran very well. Yeah, fine, they're not, but the principle still stands. as you do i great you need a good You need a good infrastructure of people, process, systems and controls to ever be able to get to passive investor because you'll never relieve tasks accurately without having good processes in place.
00:38:47
Speaker
I totally agree. I mean, look, I'm talking my own book, but it's why I believe so much in the entrepreneurial operating system because you start in the leadership team in a functional seat. You may at the same time be a visionary or an integrator where you're leading those quarterly sessions, the annual planning, you're declaring the 10 year target, the three year, the one year and assigning the 90 day rocks.
Rob on Entrepreneurial Operating Systems and Investing
00:39:05
Speaker
And one day you move out of the accountability chart into the owners box and all you're receiving is a copy of the vision traction organizer, the two page business plan, along with the financial statements, and you're collecting your dividend check and it's a it's a pretty clear like you know there's black and yellow books like ah dummies for you know you probably hate accounting for dummies but
00:39:24
Speaker
though Let's say software development, JavaScript for dummies, but I really like the fact that that traction, the book by Gino Wickman and then EOS, like it gives you an operational, not financial. That's why I think people should come talk to the folks like you, but an operational playbook from go to go from founder, owner, operator to eventually passive investor over a series of quarters and years. But I just can't stress it enough. If they're not in control of their finances, everything we write on the VTO is bollocks. Yeah, and it's so that mix between commercial operational finances, they're so interlinked, really, that it's really important, trying to find, I think it is hard. I think it's hard because I won't, I'll be honest, even in corporate world, it's very hard to find good finance people. It's hard, it is hard in the market to find
00:40:11
Speaker
ah I mean, I think I'm a good finance person. But it is hard to find ah good finance people. And that is why people need financial consultants to help them find the right people. Because like you say, probably they're paying the CFO 100,000 to think, oh, well I'm paying them, they've got to be able to do the job. Well, They've got a certificate, right? They've got a certificate. I know hundreds of people that have passed exams that weren't actually that great at their job because there's elements of it that they wouldn't know. So the CEO can't bury their head when they employ senior people. There should be certain things that those people should be delivering to them.
00:40:48
Speaker
And if they can't deliver it, then you should be questioning to yourself. You might maybe don't know, but you should be questioning to yourself, why is this person? I mean, I've seen CFOs that don't even do a forecast. And I'm like, well, how could you as a business owner to have a CFO and pay them all this money and then not get a forecast? like the So that's why, because I often do one-to-one strategy sessions with people, because I will talk through in those sessions, what should they be expecting? from these types of roles so that that people can get a guide whether they have the right teams in place.
00:41:22
Speaker
Yeah, I can see that. All right, this has been mega and it's very kind of you just to let me put your link in to to contact information. So found us about to reach out to Julie help me. um Let's flip to the other side. Let's talk about let's talk about acquisition. So now you and I you've helped me stabilize my business. We're generating some cash. It's we're building it up on our balance sheet and we're like, Come on, let's go in order to hit this mad 10 year target that Rob's laid out. We're going to need to acquire some stuff because we can never get there organically because we've done our forecast and we We recognise that. um You've just described what a kind of good finance function looks like.
Evaluating Acquisition Targets with Poor Finance Structures
00:41:59
Speaker
How how bad is too bad for you to let me buy the target? Oh, God, where do we even start? and i know what You know I'm going to bring a few dogs to you, right? Yeah, yeah, yeah, yeah.
00:42:12
Speaker
ah Well, I think if the reality is in this country, in the UK, we are very behind on exit planning. And I think if you want, if you're expecting sellers to have a brilliant finance team, I think you need to not start because the reality is they don't. So I think you've got to go in open and knowing that you're probably going to find businesses that haven't got a great finance structure. But that's fine because where there's weakness, there's opportunity, isn't there? Yeah. So, ultimately, you know, the fact that this, I've seen buyers that say, oh, I've got a CFO, show me the oil chart. The CFO is the wife. So it's like, well, what qualification has the CFO got? They haven't got a qualification. Well, they're not a CFO then, are they? They're just...
00:42:56
Speaker
I don't know, maybe doing some admin or paperwork or helping with the strategy, which is fine. But they're not a CFO, they're a CEO. yeah They've just been given the title because maybe they do a bit of finance paperwork behind or they're the ones that signed off the accounts or whatever. So and I think getting in your all chart and being, making sure, you know, that ah what these people, so maybe have they got roles, of you know, like a job spec or roles and responsibility for their staff. We should probably go for the other departments as well, because you want to know operation if you've got good staff as well, but finance staff. Will you dive in and start asking those questions of the target? Like after there's been the initial courtship and we've all wooed each other and we love each other and it's going to be amazing. And we're going to, we're going to combine these companies and we're going to get to the sunny promised uplands.
00:43:42
Speaker
And then Julie wanders in with her Jacknail boots, like, how how does it, ah what at what ah what point do you meet the target once I've introduced and you're like, okay, Rob, I don't even know what numbers they have. Where do we even start? Right. So, ah so I do strategy sessions with people. So my company generally, we generally start once people get heads of terms. So once people are at heads of terms, that's where the, do did that would typically be where our sort of acquisition CFO services would come in. but i So head heads of terms, we've basically agreed price and structure. Price and structure. prices Me and the opposing founder.
00:44:15
Speaker
But obviously, people have lots of questions up to that. So that's where I do my strategy sessions. So if people want someone to bounce ideas, or or someone to come up to school with the seller, engage these questions about the finance team. you know like For example, I could go on a call with someone, ask them questions about the finance, and I'd be able to tell them about probably about an hour, whether I thought it made sense or not. you know Now, it wouldn't necessarily stop them doing the deal, but it can help you go in with a bit of a better mindset to build your cash flows. Because you might say, right, I need these budgets. because i I can absolutely guarantee that probably 90% of businesses then won't have a good finance structure that we talked about. They will have this, they'll generally probably have a bookkeeper, or it might be the owner. I'd probably steer away from that. But anyway, at least if they've got a bookkeeper, and they all have an accountant, although every time I speak to people, they go, Oh, don't bother contacting my accountant, the rubbish. That's what people say to me. So I'm like, Okay, well,
00:45:08
Speaker
um Can I ask you a quick question? So I've already got to heads of terms, but my heads of terms, which includes my indicative price, is based on the indicative financials that I've been given by the counterparty. But if the counterparty's financials are manifestly wrong, then my implied price is going to be wrong, isn't it? In that situation, does the deal normally just fall apart because the the valuation is going to drop precipitously, isn't it, when we realise what their real profitability is? Yeah. Oh, I've seen values drop by over a million. Why over a million? Because of fraud. Yeah, so we do we do have valuation services that we offer and and and we also do... sort of packages as well so people are looking at five deals. Some people take them but what I tend to find is this is where you know acquirers can't be sinned you with their money either because we often get oh I don't really want to spend too much money until I do the heads.
00:45:56
Speaker
Okay, that that's fine. You know, we we're not, at the end of the day, we respect what people's decisions are. You know, people are their own, you know, entrepreneurs, they're not, they're big, they can be busy savvy. And perhaps they are good enough to get to an indicative offer themselves. and But I have seen lots of deals from very well established entrepreneurs and business owners that do struggle because they don't really understand the intricacy. So you've just got a decision to make. Are you willing to invest in that business before you get to heads? um If you're not, then that's when people typically don't use any um ah support. ah But yeah, the deal can fall through or can go on for months and months and months and months because the seller thinks they're getting a bad deal because you know, the brokers told them it's worth 10 times more than it's actually worth and nobody actually nobody actually knows. Although I do feel for brokers a little bit because ultimately they're just passing the buck. The fact is,
00:46:47
Speaker
A business senate going to market to be sold shouldn't be expecting the broker to tell them their value. If as a business and you don't know your value from a finance professional, you're not ready to go to market, in my opinion. So then to blame the broker and say, well, well the broker's not a finance professional. see you but Technically, your broker should be being ethical and saying this and they're not, so they are at fault. But why are people expecting brokers to give them their financials? You know, they're not an expert, are they? They're not an accountant or a finance professional. So I don't think people should be going to market not knowing their valuations, or not having at least an integrity third party check on their accounts to see whether their balance sheets in order and things like that before they go. yeah so so So if I'm managing the opposing, I shouldn't say opposing, it doesn't need to be adversarial. the The founder that I'm looking at pairing up with to acquire their their business, I'm assuming talking to them about the
00:47:39
Speaker
the logic by which i've but I've applied to arrive at my indicative valuation and just try and manage their expectations to say, look, like we're going to need to understand the finances. And if it if it's if you've miscategorized expenses, which often happens, if you haven't reconciled the balance sheet properly, which often happens, that is going to have an effect on this implied valuation. So just like this is where I hope we're going to get to. But we're now going to need to go through a process of understanding the finances. And so and the deal still might fall apart. But I would imagine that would be the way as a sort of a biz dev guy, not a finance person, that that's how I would at least try and manage my counterparties expectations to not not not kill the deal on an emotional level once they realize that I'm not going to pay what they hoped I was going to pay because it's not the business they held out it to be.
00:48:28
Speaker
Yeah, the most important thing is that you have the clauses in the heads so that everyone's aware of what what the risks are. And that does need good conversations. People will often rush to heads thinking once they get to heads to get the deal. But if you can't get the information pre-heads, it's not going to be an easy due diligence process anyway because they're likely they don't have it. Now, if a company doesn't have it, that the information that you need, well, then you've got a choice as the buyer. You know, do you stick with it because you feel there's still opportunity and you just take the risk and have better clauses and get a better deal? Because that's what will ultimately happen. The buyer will push for a better deal structure on the basis that there's a lot of risk. Or do you just throw the towel in and go, I don't want to do this deal because I can't be bothered to deal with this because they're not going to have it?
00:49:10
Speaker
Both are, there isn't a right or wrong, but I think getting in the questions on the calls of the seller, and that's one of the things I help with the strategy sessions when people do deals would be to talk through the sorts of questions, because obviously I've done my own deal and we see hundreds of deals. Yeah, of course. Like there's things and commercially and things that I can hear from sellers, whether I think, you know, there's a bit, you know, for, especially in the finance world, like I can ask them the questions about what they do for a month and what's their processes like. you know, it only needs to be a half an hour conversation. But from that, you can gauge relatively quickly whether you think they're going to have a good process. Because then the buyer's got a bit of an informed decision to make because they know before they go to heads that there's a lot of potentially risk. So once you know there's risk, then you can bolt in the right words with your solicitors in the heads of terms, so that those conversations can happen. And I've often gone on and articulated to sellers the reason
00:50:01
Speaker
Because it's a problem. Buyer and seller often, neither of them are generally financially articulate fully. So it's important that someone, an immediate can come in that can explain it. And I don't, I don't think the broker's the right person, because sometimes they're too, so probably a bit unethical, you know, they've got a bit of a reason to want it to go through, haven't they? You need an independent that's, and you know, has no bias against the deal to come in and talk, just talk the facts, basically. Because the most important thing is that each party knows these are the risks that the deal could move, even if you don't know the number.
00:50:34
Speaker
You need the claw in, the claws in. So that when I did my deal, I signed my heads in one day. Because we had already had all of the commas. I'm not saying it was a bit of a lengthy process to get there. This is when you acquired another account. This is when I acquired the business, yeah. And we're at another one now at Heads of Terms, which we've had things come up, but we had the clauses, but we saw it. We put the clauses in the heads. it has changed but quite a significant value if you know we're still discussing whether we do the deal but it hasn't been a problem because we've been able to watch as in the valuation change because we've explained it based on what we put in heads and they've understood it so that's the thing so that's it's and you've got to be able to articulate why you're changing it as well because
00:51:18
Speaker
the buyer, the buyer could sell or could just say, oh, they're trying to do me over here. And to be honest, potentially, they probably could be because I'm not saying all buyers are ethical. No, you know potentially, they could be trying to do get one over on them and do it. So it's important you have an ethical, independent third party that can articulate, I think, to both parties, in my opinion, if you don't feel financially articulate to do that yourself. Yeah, I couldn't agree more. Julie, this has been so unbelievably helpful on so many different levels. um Like I said, I'm going to put your contact information in the show notes, encourage people to subscribe to your podcast, which I'll link as well. um I just want to say thank you very much. And I i know this is gonna, gonna help some people. And because we expect because we, we we try and create content for first time founders, a bunch of them are going to listen and not pay attention until it bites them in the ass.
00:52:06
Speaker
and then hopefully they can come back and listen again and then it will help them. So thank you so much.