The first thunderstorm hit, and the skies opened up as I drove south through Newburyport (MA), last Thursday evening, portending a rainy 24 hours in the Boston area that washed out our July 4th plans.
So much for the little kids’ parade, the barbecue, the pool, and the fireworks with our daughter-in-law Allison’s family in Danvers. When I woke up on Friday morning – Independence Day! – there really was no escape: two weeks into summer, it was time to spring-clean the home office.
Now even my wife, Anne, would admit that I’m reasonably neat and well-organized, or at least the top of my desk is. But when things get stashed in the desk drawers or in paper files (not everything is electronic yet) or in the supply closet, retrieval is often something less than instantaneous.
So July 4th was a day to “declutter.” If I hadn’t accessed a file in a year, out it went. Old stationery – recycle bin. Dusty business books – rummage sale. Twenty years of fully documented tax returns – shredded, with a few recent exceptions.
I did stop short of replacing all my dog-eared hanging file folders – a Staples run could easily have sidetracked me – but at the end of the day, when the dust had settled inside and the rain had stopped outside, viola! Everything was accessible. The remaining “stuff” was logically arranged, for the first time in a while. No more digging through a bunch of old power cords and outdated cell phones to find the one headset that works with my mobile phone. It made for a dull holiday, but there are empty shelves in the bookcases and almost-empty drawers in the desk (well, maybe one or two). It’s perhaps just an illusion (or even a delusion), but Annie tells me that the office really looks under control.
Unfortunately, the same can’t be said for a prospective client to whom I was introduced a few weeks ago. A six-year-old software company that is still emerging a bit compromised from the recession, the $5 million firm needs some supplemental funding to resume its historical growth and profit trajectory. The President shared his year-end financial statements with me showing a balance sheet with entries for six different bank accounts, detailed receivables balances for the dozen most significant customers, and multiple deposits for rent and utilities. The liabilities side of the ledger was even more extensive, including lists of balances owed to major vendors plus the roster (by name) of fifteen holders of the Company’s convertible debt.
The income statement appropriately led off with revenue, but instead of there being a single dollar total for the year, there were 15-20 lines showing total sales to each customer during the year. The list of expenses was even more detailed, starting with a line for net payroll (all departments rolled into one entry), a second line for withholding taxes, and successive lines for the various payroll taxes – FICA, MedFICA, SUTA, FUTA. Arrayed down the page after that was an alphabetical list of expense categories: accounting, advertising, auto, bank fees, conferences, etc. Some accounts were split by type – legal-patent was separate from legal-corporate – and others were identified with a department, e.g., travel-sales differed from travel-G&A, but were recorded on adjacent lines. To the reviewer, the overwhelming impression was one of clutter.
All of this begged my question to the President, “Do you find this useful?”
“Well,” he said, “it helps me keep track of who our money is coming from and where it’s going, but I really have no idea how to measure what’s appropriate to spend in any category. I also have no real sense of how to control it.”
I heard opportunity knocking, but it wasn’t the time for a lesson in Accounting 101. Instead, I made the following points:
- Financial statements vs. operating reports – Your two primary financial reports provide a convenient summary in a standard format of how your business is doing financially for a period (month, quarter, year) in the income statement and at a point in time on the balance sheet. Your accounting/finance team should produce supplementary reports to provide the detail on sales, accounts receivable, investors’ status, etc.
- Standard formatting – For comparability and ready understanding, it is helpful to organize the income statement in the basic categories indicated in the sidebar (Draining the Swamp).
- Expense grouping – Each category above should be subdivided only to the extent that there are meaningful revenue or expense totals in each subcategory. For example, if product revenue and service revenue each is a significant number, they should be shown as separate subcategories. Also, to the extent that the major focus of an employee’s efforts is in one of the four expense categories (Direct, R&E, S&M, or G&A), his/her gross payroll and payroll taxes should be shown, respectively, as subaccounts in one of the four. And the same types of expense (e.g., travel, or depreciation) can be charged to more than one of the four major expense areas.
- Balance sheet accounts – Similarly, the balance sheet typically lists just the major categories of assets (cash, receivables, inventory, etc.) and liabilities (payables, loans, deferred revenue), with the total balance in each account.
- Quick analysis – For each item in the income statement, it is common to display the percentage that the item bears to net revenue (100%) to allow ready comparison to standardized norms for the industry.
As a first step in cleaning house, recasting your financial presentation – even just in an Excel spreadsheet as a stopgap measure – will reassure your funding sources that you know what you’re doing in the financial area. Bankers are less likely to trip on the numbers if the path through them is familiar.
It’s a lot like having the sun come out the day after the thunderstorms, allowing for the ultimate de-clutter exercise: clearing the tree limbs and the fallen branches for the parades, the barbecues, and the fireworks, all of which did happen on the Fifth. A task made even enjoyable after a surprisingly productive Fourth!