What a Fractional CFO Looks At First When They Walk Into Your Business

Suppose someone like me walked into your business tomorrow morning. Someone who has read many financial statements but has never seen yours, with ninety minutes before the next appointment. What would I open first? What would I ask you? And what would I know about your company by the time I left that you might not know yourself?

I want to answer that this week, because every owner should have the same insight into their own business. It’s five reports, three questions, and one page I would write before I leave. By the end of this issue, you’ll be able to run the same ninety minutes on your own company before anyone else does.

Why I Have an Order

I didn’t always have one.

One tax season I had four clients dealing with serious issues at about the same time. Two were in the middle of complex real estate transactions. The other two had critical cash flow issues. Every one of them had a good reason to call, and the calendar was already full. I knew how to do the work. The hard part was the first question: which one do I work with first? The accounting software showed me their books one client at a time, so to know where any one of them stood, I had to open that client’s company and read their reports. When four companies need you at once, the scarce thing isn’t your expertise. It’s knowing whose problem takes first priority. That week is told in more detail in Issue 20.

So I don’t use a script, and I don’t think you should either. Every company is different. But when I walk into a company I don’t know yet, there’s an order I keep coming back to. Ninety minutes isn’t a full read of a business, and if the books aren’t current it takes longer, but it’s enough to know where the biggest risk is.

The First Half Hour: The Bank, Not the Books

The first thing I ask for is the bank balance. I don’t mean the balance sheet with the bank balance on it, because the cash on the balance sheet may not be reconciled yet. I mean the bank balance itself: today’s available balance, the one you can log in and look at. And if there are checks out there that haven’t cleared, or payments set to go out this week, I want to know that too, because that money is already spoken for.

Last week’s first question was whether the bank accounts were reconciled through October. This is why it came first. Until they are, the books and the bank are telling two different stories, and I start with the one that can’t be argued with.

Then I read the statement of cash flows. It’s usually the financial statement owners tell me they have never looked at, and it’s the one that tells me how the cash was collected and spent. Think of it this way: it’s a history of your checking account, in three sections. Operating is the day-to-day business: customers paying you and you paying suppliers and payroll. Investing is the big things you bought or sold, like equipment or a building. Financing is money from outside the business: a loan coming in, a loan being paid down, you putting money in or taking it out.

Your profit and loss statement, the P&L, tells me whether you earned it. On accrual-basis books, it counts a sale when it’s invoiced, whether or not the money has shown up yet. On cash-basis books, profit is usually closer to the changes in the bank, and the gap is mostly in the investing and financing sections. Either way, the cash flow statement tells me where the money went. Those are two different questions, and a company can have a great answer to the first and a scary answer to the second.

Profit Up, Cash Down

Here’s what that looks like. I want to be clear about this one: it’s a composite, a pattern I’ve watched over and over, not one particular company, and the numbers are rounded on purpose.

Say you run a company that does the work first and bills later, with its books on the accrual basis. The P&L for the quarter says you made $40,000, and your bank balance went down $25,000 in the same quarter. Both of those are true. So where did $65,000 go?

Assuming nothing else impacted cash, the cash flow statement answers it in two lines. Receivables went up $50,000. In other words, more of what you sold is still uncollected; the sales are on the P&L, and the money is still out there in unpaid invoices. Whether customers are paying slower or you billed more is what the receivables aging, further down the list, will tell me. And you took $15,000 in draws, real money leaving the account, sitting down in the financing section where nobody looks. Fifty plus fifteen is sixty-five.

Is that business in trouble? Not necessarily. But it tells me what to go ask the owner. The owner thinks they had a great quarter. The bank account knows better. And I know that in the first thirty minutes, because I read the cash flow statement before the P&L.

The Next Half Hour: Margin, the Banker, and the Agings

Now the P&L, and I’m not reading it for the profit number. I’m reading it for direction. Gross margin is what’s left of every sale after the direct cost of doing that work, the materials and the labor on the job. I look at it for the last three months, side by side. One month of P&L hides a slide. Three months show it. If it’s sliding, I don’t know why yet, but I know what to ask.

Then the balance sheet: what you own, what you owe, and what’s left over, which is your share. I read it the way your banker reads it, because it’s what they read first. Does what you own cover what you owe? How much of the line of credit is drawn? What the banker wants to know is, can I trust these numbers, and is there a good plan behind them? Issue 17 walks through that read.

The last two reports are the agings. An aging is a list of every unpaid invoice, sorted by how long it’s been sitting there. The receivables aging is who owes you money and for how long, and the column past sixty days is where the truth about your collections sits. Then think the opposite way. Payables aging shows who you owe and who you’ve been delaying payment to. Payroll taxes usually sit in their own liability accounts rather than on this aging, so they get a question of their own: when was the last payroll tax deposit made, and was it on time?

Five reports. About an hour, if the books are current. That’s it.

The Last Twenty Minutes: Three Questions for You

The reports tell me what happened. Only the owner can tell me why. So I ask three questions, the three I’d start with. If you’re reading this about your own business, answer them out loud if you can. It’s harder to skip the honest answer.

When cash gets tight, who gets paid first, and who waits? Your answer tells me which vendors you value most, and it usually tells me who has been carrying you.

Which job or which customer had the best gross profit margin last year? And how do you know? The first question gets a quick answer. This one usually gets a long pause, and that pause is where the pricing problem lives. Most owners know their biggest customer, but the big one might get special pricing, extra service, and a whole lot of your people’s time. Biggest isn’t the same as most profitable.

What’s been on your need-to-do list for more than a year? Just about every owner I’ve met has one, and it’s been sitting there a year because nobody’s name is next to it. A priority without an owner is a priority deferred.

Three questions, twenty minutes. More often than not, I learn more in those twenty minutes than in the hour before them.

One Page Before I Leave

Before I leave, I write one page, by hand if I can. It’s harder to ignore a page someone wrote in front of you. Three things to fix first. Not thirteen. Three. And next to each one, a name: the person who owns it, the authority to get it done, and a date it’s due. Sometimes the name is the owner’s. Sometimes it’s somebody else’s. But it is never blank. A blank line next to a priority is a promise nobody made.

Here’s the part that makes the first visit worth it. That page becomes your standing monthly review. After every month-end close, review the same five reports in the same order, ask the same three questions, and put last month’s page on top. Did the three things get done by the name on the page? If they did, pick the next three. If they didn’t, you don’t add a fourth. You ask why the first three stalled. Around the third month the team gets into a rhythm, and everybody knows what the top three are and who is carrying them.

Run It on Your Own Company

So here’s what I’d encourage you to do this month. After your next month-end close, block ninety minutes. Open the bank balance, the cash flow statement, the P&L, the balance sheet, and the two agings, in that order. Ask yourself the three questions. Then write it down on one page: three things, a name on each, and a date.

The one page is a free worksheet, the Priority and Owner Grid: three priorities, one name on each, and one sentence for what done looks like. Put the date in that sentence.

alinement.com/brief/tools/priority-owner-grid

One Final Thought

Nobody who walks into your business for ninety minutes will ever know it the way you do. What an outsider brings is the order, and the habit of starting from the bank instead of the books. Both are yours to keep.

I’m curious: of the five reports, which one haven’t you opened this year?

I’d welcome your thoughts.

P.S. The first episode of Cash First, the channel’s video series, goes live this morning: How to Build a 13-Week Cash Flow Forecast (Row by Row), at youtu.be/y4IgGdaCyLg. Next week: the year-end money decisions every owner should understand before December 31, and which ones belong with your tax preparer.

And if you’re an advisor working with owner-led businesses, visit alinement.com/advisors to learn more about the tools and resources we’re building for the advisory community.