Financial Delegation is Not Financial Abdication

"Frank, my tax return is wrong."

Those are fightin' words to a CPA.

I replied, "What's wrong with the return?  The taxable income matches your profit from your QuickBooks P&L."

Admittedly, that doesn't mean much.  I work with hosed up QuickBooks records all the time.

I continued, "I trained Debbie, your bookkeeper to read real estate settlement statements.  I checked all her numbers, and they're correct.  What's wrong?"

"Frank, I didn't make any money on the house sale.  I lost a little."

"How is that possible?  You bought the house for $150K and sold it for $170K.  I know you made $10K in improvements.  I see that in QuickBooks.  So your profit is $10K, which is exactly what's in QuickBooks."

"Frank, not everything is in QuickBooks.  I spent $15K on the house from my own money, not out of the LLC accounts that are in QuickBooks."

"Why didn't you tell Debbie about this, so she could record the transactions and get the profit right in QuickBooks?"

"I don't know anything about that financial stuff.  I rely on you guys to sort all of that out."

 I wish I could honesty say this was the only time I've heard a business owner tell me that he doesn't understand the financial aspects of his businesses and really doesn't care.  Not caring about your business finances will sink your venture.

You can't abdicate financial responsibility for your business.  I don't care if you own a business with annual revenue of $100K or $100 million.  You can delegate the bookkeeping, but you can't delegate the financial responsibility.  If the company's finances are screwed up, it's the owner's fault.

Business owners tell me all the time that they don't understand balance sheets and profit and loss statements.  Every year, they wait anxiously until their tax returns are done to see how they did financially.  Of course, March of the following year is just a little bit late to change course if your financial performance is going bad.

If you haven't started your business yet, and don't understand financial statements, stop now before you create a financial mess.  No, I am not telling you to stop permanently.  Just stop until you seek some financial education.
Clients sometimes ask CPA's to teach them to read financial statements.  That's not what CPA's do.  We aren't educators, and we don't have a hundred hours of spare time to teach them.  Instead, sign up for two community college courses.  Most community colleges have a course in starting a business.  It covers the basics like local licensing requirements and banking.  They also cover some basic bookkeeping, but not enough.  For that take Accounting 101.  If you're wondering if you really need to understand debits and credits to run an auto repair business, no you don't.  But you need that understanding to successfully run one.

Accounting 101 will teach you how financial transactions come together to create balance sheets and P&L statements.  When you understand how financial statements are put together, you will understand how to read financial statements as well.  You can't possibly know if you're paying too much for materials if you can't read your P&L statement.

So you're convinced that you've hired a controller to tell you when your finances are going in the crapper.  How do you know you have a competent controller?  Did he tell you so?

Jim owned a multi-million dollar medical research lab.  He hired Sam as his controller.  Sam in turn hired a staff of three bookkeepers to enter transactions into QuickBooks and reconcile the bank accounts.  Sam admitted that he wasn't an accountant.  He was a "financial" person.  In the real world, that means Sam didn't have a clue about accounting, even though he was in charge of that department.

Jim got paid in advance for the medical studies his company performed.  His customers paid him sometimes hundreds of thousands of dollars, which Jim would then spend on labor and materials for the studies.  At any point, Jim was holding at least a million dollars of customer money that he was obligated to spend on specific tasks in the future.  You record this future obligation as a liability on a company's balance sheet.  You might even think this would be an important number to know.  At least I thought so.

If you only have $900K in your bank account, and you are holding $2 million in customer advance payments, you might just be in a bit of trouble.  This was Jim's situation.  Only he didn't know it.  Neither did his controller, Sam.  Since Sam was a financial guy not an accounting guy, he didn't know the company was spending money on overhead and salaries that wasn't theirs.

We alerted Jim to the problem when we were engaged to prepare an income tax projection for the year.  That customer liability was a big factor in any potential income tax liability.  So we dug into the QuickBooks balance and determined that the company had overspent by over $1 million.  Jim was busy worrying about whether to lease or buy a BMW when he should have been worried about survival.

Shortly after we delivered the bad news to Jim, Sam moved out of the area and decided that he would work remotely.  In a couple days, Jim could no longer get in contact with him.  Within a week, Jim filed for bankruptcy both personally and for the business.  He got no sympathy points from the bankruptcy court for being a financially unsophisticated scientist.  When you aren't paying your bills, nobody gives a damn why.  It's all on you.  You can't delegate financial responsibility for your business.

RGIII is well into rehabbing is ailing knee.  He expects to be ready for the first regular season game.  As I've noted I the past, RGIII and I have a lot in common.  In high school, I was a basketball legend......... in my own mind.  I was also on the chess team.  The basketball coach took wicked pleasure in coming into a chess team practice session and asking if any of us had injuries that would keep us out of the next match, hang nails and so forth.  The joke was really on him.  We were a championship chess team.  Our basketball team was an embarrassment to humanity.  Injuries wouldn't have hurt our performance any.

As always, thanks for reading.  Please visit my Facebook page "How to Screw Up Your Small Business."  I promise you a couple rants daily.  Until next time, let's do it to them before they do it to us.