Every now and again I come across really shocking behaviour by so-called accountants. And when I do I like to have a good rant about it.
Because I think that people brave enough to start and run their own business, need to know just how much damage can be done when we trust someone with our finances who isn’t up to the job.
I’ve been working with a business since November who’ve had the worst experience I’ve ever come across (and that’s saying something)
Let me tell you a bit about them
The directors, let’s call them Andrew and Kate, set their UK manufacturing business up 9 years ago, and have grown it to become a national brand in their sector. Every year they win industry awards for their innovation and quality.
And it seemed like everything was going fantastically. They took decent dividends and enjoyed a pretty good lifestyle. Life seemed great.
They’d taken on a management accountant and over a couple of years he’d pretty much taken over every aspect of running their finances. Smart delegation you might think; focus on what you’re good at, and leave the bean-counting to an expert.
But things didn’t feel right….
Lots of things just didn’t feel right. Cash was always tight and they didn’t know why. The accountant said it was because they were growing so quickly – but he “had it covered, nothing to worry about.”
Then suddenly the business was put into special measures by the bank. Obviously a great shock; I mean why would the bank do that to a successful business? The accountant said the bank just didn’t understand the figures. (yes, he really said that)
Eventually Kate realised they needed a second opinion so they came to me at the end of October and asked me to take a look and see what I thought.
How bad can things be?
It didn’t take me long to work out that the business had 4 days of trading left before they completely ran out of cash. I also found out that they’d been insolvent for over a year, which potentially exposed Andrew and Kate to significant personal liability.
And we discovered that the bank were considering foreclosing on their business.
Can you imagine how it felt to go from believing you had a successful business, to meeting with an insolvency practitioner, and being told you were probably about to lose your business and your home – all in the space of 10 days?
So just what had the accountant done? (or not done)
1) There was no cash flow forecast
Even in a business with very tight cash flow, he didn’t have a cash flow forecast. It appeared he just juggled week by week what they could pay.
2) The book keeping was just wrong, and sloppy
The book keeping on Xero had significant errors, and could best be described as sloppy. He had a university student doing the books, believing that it was just an admin job. The bank account wasn’t reconciled, the HMRC balances were wrong, and any unknown payments were dumped in the directors’ loan account (this happens a lot by the way)
3) HMRC arrears that only the accountant knew about
We found a file hidden away that revealed the business had 2 years of corporation tax arrears. He just hadn’t dealt with it, and worse had never told Andrew. When we called them we found out they were about to issue a winding up petition because they’d been ignoring the letters!
4) The management accounts were, frankly, a joke
The so-called management accounts were just wrong. Despite it being a manufacturing business where gross margin is everything, they hadn’t put any stock movements through for several years, so monthly gross margin could fluctuate from (8%) to 85%. So any monthly profit figure was completely meaningless. And the accounts didn’t include the directors’ dividends or tax, so the directors couldn’t have known they’d been making losses for 2 years.
5) He made sure they never understood the finances
Whatever Kate or Andrew asked him about the figures or challenged him, he would tell them:
- It was far too complicated for them to understand and to leave everything to him.
- Not to worry about anything, the business was doing well.
- That their opinions were wrong!
He even encouraged Andrew to go on overseas trips to secure new customers, even though they couldn’t afford the air fares.
6) He argued with everyone
He loved a good argument. We found out he’d been arguing with everyone from the bank to HMRC and was always telling them that their figures were wrong and his were right. And he was always arguing with Andrew and Kate; it became a real battle of wills in the end.
We still have no idea to this day what he was playing at, and whether there was some other motive. And we decided we couldn’t waste any more energy on him – we had to move on and save the business, quickly.
We’ve gone through a painful experience piecing together the true position of the business and it’s been a massive distraction from running the business. The damage done by this accountant was very nearly fatal.
What we did
- After identifying the urgency of the cash position we raised emergency funds from family (any traditional lines of credit were just not an option)
- Created a cash plan that let us forecast daily for the next few weeks, and then weekly for the next 4 months. This took the constant panic out of the business and suppliers started to trust they would get paid. Then I trained Andrew to take this on himself.
- Put together real management accounts for the last year to see what the actual position was, and then put together an action plan to get the business into profit as quickly as possible.
- Trained his office manager to do the book keeping (accurately) and found him a good management accountant to take over the monthly reporting.
- Put a strategy together focussing on the most profitable products and customers that would build the profits as quickly as possible, whilst cutting costs and making the business more efficient.
So what are the lessons Andrew and Kate learnt?
- Not to delegate an area unless they completely understand it themselves first.
- To trust their instinct more, even if a professional is giving them advice.
- That they have to understand everything about their finances, and be in control of their own cash flow.
The business is transformed. Andrew is, to quote him “all over it” every day.
Because he’s got daily control of his cash flow, has daily and weekly KPIS, accurate monthly accounts and knows his business in under control, he’s able to confidently go out and bring in new business.
Andrew’s made harsh decisions quickly that are paying off already. The next year will be a slog just to fill the black hole and get the business back into profit but we’ve got a very clear plan of how that’s going to happen and I have no doubt they’ll pull it off.
Taking decisive action so quickly impressed the bank enough for them to extend their support and they’ve now become big fans of the business.