I recently made a observation that surprised me a little. Businesses with bad bank relationships more often than not have little to no relationship with their accountants.
Whilst we spend considerable time helping good businesses to become great, Pearl often also get asked to help businesses going through difficulties with their bank. When I reflected on what these clients have in common, at first glance we recognise that most of these businesses have experienced some form of financial hardship either currently or in the recent past. The business has not been profitable or perhaps it is profitable but is producing negative cash – ie the business model requires more cash to operate than the business has been generating. However this isn’t the amazing bit. What is a surprise is that most all of these clients have a dysfunctional relationship with their Accountant and the in-house financial management capabilities are weak.
Banks have clearly seen this phenomenon too. I recall a few years ago discussing credit risk with the then head of business banking at NAB. Interestingly he cited that the number 1 sign that a business was in financial distress was that the business was late in providing its financials to the bank. Now this bankers observation I think was more suggesting that these businesses had something to hide. However it is just as likely that these businesses will be delaying financial report production because the actual process of producing financials is not well managed.
Small business is tough and cash is scarce – I get this. I run one too. However there are things that you should scrimp and save on and there are things that you need like air. Good financial process is one of these. If you don’t have a great relationship with your Accountant – give them a call and go out for lunch with them. You need to be catching up with them at least once a quarter and talking through your financial processes. If this is going to cost you more – pay the money. Your Accountant should be involved in your business, helping you to decipher the hints about your performance contained in your Profit and Loss and Balance sheet reports. They need to be making sure that the processes that go to producing those numbers are correct. they need to be making sure that you are reading and understanding those numbers. You can bet the bank understands them, but unless you are drawing the same conclusion as the bank from them then you will never achieve banking excellence.