This Harvard, IL company was in its second generation, and after a disastrous relationship with a new client, had been struggling with profitability for the past few years. Even though the bank was supportive, the availability on their operating line was going to evaporate if the bank lost confidence in the company’s ability to return to profitability.
We were hired for our approach and services, especially our part-time CFO services. Our review of the company’s financial statements and month end close process identified some issues that needed addressing. By tracking the adjustments that were being made at month end, we could see that the inventory account reconciliation was arbitrary. These adjustments not only affected profitability, but resulted in dramatic swings in monthly net income.
Tracking these postings over the prior 18 months proved that a lack of operational control was creating the monthly variances. Some detective work and analysis of the company’s ERP system allowed us to institute a change in the transaction mapping that resolved some of the issues. Other major variances were eliminated by moving finished goods into quarantine in the ERP system prior to final inspection.
A change in the tracking and calculating of month end financial adjustments for prepaids and accruals tightened the financial postings, eliminated adjustments at year end for the annual insurance audit, and uncovered a miscalculated insurance accrual that returned $140,000 to the bottom line.
By reviewing the company’s income statement, we determined that the level of detail didn’t provide the owner with enough information to allow him to manage the business. Completely rewriting the financial statements gave him not only an overview of the company’s profitability, but subsidiary reports provided him with the detail he needed to make changes in the company’s operations and dramatically improve profitability.