Straight Talk

Company successfully refocuses its monthly reporting system to reflect financials that mean more to managers.

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Are you getting the right set of numbers to help you run your company?

Numbers, numbers, numbers. To respond quickly and effectively to crises or business opportunities, owner-managers must be able to evaluate their sales patterns, inventory levels, profit margins, cash-flow spikes, and a host of other financial trends. Without financial reports that are timely, accurate, concise, and, above all, relevant, even healthy businesses can face financial ruin.

That's what happened to R. S. Bacon Veneer Co. Five years ago, the Hillside, Ill., company was selling about $4 million worth of wood veneer products, mainly to furniture manufacturers. Then its Big Eight accounting firm decided, based upon the elaborate set of financial reports it prepared about Bacon each month, that the manufacturer was on the verge of financial disaster. Liquidate, advised the experts. Instead, the firm decided to switch its accounting agency and financial reporting system. Today, business has never been better, with sales between $12 million and $15 million.

Bacon's experience illustrates just how essential the right set of numbers can be. Before the accounting switch, "we'd get this set of financial documents each month that would have made better sense for General Motors," recalls president Jim McCracken. "We wanted to know if we were making money or losing money. But instead, we got all these numbers that were impossible for us to use. And if we asked questions, we'd be bounced from one special consultant to the next so that we'd never be able to get a sense of our larger financial picture."

In retrospect, it was like a bad business-school joke. During a typical month, R. S. Bacon would receive financial reports that blathered on for 100 pages or so about items ranging from "operating income theoreticals" and "purchase price variances" to "cutting logs to flitches -- yield variances." McCracken and chief executive George Wilhelm didn't have a clue how to sort their way through this numerical quagmire. So they often just filed the quarter-inch-thick reports away in a desk drawer. When they would send their financials to their banker, recalls McCracken, "we'd always include a letter that explained what we thought had really happened to the business during the prior month."

The consequences of this confusion escalated quickly. During the early 1980s, sales stagnated at the worst possible time, just after Bacon had invested a good bit of capital in a new production facility in Grundy's Center, Iowa. McCracken and Wilhelm had begun worrying that they were losing control of their inventory levels and various profit margins. "Every month we'd sit down with those statements and try to understand them -- try to figure out what we needed to do next. But we didn't even have a handle on what our cash flow was and whether we should add to inventory or reduce it," McCracken complains.

There is a point at which an entrepreneurial company's growth no longer compensates for inadequate, irrelevant financial reporting systems. The moment of truth is different for every company. It might result from a diversification strategy that forces a reevaluation of all profit margins; an accounts-receivable glitch that creates a cash-flow crisis; a growth spurt that necessitates an intensive inventory buildup; or simply a bid for increased financing from bankers or other investors. Whatever the trigger, no entrepreneurial company can continue to grow without adjusting its reporting system to fit its size, sophistication, and management concerns.

For R. S. Bacon, the crisis came when its accountants slapped a "going concern opinion" on a year-end statement. (These opinions, which were eliminated by the accounting community about a year ago, warned bankers and other creditors that, in the judgment of the company's accountants, it could not continue to operate without an infusion of capital.) After a several-month investigation, the same accounting firm urged Bacon to liquidate. McCracken and Wilhelm were panicked. "They were the ones, after all, who worked with our accounts and understood our numbers. I'm still amazed," McCracken says, shaking his head, "that we had the courage to throw them and their reports out the door."

When the manufacturer switched to another accounting firm, Chicago-based Miller, Cooper & Co. Ltd., on the recommendation of its bankers, Wilhelm and McCracken got a welcome surprise: these accountants had no doubt that the company was fundamentally sound. The main problem, as they saw it, was the company's impenetrable reporting system and the way it stymied informed management decisions. "There was no way that a practical businessperson, whose financial department consisted of a bookkeeper and a clerk, could get anything useful out of those numbers," recalls Marty Birnbaum, the partner who works most closely with Bacon.

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