Written by: Julie Allison, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
I’ve sat at the front of classrooms since elementary school. My last name begins with “A,” which puts me near the top of the list when teachers assign seats alphabetically. In college, I sat in the front row of Dr. Marshall’s accounting classes. Seating was no longer alphabetical, but I had learned that close proximity provided better access and visibility for questions. I didn’t want to miss out, and I was striving to get everything “right.”
A lean man with white hair, Dr. Marshall wore wire-framed glasses, ironed dress shirts, and pants with sleek pockets. Facing the class, he would tap the back of the eraser against the board to emphasize key points. His classes and exams were hard. Like a European train, they started right on time and kept moving until the final destination. We had to jump on board and stay engaged or get left at the station.
After class, we would gather outside his room to discuss test questions or new concepts. If we wanted to pass the certified public accountant (CPA) exam, we would need to master principles such as capital leases, deferred taxes, and pension liabilities. Public licensure would prove our knowledge of complex rules to prospective employers, but there was a lot to learn. Night after night, I highlighted page after page of Kieso and Weygant’s book of Intermediate Accounting in preparation for the test.
I had yet to learn that the CPA exam was not the only big test I would encounter. Accounting principles were not the only lessons I needed to learn. Keeping a small business alive during a pandemic would prove to be harder and the stakes much higher. The ability to survive would be determined by good preparation and quick decision making as the train hurled down the tracks.
The CPA Exam
After graduation, I took the CPA exam over two and a half days in my seat near the front of the civic center field house. The days were long. The test itself was a blur. I remember rubbing the soles of my tennis shoes against the gym floor as I searched for the answers. Then in a moment, it was over.
The envelope from the Committee of Accountancy arrived weeks later. Out of four parts, I had passed three: Audit, Theory, and Practice. For Business Law, I was still on the train but had not yet reached the final destination. I traveled on through more studying, a second exam, and finally, another letter.
“It gives me great pleasure to inform you that the Illinois Board of Examiners has reported you successfully passed the CPA examination.”
I expelled an outbreath of relief.
I had reached the destination.
Dr. Marshall had taught me well.
More Lessons to Learn
I took my first job at a Fortune 100 company, knowing everything I needed to know: sit up front, ask questions, and remember all the right answers. I chuckle now at this fusion of my innocence and ego. I imagine Dr. Marshall would, too. He knew better.
Prior to teaching, he had worked for a chocolate company. He knew that “book” knowledge could only take the train so far. Seeking answers to complex business issues had more to do with good decision-making, business practices, and employee behaviors.
During final exams, he handed out chocolate bars from his old company. I could see the joy he carried from his days at the factory, a reminder of the need to find the connection between accounting and the ultimate service or product. If you don’t feel good about the chocolate bar you’re helping to make, it’s time to move on.
In a culture where materialism breathes life into “more is always better,” he spoke of identifying needs versus wants and fiscal responsibility. When I bought my first car, I could hear him telling me to keep it for ten years. Instead of buying a flashy new car when the loan was paid off, I could continue to make loan payments to myself. Years later, those payments would turn into a down payment for the next car. Flashy new purchases can be distracting for small businesses, too.
He spoke of ethics, of course, and how one slip could ruin a career. I now wonder what he witnessed in his career, knowing what I have seen in mine: stolen factory parts, procurement schemes, and company checks making their way into personal bank accounts. Companies of all sizes need just as much help to implement business processes and changing behaviors as they do with accounting principles. Often times, changing accounting principles is the easy part.
Hurtling Through a Pandemic
The pandemic of 2020 was a new test altogether. For small businesses, the criteria for passing changed from selecting the right answers to surviving. For one of my clients, the train derailed in late April. Within a matter of days, they lost all revenue with no idea when it would be restored. It felt like we would need a construction crane to get us back on the tracks.
While no business is ever prepared to lose one hundred percent of revenue, we were still in the conductor’s seat. We already had a monthly cash forecast process in place. I laid out the best- and worst-case scenarios and actions that could be taken to preserve cash and keep the company alive.
The client had already vacated an expensive office lease in exchange for a smaller co-working space without a long-term commitment. They knew big leases were only flashy objects. They also had worked to negotiate an early termination clause in a key long-term vendor contract that was signed just one month before the pandemic hit. They terminated that contract without penalty, which eliminated the largest monthly cash outflow. We further revised the cash forecast to reduce all non-critical expenses until revenue was restored.
The process was hard and painful. While the client had a relationship with a local bank and a pre-established credit line, they did not qualify for most pandemic relief grants. They also were careful not to borrow money without a revenue stream to pay it back. The cash reserves that seemed sufficient just months prior were at risk of being depleted before the end of the crisis. The organization made tough decisions that impacted employees, contractors, and vendors.
But nine months later, the train is back on the tracks. Through negotiations and grace, some revenue has been restored. The organization is still alive because of preparations made before the pandemic that provided the flexibility to act with haste after it hit. Instead of chasing the screeching train down the tracks, we stayed on board and drove it.
Jump on Board… or Get Left at the Station
After twenty-five years of accumulating my own business experience, I think back to the importance Dr. Marshall placed on his anecdotal stories. These days, I think less about accounting for deferred taxes and more about the best practices to keep small businesses alive.
Fortunately, you don’t have to pass the CPA exam to learn these lessons. Implement these practices in your small business today to improve your chance of surviving disastrous events tomorrow:
Keep fixed costs, such as rent or utilities, to a minimum, especially during the launch of a new company. These costs can derail an otherwise healthy business during an economic downturn as they must be paid even when sales disappear.
Beware of flashy objects. Everyone is out to sell your business a service or a product. Be judicious about what you really need.
Seek legal advice before entering into long-term contracts, especially contracts that limit early termination without cause. If possible, negotiate better terms before signing.
Develop a relationship with a financial institution and consider obtaining a line of credit while your company is financially healthy. It can take weeks or months to establish a new credit line with a bank. In addition, it is much harder to obtain a credit line when your financial statements are lackluster. Get it when you don’t need it so that you have it when you do need it.
Before borrowing funds or using your credit line, think carefully about whether you really need the funds and whether you have the revenue stream to repay it by the due date. Significant debt on your balance sheet may limit your ability to borrow during a disaster. In addition, after the downturn ends, many small businesses may have more debt than they can reasonably repay.
Ensure that your accounting software has both an income statement and a balance sheet and that your books are in good shape. Low-quality financial statements will hinder your ability to obtain a loan or appeal to investors. In addition, you lose important visibility into the financial health of your business.
Reassess safety stock levels or “just-in-time” practices. As we saw during the pandemic, supply chain disruptions due to economic, civil, or natural issues are real. If your business relies on receipts from suppliers, consider using multiple suppliers or carrying more stock for key items.
Diversify your revenue streams where possible. If you lose business in one channel, you’ll still have revenue in another channel to weather the storm.
Make sure that your goals, priorities, and key performance indicators include cash. Small businesses are often so focused on revenue growth and earnings that cash isn’t even discussed. Depending on how long it takes to convert a sale into cash, most businesses should aim to have at least three to six months of cash on hand to cover short-term needs. Businesses with longer cash cycles should aim to keep higher reserves.
Create a forecasting process to understand your financial health going forward. Many small businesses only look at their financials in arrears. Unless you are forecasting cash and your profit and loss, you are losing the ability to make day-to-day decisions that can correct your course in real-time.
Create a culture with strong ethics and fiscal responsibility and put processes in place to safeguard your assets.
Find a good financial business partner. Good financial resources do much more than calculate your taxes and tell you how to account for capital leases. They help you make decisions, plan for the future, and share the knowledge they’ve learned from helping other small businesses. They can help keep your train on the tracks.
Stay engaged with local, state, and federal policy makers who have the power to enact laws benefitting small businesses. The ability to negotiate and influence may be the difference between some revenue and no revenue.
It’s been a tough year. Sometimes, we pass the test, but it takes two attempts. Other times, we do everything right and still fail. We sit at the front of the class, ask all the right questions, learn all the lessons, and still run out of cash. Life is unpredictable, and so much is out of our control. It can feel like chasing a hurtling train down a never-ending track.
Good preparation and sound business practices can help keep you in the conductor’s seat. From this vantage point, you’ll be in a much better position to guide the train to the next destination. Changes in behavior and processes can only be implemented going forward. The new car can’t be unpurchased, and the business checks can’t be undeposited from a personal bank account. We can fight it kicking and screaming or be open to what the experience offers us. Learn and move forward. There is always another destination, and we are each being called to step up, jump on board, and not get left at the station.
Julie Allison, Executive Contributor Brainz Magazine
Julie is a passionate and experienced financial professional dedicated to helping women launch and manage financially sound companies. She believes that women's creative and collaborative approach makes them uniquely suited to mentor, guide, and lead. When women-owned businesses grow, so do their voices, influence, and communities. Julie has over twenty-five years of financial management experience inside major corporations working with marketing, manufacturing, and supply chain teams. She has learned first-hand the pitfalls of corporate greed and brings a holistic view of business success to her clients. Julie is the founder of Watch Her Grow, a company providing expert financial services to women-owned businesses.