💀 Bring out the dead

Whenever I’ve inherited a shitshow, the fastest money I’ve found has always been the money we’d already earned. 

It’s the cheapest money in the building. No dilution, no bank sign off, required… and it’s sitting pretty in 90+ overdue, doing… absolutely nothing.

There it stays (because collections is grinding and thankless) and it’s the first thing that gets dropped when something’s on fire. Which it almost always is.

Andrew Ross, interim CFO at Action Elevator, did the math out loud: collect the tail 30 days faster, and that’s half a million to a million a month sitting in the bank earning interest rather than waiting in ledger limbo while you pay interest on debt. 

Stuut collected $4.2m on their invoices in four months, most of it from accounts too small to chase manually. 

My favorite time of the month in those early days of repairing a finance (dys)function… was balance sheet review day.

Yes, this probably reveals something deeply unhealthy about me.

But I knew I would leave those sessions understanding a lot more about the function I’d just inherited.

I always lean on my first principles when I don’t know what to trust. And for finance, nothing is more ‘first principle’ than double-entry bookkeeping. It guarantees that the shit always has to show up somewhere. And 99% of the time, if there’s bad accounting behavior, you’ll find its familiar stink somewhere in the balance sheet.

For the first few months, I blocked out two full days. Around fifteen one-hour reviews, scheduled back to back. One for each location led by its respective Finance Director.

I’d run each review at a fairly high level, until I saw or felt something that didn’t smell right. Then we went deep.

Unsupported prepayments. Uncollected receivables. Inventory provisions. Fixed assets that sounded rusty.

Some location FDs got the message quickly. After two or three clean reviews, they graduated from monthly to quarterly reviews.

Others were in the ICU for a lot longer. And a few Finance Directors stayed there until they were no longer Finance Directors (in fact, more than a few).

My personal focus on the balance sheet sent an important message to the team: monthly balance sheet accuracy was a non-negotiable first foundation.

It all started with finance directors producing clean monthly accounts, so the group as a whole could produce clean monthly accounts.

Until I knew we were publishing clean accounts each month, I wouldn’t have anything better to do than focus on internal balance sheets…

Last week, we kicked off the series by exploring how to spot a shitshow. How to know what you’re getting yourself into before you put your name over the door. And making sure you don’t bite off more than you can chew.

But there is naturally only so much you can learn from the outside, even if your diligence is sound. The REAL truth starts to expose itself once you’re in the chair.

Sometimes it becomes obvious in the first week. Sometimes you can still be digging out new surprises a couple of years later. (Yes, this happened to me.)

So, that’s where we’ll head this week. The first steps you take to establish the unvarnished truth.

If you’ve ever been a CFO uncovering a mess underneath you, the feeling will be familiar.

At first, it can feel like you are uncovering problems at 10x the rate you are solving them. Every answer creates more questions. You don’t yet know whether you’re looking at isolated errors or something more systemic.

At times, you might even question whether you are part of the problem… that’s happened to me more than once (refer to my previous post on the Sad-Happy/Dumb-Smart Matrix).

But you have to keep digging.

I think of this as finding the bottom.

That doesn’t mean everything is fixed… far from it. And, sure, you can put sticky plasters on the emergencies (we’ll get to that).

But until you’ve found that bottom, you can’t really start rebuilding with confidence.

And that discovery process is expensive… It’s distracting. It’s time the business spends without clarity. It’s focus the finance team spends looking inward rather than outward.

Finding the bottom requires urgency and precision. You’ll need to manage the Board and the business through it as well (we’ll come to that later too).

But if your approach is too meandering, and you drip-feed bad news over a long period of time, eventually you’ll be seen as part of the problem.

Actually, forget “seen as.”

You will be part of the problem.

So, how do you find the bottom… and fast?

It turns out this is a pretty useful way to think about inheriting a broken finance function.

Every issue sits somewhere on two dimensions: are you aware of it, and do you know how severe it is?

Now let’s put this matrix to scale.

A shitshow finance function, as we defined it last week, will have a much greater surface area of unknowns. Something clean and simple will have far less.

Let’s take each of the four quadrants in turn and think about what they mean for the CFO:

You will eventually need to conduct a thorough review of the team, and that will likely mean plenty of change.

But now is not the time. You don’t yet know enough about the issues, and uncovering them will teach you plenty about who has the capability you need and who doesn’t.

There is, however, one exception.

If reporting integrity has been seriously compromised, or you strongly suspect it has, you will often need to replace your Controller/CAO, or whoever is your right hand on accounting and reporting.

There are rare exceptions. Maybe they inherited the mess themselves. Maybe they’ve been raising the alarm and nobody listened. But these are also frequently used excuses… so don’t confuse the two.

Fixing a mess like this requires a particular skill set. And it’s rare the incumbent can do it, for two reasons:

If you’re going to have sleepless nights over reporting accuracy, you need someone beside you who will worry about it even more than you do hunting for the answers.

They need to be:

Some inexperienced CFOs (from a non-accounting background) mistake this for needing a GAAP savant. Someone who sleeps with IFRS under their pillow and gives their child the middle name ASC 606.

Core accounting operations, and technical accounting are not the same thing, and require very different skillsets.

You need someone who understands how the accounting and transactional plumbing actually works, and how to fix it at the root.

Part investigator, part repair operator, part risk mapper.

And ideally completely independent of the current setup. No politics to protect. No sunk intellectual capital in why things have “always worked this way.” Just a fresh pair of eyes and a mandate to dig up as much shit as quickly as possible.

They don’t even need to be permanent. In fact, when it’s really bad, that can be an advantage.

I have two or three interim contractors I’ve called on more than once in exactly these situations. People I trust to parachute in, get their hands dirty and find the truth fast, with no expectation that they’ll become my long-term CAO.

In a smaller business, of course, you may need to play much of these roles yourself. The same thinking then applies to the bookkeeper or accountant you inherited.

To expose the truth in a broken finance function, all roads lead to the balance sheet.

It is the fastest place to see where the numbers are wrong, then trace those errors upstream to understand which processes are broken and which still work.

Of course, the goal is truth across all three financial statements. But you inherited a shitshow, remember. You don’t have that luxury yet.

So why the balance sheet?

In short, if you screw around with the P&L, the other side has to land somewhere.

The balance sheet is the elephant that never forgets.

And why not the cashflow statement? Yes, people love saying “cash is the only truth.” But a bank balance only tells you how much cash you have right now. Beyond that, the cashflow statement is built from the P&L and movements across the balance sheet. If those underlying numbers are unreliable, the cashflow analysis is too.

In short, you cannot have an accurate P&L or cashflow statement without an accurate balance sheet. Whereas the reverse is not necessarily true (or at least not as directly). 

The balance sheet isn’t the only source of financial truth. But in a broken finance function, it is the best diagnostic surface.

So, if erm… “inspecting”... the balance sheet is the fastest route to the truth, how do you actually do it?

The specifics of running a full balance sheet cleanup will have to wait for a dedicated post. And crucially, if you’ve got the right Controller beside you, they should be more than capable of running the process.

But the principles are pretty simple:

Start with ownership.

Imagine the balance sheet as a matrix: GL accounts and balance sheet areas down the sides, operating locations/legal entities across the columns.

You should be able to put one name against every combination.

Then make absolutely sure those people understand what they own, including what sits around the edges of their remit.

There are almost ALWAYS areas in a broken finance function that nobody really owns, or with fuzzy accountabiltities. It should be no surprise… that’s where the mold grows first and fastest.

Early on I’d pay particular attention to:

These are some of the cornerstones holding together the rest of the balance sheet.

If the balance sheet carries the other side of the double-entry from the P&L, these accounts sit at the natural ultimate control points in those chains of entries.

Cash is where transactions ultimately settle. Intercompany should mirror cleanly across entities. And the P&L reserve is the final landing place for the income statement: opening reserves plus cumulative profit or loss should bridge cleanly to closing reserves.

So, if they don’t work… that is your starting point.

With the ownership matrix in hand, set up regular balance sheet reviews with the people whose names are sitting against those balances. As I shared in the opening story, I used to line these up back to back over a couple of days.

And, yes, at the beginning, you should be in the room. Even if you have a highly capable Controller.

Balance sheet control has lapsed in the past. Your presence sends a very clear message that it lapses no more.

But it’s not the only reason:

And if this is unfamiliar because you don’t have much of an accounting background, keep it simple… Point at big numbers and ask where they came from. Keep pulling the thread until you understand it. These reps will make you a better CFO, I promise.

As your confidence grows, you can reduce the frequency of your involvement and hand more of the review leadership to your right hand, and eventually settle into a BAU routine.

The balance sheet reviews won’t surface everything. There will be things that are unknown unknowns to you and the finance team, but already known elsewhere in the business.

So give people a clear opportunity to surface them. Ask the exec team. Ask the operators. Ask the wider finance organization: What do you know that I need to know?

Customer disputes. Inventory problems. Unrecorded commitments. Old agreements. Side deals. Things people have been quietly working around for years.

I think of this as a one-time amnesty for inherited bad news. How you do this is important. You must make it psychologically safe for people to bring out the dead.

Let’s assume the reviews uncover what you’d expect…

Under-accruals. Overstated prepayments. Unreserved bad debts. Inventory issues. Old reconciling items. And behind those balances, a collection of broken processes.

You can’t attack everything randomly.

Collect what you find into two central lists:

This can be an uncomfortable stage. You are turning a large pile of unknown unknowns into known unknowns.

Suddenly your name is on a long list of things you know are wrong in books, and you can’t fix it all at once. Next week, we are going to get into how you start to repair these issues.

If it’s a bad situation, it could take months to sort the basics. And in the meantime, you’ll have another problem…

All of this discovery means you will likely be bringing a fresh bucket of manure into the Boardroom each month for a while.

That creates a nasty optics problem. And potentially an embarrassing one for the people who oversaw the business before you arrived.

It can temporarily look like you are making things worse as you surface more write-offs, restatements, forecast revisions, control failures, and inevitably some uncomfortable new truths about the business.

The truth is, managing this dynamic is the hardest bit. The bit that requires the most judgment and skill. I did say these jobs weren’t everyone’s cup of tea…

But also remember: if you did the work we talked about in Part one, you should have the mandate to do this.

There is no precise handbook. It depends entirely on the dynamics, the stakeholders, and the issues at hand. But there are a few principles I’ve found useful:

You get a grace period as the new CFO. But it is finite…

If six months in you are still appearing at every board meeting with another completely unexpected accounting problem, eventually it stops being the mess you inherited.

It’s just your mess…

As you start surfacing more and more problems, the temptation is to start fixing everything you see.

In a true shitshow, that will have you spinning in circles. The surface area of problems and ideas is simply too large, and you’ll end up with a long list of half-done things.

The balance sheet gives you a lens to quantify and prioritize the mess. To get to the bottom as quickly as possible, understand what really matters, and create the conditions to start building back.

And that’s where we will go next week.

Now you know what’s broken… how do you fix it?

:::::::::::::::::::::::::::::::::::::::::::::::::::
:: Thank you to our sponsor ::
:: Stuut ::
:::::::::::::::::::::::::::::::::::::::::::::::::::

If you enjoyed today’s content, don’t forget to subscribe.

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.