Our balance sheet is off by $18K and we have no idea why

What happens when the balance sheet doesn’t balance? My background is in agriculture and I don’t know much about finance. I can understand the profit and loss account, but I could never understand or read a balance sheet.

I asked our accountant what it meant. She said she wasn’t quite sure, it could be a number of things: it could be a bookkeeping error, it could be that some cash was missing, or there could be something wrong with our depreciation schedules.

She told me there was over $18K difference, which is a lot for a small company like us. I asked her how long it’s been a problem and why we didn’t know about this sooner? She said she didn’t know and that she doesn’t look at the balance sheet or do a reconciliation every month.

The board member wanted us to buy machines from his company

We need a new machine for the factory. It costs more than $250K. We looked at all the alternatives and decided on the Northeastern-10. As the expenditure was over $200K, it needed Board approval. One member of the Board was associated with a local company that sold a competitor to Northeastern. He asked if we had looked at his machine and we said we had.

He insisted that we buy his company’s machine even though it wasn’t the best for what we want to do. Our shareholder agreement said we needed 80% approval for expenditures of this level. He blocked all approvals.

It takes a unanimous vote of the Board to change the shareholders agreement.

The increased transportation costs ended up being due to corruption

The company was now 5 years old and sales are over $10M. We employ 45 people and are growing in double digits. We have had very little staff turnover and most of the employees have become shareholders. We have been using more subcontractors to get work done. We always have competitive bids especially as we are located in a relatively small city.

My accountant came to me and said that she was concerned that transport costs were increasing to an unacceptable level. It looked like next year would see a 15% increase. She also said she talked to friends in other companies and they weren’t seeing the same cost increases. She suspected that all our bidders were operating in concert to raise prices. We did a lot of work and found out she was right, they were taking turns winning but the price always went up.

We talked with our operations manager and he said he always chose the low bid. We decided to talk to one of the haulers. What he told us was hard to believe. He said

there was a bidding ring but that it was organized by our operations manager. He was taking a 5% kickback on any bid. The hauler in question had refused to pay and was therefore cut out.

After much debate we called the police. Their investigation showed that our manager was corrupt, that his brother was involved, and that this had been going on for at least three years.

With inflation and currency devaluation, delays in payment are causing us to lose real money

When we wrote our business plan and figured out our working capital, we thought we would be paid within 30 days of sending out the invoice. To be safe, we used 45 days in our models and made sure to have funds available.

The inflation rate is now over 10% and there has been a 40% devaluation of the currency. This means it is really important to collect cash quickly.

We just signed a new agreement with a mobile platform and it stated they would pay within 30 days. They did on the first three invoices, but then they took 60 days and now are up to 120 days. They are much bigger than us and we need them to survive but with a 120 delay in payments we are running out of cash every month. The banks won’t help. In real terms, we never get our money back. We can’t delay our payments out to 120 days.

The CEO was setting unrealistic expectation with the board and investors

No matter how much time and effort we put into controlling our project costs everything always cost more and takes longer than we expect. We’re not dumb – we just can’t get it right.

We tried to figure out what was going on. After a lot of discussion, we focused on what the CEO expected. It emerged that the CEO made promises to the board and investors that he knew he couldn’t keep. He then tried to impose these targets on us and the projects. He just thought it was easier to manage the board this way.

We told him this wasn’t the way we wanted work. We needed honesty and transparency and it was better to face reality than to create expectations that we knew were unrealistic from the start. He and we couldn’t rely on this type of behavior as the business grew.

Commitment accounting for stronger financial control

It was SO amazing to finally see a decent amount of money in the bank. The transfer of funds had just arrived from our first institutional investors and I was excited to no longer worry about where every penny was going.

My personal advocate had a different point of view. He said this was a dangerous time and that I needed to pay even more attention to the bank account. He suggested I sign every check and every bill and move to “commitment accounting.” This meant opening  a commitment document for every planned expenditure; it would show what we were spending, why, to whom, and the estimated cost. The document would be closed when the bill was finally paid. This would show if expenditures were more or less than planned.

My PA also suggested that every check over $2500 should be signed by two people. He said this was necessary to build discipline in the company and to exercise strong financial control as we grow.