Tension swept the room as two grown women with clenched jaws and knotted fists looked like they might start throwing punches. “I don’t want to read ‘em. That’s why I hired you.” One of the women slammed the stack of financials on her desk with as much disgust as there was surprise. 

Her daughter pleaded, “Matt. I thought you were going to fix this?” 

“I am fixing this.” I needed to be careful with my words as I was hired to ultimately fix a business and had discovered a bees nest of sorts that was threatening not only my clients’ business but also her relationship with her mother. “Talking about this is fixing this.” I continued “In order to begin to fix the business, we first need to get a full understanding of where all the credit card debt is and how it got so out of control.” 

I had the unfortunate task of being hired as “the bad guy.” Although I didn’t know it when I was being hired, I was figuring it out pretty quickly as I watched these women crying and arguing over their business’s finances.

The daughter had approached me a few months before this conversation to help her “fix her business.” This is typically as much detail as I get. Honestly, that’s all I need to know at first. Quickly, I’ll uncover what specifically needs the fixing; finances, operations, people, all? 

How an entrepreneur goes about addressing their business’s issues varies greatly. New Accountant. Hiring a Consultant. Refinancing debt. Finding Investors. Hiring People. Firing People. Etc. There’s never a time when the plan is exactly the same. This is why I like to take the time to hear my clients’ stories of how they’ve tried to do things in the past. This helps my team by not wasting time doing the exact thing you already tried. It also tells us where we may begin. 

In the case of the Mother / Daughter feud, this was the second meeting. At the first meeting, the daughter explained that she wanted to buy the building they were renting. There’s a large number of reasons business owners want to do this; save on cash flow, establish generational wealth, tax benefits, control, etc. She estimated that she could save around $2,500 a month if they purchased the building. After reviewing her notes, discussing the specifics of a potential building loan, I agreed that her math was more or less, accurate.

“Why don’t you just call the bank you already have a relationship with and see if they’ll help you buy the building?” I asked after reviewing her math. Typically, starting with the bank you have a business deposit relationship with makes the lending process that much easier.

“I did…” she paused. Suddenly looking quite a bit nervous, she continued, “I applied over 6 months ago and no one will call me back.” She looked pissed. And frustrated. And then, a twitch in her eye. She was starting to cry. Through a clenched jaw, “They just sent me this letter.” She handed me a letter.

I reached for the letter as if it was a death threat with possible fingerprints. I spent a second glancing over the benign letter that many banks pump out on a daily basis only to destroy business owners’ confidence. The bold letters in the middle of the page read, “DECLINATION.” And below that: “INSUFFICIENT CASH FLOW” I paused. I knew what was going on. This business owner puts every ounce of her determination into her business. All her time. All her energy. Sacrificing time with her kids. Sacrificing time away from her husband. Making less than her peers but believing she can make her children’s lives better by teaching them entrepreneurship. She needed closure from the bank. A more thorough answer than the letter gave her. This is why she called me. She wanted to figure out how to grow her business, create a better life for her kids, and create a money making machine. 

When I looked up from the letter, she looked as if there was more to the story than I had at that moment. I hadn’t even said anything yet. She almost yelled, “Can you believe this?” 

I told her I needed time to review everything she had provided to the bank and I would return with a plan of how to get the financing done.

When I reviewed the financials with my team, I noticed a few glaring issues. The financials were indeed telling me a story about her business. They were telling me intricate details of how this business owner was operating things. Specifically, how the financials are prepared and if any adjustments were made to them. These financials showed no liabilities, the assets didn’t equal the liabilities plus equity, and the net income on the income statement was different than that on the Balance Sheet. In short, it was a disaster; obviously wrong, obviously changed by someone trying to cover something up or make them look better. Obvious.

The story I was reading wasn’t of a successful business owner looking to expand their business. It was the story of someone trying to be “smarter” than a bank. As I was first reviewing the financials, I didn’t know if it was the daughter or someone else. But, someone definitely adjusted them. And, they were sloppy about it. Maybe they thought they were smarter than everyone. Smarter than a Consultant. And Smarter than the owner’s mother, who invested over $200,000 into the business (which also wasn’t on any of the financials I saw.)

I’ll get back to the fight between the women in a moment.

I get asked questions like these all the time;

• Why did I get declined for a loan?  
• What story do my financials tell? 
• Am I making money?
• How much money am I losing?

They’re normal questions. Questions that bankers ask. Questions that accountants ask. Questions that business owners ask. That’s why I’m here. I help everyone read their financials in a way that fits their perspective. 

A banker, for example, might ask the question: “Why aren’t there any liabilities?” He or she is likely concerned that if there are no liabilities, then there is nothing for them to refinance. It also might tell them that the financials are likely wrong as they may be holding a loan statement from their bank.

An accountant, as another example, might ask the question: “How come the net income on the Balance Sheet doesn’t match the Profit and Loss Statement?” You see, an accountant knows this number is supposed to be the same on both reports. A banker should know that these numbers are supposed to be the same. A business owner likely needs a moment to google this. Kidding! In all seriousness, the bottom number on a Profit and Loss Statement is the Net Income amount. This number goes on to a Balance Sheet in the equity portion as it will (at the end of a year) become retained earnings.

So, why would an accountant ask why the numbers are different? Since they should be the same, an accountant is really asking, “What happened here that changed these numbers?” I’ve seen them different a lot of times. Often, that’s why my team gets called in; there’s a discrepancy in the numbers that no one can figure out. 

Let me give you some reasons the numbers might be different:

1. The most likely reason is that whomever pulled the reports didn’t use the same reporting period. I see this all the time. It’s not hard to fix, but it is a small detail that, if missed, could cause bankers, accountants, consultants, lenders, and investors to scratch their respective heads and say, “Why aren’t these numbers the same?”
2. Cash vs Accrual is different. In another article, I write about the definitions of these and why they matter. Suffice it to say that if you change accounting methods in between pulling reports, you will likely have a difference on your reports.
3. Changes were made to the Profit and Loss Statement after the Balance Sheet was generated from the accounting software. This happens often. A good rule of thumb is to always generate both the Balance Sheet and the Profit and Loss Statement fresh after any changes are made.
4. Changes in Excel. Excel is a great tool for spreadsheets. It’s not a great tool for adjusting financial statements. Someone who doesn’t know accounting will go into Excel and start making changes to different cells. However, if they don’t know how one adjustment impacts another, when the reports are generated, they’ll be obviously incorrect. 

Back to the complicated conundrum I found myself in: The daughter hadn’t yet told her mother about the declination letter. Hadn’t yet told her that the financials were altered. Hadn’t yet told her the $200,000 she invested was gone AND she’d racked up a considerable amount of other debt along the way. 

I thought we were having a meeting to do a routine “financial inventory audit.” This is the first step I take when I’m asked to fix finances. I need to look over all the statements, all the accounts, even the ones you hadn’t told your mother. However, I didn’t know the mother had invested so much money AND that her daughter had spent it all leaving them to ultimately not be able to get the building they wanted to purchase. 

How you read a set of financials is the most important part of any banker, accountant, business owner, or consultants’ job. 

One of the most influential people in my career told me something very important and I’ll never forget it. He said, “Matt. When you learn how to read a set of financials, you’ll be able to do anything you want in life.” He paused. As if to allow the thought of being able to do anything I wanted in life needed a moment to sink in. Then he continued, “The percentage of people who have ever seen financials, let alone the number of people who actually know what they mean, would astound you.”

So, let me ask you. How do you read Financials?