Your Financials Are a Crystal Ball (If You Know How to Read Them)

Sean Weisbrot: Welcome back to another episode of the We Live To Build Podcast. No matter how you choose to run your business, if you don't have a deep understanding of your finances, you'll be doomed to fail. If you take the time to understand your finances, make sound decisions around who has what kind of access to that information, and empower great people to be honest with you about financial decisions, you are much more likely to succeed.

Sean Weisbrot: Our guest today is Angela Rice, a certified public accountant, a certified fraud examiner, a former forensic accounting consultant, and now the co-founder of Boutique Travel Advisors and of centered CEOs. If these company names sound familiar, it's because I interviewed her co-founder for both of these companies, Janet Anova in episode 49, where we talked about isolation and loneliness as an entrepreneur and how to handle it.

Sean Weisbrot: If you haven't listened to that episode yet, I hope you do. In this episode, Angela and I talked about what are CFOs, accountants and bookkeepers, and what are the differences? When should you consider hiring them? Who should have access to view your finances within your organization? Does the CFO actually control the finances and can block A CEO or merely just advises on how to spend it wisely?

Sean Weisbrot: What are gap standards? What is the difference between unaudited and audited financial statements? What is forensic accounting? How can you tell if someone is cooking the books? What are some ways you discovered people cooking the books? How do you prepare for being acquired? How do you prepare for going public and how do you handle bankruptcy?.

Sean Weisbrot: What is it that you're doing right now and a little bit about your backstory that makes you the right person to talk about this?

Angela Rice: I spent a really long time, over a decade working in consulting. I provided expert witness. Testimony support as well as worked on forensic investigations.

Angela Rice: And in that arena, I had the opportunity to work with so many different types of companies from different industries as well as companies of different structures, from Fortune 100 companies, to private companies, to startup businesses, and it really gave me a lot of exposures. To how companies are run.

Angela Rice: Obviously when you're working on a bankruptcy type case, you're looking at a company that hasn't been run very well versus opportunities to work with companies where you really saw strong processes and procedures and you saw where companies were profitable and able to scale and grow exponentially. I sort of started to get burned out in that environment.

Angela Rice: I was raising a family and a lot of deadlines. The work was really stressful sometimes, and it was very litigious as well. When you're working in. Dispute resolution type matters. It's a, it's very reli litigious. And so I was looking for the next opportunity and I knew I had that entrepreneurial spirit.

Angela Rice: And I had, over the course of my consulting career, I'd worked for publicly traded companies and I'd worked for small businesses and I started my own business and I. I then launched a travel business. I, I didn't step away from doing, uh, accounting and finance, but I started a travel business. Having done interim management, I knew it was something that I could balance with the work that I had on my plate.

Angela Rice: And I started that business with Janet Anova and her background completely different than mine was more so in medicine. She's a nurse practitioner, so the two of us running this company, this travel business, travel was very new to me. Of course, I had a passion for travel, but that's one industry I had done.

Angela Rice: Some work, but not a lot. So it became like this passion project. But where I really saw some synergies is what Janet brought to our business was very different from what I brought to our business. And then we realized, you know, obviously the pandemic had some impact on our thought process, but even prior to, we realized we were running our company extremely different from other small business.

Angela Rice: Entities that we came in contact with. And I think that's a combination of myself having worked with a lot of businesses on the finance and accounting side and also in operations. Whereas Janet had this background in medicine where she was more focused on mindset, creativity, and the two of us realized that why we enjoy our travel business, we wanna continue our travel business, we realize our true.

Angela Rice: Expertise in terms of a partnership and how we collaborate is the combination of her skillset and my skillset, and we really wanna offer that to other business owners.

Sean Weisbrot: All right. Well thank you for the introduction. And just as a side note, you mentioned Janet Anova, who I interviewed in episode 49, and we talked about isolation as an entrepreneur at the entrepreneurial level.

Sean Weisbrot: How the pandemic has exacerbated those feelings. So if you haven't listened to that episode yet, I suggest you listen to it. You don't need to in order to understand this episode. However, I would love for you to listen to it because it is relevant to everyone. So let's get into the topic. What are CFOs, accountants and bookkeepers, and what are the differences between them?

Angela Rice: Well, there's definitely a variety of different types. Of professions within those different arenas, and I think it's really important to recognize that there's so many specialties. You can be specialized as a result of an industry, or you can be specialized because you're more in the finance or you're more in cost accounting versus financial accounting.

Angela Rice: Or tax. I know throughout my entire career, I can't tell you how many times I've been called on and people have inquired or referred business to me thinking that I'm a tax accountant and that I file tax returns. I've never filed a tax return, um, for somebody else that's not in my wheelhouse. I mean, certainly I had to take tax classes and it was part of the CPA exam, but it was never my specialty.

Angela Rice: So very similarly to an engineering type degree, you have mechanical engineers, you have computer engineers, and I think sometimes with accounting we get typecast as an accountant. Files tax returns. An accountant is someone who puts together financial statements. So it's really a broad profession and it's dictated on whether or not you wanna be more of an accountant that looks at things for business decision making purposes.

Angela Rice: And then I would say you're more on the finance and the op side, and that trajectory would lead you more into becoming a CFO because you wanna understand financial statements for the purposes of making business decisions. Now, someone who likes. The audit work or they like putting the numbers together, then they're probably going to either be an internal auditor or a controller.

Sean Weisbrot: When should you consider hiring one of these positions or all of these positions, things like that? What goes into the consideration?

Angela Rice: Yes, and I think that that, that is really a compounded question because it really depends on the type of business. Some business have more transactions than others, and conceptually speaking, it's more about how do I understand my financials for purposes of making business decisions?

Angela Rice: That would be someone where I would look more to have a consultant come on board with a strong analytical background that can really help you understand. And understand the financial components of your business. Now, if you have previously a lot of transactions in your business, a lot of paperwork, accounts, receivables, collections, you're paying for inventory and you've got a lot of transactions, then it's gonna be important that you have at least a bookkeeper.

Angela Rice: And eventually, when you look at someone who has more experience beyond just bookkeeping, then you're looking for more of a controller type position. And I think a lot of accounting can be outsource. Sourced. Um, but I think it's also very important for a business owner to understand you don't wanna over outsource because it's important that you have somewhat of a learning curve so that you understand your financial data.

Angela Rice: And secondly, one thing that I think a lot of small business owners overlook is the fact that it is so important to recognize. Segregation of duties. If one person has complete control of all of your financial data as well as your bank statements, and they are the ones that receives payments and makes disbursements to pay for things, that is really a gray area, and I'd advise you not to have one person doing all those things because you could become a victim of fraud pretty easily.

Angela Rice: And it's important to really segregate those duties so that someone doesn't have access to both your books and also cash.

Sean Weisbrot: That's something I wanted to get into a little bit later, but thank you for making the point now so it's fresh in my mind for that time. Let's say you have multiple people in your organization who should have access to at least view your finances.

Angela Rice: A lot of companies, especially companies that have a strong leadership and offer a lot of autonomy and really want their management to be part of the decision making process, you really can have transparency in your financial data, but you want it to be protected. So it means you wanna give them like more of a read only type version.

Sean Weisbrot: Who would you suggest giving that kind of access to even just read only?

Angela Rice: I mean, there are companies that have found it to be very advantageous to share financial data in certain degrees to all of their employees. They want to celebrate when the company is reaching growth milestones. They want to involve the company when there is a need for cost saving measures.

Angela Rice: So a lot of companies do quarterly type meetings, similarly to a publicly traded company to really involve their employees. So the employees feel as though they're contributing to the success of the company when it is performing well, and when it's not performing well, they feel that they can help look for opportunities.

Angela Rice: To improve the position of the company. So I actually promote that there is some transparency when it relates to sharing your financial information. Now that doesn't mean you're sharing salaries of your employees. That information, I would say is more safeguarded. But in terms of big picture, what are our revenues today and what do we want them to be a year from now, five years from now?

Angela Rice: As well as recognizing, um, having your employees understand production. Whether you are at capacity or you are below capacity is really important because your people out in production have their day-to-day responsibilities. If they have a better understanding of how it affects profitability while they're on their job, they are going to be more effective in increasing that productivity in order to have a better outcome for the company.

Angela Rice: So I think the more you educate your employees about the financial. Situation within the company, they're more likely to be proactive to help you improve your company's performance.

Sean Weisbrot: So I guess when I asked that question, I was thinking more of like giving them access to see every amount of money that comes in and every amount of money that goes out.

Angela Rice: Yeah, I mean that's, you're talking more cashflow perspective. I mean that really probably is going to be the business owners and those that are involved in the accounting, um, department, or if you're tax accountant or you're outsourcing to bookkeeper, they don't need to see the nuts and bolts. But I think it's important to share the income statement balance sheet.

Angela Rice: Probably not as important, but it's important for you to. Capture your financial data and present it in a meaningful way so that the management team top to bottom can have impact on the future performance of the company.

Sean Weisbrot: I think that's a really good idea. And in the past I've. Told the team once or twice we're not doing so well financially at the moment.

Sean Weisbrot: And then like later on I was like, okay, well the, you know, things have changed a little bit and we're doing, but I never really said this is how much cash we have on hand. Um, however, like, so this was April, 2020, right? I think most company owners had to have that kind of a conversation with their teams.

Sean Weisbrot: Like, Hey guys, things are. Probably gonna be a little bit tight for a while and you know, we need to cut salaries. We may need to fire a few people like so we can trim down and make sure we have enough money to pay the rest of you for the jobs that are much more vital. But I never went into the details of how much money was left and how much we're burning, but I agree that something should be set up for the employees to be able to see.

Sean Weisbrot: I think one of the issues I, I am not sure how to handle, which hopefully you have some advice for, is. If we're showing them revenue and, and I guess profit and and loss, if there's too much profit, then won't they start to go, wait a minute, why aren't they paying me more? Like they can afford to pay me more?

Sean Weisbrot: Right. I see they've got a billion dollars in cash sitting around that's profit from 2020. Like, why aren't they giving me more salary?

Angela Rice: Well, I think it's also important to recognize that owner's compensation can be a line item of deduction, so you can share with them the profits that are available to reinvest in the business.

Angela Rice: You don't necessarily have to disclose own owner's compensation to deduct that from your profits before owner's compensation. So that reveals to the employees more so what you have available to reinvest in your business. And you, you clearly don't necessarily have to show your bottom line, but I think it's important when you're talking about people who are involved in decisions related to cost control.

Angela Rice: Even shipping and receiving, for example, or those that make decisions about, you know, whether we're buying furniture for an office environment or someone who's responsible for the technology that we all know costs a lot of money, the licenses, et cetera, if they have an understanding and you capture the cost information.

Angela Rice: That's what's relevant to overhead type positions because they are not part of generating revenue. Whereas if we're talking about what type of information you should share with your salespeople or your marketing people, that is probably gonna be looking at the sales and marketing expenses, the investments that you're making in sales and marketing.

Angela Rice: You've gotta factor in time as well. How much time do we put on these campaigns? How do we allocate our labor costs? To different campaigns if we know we're spending money promoting a certain product over another product. And then how does that drive your revenue? So you can partition certain data that's relevant to certain people.

Angela Rice: So for sales and marketing, revenue's gonna be more important for those that are part of your overhead. It's more important for them to look at overhead items that can be either negotiated or you can even consider eliminating if you're incurring costs that, uh, aren't adding value to the business.

Sean Weisbrot: I love how you just said partitioning data.

Sean Weisbrot: We are using Google Drive. We're paying for Google Suite. What we realized was even though they have differing permission levels, they were still able to see our financials. They were able to see all of the data from all of the folders. Even though some of the files were in protected folders, they had full access to all of them, even with the permissions we had set up.

Sean Weisbrot: So we decided to split off the HR folder into a separate shared drive that just my COO and I can have. So we're gonna end up probably needing to create multiple shared drives based on marketing, sales, technology, operations, just so that we can protect the data at a high level from the people who don't need to be seeing what those things are.

Angela Rice: Absolutely. You.

Sean Weisbrot: Uh, so for anyone who uses Google Suite, please check this out for your company because chances are you are leaking important data. So I wanna go back to CFO real fast just because I think a good number of the audience are probably building startups that are looking to grow. And so I feel like while probably most of them, like us don't have a CFO, it may be some position that they hire for in the future.

Sean Weisbrot: So. Would you suggest the CFO actually control the finances and be capable of blocking a CEO from spending money? Or should they merely just manage the finance and advise the CEO on how to spend it more wisely?

Angela Rice: Well, really, the CFO is an extension of the CEO to be A CFO. It requires more than just a background in accounting.

Angela Rice: It is definitely a management leadership type position. So I really like to think of it as a collaboration where the CEO and the CFO are making business decisions together, where the CEO is more focused on the operations, the idea, the creativity, and what it is we do as a company, our why, our how, and it's more the visionary.

Angela Rice: Whereas the CFO is more the one that's able to provide the analytical data to support the various. Decisions and the visions of the CEO. So it's a really different skillset when we start talking about what are the responsibilities of of A CFO versus an accountant who's maybe had 20, 30 years of experience doing audit tax, or even working as a controller because it's, you know, some controllers definitely become CFOs, but you also have to be very careful to ensure that.

Angela Rice: That accountant, a lot of accountants are either introverts or they tend to be more people who like to work with numbers, not necessarily work with people. So if you are going to promote somebody with a finance accounting type environment to then become A CFO, which most do, you really definitely are looking for candidates who have other characteristics that allow them to be part of leadership.

Angela Rice: They have to have that managerial and leadership qualities to really provide the value expected of A CFO.

Sean Weisbrot: So if I'm getting this right, the CEO says this is what I wanna do. The CFO says, okay, we have enough money to do it, and then the CO says, okay, I'm gonna make it happen.

Angela Rice: A CFO, if you're paying someone as CFO level, they're not the one that's doing the bookkeeping, they're at a much higher level.

Angela Rice: So the CFO is gonna go to a controller and go to the bookkeeper and say. You know, give me the up-to-date numbers, whether it's a current balance sheet or it's a register, or it's a, the trial balance is gonna be something more that a controller does. The CFO is gonna be looking at projections. They are going to be looking at the viability of the company.

Angela Rice: Like, where are we gonna be in five years? If we introduce these new products and we're launching them at these different phases, what does that look like? So they're more of a visionary on the accounting side, so they're not going to be as. Knee deep in the financials, but instead they are going to, um, work with a CEO to say, okay, we have these three or four different product lines.

Angela Rice: Do you know which ones actually make us money and which ones are losers? Do you know where we have productivity failure in our company? If they have an additional 20 or 30% capacity? What happens when we drive more business? That in that situation, it's going to be a windfall because you have people who are, have the capacity to do more work.

Angela Rice: On the flip side, if you have people that are performing at 115% capacity, they're working overtime. Now you have the concern of productivity issues related to the more overtime that we do. Sometimes that affects our ability, you know, you can only continue to work overtime so much, so you're gonna have to bring on new employees.

Angela Rice: You're going to. Really see costs go up as you bring on new business because you don't have that capacity, like in the first example. So A CFO is more able to really foreshadow and predict what is going to happen to the structure of the company and its profitability based on the decisions that are being made by the operations and driven by the CEO of the company.

Sean Weisbrot: I understand that the CFO doesn't actually do the the numbers, but isn't it like if I were to say. I wanna develop a new product line, tell me how much money it's gonna need to to do, like to do this thing to make it happen. And then can, you know, do we have enough money to make it actually happen? Something like that.

Angela Rice: Yeah, I mean, I think the CFO's job is, if this is what you want to do, this is what it's going to take. If you wanna launch this new product based on the expenses that we're projecting for this product, your sales are going to have to be. 10 times what they are today. If you're looking at a an expansion, you have to consider what are the fixed costs of that expansion and what is our production increase going to have to be in order for us to be profitable?

Angela Rice: Once that expansion takes place, you also have to look at, a lot of times when we make investments in a business, the costs are incurred. First, you have to come up with capital, so you're incurring this. Cost. Are you prepared to con incur that cost knowing that the sales might not be until a future date?

Angela Rice: So the CEO is really gonna work with the CEO to say, if the CEO says this is what I'm going to do, the CFO is going to help them financially to say if this is what's going to happen. We need to be prepared to spend X dollars and be prepared to generate y in revenue. A lot of people make decisions based on their passion, right?

Angela Rice: Think of innovators and inventors. They're so passionate about their invention and, and they believe in their products, that they believe that their ideal clients are going to want those products, but ultimately, if that product cannot be produced. Profitably, it's never gonna become a business. So when you align A CEO with a CFO, the CFO is gonna work with the CEO to ensure that the vision can truly become something that is profitable.

Angela Rice: And you also have to recognize with a lot of companies, particularly startup, you're losing money, you're putting more money into the business. That ROI comes at a later date, but you're really at some point, if you only have so much cash flow, you really have to recognize, okay. Maybe we have these three or four different ideas as far as product launches, but if we launched 'em all at the same time, we'd be broke.

Angela Rice: So which product do we launch first, and is it based on which product is gonna generate revenue the fastest so that we can then. Take the profit from that product in order to reinvest it in product number two, or do you start with product number two or three? That requires less of an upfront investment and more sweat equity where, okay, it's gonna take us longer to sell that product, but once we sell 2, 3, 4, because it's a higher ticket product or service, it's gonna allow us to then.

Angela Rice: Diversify our products and have greater ability to service more people.

Sean Weisbrot: At what point should a startup founder A CEO think about bringing on A CFO? Is it an A round, is it a B round? Like do you have any understanding of that part?

Angela Rice: You know, it depends on the background of the founders. If there's one founder or five founders, a lot of times you'll find that one of those founders has the background in accounting and finance.

Angela Rice: So they fill that role from the standpoint. Um, one of the owners already has that background, so that's always. Kind of a win-win when you bring someone on as an equity partner who can service that role. There's also the opportunity, there's a huge market for CFOs that provide their service on either a part-time basis or a consulting basis.

Angela Rice: So you're not paying for a CFO to work full-time in your business, but rather maybe they provide. So many hours a week or a month, and that allows you access to their expertise without necessarily having to pay their full salary. I also think that when you're in the earlier stages of your startup, obviously the more complex your business, the greater need you're going to have for that.

Angela Rice: CFO level position, your business might be a little more simplistic on the onset. So again, I would look for someone more on a consulting basis until the complexity of your business really requires a CFO. The other thing to look for is sometimes we get caught up in titles. The CFO title is automatically going to have a premium attached to it, so I would really look at resumes.

Angela Rice: Where you can kind of get a good sense of someone's financial background, where they have financial analysts for a large company and do they really know your industry? So not only are they bringing finance and accounting expertise to your business, but they're also bringing industry experience. You don't necessarily have to call that position the CFO title, 'cause right there you are creating a premium for the position.

Angela Rice: You might wanna bring it in as a financial analyst and then out. Source some of the CFO level work to an outside consultant that is paid on an as needed basis or a retainer every month. So there's a lot of flexibility. I'd be really careful not to overinvest in A CFO if your business doesn't have the financial means to pay for that position, or if they're not going to get the ROI from A CFO early on in their business.

Sean Weisbrot: Makes sense. Yeah. We we're in the process of trying to hire a marketing director right now rather than a CMO because we're, we're definitely aware of that premium, and so we're trying to find someone who has like a lot of experience as a marketing manager or maybe even already experienced as a director, and then hopefully be able to groom them to become a CMO over the next, let's say 18 months, something like that.

Angela Rice: It's a great idea. You really wanna choose that candidate can can grow with your business and they have the underlying skillset, the leadership, which I think is so important. You kind of wanna, as I think it's kind of a given that they have the financial expertise, they have the accounting expertise. You wanna be able to ensure that they have the leadership qualities.

Angela Rice: And I think really even companies that are looking to go public as a startup, I think that. There's credibility when an investor is looking at your business and they recognize that you're making good, solid business decisions by recognizing that you don't need that position full time. Yes, it's probably something that if your business is taking off and in time, you're reaching certain levels where there's a lot of diversification in your products, or there's a lot of complexities and, and there's a lot of overhead and, and productivity, uh, concerns as well as you're, you know, you're bringing on.

Angela Rice: Employees, things like that based on the complexities of the business that is really gonna derive whether you need that to be a full-time position, you know, in your first few years of operation even versus your five to 10. There's a lot of small businesses that are extremely successful that have the controller position as their, um, sort of primary accounting role, and then they stay educated.

Angela Rice: Enough through consultants and through, um, other resources to be able to make financial decisions as an executive team without necessarily having a CFO.

Sean Weisbrot: So I wanna spend the rest of this time talking with you, uh, more about accounting principles and things like that. So before we do that, is there anything that we didn't talk about related to CFOs and all of this stuff that you may have like a final thought on?

Angela Rice: Just be mindful that a CFO and accountant are very different roles. I mean, yes, accountants can become CFOs, but it's those leadership call qualities that you want to ensure that that candidate has just be very mindful that they are very different. Just like a lot of innovators, um, and engineers, um, are equipped to be CEOs and run companies and to become entrepreneurs.

Angela Rice: Others are not.

Sean Weisbrot: I want to talk about gap standards because a lot of people really don't understand anything about accounting and even I, like I do the books for my own company, but I don't really understand a lot of this stuff.

Angela Rice: Yeah, that's a big, big component of the CPA exam and really gap standards is really understanding.

Angela Rice: Um. How you report your financials. And another layer of complexities is the fact that gap and tax laws are not necessarily the same. And we're definitely moving towards, you know, different standards. And what's been great is that a lot of companies are international, so they have to follow various international standards and even.

Angela Rice: From a standpoint of taxes, states have variations, but a lot of software now is helping to solve that problem for years. The complexities of having to follow those different standards were much more challenging prior to having the internet and, and all this software that helps really, um, automate the accounting functions as well.

Sean Weisbrot: So just for clarity's sake, gap means what Generally accepted accounting principles.

Angela Rice: Right. So for example, when you receive cash, is that revenue on the books or when do you book the revenue? For example, there's cash accounting and there's accrual accounting. So GAP would follow accrual accounting. There are instances where depending on the structure of the company for tax purposes, you can report on a cash basis.

Angela Rice: But it depends on whether or not you qualify to report on a cash basis. So same with when you receive money and you haven't performed the service or goods. It's not going to be considered revenue until you've performed the goods. And services and expenses have a lot of similarities when you buy product and it's sitting in inventory.

Angela Rice: You don't get to expense that as a cost of goods sold. That's a balance sheet item. So the gap principles are very complex. I do believe that the software that's available, um, is definitely helping business owners and even financial professionals to better utilize the standards. We have better access to the standards.

Angela Rice: Depreciation is another complex. Item where, you know, is this an item that's depreciated over five years or over 20 years, or what's the amortization of a particular asset? The way that we have access to that information is much more automated. So it makes it a lot easier for the practitioner to create the depreciation schedule based on gap or based on tax, which are different.

Sean Weisbrot: Thank you for those, uh, examples. What is the difference between an unaudited and audited financial statement? Something that every company and every country in the world seems to need to provide every year or even every quarter in some instances?

Angela Rice: Right. I mean, you, um, if you're a publicly traded company, you're required to have audited financials.

Angela Rice: And audited financials is when you have a independent auditor review your financials and there are auditing. Standards that are required for those internal auditors such as Pricewaterhouse, KPMG. Those are some large international accounting firms that most people identify with those names if they're in business and you have to follow the standards.

Angela Rice: There's audit standards related to industries. There's audit standards related to how you audit different components of the financial statements, such as the balance sheet, and if it's a going concern. You know, that's something obviously that's part of the audit. We also have standards when you complete an audit related to fraud detection and whether or not there was any, you have to disclose whether there's any concern for fraud.

Sean Weisbrot: Okay? So if you're not a publicly listed company, then you aren't required to have audited financial statements.

Angela Rice: You're not required to have audited financials unless, for example, if you're going to apply for a loan, you might have a bank, require that you present audited financials. You might be part of a partnership where there's multiple owners, where the owners agree we need an audit because that's our way of having checks and balances, especially companies that have investors who are active versus passive.

Angela Rice: If I was an investor in a business and I wasn't actively part of the management, I probably would want an audit. You'd want to know that somebody's reviewing the financials for accuracy and reliability.

Sean Weisbrot: So in that case, if it's an investor demanding it, would the investor pay for the audit or would they even be the one that recommends the independent auditor?

Sean Weisbrot: Or how does that look? I.

Angela Rice: Well, independent auditors by nature, by nature of being independent, are assumed to be non-biased. And there are some standards related to how long you can audit the same client. And there's conflicts of interest if you're providing other services to, uh, audit to clients. So definitely the industry is on top of creating that autonomy and making sure that the company and the auditor are independent of each other and there are no conflicts of interest.

Angela Rice: Usually if, if it's not required because it's a private company, it's usually they agree upon those terms that you know, the company's gonna pay for the audit, it's gonna be performed once a year, every other year. What is gonna be inclusive of that audit? Because they might have different agreed upon procedures beyond just what's required under a gap audit.

Angela Rice: So it really kind of depends. In a private setting, the parties can negotiate the different terms that would be encompassing of the audit.

Sean Weisbrot: Would an auditor also do forensic accounting or are those different roles?

Angela Rice: Different roles? I mean, I think a lot of auditors become forensic accountants, but the forensic accounting arena is much smaller than audit.

Angela Rice: I mean, think of all these publicly traded companies versus the amount of cases involving litigation where. Forensic accountant is necessary. So similar skill sets, but they're utilized for different purposes. So if you're doing forensic accounting, you might be involved in a lawsuit where a plaintiff is suing the defendant for Ill-gotten gains.

Angela Rice: So if a business owner thinks that an employee has been stealing money from them years and years and years, and they discover it, they might have an outside forensic accountant come in to evaluate the books to basically trace the losses or the money that was stolen by the employee. Whereas an auditor is going to be hired to review the books and to truly follow the gap procedures.

Angela Rice: There are procedures related to doing forensic accounting work. The A-I-C-P-A has credentials as well as the Certified Fraud Examiner provides, you know, code of conduct and things like that and best practices.

Sean Weisbrot: So that is a really good segue into my next question, which is how can you tell if someone is cooking the books?

Angela Rice: There's different ways that that, uh, books can be cooked. And so as a fraud examiner, we learned those different techniques. There's definitely a lot of surveys that happen in the industry and the industry is interested in studying and using case studies to really determine how does fraud occur and how do we prevent it.

Angela Rice: It's really the fraud prevention and obviously businesses that have a lot of cash restaurants. I mean, we obviously, people are using credit cards more today than let's say 10, 20 years ago, but any businesses that collects cash is going to be more susceptible to becoming a fraud victim because once cash is gone, it becomes a lot more challenging to trace.

Angela Rice: But with digital technology, I will say that it's also much easier to take an invoice and to docker that invoice. And again, that's another act of fraud. You also have to be careful of collusion. Collusion takes place where maybe an employee of one company, an employee of a supplier, are making fictitious invoices and running them through the business, and then they're doing some sort of, you know, side exchange.

Angela Rice: So there's so many different ways that fraud takes place. I mean the Peter Paul, you know, syndrome occurs where, you know, you're taking Paul's money to pay Peter. I mean, that's the lapping schemes. There's so many different ways that Broad can occur. So it's important to segregate duties. We kind of mentioned that earlier, and to do internal auditing as well, to verify documents.

Angela Rice: If you're, you know, dispersing large amounts of money, you might wanna require two signatures as it relates. To verifying expenses you might want in order for a big purchase order to be signed off on. You might require that to have an added signature or be reviewed by someone in upper management, you also have to count inventory because it's.

Angela Rice: A lot of times you have inventory scheming where somebody is stealing the inventory and it's assumed that it's spoiled or that it was used in production. There's a lot of different ways that you can basically quote unquote hide inventory and somebody be taking that inventory and selling it, or if it has value of finding a way to steal from the company.

Sean Weisbrot: That's why I like software companies because if anything, they can just steal the code. Let's say they, they clone the repository, like you can see that they've done it, but you, you can see those things pretty easily. But with physical stuff, it's a lot harder to, to find, I think.

Angela Rice: Yeah, if you're in a product space business versus.

Angela Rice: I mean services too though, because it's really hard to necessarily track what services are being performed by different employees. And you know, I think if you're in a billable environment, someone could fictitiously be billing to another client and the client not know that that's fictitious billing.

Angela Rice: Or you might have an example where. You have, you know, people who are supposed to be work. I mean, to me it's fraudulent if you are supposed to be working and you're not. And I think that's why it's really important to have technology and ways to track the performance of your employee. If someone's supposed to be working in a call center calling.

Angela Rice: 50 different customers in a day, and they're only calling 10, but they're getting paid as if they were utilizing that eight hour timeframe to call 50 people. But they're really, you know, surfing the internet or if they're working from home and they're, they have their computer on, but they're doing other things.

Angela Rice: Is it fraudulent to be collecting a paycheck if you're not doing the work? In my opinion, yes. So I do think you've got to really look for opportunities, and you had mentioned with software, you can see tracking. You can also see tracking in accounting systems, CRM systems, if someone's supposed to be making phone calls.

Angela Rice: If that was a big component of my business, I would wanna look at the records and keep track of, well, show me who you called yesterday. Log your hours log, how much you know, give your employee phones and log the minutes. That they have spent with clients, see if they're really nurturing the clients as they say they do, or if they're supposed to be out in the field visiting clients.

Angela Rice: Are you monitoring those site visits? Do you have checks and balance and ways to verify whether those calls or site visits have been performed?

Sean Weisbrot: It's definitely good. You reminded me. I, I just paid for a simple report system on Jira that's supposed to help us to understand the velocity of issues that our team members are committing code for, so I have to make sure that he's using it.

Sean Weisbrot: Otherwise, why am I paying for it?

Angela Rice: I really truly believe, I think one area of fraud that is, maybe it's not called fraud, but I think. Especially in times where we really have to look for opportunities to be profitable in more challenging environments, and we have people shifting to virtual offices. I really think if we're not as productive as we're supposed to be, and you have somebody who's working two hours a day and you're paying them to work 40 hours a week and you don't have a way to monitor them, that to me is a big area of fraud.

Angela Rice: If a company is. Thinking that they're getting this productivity at 80, 90% and it's really 20%, that is a huge loss to the company.

Sean Weisbrot: So there's two more main questions I wanna cover with you. The first one is, what do you need to do in order, uh, financially speaking, I'm terms of preparation in the case that some other company wants to acquire you?

Angela Rice: Love this area. So this is the area of business valuations and really understanding the value of your company. And I think I've done some valuation work in my career. It wasn't an area of high focus for me, but it was definitely an area of intrigue. It was something I considered whether I wanted that to be my specialty.

Angela Rice: And it's really, if you know you are looking to acquire a company, it's really important that you look at economies a. Scale. If I buy this company, am I gonna create some synergies to make both companies more profitable? On the flip side, if you're looking to be purchased, if I were looking to sell my business, I would be looking at cutting costs and creating the largest profit growth imaginable, as well as look for opportunities to reassess my products and services.

Angela Rice: So I'm. Selling those that are more from a margin perspective, generate more money for my business. And I'd also be looking at creating more value on the balance sheet so that my company is leaner. I'd also create a leaner, so if you have people that are underutilized, I would look for ways to utilize. My employees, I'd make sure that I have processes and procedures that are either written or a lot of people are turning to videos that, uh, really document their processes and procedures because when somebody's gonna come into a business, they are going to wanna see that that business is, can run itself.

Angela Rice: And as a business owner, if you are. If you can't step away from your business for two weeks, three weeks, or six months, then someone is gonna have a hard time acquiring that business unless you are part of the acquisition. So if you know you wanna sell your company, you've gotta make that company as valuable as possible by increasing the revenue and controlling costs, and it's also really important that you learn.

Angela Rice: To spend less time in your business from the standpoint of, can my business run without me and do I have the processes and procedures in place to allow that to happen? Because someone who's buying your business, one of the biggest discounts that is applied to a valuation in a small business is the key man.

Angela Rice: Discount the value of the owner. If the value of the owner is taken out of the business, extracted from the business, that's gonna reduce the value. So you need to set up your company to be less reliant on you if you're looking to sell it.

Sean Weisbrot: Let's answer the same thing, but related for going public.

Angela Rice: So a company that's gonna go public is probably going to have to be understand the regulations of going public, and I think a lot of times people jump into that arena probably too quickly or very ill prepared because they don't understand the formality and the logistics and the regulatory aspects of a public entity.

Angela Rice: So I think it's careful that you've assessed your business to make sure that it truly is running in an environment and in a way that it can deal with the scrutiny that is applied to a publicly traded company. I mean, your books are more scrutinized, your executives are gonna be more scrutinized when you run a business that's private.

Angela Rice: You don't necessarily have to be a public figure the minute you shift that business into becoming a a, a public entity. Now you have to have executives that are public figures and you also have to have tight relationships with investment firms. You're going to need, you know, your accounting needs to truly be buttoned up and you.

Angela Rice: From a technology perspective, you have to be prepared to, you know, endure what it takes to really create the um, requirements, the Schedule K ones, and all the reporting elements. So you need all that administrative processes in place if you're gonna go public and, and you need to be prepared for the public scrutiny and the regulation.

Angela Rice: Of course

Sean Weisbrot: it makes sense as to why it takes like a year and a half to two years to, to go from, I wanted to go public to, okay, let's do it.

Angela Rice: Yeah. And I think, you know, some business owners, uh, who have experience in the public arena and now are an entrepreneur, they, I. Are recognizing that maybe that's not the right direction for their companies.

Angela Rice: I think it comes in waves where it's trending to become a public company. And then you have companies that are public and after three, four years of success as a public company, they, they wish they had stayed private because you don't get to, you have to have a board, so you can easily lose that sense of control.

Angela Rice: And some entrepreneurs don't like that. And, and we've seen that with a lot of, uh. CEOs where they are disgruntled with their board. I mean, we've seen that happen with steep jobs. We've seen, uh, you know, people having to step down of companies that they founded. So I think you've gotta really recognize what is the reason as to why you wanna go public And some companies.

Angela Rice: If they need so much capital, of course that might be a necessity to go public, but, you know, service companies probably don't necessarily need to go public and that's, you know, obviously law firms are not publicly traded. Very few accounting firms are publicly traded engineering firms. The, the service entities tend not to be public for various reasons.

Sean Weisbrot: So the last question I'm really interested in, which you probably are the most excited about is bankruptcies. How do you handle bankruptcies?

Angela Rice: I actually always enjoyed bankruptcy work and sometimes it wasn't necessarily a company that was in bank bankruptcy. It was a company that maybe they weren't meeting their loan obligations and the bank was hiring our consulting services to help, you know, dissect, uh, the financials, um, on a routine basis to really play a part in.

Angela Rice: Managing those financials. And I think bankruptcy, it's all about the prevention. If you do not have the cash flow to continue your business, then you have to make changes to your business. You might have to terminate employees, you might have to terminate products, you might have to terminate services.

Angela Rice: You really have to look at your margins 'cause you're in this situation where. If there isn't profits and there isn't cash flows, you have to create it and you have to create it overnight. Um, and bankruptcy is so costly. Everyone wants to avoid bankruptcy. Those that are owed monies by the company that's in bankruptcy, they wanna avoid bankruptcy.

Angela Rice: So a lot of times you'll see creditors who will negotiate with. Fee debtor in order to try to reconcile and create an opportunity for that company to stay in business. Because if someone's owed millions of dollars, that business going into bankruptcy and shutting down, they're not gonna see any return on the money that they're owed. So they would rather say, okay, we will float you and help you. Or maybe we'll. Form a joint venture or buy some of your products or buy some of your service, or maybe we'll pay for the inventory, but in exchange we're gonna get a higher percentage. So a lot of negotiations go on in bankruptcy. So that interaction to me is always fascinating to see how the debtors and the creditors really try to work together to create this value so that business can can stay in business so that it can avoid going into bankruptcy or come out of it.

Sean Weisbrot: Is there anything that you wish I would've asked about this that I didn't?

Angela Rice: Sometimes it's, it's a topic. Similarly, I'll, I'll use digital marketing as an example, like digital marketing. You and I were talking about technology, you know, before we came on air, and it's like those things are, are challenging for me, but I know.

Angela Rice: As a business owner, there's certain things that you can delegate and have a high level of understanding, and your business is gonna run just fine. You're gonna delegate and you're gonna have people who have the expertise to run those different elements of your business. But when it comes to financial data, it is so important that you make business decisions.

Angela Rice: That are both based on qualitative and quantitative data. You really have to understand your financials enough so that you're making business decisions that are driven by the financial outcomes of your business. So you use historical data in order to predict. The future, future of your company, and I think a company's becomes, you're able to predict the future outcome of your business when you use your financial data and you recognize, do I have seasonality in my business or am I overpaying?

Angela Rice: My supplier based on market rates. Well, if so, then that's the time where you need to go back to your supplier and negotiate a new contract. The business owners that are on top of their financials are making those decisions, and they're able to generate significantly more profit from their business, which allows them to have a competitive advantage over the competition.

Angela Rice: And slowly over five in 10 years, if your profit margin is five, 10% greater than your competition, eventually your valuation is going to be. Substantially greater than your competition, that it's gonna allow you to be able to invest more in your business and potentially be the one buying out your competitor.

Angela Rice: Or you are constantly investing more in your business, where you're probably gonna be seen as more valuable to. Your industry to your clients and to the suppliers, and that's really how you see companies grow and reasons why others don't. I think it's really tied to understanding the financial component of your business.

Angela Rice: It's just so important.