McCoy Accounting Advisors, CFO Insights Blog Post #33
A business can have strong sales, talented employees, detailed financial reports, and a clear strategic plan and still struggle to produce consistent financial results.
One reason is an accountability gap.
The accountability gap develops in the space between a financial decision and the actions required to produce the expected result.
Leadership approves a budget, but department spending slowly moves beyond it.
A project is estimated at a certain gross margin, but no one responds when labor begins exceeding the estimate.
A customer agrees to payment terms, but overdue invoices remain untouched for weeks.
A new hire is approved based on projected revenue growth, but no one revisits the assumption when revenue develops differently than expected.
Individually, these decisions may seem manageable. Collectively, they can have a significant impact on profitability and cash.
Financial follow through closes that gap.
Every Financial Decision Creates a Commitment
When a business creates a budget, establishes a pricing model, approves a hire, sets a project estimate, or develops a cash flow forecast, leadership is making assumptions about what will happen next.
Those assumptions create commitments.
If the annual budget assumes a 40 percent gross profit margin, operations have a commitment to deliver work within the cost structure supporting that margin.
If the cash flow forecast assumes customers will pay within 30 days, the company needs an accounts receivable process capable of supporting that assumption.
If leadership adds payroll based on expected growth, revenue production must eventually support the additional fixed cost.
This is where financial management extends throughout the organization.
The accounting department records what occurred. The management team influences what occurs next.
Strong financial follow through requires leaders to identify the operational commitments embedded inside the numbers.
Look for the Hand Off Points
Some of the largest financial leaks occur when responsibility moves from one person or department to another.
Sales closes the project and hands it to operations.
Estimating hands a budget to the project manager.
Operations completes the work and sends information to accounting.
Accounting issues the invoice and eventually turns an overdue balance over to someone responsible for collections.
Every hand off creates an opportunity for information, responsibility, or urgency to disappear.
Consider a construction project.
The estimator builds the project around a specific number of labor hours. The project manager receives the job but does not regularly compare actual labor against the estimate. Several weeks later, accounting closes the month and reports that the project margin is significantly below expectations.
The financial statement accurately reports the problem.
The opportunity to protect the margin occurred much earlier.
Businesses can strengthen accountability by examining these hand off points and asking:
What information needs to move with the responsibility?
Who is responsible for identifying a financial exception?
How quickly should that exception be communicated?
Who has authority to take corrective action?
These questions turn accountability into a process instead of relying on individual memory.
Manage Exceptions Before They Become Trends
One of the most valuable habits a leadership team can develop is learning to identify financial exceptions early.
An exception is a result that moves outside an established expectation.
Labor was budgeted at 25 percent of revenue and is running at 31 percent.
A project was estimated at a 35 percent gross margin and is currently tracking toward 27 percent.
Accounts receivable days increased from 38 to 51.
Overtime increased for three consecutive weeks.
A department exceeded its monthly expense budget.
A major customer’s payment pattern changed.
Each of these provides information that deserves attention.
The goal is to establish thresholds that trigger a conversation.
Leadership should determine which variances require action and how quickly the team should respond. This allows managers to focus their attention on areas with the greatest financial impact.
Waiting until the monthly financial statements reveal a large problem limits the available options.
Early detection gives management time to respond.
Accountability Requires Decision Rights
Employees can be held responsible for financial outcomes only when they have appropriate authority to influence them.
This is an area where many organizations unintentionally create frustration.
A manager may be responsible for controlling labor costs but have no authority over scheduling.
A project manager may be responsible for job profitability but unable to approve a change order.
A department leader may have an expense budget but lack clear guidelines regarding which purchases require additional approval.
Financial accountability works best when responsibility and decision making authority are aligned.
Leadership should define the boundaries.
What decisions can the employee make independently?
Which decisions require approval?
At what dollar amount does approval change?
When should an issue be escalated?
Clear decision rights allow employees to respond faster while protecting the company from unnecessary financial risk.
Replace General Accountability With Specific Commitments
“Improve profitability” is difficult to own.
“Reduce overtime to less than 5 percent of total labor hours by the end of the quarter” creates a measurable commitment.
“Improve cash flow” leaves room for interpretation.
“Reduce accounts receivable over 60 days by $75,000 within the next eight weeks” provides a defined outcome.
Specificity strengthens accountability because everyone understands what success looks like.
This also improves leadership conversations.
Instead of asking, “How are we doing on collections?” leadership can review the agreed metric and determine whether progress is occurring.
The conversation becomes grounded in data.
This principle can be applied throughout the organization.
For every major financial objective, identify a measurable operational commitment, assign an owner, establish a timeframe, and determine how progress will be reported.
Financial Follow Through Should Have a Memory
Businesses make hundreds of decisions during leadership meetings.
The challenge is remembering them three weeks later.
Someone agrees to renegotiate a vendor contract.
Another person commits to reviewing pricing.
A manager is going to investigate overtime.
Accounting will analyze an unusual expense.
Operations will review an underperforming project.
Then everyone returns to their daily responsibilities.
By the next meeting, new problems have taken priority.
This is why financial follow through needs a memory.
A simple decision log can be one of the most effective accountability tools available to a leadership team.
Record the issue, the decision that was made, the person responsible, the expected financial impact, and the date the team will review the result.
The next meeting begins with the open commitments from the previous meeting.
Over time, leadership gains another valuable piece of information: the organization’s ability to execute its own decisions.
That is a performance metric worth paying attention to.
Accountability Protects the Economics of the Business
The numbers inside your financial statements are created by thousands of decisions made throughout the organization.
Pricing decisions.
Purchasing decisions.
Hiring decisions.
Scheduling decisions.
Project decisions.
Customer decisions.
Spending decisions.
Collection decisions.
Financial leadership means creating enough visibility and accountability around those decisions to understand how they affect the economics of the business.
Your Critical 4 of Revenue, Gross Profit, Net Profit, and Cash can tell you where performance is heading.
The next question is equally important:
Who can influence what happens next?
When leadership can answer that question clearly, financial information becomes much more actionable.
Accountability becomes embedded in the way the business operates. Managers know which financial outcomes they influence. Employees understand when something needs to be escalated. Leadership can see whether commitments are being completed. Problems surface earlier.
That is how financial follow through becomes a competitive advantage.
McCoy Accounting Advisors works with construction, trades, service based, and professional service businesses to strengthen financial visibility and decision making. Through Fractional CFO services, KPI dashboards, forecasting, budgeting, cash flow management, and financial strategy, we help business owners understand the economics of their business and turn financial insight into better decisions.
