Jared Sanders

Beauty School Financial Planning: Taking the CFO Hat Off

Shareholder, Lightheart Sanders & Associates

Read the Transcript

Jared Sanders:

Awesome, thank you so much for having me. This has been such a great, great meeting. The topics and stuff, I don’t know about you. Even applying some of it to the accounting world and stuff like that, you’re still seeing a lot of good things. I’m still working at trying to figure out how TikTok is going to work for accounting. I have some really bad ideas, but I think it might actually be pretty funny. That’s why they’re not having me here talking about TikTok. We want to talk about controller and talk about basically being proactive or having a good system. Let me share my screen.

Taking Off the CFO Hat

What we want to do is we want to talk about taking that controller, the CFO hat off. If you’re like me, you’ve probably gotten a lot of notes down of things that you want to do today. Things that you feel are important, that list of to do items is getting bigger and bigger.

We’re going to talk about things that you should be doing and then how you can actually take it off of your list. But really, the goal of this session is to talk about things in an accounting system that aren’t typically getting done. And what I mean by that is that there’s a lot of things that go into an accounting system, and with a lot of beauty schools.

You’re stretched so much, you have so many different hats, that you miss out on a lot of the tasks and things that a CFO, a chief financial officer, would be doing if you were in a larger school where you had more resources and somebody that maybe has a little bit of an accounting mindset and probably gets more of my jokes.

We’re going to talk about how to set up an effective accounting system. We’re going to talk about specific tasks that a CFO should be doing, and then why it’s important, especially now, to have a good CFO and a proactive CFO that can help you. We’re all hearing about inflation. We’re hearing about recession. We’re hearing about the Great Resignation, the pressure within the economy and within our schools and businesses. It’s incredible. And it’s at a point where you have to be thinking about where things stand and what you’re doing with things. Real quick, I want to do a couple polls just to see where people are at.

My first question is, do you have an outside company involved in your accounting? Just throw it up there, A for yes, B for no. Good, we’re getting a lot of yeses. So, let me ask then a secondary question, who is the CFO in your school? A is an external CPA, somebody that you’ve hired out. B would be an internal staff member, not the owner, or C is the owner.

What I mean by that is, where does the buck stop? Who still feels like they’re responsible for the planning, the processing, bringing the information to ownership? Okay, I’m seeing a lot of C’s, I’m seeing a bunch of B’s, a few A’s. We’ve got one B that actually has a CPA on staff, which is awesome, but a lot of C’s, and that’s what our experience is with a lot of our schools is that this chief financial officer is falling on the owner to do it. You’re the one that’s responsible for it. You’ve got all these other things.

This is not supposed to be a session where you feel bad about yourself or how you’re actually doing as the CFO of your business. Hopefully, this will spark you to think about questions that you need to be thinking about, and then most importantly how can you get that done.

Basic Parts of an Effective Accounting System

Accounting Department

Let’s talk about just the general aspects of an accounting system. In that particular case, an accounting department handles the daily activity of the company. In a large company, you would have cash clerks, you’d have an accounts receivable clerk, an accounts payable, payroll specialist, you’d have all these different accountants doing these individual areas. For a small business, it gets rolled up into one, but it’s really who is inputting the information into your accounting software.

So, on a small business side of it, that may be you, it may be a combination of people. You have somebody that does the deposits. A lot of times you’re outsourcing, recording it into QuickBooks, maybe to a local CPA firm or somebody who can gather that information. Most of our schools use QuickBooks to pull over that information. There’s a handful of people, but the accounting department side of things really lays into just gathering that actual data and putting it into it.

Controller

From there, let’s talk about what a controller would be. This is an area that I think most people look to maybe either an outside firm, if they don’t have that skill set in house. A controller is somebody who makes sure that all of the activity is recorded, that it’s complete, and that it’s accurate.

A lot of times what we find, especially on the audit side of things, is because an owner is working as the accountant and the controller and the CFO that they relied on the auditor a lot to make sure that everything matched. So, you’d submit all your information, then you’d get your journal entries back from your auditor, and you would see, okay, hey, I’ve got a journal entry for depreciation, I’ve got these adjustments to accounts receivable, accounts payable so that my books match my audit report.

That really is a controller feature. What we’re seeing on the audit side is that they’re putting a lot of pressure on auditors to not be controllers. So you’re starting to see where auditors are having to issue findings if they do too many journal entries, or if the journal entries are too significant.

There’s a lot of pressure to pull that away from the auditors and really help schools or businesses own their books. At the end of the day, your numbers, the reports and stuff, they’re yours. The only thing an auditor actually does that’s theirs, is that opinion letter at the beginning where they’re expressing their opinion about the financial statements. A controller takes all of the information and makes sure that those financials are correct.

Now, if you’re using an outside firm to do your accounting, they’re acting as your controller. If you think about it, the accounting department is recording things as it goes along in the past, a controller is making sure that everything is correct and adjusting it in the present.

CFO

Let’s now talk about what a CFO does. A CFO is responsible for cash management tools.They’re doing cash flow projections, budgets. I’m going to go down a list of words. I know most of you are just cringing. It’s like running fingernails down the chalkboard, but debt structure, lease planning, benchmarks, using it to make sure…

Really it’s taking all of the information that the accounting department and the controller have put together and stepping back and saying, “Okay, what are we going to do with this information? What do we need to do to plan out and to continue to ensure our survival, to ensure that we’ve got growth, that we’re meeting our needs? Do we need to be planning for future investments or replacement of equipment?” All of those things go in where a chief financial officer is really taking that information and projecting out and helping it so that you’re not… The best way for me to describe it is so that you’re not being tossed in the wind.

As the wind comes and the storm arms come, you’re getting flung around and your business is constantly reacting to the environment that it’s in. A good chief financial officer, plants down things, solidifies it and allows you to navigate through and in a consistent and thought out approach. Having that ability to look at it and understand what the business needs, what its industry is in and what it needs to do to survive is really key.

To give you just a real quick example, there was a report, we’re all talking about inflation, we’re talking about keeping staff in the resignation, and also trying to handle all of that, they’re showing wages increased 6%. That’s great news, but inflation increased 9%. So in reality, people are finding that their standard of living is going down, and how does that play into your staff?

How are you preparing for it? What are you doing to address it? Can you afford to give raises and to help your staff maintain a standard of living that they’re used to with all this craziness? Those are the types of questions and problems that come to a CFO for them to consider or to think about.

What CFO Tasks are Essential?

Let me just emphasize, none of these tasks will cause a failing audit, or really disruption in terms of critical downfalls in the immediate time frame, but they do affect how effective you can be in the future and how effective you can [be] to manage all of these different things that are being thrown at you in terms of things.

So we ask some questions. For example, do you know with precision, not just general…yeah, I know everything’s more expensive, but do you know how much your costs have increased?
Do you know if you’re charging enough to cover the cost for services and students? Has that gap reduced itself? Are you making less per service or per student, because you’re not adjusting to those costs? If you raised your fees, how confident are you that you’re raising at the right amount to cover those costs? Or how are you going to help employees at least maintain the standard of living in an inflationary standpoint, or how are you going to afford the cost of that help?

So, having these thought processes and questions coming into your mind, it’s really difficult from an owner standpoint when you’re also dealing with: we got to be good at Instagram, we got to be good at TikTok, we’ve got a search engine optimization, we’ve got to run a school, I’ve got to make sure that I’m keeping good teacher and I’m keeping them happy, and I’ve got to get a financial aid person. All of those things go into what you’re trying to do.

It’s really hard. In another area, I saw where they were talking about the increase in cost of different things, and you go down the list. One of the things on the bottom was salon services. Everything else was going up five or 10, 15, 20, 40% in terms of inflation, but salon was still sitting down at 5%. And whether that’s a fear of increasing fees, whether it’s a fear of how that’s going to work out and stuff like that, there’s a lot of things go into it, but I also feel like a lot of it is that we’re not taking the time to really understand what our costs are and adjusting appropriately to cover it. So, at the end of the day, if your costs go up and you’re not raising your prices, as an owner you’re now making less money for the same amount of effort.

That’s really what it gets at. The cost of not having these questions and taking these times to do these things, at the end of the day, it’s you holding the leftovers and it really can be difficult to adjust that, especially if you’re already in a crunch with trying to deal with everything else and meet composite score for audit purposes and stuff like that, to all of a sudden see that gap adjust and shrink because you’re not being proactive and you’re not adjusting things and getting in front of these items, because you’re just not asking these questions.

Why Is It Important to Have a Proactive CFO?

So let’s talk about why it’s important to have a proactive CFO.

One:

Number one is to understand where a school truly stands financially. That’s probably one area that we see, especially from the audit standpoint, that it’s just a constant struggle, is not having a great feel. It’s like, “Oh, wait, I’ve got all these new students coming in, or my floor is busy, but I’m not seeing the numbers. I don’t understand why the experience that I’m having in my school is not reflecting on these financial statements that I’m getting prepared or having that are coming through an audit.” So, number one is to understand where you truly are.

Two:

Number two is to understand the financial threats that the school faces before they’re critical threats, before you’ve drained through your equity and your cash balances, maintaining your low fees or absorbing those costs and stuff like that. Being able to adjust to those critical threats as they come.

Key Characteristics of a Good CFO

Then the last one, and I know this one might pierce some in the hearts, but having the knowledge, the skills, knowledge and expertise to understand financials, budgeting, cost accounting, having those things in terms of being able to actually understand what does it even mean.

You can see by my slideshow, by my background and stuff like that, I attempt to be creative, but I know my limitations. So we outsource a lot of our things to simply say, “Look, I’m not good at that.” I wish I was creative. I wish that I could think beyond spreadsheets and check boxes and bullet points, but it’s not my skill set. But what my skill set really is is being able to look at numbers and understand what those numbers are saying, and being able to really know what adjustments and threats and things like that, that need to be on it.

The other aspect of a good CFO is to have the ability to convert that knowledge into effective conversations and to be able to sit down and say, “Look, hey, this is where we’re at. These are the questions that we need to have. What do we think?” Being able to convert that into a logical or at least a semi understandable conversation.

I get it. I go to continuing education with a whole bunch of accountants and it’s really boring, and it’s a real frustration. There are a lot of them that are so good with numbers, but really struggle with understanding or being able to effectively communicate that out in a way that’s easy for a creative person to understand. If I sit and talk about pie charts and pivot tables and things like that, not only is it a boring conversation, but I think most of you have already looked at your phone a few times to see when is this session going to be over and go along those lines.

It’s not a right or wrong thing other than it’s right brain, left brain. So, having somebody that understands the business, understands how to speak the language and stuff like that, and being able to effectively communicate with you is really important. They may be able to give you all the great information, but if they can’t help you understand what that information actually means, then the effectiveness of that information is going to be significantly less.

The last thing I would say is that you’ve got to have somebody that’s invested in the success of your school. We know this. Having employees, having teachers, administrators, partners and stuff like that, that are absolutely invested in… Sherry, I love your comment. That actually makes sense to me, we’ll talk about later though. But having somebody that’s absolutely invested in the success of your school, that cares to make sure that we’re getting to the final point, that we’re not just having these discussions, but that they’re invested in the success of those schools.

Being able to have somebody that loves this industry, that understands this industry, honestly that’s grateful for this industry… I promise you back in school I never thought, hey, I would spend all my day talking to cosmetologists and being in the beauty school industry and stuff like that, but there’s no place that I would rather be. It is by far and away, one of the funnest industries, and from an accounting standpoint, I get to pretend that I’m actually with the cool kids instead of being there with all of the nerds. So if you have any questions, if you need a CFO, if you want to continue this conversation later, there’s my contact information, jared@lsacpafirm.com.

If you would like, one of the things that I’d love to do is send out… We use it for our engagement letter as well, but we have a list of all of the things that would go into the accounting department, that would go into a controller, and that would go into a CFO. All of the tasks that you need to do on a daily, monthly, annual basis, if you want to get that information, just as a checklist for yourself, just shoot me or Sharon an email and let us know, we’ll send it over to you and take a look at it. And again, if you want to talk about crazy numbers or anything like that, just let me know.