Articles

The Leadership Training/Mentoring Corner - February Responses

THE LEADERSHIP TRAINING/MENTORING CORNER

In the August 2025 Newsletter we started a series called “The Leadership/Mentoring Corner” in which we posed a thought-provoking situation for you to think about and put yourself into asking yourself – “What are your next steps”. Below is the situation that was in the February 2026 Newsletter.

FEBRUARY LEADERSHIP SITUATION

Fred owns a machine shop which he started 30 years ago. The Company does $7.5 million a year in revenues. Fred has a Mechanical Engineering degree from Texas A & M. He also is a degreed metallurgist. Fred never had any interest in financial matters; in fact, he has never even balanced a checkbook. Fred has always relied on others to run the business office and accounting departments. 

Fred also doesn’t think the business is large enough to have degreed finance or accounting specialists on staff; thus, the business' accounting department is staffed with one bookkeeper, who has been with the Company since it started and a couple of individuals with high school educations who have been with the Company for 20 years.

One day, the bookkeeper lets Fred know she is leaving the Company, effective immediately, to move to Florida to be with her aging parents who need health-care assistance. Neither of the accounting department employees are interested in moving toa leadership role, nor do they have the capabilities to do so. Fred decides to seek someone with an accounting degree from a temp agency to replace the individual who is leaving.

After about 90 days the temporary accounting department head comes to Fred and discloses a number of issues in the accounting department that are being and have been done incorrectly for years, and the Company has not been as profitable as past financial statements have reported. Further, revenues have been off the past year. Sales have dropped to $5.0 million, and cash flow is very tight; several suppliers have closed down their open accounts and placed the Company on a cash basis. Further, several customers have stretched out paying the Company, and there are a number of accounts receivable over 90 days past due.

We polled several Silver Fox Advisors, and below are some recommendations on what Fred's possible strategies should be:

1.     Fred needs to consider taking a more active in role in the company’s financial position. This company is his livelihood and possibly his retirement income source. Having good numbers and control of the company’s finances is generally something that should not be delegated to someone else.  Knowing how to make a widget and how to sell are critic functions in a business; however, the financial function is probably the most important piece because without cash and financing, the business is at great risk.

2.     Fred should hire an experienced controller who has a good working knowledge and understanding of accounting. In addition, he should contract with a good outside accountant who can assist the controller in closing the books monthly and provide Fred some financial direction for the business.

3.     Fred and the controller should look at every expense item on the company’s profit and loss statement and determine which items are actually needed to run the business and eliminate and/or reduce those that are not needed, including personal expenses that are or have been run through the company’s books. The intent here is to stop the bleeding by reducing the company’s expenses, hopefully returning the company to profitability.

4.     Fred needs to meet with the controller and accountant to get a good understanding on where the company is financially, to set some goals to improve the situation. Monthly follow-up must be done to assure that everyone is on the same page, and progress is being made to get the situation under control.

5.     If the company did report losses in prior years, Fred should ask the outside accountant to look at taking advantage of any tax benefits that might be available to the company.

6.     Fred and his financial team need to get a good working handle on cash flow and profitability and work diligently to get the situation under control.

7.     Once Fred and the new financial team get a handle on the financial situation, they should focus on the various revenue sources to determine individual profitability on the lines of business and/or individual projects.

What Lenders Look for in Audited Financial Statements

What Lenders Look for in Audited Financial Statements

Jim Griffing
A Silver Fox Advisor

As your business grows, so does the need for capital. Whether you’re applying for a line of credit, refinancing existing debt, purchasing equipment, or expanding into new markets, your lender is evaluating one primary question: How much risk are we taking on?

Audited financial statements can significantly influence that answer.

Credibility That Builds Confidence

Lenders rely on financial information to make informed lending decisions. When those financial statements have been independently audited, it provides assurance that the numbers are accurate and presented in accordance with accounting standards.

That added credibility reduces uncertainty - and reduced uncertainty often leads to smoother underwriting, stronger lender relationships, and in some cases, more favorable terms.

Cash Flow Matters More Than You Think

While profitability is important, lenders focus heavily on cash flow and liquidity. Can your business consistently generate enough cash to service debt?

An audit provides confidence in key balances like receivables, inventory, and payables — all of which directly affect working capital and debt service coverage. Clear, reliable reporting allows lenders to assess repayment capacity without second-guessing the data.

Sustainable Earnings and Transparency

Lenders also look at the quality of your earnings. Are revenues recurring? Are margins consistent? Are there unusual transactions or related-party balances that require explanation?

Audited financial statements provide transparency through disclosures and footnotes, helping lenders understand not just what the numbers are — but what they mean.

Internal Controls Reduce Risk

Strong internal controls signal operational stability. Even in small businesses where segregation of duties can be limited, an audit can help identify control gaps before they become costly issues.

When lenders see that your financial reporting processes have been evaluated by an independent CPA firm, it strengthens their confidence in your organization’s overall risk management.

A Strategic Advantage — Not Just Compliance

Many small business owners think of audits as something required by investors or bonding companies. In reality, audited financial statements can be a strategic advantage when pursuing financing.

They position your business as prepared, transparent, and growth-oriented.

Planning for Financing? Start Early.

If you anticipate seeking financing in the next 12–24 months, it’s wise to start the audit conversation early. Proper planning allows time to strengthen documentation, evaluate internal controls, and present your financial story in the strongest possible light.

Our audit team works with growing businesses to not only meet reporting requirements but to help position them for success in conversations with lenders.

If capital is part of your growth strategy, we’re here to help you prepare with confidence.

What This Means for Your Business

While not every business needs an audit, lenders often prefer, and sometimes require, audited financial statements when extending significant credit. Even if it is not mandatory, an audit can strengthen your credibility, reduce follow-up questions, and potentially improve financing terms.

Next Steps

Understanding what lenders evaluate is only part of the equation. The next step is determining the right level of assurance to support your financing goals.

Not every financing situation requires a full audit, but not every situation can be supported by basic financial statement preparation alone. The level of CPA involvement directly affects how much confidence a lender can place in your financial information.

That’s when choosing the right service matters.

Our audit department works with businesses at every stage of growth, providing compilation, review, and audit services tailored to your needs. Whether you are preparing for a routine bank renewal or positioning your company for significant expansion, we help you select the level of assurance that aligns with lender expectations and your long-term strategy. Choosing the right level of service should align with your growth plans and financing strategy, not just current requirements.

Below is a comparison of the three primary levels of service and how lenders typically view each.

Audit vs. Review vs. Compilation: How Lenders View Each Level of Service

 If your business requires an audit, review or compilation, please contact our office. We are always ready to assist you with your business needs.

GRIFFING & COMPANY, P.C.

(281) 491-8866 Fax (281) 491-8998

[email protected]                                                                www.griffing.com