Let’s be blunt – most Finance Directors are honest professionals doing a difficult job. But when things aren’t adding up, and you suspect something’s being hidden, it helps to know where to look.
Over the years, we’ve spoken to many funders and business owners about the subtle ways numbers can be manipulated to give a misleading picture. So, whether you’re preparing for a funding round or you’re starting to feel uneasy about your current FD, this checklist might just flag something worth digging into.
1. Revenue Recognition – What’s Really Being Counted?
Revenue is often the first line to come under scrutiny – and for good reason. Ask your FD to break down exactly what makes up the revenue figure each month. Is it based on orders, contracted revenue, invoiced sales or cash received?
Watch out for vague jargon. “Booked revenue” or “pipeline billing” may sound harmless, but unless clearly defined, they can overstate the true financial health of the business.
If they can’t explain the revenue line in plain terms, that’s a red flag.
2. Margins are not all they seem
Gross margin should be a rock-solid metric. But often, it’s not.
Cost of goods sold (COGS) is often a complex array of accruals. And that’s always the guiding principle here. Ask how margins are calculated by product, customer, or service line. How good is the analysis by product range for instance? A good FD will have this at their fingertips – not buried in a spreadsheet they need a week to unpick.
3. What gets hidden in debtors?
Take a good look at the debtor book. What’s in the 60-day or 90-day columns, and how aggressively are overdue invoices being chased?
Look out for red flags like:
- Billing in advance without delivery
- Sales on approval or sale-or-return terms
- Invoices issued with no realistic chance of collection
Often it’s not fraud – it’s just misplaced over-optimism. But either way, it can distort the view of cash and risk.
4. Tucking things away in the balance sheet undergrowth
This is where things get conveniently tucked away. Look closely at miscellaneous accounts like “prepayments” or “other debtors.” Are those costs genuinely prepayments, or just a place to delay recognising an expense?
Ask for supporting detail. If the answer is vague, that’s your cue to dig deeper.
5. Stock and WIP – A Classic Hiding Place
Stock and Work in Progress (WIP) are frequently used to prop up the balance sheet. Ask how WIP is calculated. Are assumptions realistic? Is stock regularly counted, reconciled and tested for obsolescence?
And crucially – can they prove it? Reconciliations should be recent, accurate and repeatable.
What to Do If You’re Concerned
These quick checks don’t confirm wrongdoing – but they do help surface blind spots or questionable accounting practices. If your FD struggles to answer these questions clearly, or if the explanations sound overly technical or evasive, it’s time to take a closer look.
And if something still doesn’t sit right – get a second opinion. At Headstar, we support funders, boards and owners with independent assessments of finance functions and can help sense-check what’s really going on behind the numbers.
Feel free to get in touch for more information.
