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Episode Summary
It’s August. You ask your accounting person for the latest financials and they hand you February. Revenue’s up, gross profit’s up, and nobody in the room can tell you what your line of credit is going to look like eight months from now, or where the cash actually went. That’s where most owners live, and most of them are calling a controller a CFO without knowing the difference. I sat down with Pat Hobby, my business partner at Arkona and a 25-year outsourced CFO who has been part of over a dozen acquisitions, to walk through what good actually looks like. We got into the three statements that have to tie together (income statement, balance sheet, cash flow), why accrual basis is non-negotiable, how to build a Milestone 11 — Annual Budget from the ground up with the people who own the line items, the KPI buckets every owner should be tracking, and the punchline most owners haven’t heard: when your books are clean and your three statements tie out, you can see eight months down the road. You manage your bank instead of your bank managing you. And every dollar of clean, transferable cash flow lifts the multiple you’ll eventually transact at.
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## Top 10 Takeaways- A real CFO is a strategic partner attached at the hip to the owner, not a controller producing month-end statements.
- Your three statements (income, balance sheet, cash flow) have to tie together or you can’t see anything coming.
- Accrual basis is non-negotiable. Cash basis hides whether the month you celebrated was actually profitable.
- Reconcile every major balance sheet account monthly. That’s how you know your bottom line is real.
- Personal expenses run through the company create doubt in a buyer’s mind. Bucket them as owner perks instead.
- The cash flow statement is the one most owners skip, and it’s the one that shows what’s coming.
- Build the Milestone 11 — Annual Budget from the ground up with the people who own the line items. Buy-in replaces argument.
- Look at financials on a trailing 12-month basis. Months and quarters are arbitrary. Trends are real.
- Raw numbers tell you nothing. Profitability, liquidity, activity, and leverage ratios put them in context.
- Your cash conversion cycle creeping from 40 days to 60 days means a cash flow problem you haven’t felt yet.
Sound Bites
“A good CFO should be a business owner strategic partner. They’ve got to be attached at the hip when it comes to defining what the strategy is, what the goals are.” (@00:09:56) — Pat Hobby
“The financials of a company are the language of the business. Your financials tell the story of your business in a critical aspect.” (@00:12:36) — Pat Hobby
“If you’re tracking the cash generated based on sales, it should be around 20%. But if you see a trend where it’s gone from 20 down to 10%, there’s something wrong.” (@00:30:25) — Pat Hobby
“Every business will change ownership someday. Every business owner dies. To the degree you can say here’s our budget, here’s how we measure against it, here are the decisions we made: your value just went up.” (@00:56:01) — Pat Hobby
About This Episode
Pat Hobby is Ryan’s co-founder and business partner at Arkona. An accountant by training, Pat spent 25+ years as an outsourced (fractional) CFO for small and medium-sized companies in the Dayton, Ohio area. He served as CFO of a family-owned services business through an ESOP transition and its subsequent sale to a private equity firm, then ran shared services across a PE platform before joining Ryan to build Arkona. This is episode three of the Value Growth Series, following the systems episode with Ken Sanginario and the strategic planning episode with Greg Meredith. Pat brings the financial reporting and KPI architecture that turns a strategic plan into something you can actually measure.
Resources Mentioned
- Pat Hobby on LinkedIn — linkedin.com/in/pat-hobby-a8bb199
- Arkona Bootcamp — Ryan and Pat’s program for owners learning value growth and exit planning.
- Value Opportunity Profile — Ken Sanginario’s diagnostic tool referenced as how Pat first connected with Ryan.
- Traction by Gino Wickman — Referenced for the “stranded on an island, what numbers would you want?” framing of KPIs.
Connections
Phase + Module:
- Module 4 — Sustainable Financials — The core architecture this episode lives inside: clean, timely, accurate financials that tie out
- Module 7 — Leadership Team — The CFO seat as a strategic partner, not a bookkeeper
Milestones:
- Milestone 10 — Three-Statement Model — The income statement, balance sheet, and cash flow statement that have to tie together
- Milestone 11 — Annual Budget — Built from the ground up with the people who own the line items
- Milestone 12 — Five-Year Forecast — Where the trailing 12-month view extends into the future
- Milestone 17 — Operational KPIs — The profitability, liquidity, activity, and leverage ratios Pat walks through
Concepts referenced:
- Three-Statement Model — The closed loop that lets you see eight months down the road
- Accrual vs. Cash Basis Accounting — Why accrual is the only way to know how the business is actually doing
- Cash Conversion Cycle — From inventory purchase to customer payment, the trend that signals cash problems before you feel them
- Normalized EBITDA — The proxy for operating cash flow Pat references when talking debt-to-EBITDA ratios
- Free Cash Flow — What the cash flow statement is actually measuring
- Budget vs. Actual (Variance Analysis) — The monthly cadence Pat describes for catching problems early
- Rolling Forecast — The discipline behind trailing 12-month analysis
- Sustainable Financials — The throughline of the entire conversation
Related episodes:
- Ep. 178 — Greg Meredith - Strategic Planning — Episode two of the Value Growth Series, the strategic plan the financials should reflect
- Ep. 177 — Ken Sanginario - Value Opportunity Profile — Episode one of the Value Growth Series, the systems diagnostic Pat references