The ‘blind pilot’ syndrome. When does traditional accounting hold your business back from scaling up?

Turnover is up 40 per cent year-on-year, the team has doubled in size, and there’s still not enough money in the company account. If this feels familiar, you are not alone. It is a typical symptom of a business that has grown faster than its financial information system.

As a company scales up, the CEO can no longer see the business ‘with the naked eye’. With a dozen or so customers and a single product, intuition was enough. With dozens of customers, several products and new branches opening, intuition starts to mislead.

The problem rarely lies with the accountant or the accounting office itself. It lies in what the accounting is done for. If its only purpose is to settle VAT, CIT and social security correctly, it provides data for the tax office – not for you. Such accounting answers the question ‘how much do we have to pay?’ but stays silent on ‘where are we making money and where are we losing it?’. At KFK Borowiecky we see every day that it is this information gap – not a lack of customers or capital – that most often holds back the growth of B2B companies. We call it the blind pilot syndrome.

“As a finance professional with over 25 years’ experience, I have learnt that a management board with good data makes decisions in days, not weeks. The same principle applies to a company with revenue of PLN 5, 10 or 20 million.”

Joanna Kamińska, controlling and management accounting expert at KFK Borowiecky

What is ‘blind pilot syndrome’?

Imagine a passenger plane flying into a thick layer of cloud. The pilot cannot see the horizon, the ground or other aircraft. The instruments that would allow a safe landing are covered with tape – all the pilot has is a note from air traffic control that, once a month, tells them how much in airport charges is due. The plane is flying faster and faster, but no one on board knows whether it is climbing or heading towards a mountainside.

This is what it looks like to manage a growing company solely on the basis of tax returns and the bank balance. The CEO has two sources of information: intuition and the bank statement. Both fail precisely when the stakes are getting higher.

Tax is not operating profit

The most common mistake we see is treating the amount of tax payable as a barometer of the company’s condition. ‘We pay a lot of CIT, so we must be making good money’ – this reasoning can be misleading. Taxable profit and operating profit are two different measures, calculated according to different rules and for different purposes.

Taxable profit takes into account non-deductible expenses, exchange differences, tax reliefs and losses carried forward from previous years. It says nothing about which business line generates margin and which one eats it up. Nor does it show whether the profit is backed by cash.

A company can show a balance-sheet profit, pay income tax and still be heading straight for a liquidity crisis. All it takes is for a few large customers to extend their payment terms from 30 to 90 days while the company finances their business with its own cash in the meantime.

Tax accounting vs. management accounting

Both systems use the same source documents, but ask them completely different questions. Tax accounting is like a rear-view mirror. Management accounting, or controlling, is like the dashboard and the speedometer.

Foundation: Company Chart of Accounts and Accounting Policy

Management accounting cannot simply be ‘tacked on’ to the existing accounting system like an overlay. Its source is the Company Chart of Accounts (COA) – often referred to as the ‘nervous system’ of accounting. If the COA has been designed solely for the purposes of financial statements and tax returns, management information simply does not exist within it.

A well-designed chart of accounts enables the management to obtain data in the breakdowns it requires:

• profitability of individual customers, customer groups, services and products;
• costs and margins broken down by department, branch, project and cost centre;
• receivables and payables by counterparty and due date, with early warning of payment backlogs;
• data for ratios: current liquidity, debt, receivables and payables turnover, return on sales, EBITDA;
• cash flow reports and management statements generated almost automatically, without manual ‘copy and paste’ in Excel;
• input for budgeting and financial forecasts.

Why isn’t this a weekend project?

Rebuilding the chart of accounts requires changing the accounting policy, designing multi-dimensional analytics and aligning them with the capabilities of the accounting system. Allocation keys for indirect costs, rules for assigning revenue to projects and a document flow that makes this possible all need to be agreed.

At the same time, each of these elements must remain compliant with the Accounting Act and tax regulations. A change during the financial year requires a carefully planned transfer of balances and preserving the comparability of data.

Flying blind: a director’s liability for the company’s finances

In a limited liability company, inaccurate financial information is not merely a business risk. It is a personal risk for every member of the board of directors. The absence of accounting data does not exempt them from liability – the regulations require the board to exercise professional diligence, and this presupposes decisions based on reliable information.

Where does the protection afforded by ‘business judgement’ end?

Article 293(3) of the Commercial Companies Code protects a member of the management board who acts loyally and within the bounds of reasonable business risk. However, this is conditional upon the decision being based on information, analyses and opinions which, in the given circumstances, should have been taken into account. A managing director who did not have access to reports on liquidity, debt and financial trends loses their most important defence against an allegation of negligence.

Four areas of personal responsibility

• Company liabilities (Article 299 of the Commercial Companies Code). If enforcement against the company proves ineffective, the members of the management board are jointly and severally liable for its debts with their own assets. They can be released from liability by showing, among other things, that the bankruptcy or restructuring petition was filed in good time or that the delay was not their fault.
• Tax arrears (Article 116 of the Tax Ordinance). On a similar basis, the board is liable for unpaid VAT, CIT and other taxes together with interest and – by reference in the Social Insurance System Act – also for unpaid social security contributions.
• Damage caused to the company (Article 293 of the Commercial Companies Code). If a lack of financial oversight deepened losses, depleted assets or delayed remedial action, the company – in practice often the bankruptcy trustee – can claim compensation.
• Late bankruptcy petition. Bankruptcy law allows 30 days from the onset of insolvency to file it. Filing late exposes the board to liability for damages, a court ban on running a business and criminal liability under Article 586 of the Commercial Companies Code.

Why time matters

All these mechanisms have a common denominator: the moment when the board should have known that the company was losing liquidity. The court does not ask when the CEO found out, but when they should have found out had they exercised due diligence.

A management reporting system that gives early warning of loss of liquidity, growing arrears to social security and the tax office, excessive debt or deteriorating cash flows gives the board time to react. Time to raise financing, cut costs, restructure or, as a last resort, file for bankruptcy.

So we can put it bluntly: a well-designed chart of accounts and regular management reporting are among the basic shields protecting board members’ private assets.

3 signs that your business needs financial controlling

1. “The accountant says we’re making a profit, but there’s no money to pay the wages”

This is the classic warning light on the dashboard. Revenue and accounting profit arise when the service or delivery is performed; cash arrives when payment is made. In between lie payment terms, inventory, advances and investments.

In a fast-growing B2B company this gap usually widens, because every new contract has to be financed first. Without a 13-week cash flow forecast and a 12-month projection, a liquidity crisis always arrives ‘out of the blue’.

2. You don’t know which services and which customers actually generate profit

Revenue is visible at first glance; margin is not. Without allocating costs to cost centres and assigning the team’s working time to projects, every service looks profitable.

In practice it often turns out that 20 per cent of customers generate most of the operating margin, while several of the largest customers are served below cost. The company then grows in turnover, but it also scales up its losses.

3. You make investment decisions ‘on a hunch’

A new employee, another car lease or opening a second branch. If you decide to spend tens of thousands of zlotys based on how much happens to be sitting in your company account, you are playing with fire. The bank balance is the past – it only shows what has already come in. Without a reliable budget, cash flow forecast and risk analysis, you are working in the dark.

Another very clear warning sign is when a bank or investor asks you for basic management data and your company panics, because preparing a simple statement takes two weeks.

External CFO: the co-pilot in the cockpit

In aviation, no large aircraft takes off with just one pilot. In a company, this role is played by the finance director – the person who reads the instruments, warns of turbulence and shares responsibility for the course.

For most scaling companies, however, a full-time CFO is a significant burden. An experienced finance director is one of the highest salaries in the organisation, on top of which come recruitment, an onboarding period and the risk of a wrong hire. More importantly, a CFO without well-designed accounting underneath will spend the first months rebuilding the data instead of managing it.

CFO as a Service at KFK Borowiecky

The ‘CFO as a Service’ model combines two functions which, in many companies, operate separately and do not communicate with one another: full-scope accounting and strategic financial management. At KFK Borowiecky, this means that the same team:

• designs the accounting policy and the chart of accounts around your company’s management needs;
• implements cost centres, project accounting and customer profitability analysis;
• keeps the books in line with the Accounting Act and tax regulations;
• builds and updates cash flow forecasts, budgets and management dashboards;
• supports key decisions and provides professional analyses that give you solid arguments for your own negotiations with banks and investors.

As a result, management data is not a separate project that someone has to ‘extract’ from the system. It is a natural by-product of day-to-day accounting. You pay for the finance director’s expertise to the extent that the company actually needs it at its current stage of growth.

See the full scope of the service: controlling and part-time CFO →

Remove the tape from the instruments before the slope appears

Flying blind can work for a long time, especially in good economic conditions. Sooner or later, however, it ends in a hard landing: payment backlogs, the loss of a key customer, a refused loan – and in the worst case, personal liability of the board for the company’s debts.

The good news is that the instruments can be switched on mid-flight. It does, however, require an experienced crew to redesign the chart of accounts and accounting policy without disrupting day-to-day bookkeeping.

About the author

Joanna Kamińska – finance director and chief accountant with over 25 years’ experience in accounting, including 10 years as a finance director. She has managed the finances of, among others, an international capital group listed on the stock exchange and a B2B distribution company with revenue of over PLN 150 million. She has also worked in the property development sector. At KFK Borowiecky, she supports businesses – from family firms to limited companies – in implementing management accounting and financial controlling.

This article is for information purposes only and does not constitute legal advice. Assessing the liability of board members always requires an analysis of the specific facts of the case.

Frequently asked questions about controlling and management accounting

How does management accounting differ from financial accounting?

Financial accounting is governed by the Accounting Act and tax regulations. It is intended for external users: government departments, the National Court Register (KRS) and banks. Management accounting has no prescribed format – it provides the management with data on the profitability of customers, services and projects, as well as budgets and cash flow forecasts. Both types of accounting use the same documents, but address different questions.

From what size of business is it worth implementing a management accounting system?

There is no statutory threshold. The tell-tale sign is the moment when intuition is no longer enough: several business lines, numerous major clients with long payment terms, investment plans, or discussions with the bank and investors. The sooner a chart of accounts is drawn up to meet management needs, the cheaper and quicker it is to produce reports.

Is a member of the board of directors liable for the debts of a limited liability company?

Yes. Under Article 299 of the Commercial Companies Code, members of the management board are jointly and severally liable for the company’s liabilities where enforcement proceedings against the company prove unsuccessful. They are liable for tax arrears on a similar basis under Article 116 of the Tax Ordinance, and for social security contributions – by virtue of a reference in the Social Insurance System Act. A key aspect of the defence is, amongst other things, filing an application for bankruptcy or the commencement of restructuring proceedings in good time.

How much does an external CFO cost?

The cost depends on the scope of the service: reporting frequency, number of companies, budgeting requirements and support with financing. Under the CFO as a Service model, you pay for the expertise of a finance director to the extent that your company actually needs it, without the costs associated with a permanent role or recruitment. We prepare a quotation following an audit of your accounting processes.