Case Study: How a Value-Added Distributor Avoided Bankruptcy with Fractional Accounting

OVERVIEW

Rapid growth can be just as risky as decline when financial controls and accounting processes aren’t keeping up. After two decades of stability, a national value-added distributor with manufacturing capabilities doubled in size two years in a row. But behind the revenue growth, the company’s financial reporting was inaccurate, profitability was overstated, and cash flow risk was hidden from leadership.

This case study shows how our fractional accounting team uncovered the true financial picture, implemented GAAP-compliant policies, and helped the distributor avoid bankruptcy — while building a stronger foundation for sustainable growth.

THE PROBLEM

The firm’s books were managed by a tenured part-time employee who had faithfully served as bookkeeper for years. While this approach had worked during periods of stability, it wasn’t sufficient to handle the complexity that came with rapid growth.

On the advice of a mentor, the CEO began seeking fractional CFO support. But as is often the case in companies under $15M, very little CFO-level involvement was actually needed. Instead, what became clear was the urgent need for a stronger accounting team capable of handling the company’s scale and providing accurate financial visibility.

During a free financial risk & readiness assessment, several critical issues surfaced:

• Revenue recognition concerns – An unexplained increase in gross profit suggested possible revenue recognition errors and off-balance sheet liabilities.
• Cash-based accounting – Reliance on cash accounting overstated profitability and led to significant income tax overpayments.
• Inadequate job costing – Without accurate costing, the distributor had no insight into which products and projects were truly profitable.
• Unintegrated systems – Manual processes and shadow systems created inefficiencies and heightened the risk of reporting errors.

THE SOLUTION

Our fractional accounting team, with deep industry expertise in distribution, stepped in to uncover the true financial picture and rebuild the company’s accounting foundation. The first step was to clearly demonstrate and frame the gross profit issue, then restructure financial statements around GAAP-compliant accounting policies that could stand up to scrutiny.

Key initiatives included:

• Industry benchmarking – Using a dataset of nearly one hundred similarly sized distributors with the same NAICS code, we showed leadership what defensible margins in the industry actually looked like.
• Revenue recognition correction – The distributor was accepting deposits on high-ticket items and immediately recognizing the deposit as revenue (cash-based accounting) one or more reporting periods in advance of incurring or accruing the corresponding expense. This gave the impression of gross profit growing the more sales increased. Red flag! After implementing the ASC 606-compliant revenue recognition policy, the deferred revenue (aka “unearned revenue”) liability (equivalent to 25% of annual sales) was clearly visible on the balance sheet and gross profit was seen to be in line with industry norms in reality.
• Updated job costing workflows – We reorganized general ledger accounts, introduced expense reporting technology, and documented new workflows to ensure accurate, timely project-level profitability reporting.
• Revised KPI schema – With accurate financial statements in place, leadership could see that much of the cash in the bank wasn’t truly available to the business, and if their growth slowed, they could face bankruptcy. To prevent future risk, we designed and implemented a KPI framework tied to liquidity, profitability, and sales, giving the CEO the financial visibility required to make confident decisions.

THE IMPACT

With accurate reporting, stronger processes, and clear financial visibility in place, the distributor’s financial position shifted dramatically within months.

• Liquidity improved as the company stopped treating customer deposits as revenue and began managing cash flow with clarity.
• Accurate, timely financial statements gave leadership confidence and strengthened the balance sheet.
• Focused KPI reporting freed the owner and CEO to concentrate on expanding the sales team and other high-value growth activities, rather than chasing down unreliable numbers.
• Tax liabilities decreased considerably once deposits were properly recorded as deferred revenue, eliminating prior overpayments.
• Bankruptcy risk was mitigated with a clear financial picture, supported by GAAP-compliant reporting and disciplined accounting workflows.

By leveraging fractional accounting services designed for value-added distributors, the company transformed what had been a hidden financial crisis into a foundation for sustainable growth.

Strengthen Your Distribution Business with Fractional Accounting Services

If your distribution business is facing rising dynamic changes (e.g. growth), unclear profitability, or inefficient accounting processes, the right fractional accounting services can help you regain control.

Our team specializes in US-based outsourced accounting for value added distributors — delivering process efficiency, and actionable insights that drive sustainable growth.

Book your free financial risk & readiness assessment today and discover exactly where you can cut waste, improve profitability, and protect your business from financial risks.