This Is Why AI Should Not Do Your Accounting (Rashellee Herrera)

0:00Something may happen you may need to sell your business tomorrow. [music] They're too early in their journey to be worrying about the accounting. They'll worry about that later. How do you actually [music] start the process? They can control where they fall within the range of multiples depending on how great their processes are. You're already ready. Your data room set up. And more importantly, you never know what's [music] going to come your way

0:25and when it's going to come your way. [music]

0:34So joining me today is Rochelle Herrera, the founder at RMB Capital. Rochelle, thank you for coming on today. Thank you, Nicholas. Pleasure to be here with you and thank you for giving me this opportunity. So tell me what's the story that led you to going on your own and starting RMB Capital? Oh man, the journey has been I think pretty interesting for me. It wasn't something

1:05that I necessarily set out to do. I feel like I was just led to. So I started out in accounting a very long time ago. Actually I took my first accounting class at 16 and apparently I was very good at it. So I kind of mostly stuck with it except for when I decided to major in marketing despite my dad telling me to study accounting because I was I guess rebelling if you

1:31will. But then I ended up going back and getting my accounting degree. Yeah, so always worked in accounting between accounting and internal audit and external audit and then ultimately started my own firm. But really what what led me here was I think a series of just different events. Just going from a big corporate organization where I learned a ton to a small startup where I learned a ton, but in from a different perspective. And then seeing how essentially a lot of small businesses and startups, they don't really have the same kind of resources and capabilities that large corporations have. And I felt that in a way I felt that the things

2:20that I've learned and I've acquired over the years could be very useful for smaller businesses and they kind of give me a little spark to want to do it on my own. So. Nice. Nice. And um following up on that, what's kind of the most biggest misconception that you hear from these SMBs, startups regarding

2:40accounting and the work that you do? Well, unfortunately, a lot of startups and small businesses, there's a couple. So, I guess it depends. If they're startups in the capital raising space, like technology or and life sciences or um it it they the tendency is more along the lines of um they're too early in their journey to be worrying about the accounting. They'll worry about that later when they get to a point where they either need to raise capital or you know,

3:17do something bigger. They want to wait until the very last minute, if you will. For smaller businesses, the local businesses, their tendency is more so how little can I pay in taxes? So, they want the their their focus is more on on from that perspective. They don't really worry too much about whether things are being done correctly. Um it's more so the focus on how how little taxes can I pay. And it's two different misconceptions, I think, because the fundamental should be strong accounting, strong um if you if you're not necessarily running your financials in a way that you you actually understand what's going on with

4:01your business, you're not going to make the best decisions. And more importantly, you never know what's going to come your way and when it's going to come your way. And um if you're not ready and you're now trying to scrap together to put your books together in a way that's going to be useful for someone else um due diligence or something like that, then a lot of times you end up being in a situation where you're at a disadvantage. Either you can't capitalize on that or um you get a nice little haircut um on your on

4:29your on your price. So. Yeah. Yeah, you know, I think like a lot of people treat it as almost like a checkbox in in some ways. Like a you know, oh, we have to do accounting. So, what would you say are kind of the main benefits of having a good uh finance uh sheet in in your company? Yeah, uh un- unfortunately, it is compliance. Um and you know what? I'm going to be honest, like it shouldn't be something that business owners or founders should have to think about on the day-to-day. They should be running their businesses. They shouldn't be thinking about are the numbers being you know, like at the back end how the

5:14sausage is being made, if you will. Um they should just know that it's already made, it's already prepared. Um so, I I can get it from one perspective. But the um from the from the perspective of not wanting to be involved in it, right? They shouldn't necessarily be. Um but from the perspective of thinking it's not important at all, that's where um I think the the the disconnect happens um because it is important. If you don't have the the fundamentals, um then you're not going to make good business decisions. You It's interesting though because there are some people that actually do make um decent decisions from a from a gut

5:55perspective, but it's not sustainable, it's not long-term. You actually don't know why something is working and why this particular decision worked out that way for you because you don't have a basis from which you're starting from. And you actually really don't know what's going on in the business. You're just going off of hunches, so. Yeah, and you know, I think um even if you can, it doesn't mean you should, especially if you're a small

6:23business owner. Uh like there are so many things that you need to do and uh uh accounting isn't, I think, one of them. And how do you look at uh you know, AI as it relates to financial planning? Because I think like it's a it's a big topic in all industries. What uh what uh what is your take on it

6:46and are you using AI in any way? I think um I So, I have mixed feelings about AI. To be honest, I mostly like it, right? And yes, I I use it. I use it a lot for I think it's fantastic for research, for reading large um amount of data, for helping with um to synthesize um

7:11uh things so that you can analyze them. I think it's I think it can be fantastic, right? Um and then there's a lot of menial tasks that it's um if you're you're not it's not necessarily the best use of your time. So, if you can delegate that to a tool that can take care of that for you, then yes, that's that those are the fantastic ways I think AIs are very useful, especially in

7:34finance. But where I have the issue with AI is the and it happens in accounting firms and it happens by the um the business unit business um owners that are um reading this information and making their own interpretations and thinking that, you know, suddenly um um for lack of a better word, that AI is a is an accountant. Um so, they when when the tool is used to essentially prepare financials. Um some cases it can, but a lot of times I what I put on what I've seen, I've actually seen where I've I've received balance sheets and P&Ls from um from owners

8:21saying, "Hey, um take a look at this." And the balance sheet literally does not balance. And AI prepared it. So, I'm like, "Well, and that's the problem. Like if if your tool is doing that, then your tool isn't working. And um so so those are some of the nuances I I I see. Um it's when it's when a person um relies too heavily on AI without actually checking the underlying um data. And a lot of times it's not AI's fault. It's it's the tool. Um what it is, it's the context around the the prompt that you gave it, right? So, if if it if it it may do exactly what you

9:04said, but if it if it doesn't fully know the true story um and how to um really grasp what it what your the context around it, then it's going to tell you something, but it's garbage in, garbage out. Um and I think that's where it's it separates when if you know what you're doing, yes, use AI. If you don't know what you're doing what you're doing, you

9:22probably shouldn't use AI. So. Mhm. Yeah, yeah. And you know, I think the worst be like aspect of this is that a lot of the times people um take AI like some kind of holy thing, like it will know everything. And a lot of the times it hallucinates, as you were saying. And when it comes to things like your financials, you probably don't want to um have misinterpreted data and think that you have payroll for the next 5 months, and it ends up being, you know, your next 3 months, for example. Or something like that. Uh and I've actually heard cases from uh past accounting guests that they

10:07had like clients that told them that uh you know, they will have AI do it all and then they came back three months later saying that it's just it's it's not working. And I think the biggest threat of this is that uh if you're not a accountant, you don't know if the information that you are

10:26given is true or not. Which is the case that you just mentioned, I think, where they thought that it's that it's working, right? And that because AI is very like positively inclined for for humans and it will always tell you that you're great and you know, that it knows everything, but sometimes it really doesn't. It would tell you with certainty with with absolute certainty that this is it and then when you catch it and then you

10:53tell it, "Well, no, that's not right." then it'll say, "Oh, you're right." It sells. Um going back to financial planning, what uh is kind of your um what are some of the things that what you do uh benefits uh the the other side? For example, things like forecasting, which I think isn't as familiar for most founder-led businesses um that you can actually have clear forecast and know how much money you have uh if you understand what I'm trying to

11:30say. Yeah, so actually what what I've I focus less on um financial projections, if you will, and forecasting. What my business is around and my practice is more so around building the financial infrastructure, right? So, it's making sure that the underlying data that's supporting the financials is um is accurate and that that the information can then be used to reliably make forecast. Because if you're if your basis for where you're starting your strategic decisions as a CFO um we're not a CFO advisory firm um is incorrect, then you're you're starting wrong, so you're not going to be able to strategically make the right decisions or forecast

12:15correctly because your underlying data is is for lack of a better word garbage. So, what we what we do is we're actually building the um internal controls, the underlying processes and procedures to make sure that those numbers themselves are accurate and properly supported so that uh a CFO can then make those kind of

12:36decisions. Mhm. Rochelle, how do you go about when you start working with someone because you mentioned a lot of things. How do you go about, you know, navigating that uh client journey? Like the the onboarding phase. What do you look at? Yeah, so it depends on um where the client is in their journey, but every conversation really basically starts with that. Like getting an understanding of where the business is, what the business does, um how it makes money, um that entire business model, um it's operating structure right now, like it's org structure, how things are currently being done today. So, we're always getting a a baseline there and that's

13:18where we start. We build that profile um for our our clients. Then we also figure out where it is that they're trying to go. What are their objectives? And um so uh and then we essentially build a road map on, "Okay, well, this is where you are, this is where you want to be, and this is how

13:36we're going to get you there." But within that process, our focus is on looking at all of the the the I would say the financial assertions that would directly relate to your particular business based on what we've learned about what your business is, how it makes money, what the accounting rules are surrounding the say revenue recognition and just in in different different aspects of it. I don't want to get too technical, but from that perspective, okay, what are the rules from a GAAP perspective because everything we do is strictly is

14:12based on GAAP. How what is How does that relate to your business model and we build our uh our processes around specifically around that. And so we're looking at the risk related to financial reporting, we're building the the controls related to that to the different areas, and um we're actually going in and we're

14:33executing on those as well. Mhm. What about exit planning? Because it's one of the topics that I I thought of when you were saying this. Uh do you also help with that? And if yes, then um how do you actually start the process? Because I I imagine that it's not something that you just, you know, one month you decide to do and you can just uh

14:58plan the exit. No, absolutely not. That wouldn't be a good plan. So yeah, so that's a part of um let me talk about the the journey, all right? So um initially we we figure that out. If someone comes to us and it's their plan to exit their business within three to five years, then that's a

15:17fantastic time. Um if they come to us and they don't necessarily plan to exit within three to five years, but they they they understand the importance of infrastructure and we're working with them on on that way. Because we're constantly working with them and we're constantly having conversations with them, we are going to know um hey, at some point three to five years down the road you are going to plan for an exit, so let's start shifting the the way we're doing some things specifically

15:43towards that. But um essentially um from the from the exit planning perspective, what we do is we're strictly on the accounting infrastructure side of things. And if you think about it, um the uh I guess the most fundamental way is um enterprise value is EBITDA multiplied by some multiple, right? And the the organization can

16:10control um both to just to some extent. They can control where they fall within the range of multiples depending on how great their processes are, um and or not so great their processes are, and they can control their their EBITDA depending on how well their business is actually functioning. The principle um the underlying principle in that is having strong processes and controls over your operations, but also your over your financial reporting, and so that you can actually understand your numbers, so that once again you can make better strategic decisions that will actually positively influence your your your EBITDA and your overall performance. And so that's how we

16:51connect the dots in terms of um what we do for exit planning. But also uh the big thing too that's different about us uh compared to a traditional um accounting firm that's not necessarily focused in this area is because we are accrual base audit mindset and and everything that we do, we are actually and and with the infrastructure that we're building, we are getting you to a point where when you're ready for diligence or audits or anything of that nature, you're already ready. Your data room's set up. Um everything is you're you're you're you're in that position where you can go through and not have to worry about your

17:32financial component being part of the bus- the part of the the the diligence that fails. That won't happen. Um not with the way we're we're building it. Mhm. Yeah, you know, I think this is the kind of sad part of the human tendency uh to uh delay things and want things extremely fast. So it's very I think unlikely that someone will um be so responsible to come to you 10 years before planning the exit because

18:01such a long time horizon. What's next for you in terms of, you know, where you want to grow um if you want to grow? [laughter] Yeah, no, that's um that's a great question. So what's next for R&B is we're continuing to build out um this particular infrastructure. We've actually branded it internally. It's called Fios, financial information operating system. So it's where we're where we're building this in a way where it's scalable for us so that we can actually bring what we're doing to more clients and to to more small businesses and hopefully to get the education across that it's it's really important to build the right way from day one and

18:56not try to back into it when you're at the point because you just never know. You you um life happens for one thing. You never know when one of the situations may occur when you may need to sell your business if that's you know a route. Sometimes if you have the luxury, yeah, you can say I want to exit in in 3 to 5 years, but that may not always happen. You may not necessarily be in a position to plan that. Something may happen and you may

19:26need to sell your business tomorrow. Are you ready? You know, so it's about being ready and not getting ready and that's that's the part that I really want to to get businesses to understand. So it's more about So that's the that's really where we're headed is helping to educate businesses more. Mhm. [snorts] All right. Well, what's the best place for people to reach out and get in

19:53touch? Um you can find me on LinkedIn um and also my website is easiest way is rnbcap.com. Okay. Links are down below and Rochelle, thank you for coming on and sharing your thoughts and insights. All right. Thank you. Pleasure being here.