- Solving cash flow problems
- Determining cash needs
- Designing a plan to work with existing cash and other resources
- Structuring an exit plan
- Determining Business Value
- Optimize operations
- Drive results and drive the bottom line
- Contribute to business development
- Shape financial strategy
- Understand, identify and assess the risks of business ownership.
- Prepare the Financial portion of your business plan.
- 5. Technical or operations professional depending on your industry This is where you add someone to your advisory board
that has the operations or technical expertise related to your product or service. You may have someone in management but
once again it is always a good idea to get perspective from someone outside of management if available.
These professionals on your advisory board may charge a fee. I would be leery of this. My suggestion is to do everything
you can to build the right relationships and to promise giving business to these professionals down the line.
I have a business associate who says he never has or never worries about any problems in his business. The reason is he
gives all problems to his advisory board and lets them figure out all of his problems and lets them assume all of his worries.
Advisory Boards can be very helpful and it is worth the time and energy to build the right one.
Controlling Payroll Costs
Link to article CFO
As mentioned in a previous post the four major expenses for most businesses are payroll, rent, advertising and insurance.
One way that the Interim CFO can work to control payroll costs is through the use of forecasting tools like CashTell. The
beauty of using a forecasting tool for the purposes of controlling payroll costs is that you can optimize both the headcount
and the labor hours for different levels of sales.
For example, when forecasting, several different possible business scenarios should be assessed and analyzed by both the
business owner and the part time CFO. One of those many different scenarios is different sales volumes. When forecasting
one must look at what happens to the model when different ranges of sales volumes are entered. A good forecasting model should
be able to determine the optimum headcount and the optimum amount of labor hours for each level of sales. This is a great
tool because with this information the business owner and CFO know in advance as sales go up or down how to schedule workers
helping to maximize efficiency and manage payroll costs.
Many times when the word labor hours is used we think of mainly manufacturing, however managing payroll costs through labor
hours can be done in all types of businesses. When I was in the retail business, store managers were given a set amount of
labor hours each week for scheduling employees. They could not go over those allocated labor hours unless they had permission
together with a logical reason. My forecasting tools determined those labor hours and then if at the start of the week sales
were deviating from the forecast I would issue or withdraw more hours as needed. It was also interesting that although the
store managers complained about the small allocation of hours that they got it was amazing how the job got done with more
efficiency and no sacrifice on service.
CFO Services - More than the numbers
Link to article CFO
Services
Recently a client emailed me a complaint about two things:
- That he is losing touch with his customers because he decided to delegate
- Things are getting crazy, disorganized and disjointed. I liked it much better when we were more organized.
As an Interim CFO addressing these kind of issues is commonplace. Business Owners look to the CFO for direction and guidance.
With regard to my client feeling like he is losing touch with his customers I responded to him as follows:
In business you either go up or down. There is really no state of neutrality. Any business that does not try to grow
usually goes down. If you strive for neutrality you are very likely to go down. Therefore you must continuously strive to
grow. Having said that, as you grow you are going to continuously feel a disconnect with your customers. However there is
a solution. It is called communication. I think on a consistent basis you need to call these "delegated customers" directly
and get the feedback from the customer on how it is going and on how your company can do better. I know it is more work but
it is part of managing the growing process. Your employees will never in a million years tell you that there is anything
wrong with their service until it is blatantly obvious and then it is usually too late. Tell your employees in advance that
you will be calling these customers and give these employees both positive and negative feedback as to the results.
With regard to my client feeling that his business is crazy, disorganized and disjointed and liking it better when things
were more organized, I responded as follows:
I think you need to change your mind set a little bit here. When I was in the retail business I knew business was going
well when things got a little crazy, disorganized and disjointed because that meant things are growing as planned. When things
are not in that aforementioned state then believe me there will not be joy in organization there will be potential stress
and loss of focus as being human we all get complacent. The challenge is as things get crazy, disorganized and disjointed
to be ready with solutions and improvements so when the current set of circumstances happen again you will be able to avoid
the crazy, disorganized and disjointed and move on to new things that cause more craziness, disorganization and disjointedness.
Believe it or not that is the winning formula for running a successful business.
Being a Part Time CFO is not just about working the numbers, the metrics and the forecasts. Being a CFO means you need
to have a thorough understanding of business ownership and in turn understand how the inner workings of business work.
CFO Services - What Angels Need To See
Link to article CFO
Services
If you are an Entrepreneur and you want to be prepared for an Angel or an Angel group you are best served to have the following
ready:
- An Executive Summary no more than 3 or 4 pages.
- Pitch Deck 10 to 20 page power point presentation.
- Be prepared for a lot of questions
- 6 to 12 character references after all they are investing in you!
- Names of customers or potential customers.
- Financial Model and Business Forecasting Tool
- Where is the money going to be spent?
- What are the real economic levers in the business?
- How does it look like over the next 4 quarters
- What hypotheses are you trying to test.
The Interim CFO or Part Time CFO can help you with the final 5 points.
Angels want to know if you financially thought through the project you are proposing. You need a financial model that
addresses all of the contingencies and possible what if scenarios. You need a financial model that shows the angels you know
how much cash you need and when you will need it. You need a financial model that shows the angels that you are on top of:
- Headcount and employee plan
- Purchase and/or production plan
- The costs related to your marketing and advertising plan
- Where their investment is being spent
- The metrics that will measure the businesses performance
Angels know that every business/investment opportunity they look at is going to have a set of hypotheses that the entrepreneur
is going to present as there are no certainties. Each hypothesis needs to be carefully thought out and presented. The Angel
needs to know what hypothesis or solution to a problem you are trying to test. What are the economic levers that are dictating
that your solution to the problem is the answer and what economic levers are going to drive your solution to the market.
Speaking of angel investors there is a solid list of them on the following website Angel
Capital Association
CFO Services from One Piece of Paper
Link to article CFO
Services
In a previous post on metrics
I pointed out the importance of metrics and some of the metrics a business owner can calculate and track. However what I
did not point out is how the CFO can use these metrics or key performance indicators to help the business owner literally
manage their business from one piece of paper. A Financial Dashboard if you will. Many CFOs help their clients identify
the key performance indicators in which to manage their business. Many CFOs use financial dashboards and share them with
business owners. I am just not quite sure if the CFO is showing the business owner how to use this tool to more effectively
manage the business. It takes time and patience but really explaining to the business owner how to use the financial dashboard
and to instill the discipline to use it at least on a monthly basis can go a long way in improving the productivity of the
business and also the productivity of the business owner. Managing the business from the financial dashboard not only provides
more simplicity to complex business problems but it also helps anticipate problems and circumvent trouble.
For example, I showed a client recently how a trend in a simple metric called overhead per labor hour can show how well
the business owner is managing their overhead costs commensurate with managing their payroll costs. Looking at the way this
metric trends can give you a quick indication on whether you are maximizing your overhead and payroll expense controls. Using
graphs is a very productive way to visualize these trends.
Finding benchmarks are ok but in my view they can only be taken so far. Benchmarks means finding service or statistical
bureaus that compile metrics from other companies in the same industry so that comparisons can be made with others in the
same industry. This is certainly interesting information, and it can be useful to a point but I am of the belief that no
two companies are really alike even if they are in the same industry. Overall I believe that the benchmarking should be done
internally and the CFO, business owner and advisory board should get together to first determine the most productive key performance
indicators to track, the target goals for each key performance indicator and the way the business owner and CFO will use them
to manage the business. Certainly look at the benchmarks, but do not use the benchmarks as the target.
Getting the business owner to understand and on board with using metrics to manage their business is one of the more effective
CFO Services that can be provided.
Managing Cash
Link to article CFO
As an entrepreneurial CFO I am able to share real life experiences on managing cash flow.
In the late 1980's I owned a chain of retail ski stores in the Greater Boston area. You might think that due to the seasonality
of that type of business that the cash flow would be terrible in the summer time, but I never needed to use my line of credit.
Other than tight expense control and cash conservation strategies throughout the year there were two main reasons why we
never needed to use our line of credit:
- First, we closed the stores in the off season. Our specialty was ski equipment, ski clothing and ski accessories. Those
were the areas we were experts in. Those were the areas the consumer knew we were experts in. If we were to sell summer
goods like all of our competitors did, we not only would have slow inventory turns, but we would also have carryover of these
unproductive non-ski inventories preventing us from investing in what we did best and preventing us from investing in what
the consumer was conditioned to know we did best. The sale of ski equipment, ski clothing and ski accessories. Tying cash
up in unproductive inventory creates cash flow problems, unplanned markdowns and lost profits. Investing only in inventory
that is productive with high inventory turns and lower unplanned markdowns creates cash flow and profits.
- Second, I ran my inventory down so that I had very little merchandise on December 31. I worked with suppliers so that
I could purchase close out merchandise in January, February and March and pay for it in October. As a result I was able to
take my sales from January, February and March which are still strong periods in the ski business (especially if there is
local snow) finance the summer. In August and September which is the real start to the winter buying season I would have
a grand opening (because my stores were closed in the summer I could have a grand opening every year) as well as a major tent
sale. These sales would easily cover the October close out bills.
Understand that when you own a seasonal business or if your business simply has periods of low sales activity that you
need to identify your business cycle. I am defining the business cycle as the time you receive the inventory or raw material
until you get paid for the final product. The objective is to receive payment for the final product before paying for the
inventory and/or expenses of production and/or the expenses of selling the inventory. If you understand the business cycle
you can create strategies and work with suppliers to most productively meet your needs.
The CFO can help you identify the business cycle, put together operating strategies and work with suppliers to manage cash
during slow periods.
Exuberance
Link to article CFO
One of my clients is having a real good year. I know that is unusual for the current economic environment but this particular
client makes very unique and effective sales presentations which has lead to his success.
My client recently (within the last two weeks) added some new employees in order to keep up with the demand and he asked
me if he should buy a new truck. He said he thought it would make one of his new crews more productive.
I said hold it as I immediately went back to my business experience and how when I had a peak in demand and was doing really
well how I went overboard with capital expenditures, how I added locations and how I added product lines as I thought the
great demand was never going to end. This was a big mistake. I said to my client Exuberance as I thought of my own exuberance.
I went on to tell my client that we have not even tested our new employees to see if they are going to make the cut as permanent
employees and we are thinking about buying trucks to make them more efficient. My client went on to say that he could take
one of the new guys and let him go solo on the truck to do some lower end jobs. I told my client that we should do nothing
and review this in another two months. In two months we will see if we still have the same sales backlog, we will see if
the new employees are working out, we will also have a better idea how as a business we handled this excessive amount of sales
activity from a quality standpoint and we will know if it is profitable to do these smaller jobs. We will also have a better
idea to see if there is time to market the smaller jobs for the truck strategy my client talked about. I told my client that
business owners (me included) have a tendency to really over spend when times are good. They almost do it because they have
the cash available to do it and things are going so well so they think they need to capitalize on this success without thinking
that these great times are not going to last forever and the overspending still has to be paid for. As I told my client this
he began to understand and he thanked me for putting the breaks on the idea. I told him you must be equally as disciplined
in managing upturns as in managing downturns and you must never think you can afford something just because the cash is currently
available. You must constantly look to conserve cash unless a real return on the investment can be forecasted with accuracy
and all of the other areas of the business are stable and tested as cash is the lifeblood of your business.
This exchange between my client and I is just one more example of how it is a great advantage for a business owner to have
an entrepreneurial chief financial officer. The entrepreneurial CFO can reflect back on the many real life business experiences
and apply those experiences for the benefit of their clients.
The Value in business and Cash Flow Forecasting
Link to article CFO
As a Part Time CFO I have the following questions:
Does the small business owner see the value in business forecasting?
Does the small business owner see how the business forecast helps you to become proactive versus reactive?
Does the small business owner see how the business forecast allows you to take a look into the businesss future using multiple
what if scenarios allowing the small business owner to understand what is going to happen and arming the business owner with
multiple strategies ready to implement depending on which scenario becomes reality?
Does the business owner see how commonly asked questions like:
Should I add or cut a product line?
Should I add or cut a location?
Should I add or cut an employee?
Should I Lease or Buy Equipment?
Should I add a truck or van?
Will I need more cash in 6 months?
can all be answered through business forecasting?
Does the small business owner see how you can solve todays problems with business forecasting?
I dont think they do!!
Sorry for the rant, but I just do not understand why the value of business forecasting is underestimated by the small business
owner. Fortune 500 companies and large businesses are always forecasting and they see tremendous value in it. To the Fortune
500 Company everything is about what is going to happen next and how can we strategize for what might happen next. Everything
is about being proactive because if you are reactive the quality of decisions go way down and the value of your stock and
the value of the company go down and people get eliminated! To many small business owners who have viable businesses the
lack of business and cash flow forecasting will reduce the quality of their decisions and the value of their companies and
they will be eliminated. Do you think these Fortune 500 companies would spend the huge amounts of time on forecasting if it
was not important, if it did not add tremendous value, if it did not work? It is not valuable only to the Fortune 500 Company
because they are big. It is valuable to the Fortune 500 Company because it is an effective way to operate a business!
Many small business owners will say Gee I wish I saw that cash flow problem coming. The point is, it would be very likely
to identify a cash flow problem in advance with the right business forecasting tools. In addition, you will be able to avoid
other problems like for example, inventory problems, because for each level of sales you plug into a forecasting model you
will get an optimum inventory and receipt plan. If sales start to slip or increase, you will be able to adjust to a new and
different receipt and inventory plan. It is widely known and accepted that the quality of decisions are much better if they
are made proactively versus re-actively. Is there such an urgency to simply survive one more day in your business and block
all possibilities for planning and for being proactive? Even if you wanted to do that and just survive another day there
are part time CFOs and business consultants out there who can do the forecasting and planning for you in order to give you
the immediate and long term picture you need. I know, this sounds very self serving because I do business forecasting, but
as a small business owner who has owned retail, manufacturing and service companies all of my life I constantly relied on
business forecasting and strategic planning to run my businesses and it was valuable.
The proper business forecast is a solid predictor of the future not because the forecast or person doing the forecast is
some kind of soothsayer or gypsy lady that has ESP, but because one can enter multiple what if scenarios covering as many
different likely possibilities as one would like. With each scenario a strategic plan can be developed. As any one of these
scenarios start to unfold, the business owner can work the strategic plan devised for that unfolding scenario.
One of those scenarios that you want to look at could include something like what would the financial picture look like
if you cut or added an employee, cut or added a location, cut or added a truck, cut or added a product line, leased or bought
equipment and what will the impact on cash flow be for anyone of those scenarios.
And guess what, I have a solution for those small business owners out there who are only worried about the problems of
the day and wants to be in reactionary fire drill mode all of the time. For those of you only worried about the problems
of today, a business forecast can help identify how to solve those problems that are happening right now! The proper business
forecast that prepares monthly projected income statements, balance sheet and cash flows encompass everything that is happening
in the business and therefore can solve any problem and/or answer any questions. This includes identifying the best course
of action and the softest landing for troubled businesses as well.
A client was having a cash flow problem and there were a number of factors on the surface
that were causing the problem: They were:
1. Too much debt
2. Owners Salary too high
3. Selling prices too low
However while doing the forecast for a scenario where sales were flat to the previous year, the forecasted inventory receipt
plan that correlated with those flat sales was much less than what happened the previous year. This forecast showed that
inventory turns could improve by 1.5 times and this efficiency in inventory receipt and turns would increase free cash flow
by $40,000 per year. This improvement would have never been made if the forecast was not done. Furthermore, finding this
kink in the armor took pressure off the owner to have to reduce their salary and it took pressure off the business to have
to increase prices too much in a competitive environment.
By the way I want to repeat something. The proper business forecast will have projected monthly income statements, monthly
balance sheets and monthly cash flows all tying into each other. If your forecast does not have cash flows, then throw it
out with the bathwater. It is no good!
Attention Small business owners. See the value in being proactive versus reactive. See the value in answering questions
you ask yourself every day, see the value on putting together a strategic plan based on what the forecasts tell you, and for
those of you who are just trying to survive one more day, see the value in solving todays problems today through business
and cash flow forecasting.
CFO Must Find The Softest Landing Possible
Link to article CFO
One of the biggest challenges I have as a Part Time CFO is working with distressed
companies. These are companies that are very insolvent and have had a recent history of significant operating losses or were
companies that were always on the edge and then developed more significant problems during the current economic downturn.
These are usually companies whose business owners never admitted there was a problem until it was too late. These are usually
companies who did not prepare business or cash flow forecasts or a strategic plan or exit plan. These are usually companies
who are reactive versus proactive. Since in business is is 80% ingenuity and guts and 20% luck. These could be companies
that were simply not lucky. Most of the time the softest landing possible crushes the hopes and the dreams of the business
owner and it is not an easy position for the CFO.
When working in these situations you look for the softest landing possible. 95% of the time the softest landing possible
is viewed by the business owner as a nightmare. This is understandable because the softest landing possible usually isnt
selling the business for millions of dollars which is the dream of most business owners.
The personal liability situation of the business is an important consideration when seeking the softest landing possible.
Usually the rule of thumb is the more personal liability exposure the harder the landing. This is usually the case because
the more personal liability exposure the business owner has the less the impact the corporation has to protect the business
owner.
I am going to write about 3 possible options when a business is insolvent that may provide the softest landing. I am going
to explain each one only briefly because I am not an attorney and I urge everyone contemplating these options to consult an
attorney.
1. Bankruptcy. I think we are all familiar with this one. This may have to be combined with personal bankruptcy
of the business owner due to excessive personal liability incurred in the business. Another consideration with this route
is also the cost. It can be expensive especially the business bankruptcy. Sometimes a bankruptcy filing can be used as leverage
with creditors and also at times with hostile partners. You have two forms of business bankruptcy which are Chapter 7 which
is a complete liquidation and closure and Chapter 11 which is a reorganization. With a Chapter 11 or reorganization one of
the most important factors is will the trade supply you? This is when the business owner has to rely on whatever relationship
equity they have built with the trade. Chapter 11 is only viable if there is some type of debtor in possession financing
available or if operations can be funded by only paying current expenses and a very small piece of old debt.
2. Private Foreclosure Sale. This is when there is a bank or other senior creditor in first position to be able
to take all of the assets under a security agreement with a filed UCC. An acceptable offer is made to the senior creditor
by an outside investor usually for less than what is owed the senior lender but probably for more than the senior lender would
get if they liquidated the company. Only the assets of the company are simultaneously seized and sold to the investor in
a private foreclosure sale. The liabilities are left in the old company. A deal is made by the outside investor with the
current business owner for either equity in the new company or a job/consulting position or both depending on the business
owners desires. Available cash before the foreclosure sale is used to pay down or negotiate with personal liability creditors.
On one hand the trade loses what ever the company owed them, but on the other hand they could perceive new management and
new majority ownership and a new day to do business with someone who will pay.
3. Strategic buyer. This is when you can find a buyer who is in the substantially the same business. A strategic
buyer will be in a better position to work fast and also will pay the most while seeing an opportunity to expand their business.
The strategic buyer buys all or selected assets and none or selected liabilities. The purchase price and earn out (there
is likely to be an earn out as we are talking about a depressed business with an uncertain future) needs to exceed personal
liabilities and any secured creditors with perfected security interests (filed UCCs). The seller needs to be prepared to
offer settlements to creditors giving priority to creditors with personal guarantees. This is not easy to do but can be a
way out. In this option the trade knows the strategic buyer and although the trade knows they have probably lost the receivable
they have a stronger company to do business with who they are familiar with.
Once again, these are all complex strategies and every situation is different. Experienced lawyers must be obtained to
see if any of these options is right for you. I have personal experience with all of these scenarios and it is important
to review each option carefully to flag the risks and opportunities. These are 3 possible options to provide the softest
landing possible for an insolvent company. The challenge here for the CFO is to explore all of the options available to the
company knowing that each option likely presents unpleasant downsides for the business owner and you must identify the option
that presents the least unpleasant downsides. Keep in mind that it is also likely that the worst thing you can do is nothing.
Therefore it is important that the Chief Financial Officer stays focused on continuously influencing the implementation of
the softest landing possible.
Bookkeepers and the CFO Work Great Together
Link to article CFO
Services
I had a prospective client/business owner recently who was ready to hire me. He said before he hired me he had to ask his
bookkeeper their opinion. The bookkeeper had not met me and did not know me and although I thought it was a strange way to
operate I said that was fine. When I followed up with the prospect he said that the bookkeeper thought that a Part time CFO
was not needed and based on that, the business owner said he was not going to hire me.
I was surprised by this. I felt bad for the business owner on how he would let the bookkeeper make such a decision. I told
this prospective client and business owner that in my experience there were only two reasons why a bookkeeper would say no
to CFO services without knowing or meeting the CFO:
1. The Bookkeeper is acting very inappropriately in the day to day responsibilities of their job (possibly stealing) or;
2. The Bookkeeper is afraid to have their numbers scrutinized in fear that inadequacies in the bookkeeping will be exposed.
The point is that bookkeepers and CFO's work famously well together. They compliment each other. The Part Time CFO goes
into the engagement happy when they know a bookkeeper is on staff preparing the numbers and the CFO and bookkeeper work together
to make sure the numbers are right so the best business decisions can be made for the client. The Bookkeeper and CFO are a
powerful combination in terms of helping the business generate accurate financial numbers. That is why when a bookkeeper repels
a CFO who they do not even know or never met, that should raise the eyebrow of the business owner.
Business Risk
Link to article CFO Services
I wrote an article on understanding the risks of business ownership some time ago but I wanted to revisit this topic under
the heading of Business Risk. The more I think about Business Risk the more I think it is valuable for the business owner
to understand what Business Risk means. As I see it, especially in this so called New Economy the business owners must be
more sensitive to risk than ever before.
When you are a business owner, risk is all over the place. The critical element that keeps your sanity is your assessment
of that risk. What should be going through your mind is whether the risk you are assessing is mild, concerning or severe.
Just by opening up for business and putting the lights on there is risk. Every single day you are likely to encounter at
least one (likely more than one) of the following risks:
Buying equipment
Not Buying Equipment
Leasing Equipment
Not Leasing Equipment
Purchasing inventory
Not purchasing inventory
Hiring employees
Not hiring employees
Incurring debt
Not incurring debt
Do you see where I am going with this? Every decision you make whether you do something or you do not do something carries
risk. This is by no means a complete list! I could go on and on with inventory mix, collections of accounts receivable,
choosing suppliers and so on. This is why it is so challenging to be a business owner. This is why it takes a certain mentality,
a certain make up and a certain mindset to be a business owner. The job of the business owner and CFO is to assess each and
every one of these risks. If the risk is severe or cannot be tolerated then the risk must be mitigated.
Do you see why the business owner needs help with this? Do you see why the Chief Financial Officer can play such an important
role no matter what the size of the business is? Even in the smallest of businesses these risks need to be assessed and mitigated
if severe.
The Risk of Employees
Link to article CFO
From looking at the unemployment rates it appears that businesses are starting to understand the risk in employees. This
Wall Street Journal Editorial by Michael P. Fleischer, President of Bogen Communications in Ramsey, NJ identifies all
you need to know with respect to the risk of employees. However if that was not enough let me add some other risks:
What if a new hire is only a sub par performer on the job? Here you are risking all this money and the productivity isnt
even there. This employee who you interviewed multiple times and had your current employees interview multiple times who
all giving this prospective employee rave reviews isnt working out. Now you have to lay off this employee adding to your
unemployment insurance contributions.
The risk of rising health care costs and the latest health care plan providing much uncertainly among many business leaders
and small business entrepreneurs.
Take a look at existing employees. Can you really afford to have sub par performers?
The risk of laying off or firing an employee is another burden of having an employee. One never knows when they layoff
or fire an employee what legal action awaits. Even if you win the case you lose as you lose the legal costs to defend!
In the final analysis, subcontracting work and responsibilities has got to be a more viable option than ever before. Todays
business owner needs to take a look at this option. Subcontractors can be interchanging movable parts and if they do not
work out it is easy to let them go. When you let go a sub contractor there is virtually no risk of legal action especially
when compared to the risk of letting go an employee. With subcontractors there are no health costs and no benefits. Keep
in mind that I am talking about Sub Contractors, not independent contractors who in the eyes of the taxing authorities could
be employees in disguise. Hiring people as independent contractors could get you into a lot of trouble. Subcontractors are
real businesses that can do work for you and other customers that needs to be done within your business. Independent contractors
are individuals who are looking for work and really do not operate a business in their field and come and go as an employee
would. For IRS distinction click
here.
A reputable Part Time CFO who is a subcontractor and not an employee or independent contractor can help you assess the
risk associated with your current or proposed employees. A good CFO will also help you identify, assess and mitigate other
risks in your business.
Oh No! Don't cut Advertising and Marketing
Link to article CFO
One of the CFO Services available to my clients is an expense review. During this analysis I look for alternative vendors
with more value or negotiate with existing vendors for lower pricing. No matter how good the CFO is in cutting expenses I
have never seen a P & L with zero expenses. Eventually you are going to need sales growth.
With this difficult economy still continuing, businesses are still looking to cut expenses which is a good thing and cutting
expenses should be an ongoing practice no matter what economic condition we find ourselves in. However as this current economic
difficulty continues I see businesses now cutting into their advertising and marketing budgets. Like other expenses, a review
and analysis of advertising and marketing expenses should be ongoing no matter what economic condition we are in. When this
analysis is done and certain advertising is determined to be ineffective then it should be cut. I am fine with that. However,
what I am seeing is that business owners are starting to cut more effective advertising and putting off new promotions that
they believe will be effective and in my view this should not be done. Cut elsewhere but not advertising and marketing unless
said advertising and marketing is determined to be totally ineffective. As a CFO, I am well aware of the risks involved in
advertising and marketing. However, I am also aware that businesses owners cannot retreat forever or they will retreat right
into bankruptcy court.
I am also well aware that in difficult economic times your most effective form of advertising isn't as effective in difficult
economic conditions as it is in peak economic conditions, but it is still your most effective form of advertising and cannot
be cut. Making the decision to keep more effective advertising going and making the decision to take on new advertising and
marketing opportunities that you believe will work is where the risk of entrepreneurship in its most precious and sacrosanct
form comes to the front. This is what separates the good business people from the not so good business people. More importantly
this is what separates you from your competitors because your competition is retreating!
When someone either cuts more effective advertising and marketing or passes on a new advertising and marketing idea that
they really like, I am reminded about the story of the Hot Dog Vendor.
A Man lived by the side of the road...and sold hot dogs.
He was hard of hearing, so he had no radio. He had trouble with his eyes, so he had no newspaper. But he sold good hot
dogs.
He put up a sign on the highway, telling how good they were. He stood by the side of the road and cried, "Buy a hot dog,
mister!" And People bought.
He increased his meat and bun order, and he bought a bigger stove to take care of his trade. He got his son home from college
to help him. But then something happened. His son said, "Father, haven't you been listening to the radio? There's a big Depression
on. The international situation is terrible, and the domestic situation is even worse."
Whereupon the father thought, "Well, my son has gone to college. He listens to the radio and reads the newspaper, so he
ought to know." So, the father cut down on the bun order, took down his advertising sign, and no longer bothered to stand
on the highway to sell hot dogs.
His hot dog sales fell almost overnight. "You were right, son", the father said to the boy. "We are certainly in the middle
of a Great Depression."
If the business is cutting into advertising and marketing because the advertising and marketing is ineffective that is
one thing, but if the business is cutting more effective advertising and taking a pass on new advertising and marketing opportunities
that they believe will be effective, I think they need to re-think that!
The CFO Provides the Tools for Success
Link to article CFO
It is often said, that in order to succeed in business you need 3 things. One is the ability to take action. Two is Self
Mastery which is taking control of your mind and thoughts and three is you need the proper tools.
The ability to take action and self mastery come from within, but the proper tools can come from a good CFO.
Your CFO needs to use tools that:
1. How much cash they will have or need at any point in the future.
2. Allows business owner to choose multiple scenarios to see what can happen if:
* Sales/revenues change up or down.
* Expenses change up or down.
* Inventory changes up or down.
* Debt structure increases or decreases.
* Capital Expenditures increase or decrease.
* Headcounts increase or decrease.
3. Determines optimum inventory levels.
4. Determines optimum timing of making trade and expense payables and determines
how much to pay.
5. Determines a company's ability to make capital expenditures.
6. Determines whether a company should lease or buy capital equipment.
7. Determines when a business owner can retire and still pull out a paycheck from the
business.
8. Determines how much debt you will have at any particular point in time.
9. Determines what the business owner has to do to increase cash flow.
10. Determines Break even points.
11. Determines optimum inventory receipts or manufacturing output.
12. Determines optimum expense levels.
13. Helps develop operating budgets.
14. Helps determine optimum headcount.
15. Assists in determining Business Valuation.
16. Helps Determine key operating metrics.
17. Determines the effect of adding or eliminating a product line or business segment.
18. Determines the effect of adding or eliminating a store location.
With the Proper tools from the CFO the tripod of success can be completed and success will be achieved.
Do you keep growing your backlog?
Link to article CFO
As a Part Time CFO I look very carefully at sales order Backlogs. I understand that given the current state of the economy,
having long backlogs have not been the problem, but I still think that it is a discussion point. First let me make sure I
say that healthy backlogs are different times frames for different industries. Some industries are not considered healthy
if their participants do not have a 6 to 12 month backlog. Some industries customers expect backlog. In this article I am
asking the business owner to assess their backlog from the perspective of what is healthy in their industry.
Backlogs can be an indicator of the customer's propensity to buy. Backlogs can be an indicator of demand. Backlogs can
be a solution to cash flow problems by increasing production, staff or capacity to cut into the backlog and accelerate the
receipt of cash from the customer. Backlogs have their place. They keep the business owner in a state of harmony. They
keep employees busy and minimize layoffs. However, there has to be limits. There has to be a point where the backlog is
too long. The longer the backlog the longer customers are waiting for product and services. The longer the backlog usually
means the longer the cash cycle because inventory and labor is needed well in advance of delivery of the products and services.
So although backlogs can solve cash flow problems by cutting in to the backlogs, they can also cause cash flow problems if
they get too long. The bigger the backlog the longer the cash cycle the more strain on cash flow. Also, by accelerating
sales and cutting into the backlog you will increase production thereby decreasing fixed overhead, have faster inventory and
sales turnover and make more money.
The business owner together with the CFO has to make it a point to assess the backlog. Some of the things that need to
be assessed are:
If their currently a cash flow problem?
What was cash flow and profits like with a shorter backlog and faster turnover?
What is the staffing availability?
What is the customers patience level?
The CFO should prepare a business and cash flow forecast to help answer these questions and more with respect to the size
of backlogs.
Just like there are optimum inventory levels and optimum employee levels there are optimum Backlog periods. Dont get me
wrong, backlogs can be great, but an optimum backlog must be determined. The optimum backlog period depends on the industry.
What is Educational Marketing?
Link to article CFO
Services
As a Part time CFO I need to be able to play a large role in helping the business owner make strategic business decisions.
In order to do this the CFO has to know more than just the numbers. The CFO needs to understand the whole business. This includes
having a solid understanding of marketing.
Today I want to discuss a marketing concept that in my view is very effective. It is called educational marketing. Educational
marketing is defined as informing your customers on how to make the best buying decisions. In other words stop selling and
pitching and start helping and informing your customers on how to buy. Educational marketing converts skeptical shoppers who
became skeptical because they were sales pitched to death and turn them into informed buyers. Educational marketing is a specific
type of marketing where you assume an expert and training role and you engage potential customers and clients through information.
Educational Marketing is more effective than traditional price driven advertising as it helps consumers do their homework
so the prospect can make an informed buying decision.
The hard sell is getting very stale. Have you noticed that people are avoiding and running away from being sold and pitched?
They look for information that helps them buy the right products. By informing your customer you are inherently building a
relationship and trust which is the basis for who people do business with. In addition to the credibility you build, you become
an expert and a resource instead of just another supplier or vendor.
Think about it. Is your primary objective in marketing your business to promote what you do? Is it to promote your product
or services? I say NO and NO! I say the most important function that your marketing serves is to establish that you and your
company are knowledgeable, capable and can be trusted. To so this is going to require a radical shift in traditional thinking!
By answering the questions that customers are asking themselves when they are making decisions to buy your product or service
is the exact approach you should take in determining your educational marketing message. Put yourself in the customers position
and ask the questions. It is the educational and instructional answers to those questions that will produce your marketing
message.
Here is the point. If you are the one who is informing the prospect and providing solid information to the prospect. Guess
who the prospect will develop a relationship and trust with and guess who the prospect will think of, when it comes time and
when the prospect is ready to make the ultimate buying decision? That's right, you, because you are the person who provided
the information and education and you are the expert and the prospects resource! It's providing your prospect with educational
based messages not selling based messages that will turn the prospect into a customer.
Resist the urge to pitch and start educating your prospect. You will gain the credibility and trust that will earn you
much more business!
CFO Services Explanation of Accrual Versus Cash Reporting
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As part time CFO I constantly get asked the question as to what the difference is between the cash and accrual basis of
accounting. For those of you who are QuickBooks users you probably know that QuickBooks (thru the Modify Report Button) provides
the user with the option of reporting financial statements under either cash or accrual reporting basis. Many times my clients
see a significant discrepancy in their profit and wonder why. One of my CFO Services is to explain to the client the difference
between the cash and accrual reporting basis.
Under the Accrual Reporting Basis revenues are recognized in the month the product is sold or the service is performed
whether the cash on the sale is received or not. To give you an example, if you sell computers and the computer is shipped
to the customer in the month of May with 60 day terms. Under the accrual basis the sale will be recognized in May and not
60 days later in July when the cash is received. Under the Accrual Reporting Basis expenses are recognized when incurred
and are not recognized when paid. For example, if part of your cost to produce the computers you built and shipped in May
were to hire outside contracted labor with 30 day terms the expense would be recorded in May even though you paid for the
contracted labor in June.
Under the Cash Reporting Basis revenues are recognized in the month the product is paid for by the customer and not in
the month when the product was shipped to the customer. Going back to the computer example the computer is shipped to the
customer in the month of May with 60 day terms. Under the cash basis the sale will be recognized in July when the product
is paid for, not in May when the product was shipped. Under the Cash Reporting Basis expenses are recognized when paid and
are not recognized when incurred. For example, if part of your cost to produce the computers you built and shipped in May
were to hire outside contracted labor with 30 day terms the expense would be recorded when you paid the expense in June and
not when you incurred the expense in May.
So which is method is better? For income tax purposes both methods of accounting are allowed and you should consult an
income tax professional to find out. For management purposes, in my view the accrual basis of accounting is better hands
down. The accrual basis is better because it provides a more accurate matching of expenses with revenues. Taking a look
at the computer company example under the Accrual method the product is shipped in May and revenue is recognized. The expense
associated with the product (outside contractors) is recognized in May when incurred. This is a perfect match of revenues
with the expenses that produced that revenue. Now take a look at the same example under the cash basis. The revenue would
be recognized when paid in July and the expense would be recognized when paid in June. There you have an obvious mismatching
of revenues and expenses.
Through utilization of the accrual basis and the proper matching of revenues with expenses more useable management reports
are available and in turn better decision making. Certainly the CFO as well as the business owner will be able to better
utilize and make more effective judgments with the accrual basis of accounting. As previously mentioned the IRS allows for
both methods of accounting however under GAAP (Generally Accepted Accounting Principles) only the accrual reporting basis
of accounting is allowed.
CFO Services - Selling Your Company to Employees
Link to article CFO
As a Part Time CFO I often get involved in exit planning and executing exit plans. The purpose of this post is to give
you a preliminary check list when selling your company to employees. Generally it is normally not advisable to sell your
business to employees. The reasons are that employees usually do not have the financial resources to make a significant down
payment nor do they have the credit capacity to assume personal guarantees that may be outstanding. However some business
owners who have significant trust in employees they have employed for years or want to reward employees that have been loyal
for years really do want to sell the business to these employees and are willing to assume the additional risks.
Below is a preliminary check list to consider when selling your company to employees:
Does the potential employee buyer or buyers have as much skill as you do? Do they think like business owners or do they
think like employees?
When you retire, what skill sets that you brought to the table in the day to day running of the business need to be filled?
Will the new employee Owner(s) have those skills sets?
If not, what is the best way of finding someone who has the required skills and should they be hired before the sale
or your retirement date to break them in?
When should the closing date be of the new employee owner(s)? Timing is important. For example are you selling the business
going into peak season or going into the slow season? If you are selling into the slow season this may bet the new employee
owner(s) off on the wrong foot.
Does the stock ownership to employees become gradual or all at once on a retirement date and what are the income tax
ramifications of each?
How does personal liability get transferred?
If multiple employee owners will they work well together and make good partners? If not, that could spell disaster.
How much is your business worth today?
How much will the business likely be worth at your planned retirement date?
How much money do you need from the business in total?
What form can this payment take? For example, lump sum or per year for how many years. If you need to take a note for
any part of the purchase price which is a likelihood what is the credit worthiness of these new owner employee(s)
How much money do you need to live on after retirement?
What portion of that retirement amount must come from the proceeds of the sale of your business?
As previously mentioned this is a preliminary list to think about and consider. As a CFO I usually hand this list to the
business owner when they are contemplating selling to an employee as this list gets them thinking in the right direction.
There are many other factors that need to be carefully considered about your specific situation. Make sure you have a team
of professionals helping you.
Pick One Strategy and Go for It!
Link to article CFO
As a Part Time CFO, I have clients who are either startups looking for investor money or are startups that are self funded
and are putting together their first strategic plan. I am an entrepreneurial CFO so I understand the thought process that
goes into the strategic plan. We see so much opportunity with multiple market channels to pursue.
As entrepreneurs we always think we can go after all the markets and all of the channels all at once. Create our strategic
plan around attacking every possible opportunity. Fire all the guns at once! After all, why leave a stone unturned? The
logic is if one or two of the market channels are doing well you can just focus more resources or all resources to those channel(s).
However, in reality when we try to go after all market channels we dilute our resources and find that we are not successful
at any channels because each channel individually deserved more resources and more attention in order to be successful. I
can't tell you how many times I went kicking myself thinking about a specific market channel and saying "if I only had more
resources I would have been successful in this channel". Knowing I would have had more resources if I did not try to pursue
all the market opportunities at one time.
The challenge is convincing yourself and any investors why the channel you did not select is not the right strategy, however
what your plan can ultimately show is you think one channel, lets say "mom and pop retail shops" is the best opportunity in
the short term (first 2 or 3 years) and then when the company has more resources or is ready for another round of financing
it can incorporate "the big box retailers". Then down the road once after it has established itself and profited with big
box retailers maybe the Canadian market channel can be pursued and then international and so forth. If it takes 3 or 4 years
instead of 2 or 3 years to profit and be successful with the mom and pop retail shops then so be it. At least you preserved
your resources so that you could survive the extra time it needed to profit in that market.
The other thought that goes through the mind of the Entrepreneur that makes going after all the market opportunities so
tempting is beating any competitor to the punch. Once again you need to avoid this temptation. In my view if you are first
to the market place with a product or service you should choose the channel that gives you the most brand recognition opportunity.
That way you will always be perceived as the pioneer and being first in the market place when you finally enter that new
market channel, even though someone else beat you to that new market channel. There is always a distinct brand recognition
advantage in being first to the market place no matter what channel is pursued.
I know it is hard. I know you want to go after it all. I know you have good reasons to go after it all. Avoid those
temptations. Pick the best market channel and pour all of your focus, energy and resources on that one channel and you will
give your startup the best chance to succeed!
CFO Services - Don't Shoot From the Hip
Link to article CFO
Whenever former Boston Red Sox Manager Joe Morgan was questioned on why he made certain decisions in a game, his answer
very often would be "six-two and even". This was an expression he used which really meant he didn't have a logical reason
for making the decision and he was using gut feel and shooting from the hip.
Too many small business owners shoot from the hip. They simply don't have the information or the proper analysis to make
quantifiable, sound business decisions. A Part Time Chief Financial Officer provides the tools to avoid shooting from the
hip. Through forecasts and financial dashboards the Part Time CFO can provide the small business owner the information and
analysis that provides quantifiable guidance to the most commonly asked critical questions like:
Will I have enough cash to get through a dip in my business and what kind of dip can I withstand without needing more
cash?
What will happen to my business if I invest in a new product line and what will be the impact on cash flow?
What will happen if I maintain the status quo and keep doing business like I have been?
Should I discontinue a product line and dropping this line make me more profitable?
Should I buy a truck or new piece of equipment?
What will happen to my business if I try a new advertising campaign?
I want to get involved in internet marketing. What investments need to be made in people, time and money and how does
this impact the entire business?
Should I add a location and can my business handle the additional investment in adding the location?
What is the liquidation value of my business should I decide to discontinue my business?
Can my business be more productive and are we operating at peak efficiency?
Is there another business model that would be more effective?
Should I add another employee or is that just going to build additional expense with very little benefit?
Should I lay off staff and what impact will that have on the business?
How do I evaluate sales performance?
Is my overhead too high?
Are my selling prices where they should be?
Are my gross profit margins where they should be?
These are critical questions in business. Answers to these questions can make or break your company. An Interim CFO has
the tools and the expertise to provide the quantifiable analysis that will make the answers to these questions much clearer.
So the next time you have to answer any of the aforementioned questions, make sure your answer isn't "six-two and even".
CFO Services - Quick Cash Flow Metrics
Link to article CFO
Services
As a Part Time CFO I am called upon to do some quick cash flow analysis for clients. This is not often very easy as with
cash flow there can be a lot going on. One of my favorite metrics and first places to go to get a good sense of what is happening
is Days Sales Outstanding (DSO) and Days Payables Outstanding (DPO). DSO tells you the average number of days it takes a
company to collect their accounts receivable. DPO tells you the number of days it takes a company to pay its trade creditors.
If you are paying your trade creditors appreciably faster than you are collecting your receivables you probably identified
one source of a cash flow problem.
DSO is calculated by taking your accounts receivable as the numerator and Total Credit sales as the denominator. Multiply
that quotient times the number of days you are tracking and that is your DSO. Let's get more specific as to the numbers.
You can take the accounts receivable off of your balance sheet. Most companies total credit sales are usually their total
sales, however if they can specify a certain percentage of sales that they know are COD they can deduct that from sales to
determine credit sales. The number of days represents the number of days you are tracking. So for example if you want to
determine what your DSO is for the fourth quarter you take the accounts receivable on the December 31 balance sheet and put
it in the numerator and then you take your total sales (assuming all your sales are credit sales) for the fourth quarter off
of the income statement and put it in the denominator. Then you take that quotient and multiply it times 92 days which are
the number of days in the fourth quarter. That will give you DSO.
DPO is calculated by taking your Trade Accounts Payable as the numerator and Cost of Sales as the denominator. Multiply
that quotient times the number of days you are tracking and that is your DPO. Let's get more specific as to the numbers.
You can take the Trade Accounts Payable off of your balance sheet or Accounts Payable Detail. Keep in mind that your Trade
Accounts Payable are the amounts you owe to your inventory vendors versus your expense vendors like the phone bill or Office
supplies etc... Take the cost of sales off of your income statement. The number of days represents the number of days you
are tracking. So for example if you want to determine what your DPO is for the fourth quarter you take the Trade Accounts
Payable on the December 31 balance sheet and put it in the numerator and then you take your cost of sales for the fourth quarter
and put it in the denominator. Then you take that quotient and multiply it times 92 days which are the number of days in
the fourth quarter. That will give you DPO.
As a CFO these are my "go to metrics" when making a quick assessment of a cash flow problem.
CFO Services - Financial Numbers Can Play Tricks
Link to article CFO
If a baseball bat and ball together cost $1.10 and I told you the bat costs one dollar more than the ball. How much does
the ball cost?
Most people say the ball costs 10 cents. The right answer is the ball costs 5 cents with bat costing one dollar more than
the ball or $1.05 for a total cost of $1.10.
The reason why I bring this example up is because financial numbers can play tricks on you. It is the job of a Part
Time CFO to understand all of the tricks numbers can play and help the business owner understand and interpret the financial
statements properly so better business decisions can be made.
Reading and understanding the financial numbers on financial statements can play tricks on you. Many times a company is
making money so the P & L looks good, but they have poor cash flow. This is the case usually because the cash cycle is too
long (The cash cycle is the time frame between the outlay of cash for inventory (and material and labor) and the ultimate
receipt of cash from customers). These time frames need to be compressed. Some of these issues to compress the cash cycle
involve negotiations with the trade for better terms as well as stricter company credit policies for faster accounts receivable
turnover. Sometimes a solution can also be extending payroll from weekly to bi-weekly or even monthly where it is legal to
do so. Some clients also need an inventory purchase and receipt plan as they may be overbuying inventory.
To understand better how profit does not equal cash watch the following six minute and 30 second presentation:
Profit Does not Equal Cash Presentation
Another trick that financial statements and financial numbers can play is in understanding the equity section of the balance
sheet. This is the section of the balance sheet that values the difference between assets and liabilities. A high equity
balance can be deceiving if a high percentage of assets are made up of intangibles like goodwill, non-competes or patents
and trademarks. A high equity balance can also be deceiving if a high percentage of assets are made up of machinery, equipment
or other fixed assets that depreciate in actual value faster than the accounting depreciation calculation.
Accurate gross profit margins on your P & L can play tricks on you. Understanding what needs to go in cost of goods sold
and what is a direct cost of the product or service is very often done incorrectly. For example many business owners in the
trades such as construction, electricians, plumbers etc and who are in manufacturing do not put direct labor in cost of goods
sold. This is leaving out a direct cost of the product or service and without it will inaccurately overstate gross profit
margins which can lead to poor business decisions.
Helping the business owner read and understand their financial statements in order to make better business decisions is
a CFO Service that needs to be done early in the process. Remember, financial numbers can play tricks on you.
CFO Services - Guidance to the Entrepreneur with an Idea
Link to article CFO
As a Part Time CFO who performs multiple CFO Services I very often come across entrepreneurs with an idea. It is great
to see the enthusiasm and the passion the entrepreneur possesses about their new idea for a product or service. I do not
call these situations start-up companies yet because they are just an idea and not something that was put into motion. To
me a start-up company is an idea that had been put into motion.
One problem I notice very often is that the entrepreneur thinks that the idea is sellable to an investor as an idea. For
example, an entrepreneur has an idea for a new widget that will solve a particular problem in the medical industry. However,
it is just an idea. There is nothing tangible. Oh sure, there may be a bunch of doctors that were polled who will say that
it will work, but there is no prototype of the widget therefore an investor will question whether the widget can actually
be produced. The investor will also question the costs the widget can be produced at because since it has not been produced
no one has any idea of what manufacturing challenges exist that may escalate costs. The idea doesnt even have a contract
manufacturer lined up to at least identify someone who can possibly produce this widget. I could go on but the bottom line
is that the entrepreneur must take their idea and create as much tangible evidence as possible to support the success of the
idea.
The objective of an entrepreneur with an idea is to create as much tangible evidence as is humanly possible in order to
convince an investor to make a maximum amount of an investment in exchange for the least amount of equity. The more holes
in your idea the lower an investment you will attract if any and ultimately you will give up the most amount of equity. Investors
do not invest in ideas. They invest in solid business plans and business models with strong management chock full of tangible
evidence that they will get a return equal to 5 to 10 times their investment in five years.
The Part Time CFO can help the entrepreneur develop the business plan, prepare the forecasts and the financial section
of the plan, be a strong part of the management team, help develop the strategic plan, find investors, help pitch the deal
to investors. These are essential CFO Services.
CFO Services Know Your Numbers
Link to article CFO
As a Part time CFO I see a lot of Business Owners and the one thing that the most successful business owners have in common,
is that the most successful business owners Know Their Numbers.
What does it mean to Know Your Numbers? Here are just a few things that it means:
It means understanding and knowing what your operating costs per hour are.
It means understanding and knowing what your gross margin percentage is on key products.
It means knowing which products you make the most money on and what products you make the least money on.
It means knowing your inventory and what is slow moving.
It means knowing your inventory turns ratio.
It means knowing your average wage rate of direct laborers
It means staying on top of how many days your receivables are outstanding
It means knowing how many days your payables are outstanding and knowing when to time all of your disbursements.
It means being able to answer a question with total confidence when an employee or a vendor needs a decision because your
answer is centered on the knowledge you have about the most important numbers/metrics in your business.
It means increasing the overall accuracy of your decisions
It means improving the productivity and performance of your business because you are able to evaluate the productivity
and performance of your business.
It means understanding the metrics associated with your advertising campaigns
It means knowing how much cash you have on hand at all times.
It means you know what your monthly debt service is.
It means knowing how productive your capital expenditures are.
When a business owner knows their numbers they are on top of almost all business scenarios that can take place in their
business. They have a stronger sense of control over their business. Most importantly, the business owner who Knows Their
Numbers reduces the risk of business ownership!
CFO Services - Reducing Business Risk
Link to article CFO
What would you dare to dream if you knew you wouldn't fail?
By asking this question I am attempting to put you in the mindset of my clients. I am attempting to put you in the mindset
of a business owner, of an entrepreneur. Many of you are probably already in this mindset, but for those who are not, I believe
by understanding this mindset it will help you understand this post, because my clients are of this mindset. My clients are
entrepreneurs. They will do what others might only dare to dream. They are risk takers because running a business and doing
what others might only dare to dream involves great risk. As a part time Chief Financial Officer it is my job to reduce that
risk. This is my primary purpose and the primary purpose of a CFO. All of the things that I do is done to achieve the ultimate
goal of reducing the risk of business ownership for my clients. Reducing risk gives the business owner more time and more
freedom to find and create opportunity.
I see a lot of business owners and the one thing the most successful business owners have in common is the most successful
business owners "Know Their Numbers". They understand their costs, they understand their cash flow, and they have a basic
understanding of their balance sheet. By knowing your numbers you are able to make better business decisions and when you
make better business decisions you reduce risk.
Knowing your numbers starts with having accurate financial statements and if you dont have a bookkeeper to accurately maintaining
your books and records I guarantee at some point you will be in a lot of trouble. Strong sales can cover a lot of mistakes,
but when the sales slow down the strategies you employ during that difficult time depend on financial analysis and if you
have bad numbers, forget it.
Simply put, whether times are good or bad, with accurate financial statements you make good business decisions, with inaccurate
financial statements you make bad business decisions. Some people say, Why do I need accurate financial statements, I don't
make any decisions based on my financial statements anyway, and I say, that's called managing by the seat of your pants and
guess what, your competition is managing by knowing their numbers. And that's why people who manage by the seat of their pants
and don't know their numbers, get crushed when sales slow down or in an economic downturn.
By knowing your numbers you will be in control of your decisions, you will be in control of your business and most importantly
you will reduce your risk. I wrote a lot about risk today and that ultimately the main reason people hire me is to reduce
risk. The Free spirit of the entrepreneur is inherently prone to risk because remember, it all started with the question "What
would you dare to dream!!"
CFO Services - The Power of Control
Link to article CFO
I am a Part Time Chief Financial Officer. I was asked recently by a colleague,"when does a client become a client? Is
it some particular CFO Service that they are looking for? Is it usually some problem the client is having whether it is solving
cash flow problems, getting the business owner to know their numbers, Preparing a business and cash flow forecast or doing
some strategic planning?" I responded by saying that certainly the potential client could be looking for specific CFO Services
or for solving a specific problem, but the client really doesn't become a client until they feel some loss of control of a
particular problem in their business. For example a potential client may feel they have a cash flow problem, but if rightly
or wrongly they can justify in their mind that they can solve the cash flow problem, they feel they have control of the situation
and so they say "I can solve this one, why pay someone to solve it?" Of course, the potential client does not understand
that a good CFO can identify potential problems, like cash flow problems before they occur. The potential client does not
understand that through the use of the right business and cash flow forecasting tools a good CFO can tell the business owner
that trouble is brewing and what to do to prevent the trouble. So it is all about the level and sense of control.
As someone who has owned retail, manufacturing and service companies for 25 years I surely can say one of the most uncomfortable
feelings for any business owner is the feeling of a loss of control. It only has to be the feeling of a loss of control in
one aspect of the business. It doesn't have to be the feeling of a loss of control of the entire business. The fear and
the risk of loss that you feel when you feel a loss of control can be numbing. Conversely, there is no greater feeling for
a business owner than the feeling of having control over their business and being able to solve most all problems or issues
that come their way.
The potential client underestimates the value of strategic planning. Through the strategic planning process that wonderful
sense of control begins to emerge and when the planning process is through and it is then maintained on an ongoing basis that
sense of control becomes a more permanent posture of the business owner and confidence ensues. One thing the potential client
never underestimates is the power of control.
CFO Services - A Difficult Employee Question
Link to article CFO
As a Part time CFO I am often in a position to advise clients how to answer the following non financial related question:
What do you do with an inferior employee(s) when the business owner is virtually convinced that the employee market for
the particular skill that the inferior employee(s) is in is so thinly populated and thinly skilled the replacement would either
be worse or no replacement exists? Assume the inferior employees are not stealing. They just lack the talent, the ambition
or they are just plain lazy and incompetent.
Many may say that it is impossible for a skill set in an employee market to be that thin. Many may say this is an easy
decision and that you just get rid of the inferior employee(s).
These are all legitimate comments but what happens if the market is really that thin? What happens when the loss of the
inferior employee results in a loss of business for an unknown period of time? What happens if the training costs to train
the new employee who is being plucked from a thinly populated and talented market is expensive?
I have personally faced these types of situations in businesses that I have owned and they do happen contrary to many who
believe that an employee market no matter what the skill set can be thinly populated and thinly talented. In the two specific
situations I was personally involved in as the business owner I kept the inferior employees and as a result I believe I paid
a higher price versus biting the bullet, letting go the inferior employees and paying whatever price I had to pay including
lost business.
What I found was that inferior employees bring down other employees who are more talented, more ambitious and more willing
to work. The inferior employees are the proverbial "Bad Apples" that spoil the whole bunch and as a result everyone goes
down with them making the whole operation that much more inefficient, ineffective and dis-serving to the most important people
in the process, the customer.
Believe me; I understand how tough the decision is to cut the cord. You know that you are going to spend a lot more sleepless
nights while you lose business and do not have replacements. You will personally have to work more hours and this can be
taxing especially when you already work crazy hours. It tears the very fiber of the business owner, but it is one of those
unfortunate situations business owners encounter.
The key is take every precaution you can to prevent this during the hiring process and during the employee's first 90 days
on the job.
Even though this is a non-financial challenge a CFO has more value to their clients if they can guide the client through
this challenge and provide real life insight. It is the CFO who has prior business ownership experience that is best equipped
to handle these situations. At the end of the day these non-financial insights can be one of many valuable CFO Services.
CFO Services - Inventory Planning For Profit
Link to article CFO
For charted illustrations for this article click on the "CFO Link here: CFO
As a Part Time CFO where I have multiple clients, there are many clients when I engage with them for the first time that
I find do not have an inventory plan/forecast. An inventory plan/forecast is an essential tool and is one of the essential
CFO Services in order to manage cash flow and reduce risk to the business owner. Retailers especially need this tool because
inventory to a retailer represents one of the retailers' greatest risks, but the need for this tool also holds true in distribution
and manufacturing companies.
An inventory plan or forecast is different from an open to buy plan. Most retailers have an open to buy plan by product
classification. The open to buy is calculated by taking projected sales in the product classification (retailers usually
use last year's sales. They should work with a CFO to prepare a more legitimate sales forecast taking other economic, market
variables and the retailer's knowledge of the customer into consideration) and adding the desired ending inventory you want
to have at the end of the period you are buying for and then subtracting the beginning inventory for the product classification.
The result is how much you should buy or is known as your "open to buy". You can use cost dollars, retail dollars or units
in the aforementioned calculation. You can also include planned markdowns, average markups and other factors. I like to
keep it simple and use units.
Now there are other factors that retailers consider (justified or not justified) that increases their "open to buy", for
example:
1. How hot the buyer thinks the product will be (This will increase projected sales and therefore increase open to buy)
2. Sizes you may have to fill from beginning inventory to complete size runs or decisions to carry larger or
smaller
sizes to fit a certain customer segment
3. Colors you want to add because you think they will have greater consumer appeal
4. Merchandising plans that have higher stocking requirements to fill rack or shelf space properly
5. There may be a bad product mix or obsolescence in beginning inventory for the product classification
and therefore
the beginning inventory needs to be reduced to account for that
6. Better payment terms offered by supplier
7. Extra discounts from suppliers at certain quantities
8. Pressure from a supplier to buy more or they will threaten to open a competitor.
9. Pressure from a supplier to buy more who is giving you more advertising money
10. Pressure from a supplier to buy more because they have given you great support or provided you with
favors in the
past.
Do you see how you can overbuy? Do you see how easy it is to commit the greatest sin in retail? Some of these aforementioned
examples are justified, others are not. All of these factors create more risk.
Items 1 through 5 above and are legitimate reasons for taking additional risk and increasing your open to buy if you really
did your market/customer study homework. Item 6 above is legitimate only when you are considering the timing of shipments.
Items 7 through 10 above are booby traps and are not legitimate reasons to go over your open to buy and take additional risk.
In a future article I will explain why the booby traps are booby traps, but the purpose of this article is the absolute need
for an inventory plan/forecast.
Let's say that you have ice water running through your veins and you do not succumb to any pressure. You simply use your
experience and knowledge and if you do go over your open to buy in a product classification you legitimately feel a product
is going to be hot or you have to complete size runs or there are colors you believe will be in great demand or you have a
new merchandising plan that has higher stocking requirements or your beginning inventory could be completely stale and you
have to discount a lot of it. Even though you have these legitimate reasons for overbuying you are still assuming greater
risk and you need to understand the extent of the risk you are taking and that is where the inventory plan/forecast comes
in.
Most retailers just have their open to buy analysis by product classification and call it a day. However they are missing
an overall top level inventory receipt plan and inventory forecast. Why does the retailer need an overall top level inventory
plan and complete inventory forecast in addition to their open to buy by product classification? Because this plan/forecast
gives the retailer a macro view to clearly see how overbought or under bought they are as well as to see what the impact on
cash flow will be. This helps the retailer measure their risk and see what is really going to happen at the entire company
level.
This plan/forecast starts with beginning inventory and then adds the inventory receipts on order and lists them by the
month they will be shipped in and subtracts the costs of the projected sales by month to determine ending inventory by month.
You will be able to see how the projected ending inventories by month compare to last year's monthly ending inventories.
However that is not enough. You may have overbought last year. The final test should be entering your inventory plan into
a business and cash flow forecast and letting the projected cash flow tell you if you are overbought. In the business and
cash flow forecast you must also plug in the proper months when the supplier invoices will be paid. If you find that the
business and cash flow forecast tells you that you are going to be out of cash during the year then you are likely overbought
and are assuming great risk.
The retailer may want to rethink purchases if inventory is rising in the forecast. Certainly this could be gearing up
for a busy period but even if that is true you must still assess if you are bringing inventory in too early especially if
your trade terms are 30 days or less.
As mentioned, an inventory plan/forecast works best when it can be plugged into a business and cash flow forecast, but
it is still useful to give the retailer the macro view of the impact of inventory ordered. The Trade Accounts Payable Plan
should also be prepared as part of this inventory planning/forecasting process.
One of the CFO's major responsibilities is to reduce risk. To the retailer inventory represents the greatest risk. I
have seen many retailers overbuy their way out of business. The Chief Financial Officer (CFO) needs to guide the retailer
through the inventory planning/forecasting process.
CFO Services - Accurate Financial Statements
Link to article CFO
After being a Part time CFO for over 4 years now, I am seeing a trend that is not good and not productive for the business
owner. The alarming trend is there are too many business owners who have inaccurate financial statements.
Many business owners want to know two things no matter how interested they are in financial information. That is they want
to know what their sales are and they want to know what their net profit is. Even the most uninterested business owners in
financial information want to know those two metrics. However, if the financial statements are not accurate you will not know
those two metrics or if you do know those two pieces of information they will not be accurate.
Why does the business owner need accurate financial Statements?
To make better business decisions - How can you make business decisions on Collections, pricing, what vendors to pay, capital
expenditures, inventory purchases and much more without accurate financial statements?
To get bank financing and to obtain leases - Banks will take you a lot more seriously if your financial statements can
back up what you tell them. Furthermore when a banker sees inaccurate financial statements (and many financial types can usually
tell inaccurate financial statements merely through looking at them) there is very little chance to get a loan.
Allows for better financial analysis - Without accurate financial statements there is no basis for solving problems or
for strategic planning. For example without accurate financial statements you cannot solve cash flow problems nor do a business
and cash flow forecast. You cannot determine with certainty whether a change in business model is going to work for you.
Estate Planning - If you are going to have an effective estate plan the accuracy of your financial statements are a critical
part of the process.
Selling a business - The amount of earnings that a business has is critical to its valuation. Inaccurate financial statements
will be discovered by the buyer during the due diligence process and your deal could be in jeopardy.
Shareholder Buyout or Disputes - Just like selling a business accurate financial statements are critical in any shareholder
buyout or dispute. Similarly the following events also require accurate financial statements:
Employee Stock Ownership Plans
Litigation or Divorces
Shareholder Buy and Sell Agreements
A Part time CFO can be a very cost effective way to make your financial statements accurate and alleviate any problems
you may have with any of the aforementioned events.
CFO Services - Excess Cash
Link to article CFO
Services
As a Part time CFO from time to time I get requests from clients as to what to do with excess cash flow. I know it sounds
strange during these challenging economic times, but some companies do produce excess cash. This can occur if business is
really good or just from a seasonal fluctuation in a seasonal business. When these situations occur we have a tendency to
think only about putting the money in an interest bearing bank account. However, if you have seen money market and CD rates
lately you know that if you can get an interest rate of 1% per year you are lucky and this does not seem to be changing anytime
soon.
Here are some things that can be done with excess cash:
- Call all Trade Vendors to see if they will offer early pay discounts. Some offer them as a matter of policy but
I would make a phone call to them anyway to see if they would accept a higher discount. After all you may be inquiring at
a time where they need cash.
- Call the Landlord and see if he will give you a discount for prepaid rent.
- Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
- Pay down your line of credit as long as you can dip back into it and the bank doesn't freeze your line as you pay
it down.
If you think about points 1 thru 3 these are operating expenses you have to pay any way in the near future. It is not
like paying the credit line which is additional dollars outside of ordinary operating expenses. That is why with respect to
the credit line I suggest you make sure you can borrow back into it.
I think it is very likely that the aforementioned four points will yield appreciably better results than an interest bearing
bank account.
CFO Services - An Option to Consider
Link to article CFO
Services
As a Part time CFO I run in to situations where business owners are relocating. I always liked the strategy of
owning the building you do business in. The way I look at it is you have to pay for facility costs one way or another you
may as well build equity through the facility payment.
One mistake I made is with an insurance agency that I have an ownership interest in. I have had this equity interest since
1983. We kept leasing the same office space for years. We paid almost $700,000 in rent in 27 years. If at some point in
the process we bought the property we would have probably still paid about the same in facility costs, but we would have
enjoyed tax advantages and today we would own an asset that has resalable value. This is the typical falling asleep at the
wheel scenario.
Even though the real estate market is down I still believe the right thing for business owners to do is own their building.
SBA 504 programs are providing good financing options and believe it or not banks love to do them. The SBA guarantees a
large percentage of the loan among other things so the banks are all in on that. However if you cannot finance a purchase
today a lease with an option to buy can be a very productive strategy. Through a lease with an option to buy:
- You are not committing to a purchase
- You are controlling the property and it cannot be sold from you
- You can try the property to make sure it fits your business needs before you buy
- You have time to work toward a down payment
- You can lock in a favorable option purchase price in this current real estate market
Sometimes you have to make a nonrefundable payment for the option but in this real estate environment that can usually
be negotiated. Keep in mind any nonrefundable payment you make toward the option should go toward the purchase price should
the option be exercised.
With the aforementioned advantages of ownership a lease with an option to buy could give you the opportunity to purchase
an asset for your facility dollars instead of accumulating rent receipts.
Exploring different avenues when locating can be one of the many valuable CFO Services.
CFO Services - Another Cash Conservation Strategy
Link to article CFO
As a Part Time CFO performing CFO Services it is my responsibility to identify all the ways a business can conserve cash.
This includes providing cash savings guidance for services I do not perform. The best example of this is during this time
of year I always advise my clients to have their year end tax planning meeting with their CPA or Income Tax preparer.
These year end meetings many more times than not help the business owner reduce their current year tax liability and conserve
cash flow for the business. Certainly most of the strategies evolve around purchasing vehicles, equipment or some type of
fixed asset before the end of the year, but there are other year end strategies especially for cash basis taxpayers that are
discussed like paying as many expenses as possible before year end and the proper timing of the year end billings.
Virtually every CPA or Income Tax Preparer provides these year end tax planning sessions. They usually last no more than
an hour and can even be done over the phone and it can be the most profitable hour in November/December that you will ever
spend.
A CFO should have many resources to help the business owner through these challenging times. One of those resources should
be good CPAs and Tax Preparers. If you are in need of a good CPA please feel free to contact me.
Michael Barbarita
Next Step CFO
CFO Services
781-326-3822
yourcfo@nextstepcfo.net
CFO Services - What Are Rolling forecasts?
Link to article CFO
One of the more important CFO Services is Business and Cash Flow Forecasting.
This CFO Service gives the business owner the foresight to take action. Many business owners operate their business on a
day to day basis without any business and cash flow forecasting and without thinking about what is going to happen next month,
next quarter or even next week! As a result they never understand the benefits of business and cash flow forecasting and
guess what? Their competition does understand the benefits. Their competition understands that business and cash flow forecasting:
- Reveals weaknesses and strengths in your organization.
- Finds solutions to solve those weaknesses and improve on those strengths.
- Helps you to learn more about your business.
- Helps you to be proactive about addressing potential trouble down the road like for example, a cash flow problem.
- Makes people in the organization accountable
- Gives the business owner piece of mind
One of the problems with business and cash flow forecasting is that once the forecast becomes 30 days old it is stale,
outdated and most times forgotten. To address this problem the state of the art CFO performs what are called rolling forecasts.
Rolling forecast capability allows one to enter actual results for the most recent month and then the rest of the forecast
rolls forward for the next 12 months. This is called a 12 month rolling forecast and should be done every month to keep the
forecast current. I usually prepare a 24 month rolling forecast for my clients to get a longer range perspective of where
the business is going. With these updates the CFO and business owner can make changes as needed as well as identify any other
problems. The rolling forecast makes the forecasting process a monthly occurrence and a monthly planning process that adds
tremendous value. With my clients I also combine the results of the rolling forecast with an analysis of the key performance
indicators for the month.
With tools like the rolling forecast, the business owner can be on top of their game and gain a competitive advantage against
the many business owners who do not do so!
A CFO Entrepreneurial Lesson Learned
Link to article CFO
Don't let your small business make you small minded.
This is one of those tough lessons I learned this week. I am an entrepreneurial CFO. This means that I am a Part time
CFO that performs CFO Services and my background consists primarily of owning and operating small businesses all through my
career. Even now, in addition to my CFO practice I co-own a property casualty insurance agency with my partner.
What I learned this week is that as a small business owner we can become small minded. What I also learned that a large
part of what drives that small mindedness is self doubt.
Here is my story:
Back in 2002 I put together a business plan to create Virtual Trade Shows. These virtual trade shows would help small
companies who cannot afford to attend or exhibit at important trade shows an opportunity to attend over the internet.
Here is an excerpt of the concept from the Executive Summary:
"Tradeshowsonthenet.com, Inc. ("TSON" or "the Company") was created to streamline commercial trade shows and make them
much more cost effective and more productive to the participant. The trade shows would take place on the internet providing
both exhibitors and attendees with more capabilities and tools in order for them to accomplish more at a lower cost than they
would if they all were actually at an exhibit hall. The Company's purpose is not to eliminate trade shows, but creating them
in a virtual environment while maintaining all the advantages that trade shows afford and increasing efficiencies, data and
participation."
As I reflect back on why I did not pursue my business plan, I remembered I was fraught with self doubt. Self doubt that
I could not raise the money, self doubt that I could not come up with the technical programmers, Self doubt that the idea
was before its time and so on.
Last week I received an email from On24 a company among other things creates and builds virtual trade shows. They have
3 Venture firms on their board and look like they are doing extremely well. I saw pieces of their latest virtual trade show
and it is exactly what I envisioned. Evidently the founder of On24 had no doubts about raising money, finding programmers
and the timing of the project.
I had prepared and executed business plans before but they were on a smaller scale. I let a small business mentality make
me small minded and I let self doubt prevent me from executing this plan.
The take away here is:
Wouldn't it be a shame if self doubt prevents you from serving the world!
