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My name is Michael Barbarita and the name of my company is Next Step CFO. At Next Step CFO we Provide Chief Financial Officer Services. Companies from start-up to 10 Million in sales cannot afford nor do they require the services of a full time CFO. We provide cost effective CFO Services on an as needed basis. Those services include Improving Cash Flow What separates me from my competitors is I am an entrepreneurial CFO with over 25 years of experience in owning retail manufacturing and service companies I truly understand the risks and opportunities of business ownership.
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! I have prepared several Podcasts to give the business owner a unique perspective from a Part Time CFO who has experience in owning retail manufacturing and service companies. These podcasts go into topics such as personal liability, Inventory Control, Personnel Issues, Accurate and Timely Financial Statements, the importance of Metrics, solving cash flow problems and much more.
The Podcasts are located on Itunes. Simply click the "CFO Services" link below:
and enjoy.
As always, please feel free to contact me with any questions:
Michael Barbarita
Michael Barbarita
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:
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! Michael Barbarita
As a Part time CFO I am always asked by promising new entrepreneurs about the important things one needs to do when starting a business. They often ask me what is the First Step in Starting A Business
Well, there is no specific first step, but here are some critical questions and things that you need to know when starting a business:
Michael Barbarita
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 CPA's and Tax Preparers. If you are in need of a good CPA please feel free to contact me.
Michael Barbarita
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:
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. 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:
1. 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.
2. Call the Landlord and see if he will give you a discount for prepaid rent.
3. Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
4. 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. 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.
To Keep Bank Financing - Many business owners have credit lines that need to be extended or converted to term debt. Without accurate financial statements, at the very best case you are going to make your banker nervous not to mention you may not get the credit line extended which requires you to payoff the credit line immediately.
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. 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. 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. 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. 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 don't 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!!" 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!
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 doesn't 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.
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: 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 etcÂ… 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.
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.
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:
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".
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, let's 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!
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.
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.
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 customer's 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!
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 customerÂ’s 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. DonÂ’t get me wrong, backlogs can be great, but an optimum backlog must be determined. The optimum backlog period depends on the industry.
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.
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!
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 isn't even there. This employee who you interviewed multiple times and had your current employee's interview multiple times who all giving this prospective employee rave reviews isn't 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. Today's 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. 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. 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.
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 isn't 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 UCC's). 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. There are 3 components of cost. These 3 components of cost are material, labor and overhead. As a Part Time CFO, I see a lot of business owners eliminating overhead from their cost calculations. This can lead to operating losses and cash flow problems.. Usually the reason the business owners misses overhead is they do not understand how to calculate overhead nor do they know how to incorporate overhead in their analysis.
The easiest way to calculate overhead is as a percentage of sales. Take all of the projected overhead expenses for the period you want to analyze. The period can be a month, quarter or year and divide these projected expenses by the amount of projected sales. As you go forward if sales are lower or higher than projections by 10% or more you should recalculate the overhead rate based on the new projected sales. The same recalculation needs to be done if your projected expenses are off higher or lower by 10% or more. This percentage needs to be applied to the sales dollars associated with each sales transaction or quote. You can also simply take last year's actual results for overhead and sales and perform the same calculation on actual results instead of projected results. I like to use projected results. Other than sales there are other ways to calculate overhead using labor dollars or labor hours, but I like to use sales.
There are many schools of thought regarding the calculation of overhead and incorporating overhead in cost calculations. Some do not like accounting for overhead in their cost calculations because they say no matter how much the sales price exceeds material and labor, the overhead will begin to be paid and that is their only objective. I say a couple of things about that. First, sales better be high enough otherwise if you employ this school of thought you will guarantee yourself you will not be profitable. Even if sales exceed material, labor and variable overhead by just a few dollars you will eventually pay for all of the fixed overhead but the sales must be high enough and that is a huge risk. Second, an argument can certainly be made that a sale that at least covers some overhead is better than no sale at all, however are you sure there is no other sale out there that you are not making that covers more of your overhead or all of your overhead or do you justify giving your product and service away just to make a sale knowing it is covering some overhead?
Note I added the term Variable Overhead above. Sometimes there are expenses that a business owner calls overhead, which can be considered overhead but are actually expenses that are variable to sales. Expenses such as credit card fees or gas where a service performed is going to require going to a specific location need to be identified as variable. Variable overhead should be incorporated as part of the expense component deducted from the selling price to determine profit before fixed overhead.
My view on overhead is that the business owner needs to know what the overhead component of their product or service is so that they know what their true bottom line is on each and every transaction/quote. Unless your expense and/or revenue projections are way off, knowing the true bottom line on every transaction will give you the piece of mind that all costs are accounted for and that the bottom line on the transaction/quote is credible. At the end of the day the business owner can use their own discretion as to whether a sale that does not entirely cover fixed overhead is worth making. If it were me I must be extremely confident that there is no other sale to make that will give me a better return before I would accept a sale that only partially covered fixed overhead. For example let's say you know with reasonable certainty that your business is in a state of low demand maybe due to seasonality or economic conditions. If I am convinced there is no other sale out there that is going to give me a better return or if I think the customer is worthwhile to keep because the customer will give me long term potential at higher profit margins then I would make the justification that I am at least covering some fixed overhead. Otherwise make sure your selling price covers all three components of cost which once again are Material, Labor and Overhead.
Calculating Overhead is one of many important CFO Services. 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. 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:
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. 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 CFO's help their clients identify the key performance indicators in which to manage their business. Many CFO's 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. 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: 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:
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 Recently a client emailed me a complaint about two things:
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. Many founding entrepreneurs of privately held companies do not communicate well with their investor stockholders. I have seen this many times and this is a recipe for disaster. What happens is the founding entrepreneurs are afraid to be the bearer of bad news and so they either do not report any bad news or sugar coat bad news and by doing so keep important information from the investor stockholders. Many times investor stockholders wake up one morning and find out the company is going out of business and their stock is worthless. This sets up the founding entrepreneur for liability as well as angry stockholders who lose confidence in the founder.
The rule of thumb is to communicate consistently with your investor stockholders good news and bad news and do not sugar coat the bad news. Your investor stockholders may have creative ideas to address whatever the issue causing the bad news is.
It is the role of the CFO or Interim CFO to guide the founder in this area and to make sure all of the news whether good or bad is being communicated clearly and to assist the founder in consistently communicating to their investor stockholders.
Michael Barbarita
Michael Barbarita
How Much Money do I need to run my Business???
This is the question many business owners ask. Sure, start up entrepreneurs ask this question too, but I also want to address everyday business owners whether they have been in business for one year or thirty years they need to know how much money they are going to need to run their business. Their time horizon can be a month a year or five years, but they need to know if they have to put money in their business, get money from other sources or if they do not need money at all. If business owners knew in advance how much cash they needed or how much cash on hand that they had at different levels of sales volumes and expenses they would have time to react. As a business owner, I say tell me when it is cloudy not when it is raining. Next Step CFO has a sophisticated forecasting modeling tool called CashTell that can tell business owners what their cash position will be at any point in the future giving the business owner a great advantage in preparing for what is to come. CashTell was developed by Next Step CFO and is exclusively available to Next Step CFO clients.
By the way, if your bank has you on what is called Financial Covenants, knowing what your cash needs will be and if you are still going to be in compliance with those financial covenants shows your banker that you are on top of your business. Financial Covenants are parameters and metrics that your bank requires you to meet in order for your loan to be in compliance. If you miss a financial covenant you are probably in technical default on your loans. One example of a financial covenant that you may be under is what is called interest coverage. Interest coverage is how many times does your net income cover interest expense. If your covenant is that net income must be at least 5 times your interest expense and net income is currently at 4 times interest expense then you blown your covenant. A good forecasting tool can show if you are going to stay in compliance with your covenants in the future.
Do you have a Business Plan?
Whether you are a start up or have been in business for 25 years, every business should have a business plan.
One great thing about business planning is it really gets you thinking about the direction you want to take your business. As a business owner as well as a Interim CFO, I can tell you that business owners need to spend more time really thinking about the direction they want their business to go. Preparing a business plan provides the impetus to get you thinking about that direction.
Changes to the plan are encouraged as a business plan is not a relic you write up once and stick in a drawer never to be seen again. A business plan is a working document that is subject to perpetual changes. It is the working document aspect of a business plan that makes the business plan effective. At a bare minimum your business plan should include an executive summary, employee and headcount plan, a marketing plan and your perspective of how you are different from the competition.
Business plan preparation should be a part of every CFOs arsenal of CFO Services. Imagine for a moment that it is one year from today. What would have happened in the last year that would make you happy with your progress? How about if you were able to say that the cash flow in your business has improved dramatically and is no longer the issue it was a year ago! What kind of weight would be lifted off of your shoulders if that was the case?
There is nothing more frustrating, time consuming and at times humiliating than having cash flow problems in your business. In addition to the frustration, time consumption and humiliation the biggest impact that cash flow problems have to the business owner is the disruption and distraction to what the business owner is most productive in their business. The business owner gets so consumed by the cash flow problems they find it difficult to do anything productive and the business continues to backslide. When vendors start calling about late invoices, key Employees find out about your cash flow problems and they start looking for other jobs as they do not want to stay with what they perceive to be a sinking ship.
Next Step CFO has prepared a free email report called "Solving Cash Flow Problems" which identifies the areas in your business that are causing cash flow problems and how to solve the cash flow problems in each area.
Are you maximizing the selling price of your product or service? One way to tell if your pricing is too low is by the number of customer complaints you get about prices. If the complaints about prices are diminishing or non existent your prices are probably too low.
I had a client who was getting absolutely no complaints about their prices. As a matter of fact they were getting a lot of compliments. Come to find out they were selling there product below cost!
The business owner usually has a good handle on what competitors are charging for their product or services. As a matter of fact most business owners price their products against competitors. However comments from the customer combines what the price of the product or service is with the value being delivered and therefore is the best barometer.
CFO Establishing a system of collecting accounts receivable so that your receivable strategy is consistent and timely is critical to successful collections. It is incumbent upon the CFO to provide the direction to implement the Accounts Receivable Collection strategy. Here is an example of a strategy that if applied consistently and timely will lead to successful Accounts Receivable Collections:
Assume an invoice with terms of net 30 days
I always use a collection agency that has a legal staff so that if the account is not collected using traditional collection methods legal action can be taken right away. Once again the key to the process is consistency and timeliness.
Accounts Receivable collection strategy is one of many important CFO Services.
CFO Give me a CFO who has owned a business before over anyone with a lot of practical experience and a lot of diplomas. The reason is the Chief Financial Officer who has owned businesses understands the business owners risk because they too have been there. Not only do they understand the risks and feel the risks, they can identify the risks more easily and quickly because they have an owner's perspective. Until you felt what it is like to have an unsuccessful sale in retail or to not be able to fill manufacturing orders because you did not have the right inventory or not having enough cash flow to make payroll, or the pressure of employees under performing you don't really understand. These are just a few of the issues that only business owners worry about and stay up nights thinking about. Employees and vendors do not worry about these issues nor do they have the owner's perspective of these issues. A CFO who owned a business before not only has the financial and business acumen to be productive, but also has a mind set that only a business owner has and can perform like a business partner without owning stock. In short, it gives the business owner another set of business owner eyes and that is invaluable.
CFO As I see it Business Forecasting is finding the right number of "what if" scenarios in order to identify enough possibilities of what is going to happen. A lot of business owners think that forecasting is like being a soothsayer in that business forecasting identifies exactly what is going to happen. No one can predict the future and there are too many different things that could happen to a business that will throw off the most sophisticated of forecasts. As I see it the role of the Chief Financial Officer in forecasting is to identify the top 7 or so likely scenarios and do a "what if" analysis on those 7 scenarios. One of the 7 scenarios should be a best case and a worse case. The proper forecasting tool to use is one that has a Profit and Loss, a balance sheet, cash flow, inventory plan and sales forecast all in one. These schedules can be broken down by quarter, month or even by week. Of course it needs to be adaptable to retail, manufacturing, distribution or service depending on the type of business the CFO is forecasting. The model also needs to identify where the risks and opportunities are and incorporate the key metrics. The great thing about this model is that as one number changes anywhere in the model all the numbers adjust. Next Step CFO uses this tool in business forecasting as a part of its CFO Services. It shows the business owner all of the risks and opportunities associated with any scenario and it allows for more thorough decision making and a reduction of risk for the business owner.
CFO Does this sound a little out there? One of the CFO Services that I think adds real value to the business owner is a CFO who understands Search Engine Optimization (SEO). Who said that CFOs are all about the numbers? In today's business world the CFO has to provide services for their client that go beyond the numbers that really assess risk and find opportunity. In today's High Tech world giving the business owner guidance on SEO and getting them to the top of Google can really provide another opportunity for the business that did not previously exist. The thing that makes SEO suited for the CFO as part of a CFOs Duties is the detail orientation of a successful SEO plan. By understanding the components of a successful SEO plan and by properly delegating the plan to the right people the CFO can help the business owner generate more business and have added value as a CFO.
CFO One area that my retail, manufacturing and distribution clients in my CFO practice need to do better and to understand better is getting rid of stale inventory as soon as possible. Business owners hate to admit when they make a mistake (i.e. when they buy or produce something that doesn't sell - a dog). We all do it, I used to do it. It is a peril of the game. DON'T TAKE IT PERSONALLY. However, fail forward fast. Which means once you know it will not sell get rid of it, allow yourself to use the cash from the sale to purchase more productive assets and more productive inventory. You know; the stuff that really sells. Don't worry about the margin hit!! Take the margin hit, otherwise it is almost a guarantee you will sell it for less somewhere down the line. By selling the slow movers as soon as possible you will get more inventory turns which will result in less inventory and more profit. It should be one of the CFO Duties to manage inventory turns and to impress upon the business owner the extreme benefits of admitting inventory mistakes as soon as possible, converting them to cash and buying more productive inventory assets.
CFO One of the CFO Duties should be to research and identify the right operating system for the business owner. The way I look at operating systems for my CFO clients is I identify which modules are to be purchased for necessity and which modules where if purchased will produce a payback. For most manufacturing and distribution companies internet based systems allowing sales reps to enter orders from any internet connection including their laptops has a significant payback through saving administrative time and using commission only reps to enter the data and do more of the administrative work. Another module with significant payback offered in most operating systems are web based stores. Once again for manufacturing and distribution business owners web based stores can produce a payback through its communication tools. For example, in a web based store all of the manufacturer or distributors customers can purchase products on line. You can offer special pricing to individual customers, but more importantly you can make them aware of special pricing deals, new product introductions and closeouts. You can also put deadlines on when those special pricing deal offers will end and the system does that automatically. This has a tremendous payback as customers can place orders more conveniently and with more information at their finger tips. You can also put deadlines on when those special pricing deal offers will end. The CFO can really help the client business owner with a more profound understanding of the payback associated with operating systems.
CFO I believe it is a valuable service to my CFO clients to offer business plan preparation. One of the key attributes for a CFO to have in order to prepare business plans is prior business ownership experience. With prior business ownership experience a CFO will have a better handle on the operational and marketing components of the plan. This experience will give him the ability to ask the right questions to the business owner and staff. The CFO already possesses the skills to prepare the financial portion of the business plan. The main purpose of a business plan is to put a company on the right track. Lot's of times business owners say they are headed in a certain direction but as CFO when you start to peel the layers away you find that the company is going in an entirely different direction to what the Business Owner thinks. The business plan will help put the business owner in the direction he wants to go. In addition, business plans are of vital importance when the company is seeking additional financing whether the financing is coming form a bank, an angel or a venture capitalist. Since it is imperative that CFOs offer finding financing as a CFO Service, it only follows through that the CFO should be able to prepare the business plan.
CFO Keeping consistent track of the business value of your CFO client is a significant CFO Service. Business owners should be kept abreast of the value of their business on a quarterly basis. Business Valuation can be utilized and needed for the following purposes:
CFO's should calculate two different valuations. One valuation I will call the Book Valuation. This is the valuation that uses the traditional metrics like sales, EBIT, cash flow and assets. The second valuation that should be made is a valuation that a strategic buyer would pay. This is a buyer who is in the same business and will be able to take advantage of economies of scale and synergies. This buyer will probably pay a higher price than the book valuation. I call this the Synergy Valuation.
CFO I believe it is a valuable service when a CFO keeps track of the Patents and Trademarks for a company. Patents and Trademarks can get very complicated and therefore easy to lose track of especially if there are several. Understanding where each Patent and Trademark is in the process will be one less area for a business owner to worry about. Suggesting patents and trademark opportunities is another CFO Service that can be performed that would be helpful. If the company imports be aware that if a product has FDA approval that there can be some discounts on Duty and Tariffs on those imports. Also be aware that if a company is not registered with the FDA for certain products that shipments can be refused at customs. I learned about this when I was tracking a patent for a client. Another important factor in tracking Trademarks and Patents are understanding the costs. Legal fees can get way out of hand. Most recently I have used legalzoom.com and had a lot of success in filing a trademark at a quarter of the cost.
CFO I think the CFO's responsibilities and the CFOs duties can be narrowed down to three things. Those three things are:
1. Managing and forecasting cash
2. Identifying and assessing all risk and preparing plans to mitigate risk
3. Understanding the things that make the specific industry the CFO is engaged in unique.
For the part time CFO it is vital to grasp these 3 concepts as soon as possible. Once the Part time CFO has these 3 things under their belt they can play a major role in the success of the company and the success of the company's strategic plan.
Since cash is the life blood of any business the part time CFO must be really in tune with managing the day to day cash flow. When managing cash for troubled companies the CFO must prioritize what needs to be paid. Forecasting cash needs using a 4 to 6 week model works well and helps the Chief Financial Officer identify what needs to be paid and can mange the cash accordingly.
Identifying and assessing risk will really tell the business owner where the land mines are in their business. This is an invaluable CFO Service to the business owner. If the CFO can tell the business owner when it is cloudy instead of when it is raining, the CFO will be worth their weight in gold.
People often ask me why does a numbers guy need to know about the business and the industry in which they work? Knowing the business and the industry is critical in managing cash and in identifying risk. Without this knowledge managing cash and identifying risk would be like reaching for a light switch in the dark.
CFO In my view identifying business risk and assessing that risk is the most important function of the CFO Consultant. Over the next few weeks I am going to be making a lot of posts on this topic.
I was having lunch with a colleague of mine a few weeks ago and he asked me in what areas should a CFO or part time CFO identify risk? It was a question I really had to think about.
Since I think like a business owner, one of the first risks I am going to identify is Personal Liability exposure. The first things I investigate are bank loans and leases. If these exist there is a strong likelihood of personal guarantees. The next thing I look at is if there are any personal guarantees with inventory suppliers. This is one of the hidden risks. When one fills out the credit application to do business with a supplier, more times than not there is personal guarantee language in a separate section of the application. Anytime I am filling out a credit application for a client I always cross out that section. However, most people feel it is part of the application and fill it out. This is a major risk. If you cross it out and the supplier calls you back and requires it, you can assess at that point how important the supplier is and whether or not you want to take that risk. In most cases suppliers look at it as a bonus if the customer fills it out and do not address it if the customer crosses it out.
All fiduciary taxes such as payroll taxes and sales taxes must be paid. If left unpaid, this will create more personal liability. Unpaid income taxes will also create personal liability.
Company Credit Cards outstanding represent more personal liability risk for the business owner. The CFO should look at the possibility of one of the versions of the Corporate American Express Card that had no personal liability to the owner. I have recently got one for a client.
The overall risk that must be assessed regarding personal liability is what is the likelihood that the company will not make its loan payments, its lease payments or its inventory payments. Are these payments current? Is the current and projected cash flow strong enough to at least make these payments? If not, has the owner begun to use asset protection strategies to protect his assets should they come under attack?
CFO Many businesses never assess their legal risk and more importantly their exposure should legal problems develop. Since one can sue anyone for any reason it is hard to get your arms around all of the possibilities, but here are some main areas that can be looked at and assessed and is a valuable CFO Service:
The aforementioned risks are the first things a CFO should look at when assessing what the legal risk is of a company. Of course there are countless legal risks but all must be assessed as to the probability of occurring.
CFO Lets face it, if a company is not properly capitalized it will have cash flow problems and it is destined to fail and poses great risk. Most entrepreneurs under estimate their cash needs. This is due to so many unexpected events that occur in the beginning stages of operating a business. I have never seen an entrepreneur's initial cash flow plan ever come close to actual. The prepared entrepreneur is constantly looking for more sources of capital even if he or she feels the cash needs are met. It is the responsibility of the CFO to look for these sources of capital. Staying on top of cash needs is a vital component of CFO Services and CFO duties.
What I see a lot of is entrepreneurs trying to survive with small cash resources and then when that runs out put in more cash. Most likely the new cash put in is a minimal amount and that runs out quick. It is a vicious circle and it is throwing good money after bad.
Entrepreneurs must be honest with themselves in projecting cash flow and then must be aggressive in obtaining the cash resources needed. Cash flow problems are the number one frustration for entrepreneurs.
Signs of Cash flow problems include inventory over buys or over production, rising accounts receivable with level sales, large capitalized costs and rising payables.
CFO A great Ski retailer in Massachusetts, Roger Buchika once said, "the less you buy the more money you make". What Roger meant was that too much inventory can put you out of business quick. As a matter of fact the biggest mistake retailers make is over buying. Over buying can surely cause Cash flow problems and too much inventory poses a significant risk to the business owner.
Having too much inventory is not only the mistake of retailers. Manufacturers and distributors suffer from the same problem as well. A CFO responsibility and a CFO Service is to help the business owner recognize bad buys or bad produced products early. Once recognized, price them to sell, get the cash and then buy and produce good inventory that sells and turns quickly. Calculating inventory turnover ratios is a good indicator of how well inventory is moving. Another service the CFO can perform is to prepare expected or forecasted inventory turnover ratios for specific products and monitoring their performance to determine early enough as to whether that product is productive.
If your company has old or stale inventory look to move it immediately get the cash and re-invest it in more productive inventory.
CFO Certainly foreign currency risk does not involve every industry and every business. Foreign Currency Risk really only effects businesses that either sell products or services in foreign countries or buy products and services in foreign countries. For example, right at this particular time given the weakness of the dollar and the strength of the Euro you are at tremendous risk purchasing products or services from a European source. What cost you about $1.00 around the year 2002, now costs close to $1.60. Some of this impact could have been minimized through hedging, but the dollar has been weak for quite some time and even the most accurate hedging programs will not outlast the current dollar drought. It is an important CFO Service and CFO Responsibility to put it's client in a hedging program. The CFO knows that hedging programs can be formulated and found at most major banks.
Since I am a CFO that thinks like a business owner and given today's dollar weakness European investors will convert less Euros into more dollars to invest in US businesses. If you are selling your business you may want to consider a European buyer to maximize your purchase price. Of course if you are selling products or services the currency is currently in your favor.
Foreign currency risk can be significant especially when the dollar is extra weak or strong for an extended period of time. A business that has foreign activity needs to protect its downside when evaluating foreign currency risk as this one facet can cause Cash flow problems down the road.
CFO Slow collections of accounts receivable is something that needs to be recognized by a CFO and if not detected early enough can lead to Cash flow problems. Early detections of Slow accounts receivable is an important CFO Service. Performing the calculation of Days Sales Outstanding or DSO can give the CFO a good indication of the speed of collections.
Doing business with customers who are traditionally slow payers is bad business. You may think you know these customers personally and they would never stiff you. You may even expect that they are going to be late payers. In the final analysis these customers will burn you. Get rid of these customers unless they are willing to pay upfront for your product or service. It is not worth the receivable risk.
Speaking of which, I have had clients who will not do business with companies who are in bankruptcy because that bankrupt company did not pay my client. What these clients do not understand is that companies in Chapter 11 are prepared to do business on a cash in advance basis. Take advantage of that, make money and improve your cash flow. Don't hold a grudge because they stiffed you. Business is Business.
To enhance collections send out statements. Some customers wait for statements before they pay. Many a time I have seen customers return statements versus invoices with their payments to ensure proper credit. That means they paid from the statement and if the statement did not go out they would have never paid. Also, stay on top of customers through telephone contact. Even if you just leave a message the squeaky wheel get the grease.
A business must turn its inventory but is also must turn its cash. Collect your receivables and do business with people who pay!
CFO Before I continue writing about the various business risks I thought it was time to write a post on the causes of Cash Flow Problems. In a future post I will talk about how to alleviate Cash Flow Problems. In some of my previous posts I have mentioned some causes of Cash Flow Problems, but in this post I thought I would identify as many causes as I can. Cash Flow Problems are caused by:
The above bullet points represent the key causes of Cash Flow Problems. As previously stated in future posts I will identify ways to alleviate Cash Flow Problems once these events occurs.
CFO As a Part Time CFO . Many times I see company's who do not use their fixed assets productively. What I really see is equipment or machinery not being used at all! Assets that are not used or not productive need to be sold. Turn these non productive assets into cash. Most business owners sit on non productive or no longer used fixed assets because they cannot get the price they think it deserves. Sell it and buy productive inventory or productive assets that will produce revenue! There is no point in sitting on assets you do not use. In addition many business owners sit on unproductive or no longer used assets because they may use them some day. More times than not this is a bad decision because they end up never being used.
Not paying attention to unproductive and no longer used fixed assets can cause cash flow problems.
One CFO Service that should be performed is a review of the companys intangible assets. Specifically trademarks and patents. Make sure all trademarks and patents are current and have not expired. Make sure you are aware of the expiration dates. Furthermore make sure you understand the value that the trademarks and patents have. Be on the look out for infringements of your trademarks and patents and address them by having your attorney write a letter to the violator who is infringing on that patent or trademark. Competitors are always trying to knock products off.
If you do not have trademarks and patents the CFO should challenge the business owner to see if special logos and processes should be trademarked or patented. Patents and trademarks can give a company a unique competitive and marketing advantage and needs to be looked at.
CFO The major risk of debt is how the company's debt structure impacts cash flow? Many times a CFO . will go into a company to find that they have a credit line to which they acquired during difficult times in the hope that business will come back. On those occasions the business owner got an unsecured credit line up to the maximum amount the bank or lending institution would offer. That is not the way to acquire credit. If you are going to acquire additional credit during a downturn in business you should borrow no more than 70% of accounts receivable and 50% of the cost value of inventory. If the debt you already have on the books already meets or exceeds those criteria then you will be at tremendous risk if you continue to borrow. In these situations look to cut expenses or see if vendors will extend additional credit. The part time CFO should provide debt management and debt acquisition services. This is an important CFO Service and CFO duty. A calculation to make with regards to debt is how many times does Income before Interest and Taxes (EBIT) cover interest expense. EBIT should cover interest expense be anywhere from 6 to 8 times, however different industries have different criteria.
The other risk of debt is personal liability. Virtually all bank debt and credit card debt has personal liability along with it. Another item the CFO should note is whether any of the company's debt is in technical default. A loan may not be in payment default, but it is good to know if a loan is in technical default. A loan is in technical default when a loan violates a covenant or a provision in the loan with the exception of non payment. If non payment provisions are violated then the loan is in payment default. Another CFO service is to identify if any loans or notes are due in the short term. It goes without saying that debt is a risk, it obviously can be major cause of Cash Flow Problems.
CFO A CFO Service is to analyze and assess the risk of employees. There are several angles in assessing this risk. One angle is certainly assessing risk from the competence and talent standpoint. Another Angle is assessing the risk of losing key employees, while still another angle is assessing employee handbooks and treating employees within the law.
Once a poor performing employee is recognized cut your losses and get that employee out of your organization. Having sub par performing employees is a major risk for a business. Not only are they a risk to the performance of a business but they can pose a legal risk as well. Sub par performers decrease the morale of the other employees and reduce overall productivity. Get rid of them!
It is a valuable CFO Service to suggest ways to keep key and high performing employees. The best ways I have seen to keep key high performing employees happy is to provide them with bonus programs that produce win-win situations for both the employee and ownership. The CFO should help develop a metric or group of metrics used to determine what the bonus or incentive program should be that would generate that win-win situation for key employees.
The risk of not having an employee handbook is huge. An employee handbook and following the provisions in said book ensures that you are handling all employees the same way. The worst situation you can have is treating one employee one way and another employee a totally different way. This leads to employee lawsuits and ugliness. The ideal situation is to have an employee handbook, have all employees sign it and then follow its provisions.
On a final note, one of the best ways to motivate all employees collectively is to establish productivity games within the workplace where all employees participate to win a productivity game as a team. Once the team hits the productivity target they all win. Just like in a team sport when someone is not pulling their weight team members work to motivate those employees. Ted Castle at Rhino Foods in Burlington Vermont actually puts this plan in place and is tremendously successful at motivating employees.
CFO It is not that accounts payable itself is a risk it is the status of accounts payable that may represent a risk. The CFO needs to assess accounts payable from the standpoint of the tolerance of the vendors. If Accounts Payable is overdue how are the vendors reacting? When I was in the ski retail business the terms for product received in August was December 10 or January 10. If you were 30 days late you would get a call, but a quick explanation that you haven't had any snow usually cooled the vendor for another 30 days. Sometimes you could even re-date some invoices until the following fall. I am not saying that this is the case in most industries, but you need to know what the vendor tolerance is.
From a housekeeping standpoint the CFO needs to make sure that all of the vendor invoices are entered into the system with proper amounts and due dates. If this is inaccurate you will get vendor phone calls that could have been avoided. It is always best when the company calls a vendor about an anticipated problem versus the vendor having to call. It usually impresses the Vendor's credit manager when the Company initiates the call because it shows the company is on top of the situation and is proactive. An important CFO Service is to determine which vendors need to be called proactively and establish a payment plan for any past due invoices and a plan for paying for new merchandise.
Paying for new merchandise to a vendor you are behind with can get dicey. The reason is that if a vendor makes it difficult for the company to get new merchandise (for example requiring COD on new shipments) then there is a natural tendency for the Company to look to another vendor who will give the Company terms. When that occurs, the Vendor who you are past due with gets incredibly upset because they not only are carrying a receivable but they are losing business. The CFO needs to manage this delicate balance and needs to be aware of this dynamic.
CFO The Key Operating Expenses for most (not all) businesses are Payroll, Advertising and Rent. The CFO needs to assess the risk to the company for those Key Operating expenses.
The CFO needs to have the business owner rank each employee on a 1 to 10 scale. If there are not enough 8, 9 or 10 rated employees that usually means that the employees are not very productive as a whole. This can weigh down a Company's progress and pose a great risk to the business. It is an important CFO service to challenge the business owner on the strengths and weaknesses of employees and if the weaknesses outweigh the strengths suggest ways to transition to better employees. As mentioned in a previous post regarding inferior employees, the business owner needs to cut their losses and strive for all 8, 9 and 10 rated workers. The CFO also needs to assess whether the mix of employees is too top heavy. Business owners tend to get top heavy especially if they are phasing out of the business. It is an effective CFO Duty to look at an organization chart (or create on if it does not exist) and assess where the risk of employees is.
How effective is the company advertising? Is the percentage of advertising to sales in line with industry averages? Sometimes it is extremely difficult to help the owner measure the effectiveness of advertising mainly because there is no tracking methodology to determine which advertising works best. Lots of times owners have a sense of what may work, but many times this is perception versus reality. One rule of thumb for the CFO in assessing the risk associated with advertising is to see what advertising form the company spends most of it's money and challenge the business owner as to its effectiveness. Having an internet marketing plan with effective Search Engine Optimization needs to be incorporated in a marketing plan.
What is the current status of the building/office lease? How many years left in the lease and does the current facility still meet the company's needs? An important CFO Service is to assess the risk of operating in a facility that has a long term lease that no longer meets the business needs. In addition, it is important to know if there is a personal guarantee on the lease. If the lease expires in the short term, it is incumbent upon the CFO to put together a plan to transition to a new facility they will meet the needs of the business.
CFO One thing the CFO needs to assess regarding sales are whether the company is pushing to sell the most profitable products. Metrics can be developed to analyze this area. It is important that salesman know what products benefit the company most.
Another risk area on the sales line that a CFO should look for is whether salesmen can bring their sales with them if they were to leave the company. This in my view is a major risk as salesmen always have to be coddled if they can taker their business elsewhere. Non compete agreements with salesmen can help reduce this risk.
Another CFO Service is to analyze whether selling prices are high enough and to determine if sales rise or fall with reduction of prices. In a bad economy there is always a propensity to reduce prices. Many times I have seen where reducing prices was the wrong thing to do as money is left on the table. Your best customers who usually represent 80% of your sales will usually buy from you even if they can get a better price elsewhere because they trust you and appreciate the value in your products and services.
The CFO should review whether the company has adequate sales representation in all of the company's key market areas. If major market areas are left without proper sales representation this poses a major risk to the company.
The CFO should review if the company's selling prices are meeting gross margin requirements. A low margin could be a function of product mix sold, but it also could be a function of low selling prices.
Finally it is a CFO duty to review how pricing looks as compared with the company's biggest competitors. An analysis can be done in this area to determine how the company compares price wise against its top3 or 4 competitors in the company's highest margin products.
CFO One thing CFO's must be able to do is to read and understand legal documents. This is a very valuable CFO Service to any client. The client does not want to be in a position to have to call his outside attorney to read and interpret documents. The CFO should be able to read documents like:
Being able to read and interpret these and other legal documents will save the client a lot of time and a lot money in legal fees. It is also important for the CFO to understand bankruptcy and how it works, whether your client is contemplating bankruptcy or a supplier of the client is filing bankruptcy.
CFO In the current economy it is important to know the financial condition of your major suppliers. What would happen if a major supplier goes out of business? It is important to have a back up supplier not only to protect against a major supplier going out of business but also if a major supplier decides to change your credit terms unfavorably, or cut you off to protect a larger customer in your market, or discontinues a product line that is important to you. I have seen suppliers do all of these things.
Always be on the lookout for a back up supplier. When you go to trade shows identify possible target suppliers and start to develop relationships with them. In the long run it can really pay off and you will be prepared when the unthinkable happens to one of your key suppliers.
Another good thing is to do a relationship check up with your suppliers. See how content or discontented they are with doing business with you. These checkups can give indications as to what their next move might be. A good CFO Service is to challenge the business owner about the strengths and weaknesses in the supply chain.
CFO There are three key areas in understanding the risks associated with a company's equipment:
One important CFO Service is to assess the risk associated with equipment. The cost to purchase equipment or a lease to acquire equipment is a major capital expense and an untimely purchase of equipment can cause cash flow problems. The CFO must perform an analysis on equipment performance for both quality of output and for production efficiencies. In addition an analysis of the repair and maintenance costs of the equipment must be made. Once these analyses are complete a comparison can be made as to what the monthly carrying costs of the equipment are and what the cash availability of the company is versus the repair costs, quality and production standards. Then the risk of the equipment can then be assessed as to whether or not to buy or lease new replacement or upgraded equipment.
CFO When two or more people get into business together there is risk that needs constant assessment. Partners in business together must have the following characteristics:
The CFO sometimes is called upon to act like a mediator of sorts in dealing with partner disputes, but partners need to go into these business deals with their eyes wide open.
CFO I feel the need to always come back to the basics as sometimes the role of the CFO can get clouded by the demands placed on the role. The Part Time CFO has even more of a challenge to address what is a critical need in the business as well as addressing the basics.
The basic CFO Duties and CFO services that a Chief Financial Officer should focus on are as follows:
If the CFO excels in these areas he will add tremendous value for the business owner.
CFO In todays business world I think it is important for the Chief Financial Officer or CFO to be diverse in their capabilities. Since everything in business revolves around money and it is an important CFO Service and an important CFO duty to be responsible and manage money, the CFO really has to know a lot about business and business ownership compelling the CFO to be diverse. Even though the CFO is not an expert in marketing, manufacturing or in other aspects of a business it is helpful if they have knowledge in those out of focus areas of business. One way the CFO can do this is to develop a deeper knowledge in a particular facet of those out of focus areas.
For example, one area the Part Time CFO can provide some insight and really help clients is in certain aspects of marketing, particularly website marketing or Search Engine Optimization (SEO). A good SEO strategy can help the business obtain top positions on Google and other search engines giving the client an internet presence enhancing their current marketing strategy. Once again this is an example of the importance of diversity of a CFO.
One SEO strategy that will help you get top positions on Google is the use of an RSS Feed. An RSS feed allows new fresh up to the minute content to go into a website. A good example of an RSS Feed is Reuters who services many news related websites with up to the minute news around the world through an RSS Feed. The best way for a business to use an RSS feed is to start a blog about their business and write articles daily about their business using key word rich content. Most Blogs have an RSS feed connection and connect the RSS Feed from the Blog to your website and every time you write an article about your business and post it to your blog it will change the content of your website. When you change the content of your website the search engine crawlers index your site. The more you change the content the more you get indexed by the search engines and indexing increases your search engine ranking.
CFO It is an essential and responsible CFO Service and CFO duty to perform business forecasts. Many clients of Next Step CFO ask what purpose forecasting serves. Traditionally the CFO has been an historian, meaning telling the business owner what financial results happened in the past. Telling the business owner what the historical results have been. Business owners need to know in what direction they are headed. Tell the business owner what is going to happen in the future so that you can tell the business owner when it is going to be cloudy instead of telling them when it is raining. For the most part business owners already know where they have been. Today the Chief Financial Officer needs to tell the business owner in what direction the business is going in the future.
So what is the major question the business forecast answers? The major question answered by the business forecast is whether or not the existing business model is going to achieve the desired results. If not, you need to change the business model. A good CFO can prepare a forecast on the existing business model and then if that model does not work can prepare a forecast based on a model that does work. In order to do this the CFO must have knowledge of the industry and a sharp overall knowledge of business through having experience in owning a business. The CFO must also have accurate forecasting tools at his/her disposal.
CFO Employment Liability Insurance (EPLI) is an essential insurance coverage that a CFO should recommend to their clients as part of their CFO Services. The risk of unstable and under performing employees is a great risk of a business owner and is something not always detected in an interview. EPLI gives the business owner coverage for losses plus defense costs for any Employment Claim which the insured employer committed wrongful acts to an employee. Wrongful acts include errors, omissions, misleading statements, misleading acts, misleading omission, misleading neglect, or breach of duty committed or attempted, or allegedly committed or attempted. Coverage includes claims for sexual harassment, claims under the family medical leave act and claims for inappropriately terminating an employee. You also may elect to have coverage if a third party harasses an employee. Please check with your client's insurance agent for specific coverages with your clients specific situation.
This insurance is relatively inexpensive when you consider the risk of employment claims.
EPLI Insurance is a great first step for the Part Time CFO to be proactive in protecting their client from the risks associated with having employees.
CFO The part time CFO needs to make sure their client is considering all factors when deciding on which supplier or vendor to purchase inventory. This is a CFO Service that is sometimes forgotten, but can mean many dollars saved for the client if all considerations are factored into the decision.
When considering what supplier to purchase inventory from the following is what needs to be considered:
Looking for the best price is obvious, but understanding where the quantity discounts or price breaks are compared to other suppliers is important. Some suppliers offer free freight, so if you are not getting anywhere negotiating prices with the vendor ask for free freight.
Understand what the turn around time is and how quickly you can get product once ordered. Clients with Cash Flow Problems need to time their inventory receipts more precisely so turnaround time plays a greater role. What are the minimum order quantities? Once again this plays more of a role with clients with Cash Flow Problems because sometimes you just need small quantities.
It is very important that a vendor stands by their product. If something is wrong with the product either quality wise or technically the client must have assurances that the vendor will issue proper credit upon the products return. Understand what the vendor's restocking fees are for product incorrectly ordered. Unless the client is in an industry where there are a lot of special orders, vendors should wave restocking charges.
Efficiency in handling the product is important for the receiving department. Remember, anywhere you can save costs throughout the entire process must be considered in the decision from logistics to manufacturing to merchandising/packaging to how efficient the product is to use. One of my clients is in the insulation business and although the pink panther insulation is more expensive, it is much easier to install making up for any increase in the price of the inventory.
The type of support that you get from the vendor to help you sell the product is a big plus whether they are free displays, marketing materials or coop advertising programs these programs tell you that the vendor is really interested in working with you. In the event the client runs into a cash crunch it is always nice to know that the vendor is willing to work with the client and that their credit policies are flexible enough to work through shifts in the economy or industry downturns.
Another consideration is what the competitors sell. Sometimes you can work a better deal with a vendor who is not with a major competitor because that vendor does not have much market share in the market the client serves.
One last rule: Do not over buy inventory as it is one of the most common reasons why businesses get in trouble. This is especially true for retailers. The flexibility to cancel orders without penalty helps prevent you from overbuying.
CFO If the Chief Financial Officer or CFO is going to be successful they must have solid communication skills. It is even more important when you are a CFO Consultant because with multiple clients it can be challenging to communicate with multiple clients.
Rule number one for good communications is a good communicator is responsible for both the sending and receiving of communication. You cannot be a good communicator if you are only going to be responsible for what you send out. You must also be responsible for what you receive in to make sure what the other person is saying is understood. It is important for the Part Time CFO to identify the clients needs and wants and that is where good communication comes into play.
Where communication starts to break down is when one of the people engaging in the communication does not like someone else in the communication loop. This dislike gets in the way of agreement and understanding and their must be agreement and understanding if there is going to be good communication. On the other hand you can have people who like each other in the communication loop but who do not agree or understand each other and that results in another breakdown of communication.
Therefore the objective of good communication is to have a liking and respect for the person or people in the communication loop and to attain an agreement and understanding. Once these objectives are accomplished good communication will result.
Having good communication skills and also being able to impart good communication skills to your clients organization helps the CFO perform another valuable CFO Service.
CFO It is of great importance that the Part Time CFO goes out and networks. The main reason is for the CFO to network and establish relationships with the best service providers. These service providers should cover many different types of services. With this network the Chief Financial Officer can provide their client with options. These options will allow the client to compare quality, service and price. These options will provide the cornerstone of a cost reduction program. Networking should include but should not be limited to finding the following services:
Financing services
Credit card Services
Payroll Services
Property Casualty Insurance Services
Medical Insurance Services
Factoring Services
Mortgage Services
Leasing Services
Logistics Services
Telephone and Cell Phone Services
Banking Services
Office Supply Services
Storage Services
Travel Services
Freight Services
Advertising/Web Services
Internet Services
Computer Services
Graphic Art Services
Real Estate Services
Recruiting Services
With contacts with as many service providers as possible your CFO Services will be more valuable.
CFO What??? No not that!!! Why??? So says the bookkeeper. The CFO must stress the importance of daily bank reconciliations..
In these tough economic times and even when economic times are not so tough the business owner needs to know his cash position on a daily basis in real time. The only way to be certain of your cash position on a daily basis is to do daily bank reconciliations. If you have cash flow problems or cash is simply tight, the business owner cannot afford to find out that a customer's check bounced 3 days after the fact when the bookkeeper gets the returned NSF check back in the mail. Meanwhile the business owner sent checks on that money already and risks bouncing an important check. If an EFT out of your account or a debit card transaction hits more than once due to clerical error by a vendor or bank what good is it to find out about it when you do the month end bank reconciliation. The important check you sent on money you thought you had just bounced. There are many other situations when you need to know changes to your bank balance in real time! The part time CFO needs to establish a policy of daily bank reconciliations and instill the discipline to make sure it gets done.
By having access to your banking transactions online, daily bank reconciliations should take less than 10 minutes per day. By doing this the business owner will know exactly how much money they have and can make decisions on what bills to pay with more confidence.
By the way you bookkeepers out there, when you do daily bank reconciliations the month end reconciliation is a snap!
CFO During these challenging economic times, now more than ever businesses should be looking to develop strategic partnerships. Before I give you an example let me define what I mean by strategic partnerships. Strategic partnerships are developing relationships with the objective of pooling resources with the purpose of both partners obtaining more business or both partners cutting costs.
By way of example, let me use the food industry. There are all different types of food vendors but let me use a distributor of frozen cookie dough and a distributor of frozen appetizers. These are clearly non competitive entities. Both of these companies need frozen storage, both of these companies need more business. Why can't these two companies form a strategic partnership and share offsite storage costs or one company sublet frozen storage to the other if one of the companies already has onsite frozen storage. Both of these companies see accounts that can use both products so why can't they share leads and a finder's fee would go to the referring company. Both companies use office supplies so once again to obtain bigger discounts both companies could pool their resources. Does one company have the financial resources to buy equipment that both companies can use? The bottom line is the possibilities are endless.
The CFO should assist the business owner in creating ideas for finding and negotiating strategic partnerships.
CFO It is a valuable CFO Service to solve inventory problems.
If you are a retail business there is only one thing that will bring you down real fast and that is too much inventory. In this current economic environment the cost of carrying inventory is even greater because with many banks not lending, capital is hard to get. If you overbought inventory identify the inventory that is slowest moving and reposition it on the sales floor and price it to move. You may also want to take a look at the signage in the store to make sure you are communicating clearly with your customers as to what deals you have. You may want to package items together as customers always like package deals. Yes, your profit margins are going to suffer, but with the cash you get from the sale of the slow moving goods you can use that cash to buy inventory that sells and therefore your inventory will turn quicker getting you into a profit position quicker.
During this process you may have to work with your inventory suppliers. Once again identify the slower moving merchandise and go to those suppliers to ask for extended dating. Sometimes certain styles and types of inventory that you bought may not be selling in your market, but may be selling in other markets. If that is the case it is possible that the supplier will buy back the inventory or replace it with faster moving goods and the supplier can sell your slow moving inventory in the other market where it is selling. The key to these supplier strategies is keeping the lines of communication open with your suppliers and the supplier's sales rep.
By the way I did not forget that suppliers get angry when you discount their product. This is where constant communication with your suppliers and their sales reps really helps. If you are identifying slow moving merchandise quickly enough then it is important to communicate with the supplier what your intentions are to alleviate the slow moving problem as soon as possible giving the supplier time to react and time to work with you to resolve the problem. The CFO who has experience in business ownership is going to be able to understand the business ramifications as well as the financial ramifications.
I know, it is not easy, but the critical component of the entire process is identifying slow moving goods as soon as possible, communicate with your supplier and cut your losses!
CFO Do you have an Exit Strategy? No matter how long you think you are going to be with your business there is going to be a day that you will no longer be with your business. Either you live longer and survive your company or your company lives longer and survives you. Your separation from your business could take any one of the following forms:
Through the use of strategic buyers and buyers who are looking for vertical integration opportunities a business owner can maximize value on the sale of their business. Even unhealthy businesses that are looking for a quick exit due to a distressed economy in their industry can maximize value in the same manner.
Any way you slice it, a business owner is much better off developing a strategic exit plan versus a seat of the pants exit plan which almost never maximizes value. It is a valuable CFO Service to help the business owner put together the well thought out exit strategy.
CFO Helping a client understand what their product or service cost is high on the list of valuable CFO Services.
Understanding product cost which includes the components of cost is very important to a business owner in order to price their product properly. I have had several clients who did not understand the cost of their product or service and actually sold their product or service for less than its true cost. Once the actual cost of the product was understood profits were being made. Another reason why it is important to understand product cost is controlling that cost. The only way you can control or reduce a cost is if you understand that it exists. If you do not know if a cost exists or what the cost is there certainly isn't any way you can work to reduce it or control it.
Understanding what a product or service costs is the first step in understanding how to price your product and have the proper knowledge of how competitively priced you can be. It also helps to reduce the risk of business ownership.
CFO Creativity in pricing has never been needed more than during these challenging economic times. The Part Time CFO has to help the small business owner strategize their pricing program. I am a major advocate for small business and small business owners. The small business owner really needs to be creative as they are constantly going up against the big guy who is heavily discounting in order to obtain market share. In the meantime, the small business owner cannot compete because if they do they will be selling their product for near or below cost and that will bring them down. If you are a retailer you can at least put pressure on suppliers to speak with these bigger companies who are discounting and you can use special make ups and good close outs to compete. I know it is not easy, but be happy you are not a service operation where the only way you can compete is better service. My only advice to the service organization is to develop strategic partnerships (see my post on Strategic Partnerships). The right strategic partnerships will help you to keep pace with these big guys who are ruining the market and give you the best chance to compete.
There is a tendency for small business to expand their product lines in other areas during these difficult economic times. I think that is a mistake because you lose your focus on what you do best and there is always more of an investment in a new product or service than anticipated preventing the business owner from investing in what they do best. New product lines also dilute your advertising dollars.
The pricing strategy during these challenging economic times is one of the many valuable CFO Services.
CFO I don't hear much about Break Even Points. Does anyone use them anymore? I know business owners want to hear about them and since I am a CFO For Hire and work for multiple business owners it is important that I listen to the business owner. During challenging economic times business owners want to know where their New break even point is. What I mean by New break even point is now that they have downsized and adjusted their expenses for this new economy it is time for us CFOs to recalculate the break even points and communicate them to the business owner. After this calculation the business owner will then know what monthly or weekly sales levels will need to be attained. It is also a good idea to provide "what if" break even point scenarios especially for different owner salaries and other moving target expenses. By the way, for the small business owner I usually calculate break even point from a cash flow standpoint versus a pure income statement standpoint. It is an important CFO Service to provide break even analysis. Many times the CFO forgets about calculating break even points because they get tied down with other aspects of forecasting.
CFO In a previous post on my CFO-Chief Financial Officer Blog on Blogger.com I stressed the importance of the CFO to have good communication skills. One of the critical components of communications skills is Public Speaking. It is an important CFO Service to have good public speaking skills. The CFO must give presentations to banks, to clients, to venture capital groups and to boards of directors just to name a few. Good public speaking skills allows the CFO to not only better communicate ideas, strategies and concepts but also helps to sell those ideas, strategies and concepts.
There is no better teacher of Public Speaking Skills than Jacki Rose of Boston MA. Her website is http://www.jackirose.com. She does both group and private coaching and she will turn your presentations into compelling commentary that will get results. Give her a call. You will be glad you did!
CFO One thing business owners hate is surprises. Unless of course the surprise is a pleasant surprise and then all is well. However, if the surprise is an unpleasant surprise it is enough to give a business owner gray hair at a very early age. Chief Financial Officers or CFO's need to tell the business owner when it is cloudy not when it is raining. This is a key role of the CFO. Reducing the element of unpleasant surprises is one of the main roles of a CFO. Identifying cash flow problems before they occur, identifying inventory overstocks or shortages before they occur are just a few trouble spots the CFO can identify. Another reason why companies need CFO's is for identifying and assessing risk. Today's business owner wears so many hats and needs to make decisions quickly. Business owners need a Chief Financial Officer to help them identify and assess the risk associated with those quick decisions. Today's CFO can also do many things to help reduce the business owner's risk. One example of that is looking into the Corporate American Express Card. Qualifying for certain classifications of corporate American express card will just have corporate liability and no personal liability.
CFO The most cost effective and productive way to use a CFO is on a part time basis. In other words a CFO Consultant. Back in the day, Chief Financial Officers were more commonly called controllers and controllers would pay a lot of attention to monthly closings, financial statement preparation and profit planning. With today's operating systems and more sophisticated accounting modules, CFO's can turn more of their attention to areas that are more productive to the business owner. For example CFO's can turn their attention to business forecasting, inventory planning and reduction of risk. These aforementioned productive CFO duties and CFO services do not take full time manpower. You can even add a number of other CFO services and it still will not require a full time CFO. When you hire CFO's on a part time basis they will not require benefits as most are of independent contractor status. These CFO's are also your CFO as long as you want to keep them. The Business Owner won't get a two week notice because they found another job. In closing CFO's who work on a part time basis are more valuable because they will tackle the most important issues in your business and with extreme cost effectiveness.
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