Sunday, August 31, 2008

The Risk of Key Operating Expenses

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 Companys 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 companys 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.

Thursday, August 21, 2008

Risk of Accounts Payable

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.

Tuesday, August 19, 2008

Risk of Employees

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.

Sunday, August 10, 2008

The Risk of Debt

The major risk of debt is how the companys 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 companys 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.

Thursday, August 7, 2008

The Risk of Fixed Assets and Intangible Assets

As a Part Time CFO Many times I see companys 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.

Sunday, August 3, 2008

Cash Flow Problems

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:

1. Too much inventory.
2. Too much salary to owner or too many withdrawals by owner.
3. Doing business with customers who are slow paying or who do not pay at all.
4. High Overhead too high.
5. Too much interest expense on debt.
6. Undercapitalization from the beginning
7. Unexpected casualty not covered by insurance.
8. Excessive purchases of fixed assets and capitalized costs.
9. Operating losses
10. Paying bills too quickly

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.