CFO-Chief Financial Officer

CFO Services - Executing the Exit Strategy

noreply@blogger.com (CFO) — Fri, 20 Apr 2012 23:23:00 +0000

On previous posts I spoke of Exit strategies and the importance of having a solid exit strategy, but as an extension of that post I wanted to put together a checklist for the business owner to help them understand what they have to think about in order to begin the process of preparing an effective Exit strategy. By the way, these items are going to take some deep and serious thought.

Determine the value of your business through a certified business appraisal
Determine how much money you need to live and be comfortable
Determine when you want to leave your business
Determine how you want to leave, meaning do you want to sell to a 3^rd party? Do you want to sell to a family member? Do you want to sell to a key employee or partner?
Use your advisers – CPA, Lawyer, Part time CFO to help you make these decisions
Build value in your business by keeping and motivating key employees
Do not become an irreplaceable employee in your business.
Work with your advisors to put together your estate plan and prepare a plan as to what will happen to your business should you die suddenly

This is an effective list for the business owner and Contract CFO to lead the team of business owner experts in executing the exit strategy.

CFO Services – The importance of tracking Direct Labor Hours

noreply@blogger.com (CFO) — Sun, 08 Apr 2012 03:31:00 +0000

If you are a company in the trades or manufacturing there is no metric more important to track than direct labor hours. As a Part time CFO performing CFO Services I find that the most important metrics to properly evaluate the performance and productivity of a business in the trades as well as a manufacturing business involve direct labor hours.

Direct Labor Hours are defined as hours worked by those employees who work on the actual production of a product or who work on performing the service. Sometimes this can be tracked from payroll records, however payroll records may include travel time and down time. If possible it is best to exclude travel time and down time and account for that time separately.

Some of the key metrics I like to track are as follows:

Sales per hour – Calculated by taking sales and dividing it by Direct Labor Hours. Through this metric you will be able to identify if your pricing has integrity and you will also be able to tell how efficient your direct laborers are.

Overhead per hour – Calculated by taking your total overhead and dividing it by direct labor hours. Through this metric you will know what your overhead cost per hour is and apply that overhead cost per hour to your selling price to make sure you are covering your overhead. The small business owner is always confused on how to make sure overhead is covered in their selling price.

Material Cost Per hour – Calculated by taking the cost of the materials needed to produce the product or perform the service and dividing it by Direct Labor Hours. When this metric is too high it can mean that you are inefficiently consuming materials or it can mean that you are not buying effectively (prices are too high)

Direct Labor hours are the heart and soul of managing a business in the trades or a manufacturing business. By tracking Direct Labor hours you will identify key metrics so you can evaluate the performance and productivity of your business. Utilization of metrics will help you be able to spend more time finding new business. Your Part time CFO will be able to help you calculate metrics.

Accountability

noreply@blogger.com (CFO) — Fri, 02 Mar 2012 03:52:00 +0000

As a Part Time CFO I find that business owners making people accountable for their performance is lacking more and more and as a result more of the burden of accountability is falling on the business owner. Since the business owner is responsible for everything that happens in their business, the buck stops with the business owner. This additional burden of accountability is not only unproductive to business owners, but it is negatively affecting the bottom line as well. One person simply cannot do it all!!! Therefore people have to be held accountable!!!

What causes a lack of accountability in an organization?

Primarily 3 things (not in any particular order)

Inaccurate and untimely financial statements - The financial statements are the scorecard of any business and are the supreme measure of business performance. If the financial statements are inaccurate or untimely then how can performance be measured properly? If performance cannot be measured properly how can one make anyone accountable?
Fear of Loss of the Employee - If the business owner thinks very highly of the employee and the business owner looks at the employee leaving the company as a detriment to their business they will deflect as much pressure and accountability away from that employee as possible.
Lack of having a strategic plan - Without a strategic plan the business lacks direction. When a business owner has a strategic direction that they can communicate to the rest of the organization it gives employees the reason to be accountable. An employee will not be accountable if they are not given a reason to be accountable. The strategic plan consistently applied gives the employees reason to be accountable. Consistency in the strategic plans application is critical because if the strategic plan is inconsistently applied or changed often accountability is sure to break down.

Having everyone accountable in an organization increases the bottom line, increases the value of the business and allows the business owner to sleep nights!

A CFO Entrepreneurial Lesson Learned

noreply@blogger.com (CFO) — Sun, 29 Jan 2012 18:53:00 +0000

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!

CFO Services – What Are Rolling Forecasts?

noreply@blogger.com (CFO) — Fri, 30 Dec 2011 20:31:00 +0000

One of the more important CFO Services is Business and Cash Flow Forecasting. This CFO Service gives the business owner the foresight to take action. Many business owners operate their business on a day to day basis without any business and cash flow forecasting and without thinking about what is going to happen next month, next quarter or even next week! As a result they never understand the benefits of business and cash flow forecasting and guess what? Their competition does understand the benefits. Their competition understands that business and cash flow forecasting:

Reveals weaknesses and strengths in your organization.
Finds solutions to solve those weaknesses and improve on those strengths.
Helps you to learn more about your business.
Helps you to be proactive about addressing potential trouble down the road like for example, a cash flow problem.
Makes people in the organization accountable
Gives the business owner piece of mind

One of the problems with business and cash flow forecasting is that once the forecast becomes 30 days old it is stale, outdated and most times forgotten. To address this problem the state of the art CFO performs what are called rolling forecasts. Rolling forecast capability allows one to enter actual results for the most recent month and then the rest of the forecast rolls forward for the next 12 months. This is called a 12 month rolling forecast and should be done every month to keep the forecast current. I usually prepare a 24 month rolling forecast for my clients to get a longer range perspective of where the business is going. With these updates the CFO and business owner can make changes as needed as well as identify any other problems. The rolling forecast makes the forecasting process a monthly occurrence and a monthly planning process that adds tremendous value. With my clients I also combine the results of the rolling forecast with an analysis of the key performance indicators for the month.

With tools like the rolling forecast, the business owner can be on top of their game and gain a competitive advantage against the many business owners who do not do so!

CFO Services - Another Cash Conservation Strategy

noreply@blogger.com (CFO) — Sun, 27 Nov 2011 21:10:00 +0000

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.

yourcfo@nextstepcfo.net

CFO Services - An Option to Consider

noreply@blogger.com (CFO) — Sun, 23 Oct 2011 21:51:00 +0000

As a Part time CFO I run in to situations where business owners are relocating. I always liked the strategy of owning the building you do business in. The way I look at it is you have to pay for facility costs one way or another you may as well build equity through the facility payment.

One mistake I made is with an insurance agency that I have an ownership interest in. I have had this equity interest since 1983. We kept leasing the same office space for years. We paid almost $700,000 in rent in 27 years. If at some point in the process we bought the property we would have probably still paid about the same in facility costs, but we would have enjoyed tax advantages and today we would own an asset that has resalable value. This is the typical falling asleep at the wheel scenario.

Even though the real estate market is down I still believe the right thing for business owners to do is own their building. SBA 504 programs are providing good financing options and believe it or not banks love to do them. The SBA guarantees a large percentage of the loan among other things so the banks are all in on that. However if you cannot finance a purchase today a lease with an option to buy can be a very productive strategy. Through a lease with an option to buy:

You are not committing to a purchase
You are controlling the property and it cannot be sold from you
You can try the property to make sure it fits your business needs before you buy
You have time to work toward a down payment
You can lock in a favorable option purchase price in this current real estate market

Sometimes you have to make a nonrefundable payment for the option but in this real estate environment that can usually be negotiated. Keep in mind any nonrefundable payment you make toward the option should go toward the purchase price should the option be exercised.

With the aforementioned advantages of ownership a lease with an option to buy could give you the opportunity to purchase an asset for your facility dollars instead of accumulating rent receipts.

Exploring different avenues when locating can be one of the many valuable CFO Services.

CFO Services - Excess Cash

noreply@blogger.com (CFO) — Wed, 14 Sep 2011 02:55:00 +0000

As a Part time CFO from time to time I get requests from clients as to what to do with excess cash flow. I know it sounds strange during these challenging economic times, but some companies do produce excess cash. This can occur if business is really good or just from a seasonal fluctuation in a seasonal business. When these situations occur we have a tendency to think only about putting the money in an interest bearing bank account. However, if you have seen money market and CD rates lately you know that if you can get an interest rate of 1% per year you are lucky and this does not seem to be changing anytime soon.

Here are some things that can be done with excess cash:

Call all Trade Vendors to see if they will offer early pay discounts. Some offer them as a matter of policy but I would make a phone call to them anyway to see if they would accept a higher discount. After all you may be inquiring at a time where they need cash.
Call the Landlord and see if he will give you a discount for prepaid rent.
Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
Pay down your line of credit as long as you can dip back into it and the bank doesn’t freeze your line as you pay it down.

If you think about points 1 thru 3 these are operating expenses you have to pay any way in the near future. It is not like paying the credit line which is additional dollars outside of ordinary operating expenses. That is why with respect to the credit line I suggest you make sure you can borrow back into it.

I think it is very likely that the aforementioned four points will yield appreciably better results than an interest bearing bank account.

CFO Services – Accurate Financial Statements

noreply@blogger.com (CFO) — Sat, 06 Aug 2011 01:47:00 +0000

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.

CFO Services - Inventory Planning For Profit

noreply@blogger.com (CFO) — Sat, 02 Jul 2011 16:01:00 +0000

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.

Example of “open to buy” calculation:

Product class	Calculation Item	Units
Phillips Head Screwdrivers	Projected Sales	500
	Add : Desired Ending Inventory	50
	Less: Beginning Inventory	100

	Open to Buy	450

Now there are other factors that retailers consider (justified or not justified) that increases their “open to buy”, for example:

How hot the buyer thinks the product will be (This will increase projected sales and therefore increase open to buy)
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
Colors you want to add because you think they will have greater consumer appeal
Merchandising plans that have higher stocking requirements to fill rack or shelf space properly
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
Better payment terms offered by supplier
Extra discounts from suppliers at certain quantities
Pressure from a supplier to buy more or they will threaten to open a competitor.
Pressure from a supplier to buy more who is giving you more advertising money
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. Here is an example of a sample inventory plan/forecast for a 3 month period:

Inventory Plan - Numbers in ($000)	Jan	Feb	Mar
Beginning inventory	$ 85.0	$ 90.0	$110.0
Add: Projected Receipts Product on order	40.0	60.0	70.0
Less: Cost of Goods sold on Projected sales	35.0	40.0	50.0
Ending inventory	$ 90.0	$110.0	$130.0

A/P Trade Plan - Numbers in ($000)	Jan	Feb	Mar
Beginning Trade Suppliers Accounts Payable	$50.0	$ 40.0	$ 60.0
Add: Projected Receipts Product on order	40.0	60.0	70.0
Less: Payments to Trade Suppliers (30 Days)	50.0	40.0	60.0
Ending Trade Suppliers Accounts Payable	$40.0	$ 60.0	$ 70.0

In this example the retailer may want to rethink purchases as inventory is rising. Certainly this could be gearing up for a busy period but even if that is true you must still assess if you are bringing inventory in too early especially if your trade terms are 30 days or less.

As mentioned, an inventory plan/forecast works best when it can be plugged into a business and cash flow forecast, but it is still useful to give the retailer the macro view of the impact of inventory ordered. The Trade Accounts Payable Plan should also be prepared as part of this inventory planning/forecasting process.

One of the CFO’s major responsibilities is to reduce risk. To the retailer inventory represents the greatest risk. I have seen many retailers overbuy their way out of business. The Chief Financial Officer (CFO) needs to guide the retailer through the inventory planning/forecasting process.

CFO Services - A Difficult Employee Question

noreply@blogger.com (CFO) — Thu, 02 Jun 2011 02:39:00 +0000

As a Part time CFO I am often in a position to advise clients how to answer the following non financial related question:

What do you do with an inferior employee(s) when the business owner is virtually convinced that the employee market for the particular skill that the inferior employee(s) is in is so thinly populated and thinly skilled the replacement would either be worse or no replacement exists? Assume the inferior employees are not stealing. They just lack the talent, the ambition or they are just plain lazy and incompetent.

Many may say that it is impossible for a skill set in an employee market to be that thin. Many may say this is an easy decision and that you just get rid of the inferior employee(s).

These are all legitimate comments but what happens if the market is really that thin? What happens when the loss of the inferior employee results in a loss of business for an unknown period of time? What happens if the training costs to train the new employee who is being plucked from a thinly populated and talented market is expensive?

I have personally faced these types of situations in businesses that I have owned and they do happen contrary to many who believe that an employee market no matter what the skill set can be thinly populated and thinly talented. In the two specific situations I was personally involved in as the business owner I kept the inferior employees and as a result I believe I paid a higher price versus biting the bullet, letting go the inferior employees and paying whatever price I had to pay including lost business.

What I found was that inferior employees bring down other employees who are more talented, more ambitious and more willing to work. The inferior employees are the proverbial "Bad Apples" that spoil the whole bunch and as a result everyone goes down with them making the whole operation that much more inefficient, ineffective and dis-serving to the most important people in the process, the customer.

Believe me; I understand how tough the decision is to cut the cord. You know that you are going to spend a lot more sleepless nights while you lose business and do not have replacements. You will personally have to work more hours and this can be taxing especially when you already work crazy hours. It tears the very fiber of the business owner, but it is one of those unfortunate situations business owners encounter.

The key is take every precaution you can to prevent this during the hiring process and during the employee's first 90 days on the job.

Even though this is a non-financial challenge a CFO has more value to their clients if they can guide the client through this challenge and provide real life insight. It is the CFO who has prior business ownership experience that is best equipped to handle these situations. At the end of the day these non-financial insights can be one of many valuable CFO Services.

CFO Services - The Power of Control

noreply@blogger.com (CFO) — Wed, 04 May 2011 20:31:00 +0000

I am a Part Time Chief Financial Officer. I was asked recently by a colleague,”when does a client become a client? Is it some particular CFO Service that they are looking for? Is it usually some problem the client is having whether it is solving cash flow problems, getting the business owner to know their numbers, Preparing a business and cash flow forecast or doing some strategic planning?” I responded by saying that certainly the potential client could be looking for specific CFO Services or for solving a specific problem, but the client really doesn’t become a client until they feel some loss of control of a particular problem in their business. For example a potential client may feel they have a cash flow problem, but if rightly or wrongly they can justify in their mind that they can solve the cash flow problem, they feel they have control of the situation and so they say “I can solve this one, why pay someone to solve it?” Of course, the potential client does not understand that a good CFO can identify potential problems, like cash flow problems before they occur. The potential client does not understand that through the use of the right business and cash flow forecasting tools a good CFO can tell the business owner that trouble is brewing and what to do to prevent the trouble. So it is all about the level and sense of control.

As someone who has owned retail, manufacturing and service companies for 25 years I surely can say one of the most uncomfortable feelings for any business owner is the feeling of a loss of control. It only has to be the feeling of a loss of control in one aspect of the business. It doesn’t have to be the feeling of a loss of control of the entire business. The fear and the risk of loss that you feel when you feel a loss of control can be numbing. Conversely, there is no greater feeling for a business owner than the feeling of having control over their business and being able to solve most all problems or issues that come their way.

The potential client underestimates the value of strategic planning. Through the strategic planning process that wonderful sense of control begins to emerge and when the planning process is through and it is then maintained on an ongoing basis that sense of control becomes a more permanent posture of the business owner and confidence ensues. One thing the potential client never underestimates is the power of control.

CFO Services - Reducing Business Risk

noreply@blogger.com (CFO) — Sun, 10 Apr 2011 22:39:00 +0000

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!!”

CFO Services – Know Your Numbers

noreply@blogger.com (CFO) — Sun, 20 Mar 2011 00:29:00 +0000

As a Part time CFO I see a lot of Business Owners and the one thing that the most successful business owners have in common, is that the most successful business owners Know Their Numbers.

What does it mean to Know Your Numbers? Here are just a few things that it means:

It means understanding and knowing what your operating costs per hour are.

It means understanding and knowing what your gross margin percentage is on key products.

It means knowing which products you make the most money on and what products you make the least money on.

It means knowing your inventory and what is slow moving.

It means knowing your inventory turns ratio.

It means knowing your average wage rate of direct laborers

It means staying on top of how many days your receivables are outstanding

It means knowing how many days your payables are outstanding and knowing when to time all of your disbursements.

It means being able to answer a question with total confidence when an employee or a vendor needs a decision because your answer is centered on the knowledge you have about the most important numbers/metrics in your business.

It means increasing the overall accuracy of your decisions

It means improving the productivity and performance of your business because you are able to evaluate the productivity and performance of your business.

It means understanding the metrics associated with your advertising campaigns

It means knowing how much cash you have on hand at all times.

It means you know what your monthly debt service is.

It means knowing how productive your capital expenditures are.

When a business owner knows their numbers they are on top of almost all business scenarios that can take place in their business. They have a stronger sense of control over their business. Most importantly, the business owner who Knows Their Numbers reduces the risk of business ownership!

CFO Services – Guidance to the Entrepreneur with an Idea

noreply@blogger.com (CFO) — Sat, 26 Feb 2011 01:55:00 +0000

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.

CFO Services - Financial Numbers Can Play Tricks

noreply@blogger.com (CFO) — Sun, 06 Feb 2011 18:42:00 +0000

If a baseball bat and ball together cost $1.10 and I told you the bat costs one dollar more than the ball. How much does the ball cost?

Most people say the ball costs 10 cents. The right answer is the ball costs 5 cents with bat costing one dollar more than the ball or $1.05 for a total cost of $1.10.

The reason why I bring this example up is because financial numbers can play tricks on you. It is the job of a Part Time CFO to understand all of the tricks numbers can play and help the business owner understand and interpret the financial statements properly so better business decisions can be made.

Reading and understanding the financial numbers on financial statements can play tricks on you. Many times a company is making money so the P & L looks good, but they have poor cash flow. This is the case usually because the cash cycle is too long (The cash cycle is the time frame between the outlay of cash for inventory (and material and labor) and the ultimate receipt of cash from customers). These time frames need to be compressed. Some of these issues to compress the cash cycle involve negotiations with the trade for better terms as well as stricter company credit policies for faster accounts receivable turnover. Sometimes a solution can also be extending payroll from weekly to bi-weekly or even monthly where it is legal to do so. Some clients also need an inventory purchase and receipt plan as they may be overbuying inventory.

To understand better how profit does not equal cash watch the following six minute and 30 second presentation:

Profit Does not Equal Cash Presentation

Another trick that financial statements and financial numbers can play is in understanding the equity section of the balance sheet. This is the section of the balance sheet that values the difference between assets and liabilities. A high equity balance can be deceiving if a high percentage of assets are made up of intangibles like goodwill, non-competes or patents and trademarks. A high equity balance can also be deceiving if a high percentage of assets are made up of machinery, equipment or other fixed assets that depreciate in actual value faster than the accounting depreciation calculation.

Accurate gross profit margins on your P & L can play tricks on you. Understanding what needs to go in cost of goods sold and what is a direct cost of the product or service is very often done incorrectly. For example many business owners in the trades such as construction, electricians, plumbers etc… and who are in manufacturing do not put direct labor in cost of goods sold. This is leaving out a direct cost of the product or service and without it will inaccurately overstate gross profit margins which can lead to poor business decisions.

Helping the business owner read and understand their financial statements in order to make better business decisions is a CFO Service that needs to be done early in the process. Remember, financial numbers can play tricks on you.

noreply@blogger.com (CFO) — Mon, 17 Jan 2011 00:30:00 +0000

Safe Way In Preserving Privacy - Author: admin Posted: Sun Jan 16, 2011 6:55 p... http://ow.ly/1aTzTl

CFO Services - Quick Cash Flow Metrics

noreply@blogger.com (CFO) — Sun, 16 Jan 2011 22:20:00 +0000

As a Part Time CFO I am called upon to do some quick cash flow analysis for clients. This is not often very easy as with cash flow there can be a lot going on. One of my favorite metrics and first places to go to get a good sense of what is happening is Days Sales Outstanding (DSO) and Days Payables Outstanding (DPO). DSO tells you the average number of days it takes a company to collect their accounts receivable. DPO tells you the number of days it takes a company to pay its trade creditors. If you are paying your trade creditors appreciably faster than you are collecting your receivables you probably identified one source of a cash flow problem.

DSO is calculated by taking your accounts receivable as the numerator and Total Credit sales as the denominator. Multiply that quotient times the number of days you are tracking and that is your DSO. Let's get more specific as to the numbers. You can take the accounts receivable off of your balance sheet. Most companies total credit sales are usually their total sales, however if they can specify a certain percentage of sales that they know are COD they can deduct that from sales to determine credit sales. The number of days represents the number of days you are tracking. So for example if you want to determine what your DSO is for the fourth quarter you take the accounts receivable on the December 31 balance sheet and put it in the numerator and then you take your total sales (assuming all your sales are credit sales) for the fourth quarter off of the income statement and put it in the denominator. Then you take that quotient and multiply it times 92 days which are the number of days in the fourth quarter. That will give you DSO.

DPO is calculated by taking your Trade Accounts Payable as the numerator and Cost of Sales as the denominator. Multiply that quotient times the number of days you are tracking and that is your DPO. Let's get more specific as to the numbers. You can take the Trade Accounts Payable off of your balance sheet or Accounts Payable Detail. Keep in mind that your Trade Accounts Payable are the amounts you owe to your inventory vendors versus your expense vendors like the phone bill or Office supplies etc... Take the cost of sales off of your income statement. The number of days represents the number of days you are tracking. So for example if you want to determine what your DPO is for the fourth quarter you take the Trade Accounts Payable on the December 31 balance sheet and put it in the numerator and then you take your cost of sales for the fourth quarter and put it in the denominator. Then you take that quotient and multiply it times 92 days which are the number of days in the fourth quarter. That will give you DPO.

As a CFO these are my "go to metrics" when making a quick assessment of a cash flow problem.

CFO Services - Don't Shoot From The Hip

noreply@blogger.com (CFO) — Sun, 26 Dec 2010 00:52:00 +0000

Whenever former Boston Red Sox Manager Joe Morgan was questioned on why he made certain decisions in a game, his answer very often would be "six-two and even". This was an expression he used which really meant he didn't have a logical reason for making the decision and he was using gut feel and shooting from the hip.

Too many small business owners shoot from the hip. They simply don't have the information or the proper analysis to make quantifiable, sound business decisions. A Part Time Chief Financial Officer provides the tools to avoid shooting from the hip. Through forecasts and financial dashboards the Part Time CFO can provide the small business owner the information and analysis that provides quantifiable guidance to the most commonly asked critical questions like:

Will I have enough cash to get through a dip in my business and what kind of dip can I withstand without needing more cash?

What will happen to my business if I invest in a new product line and what will be the impact on cash flow?

What will happen if I maintain the status quo and keep doing business like I have been?

Should I discontinue a product line and dropping this line make me more profitable?

Should I buy a truck or new piece of equipment?

What will happen to my business if I try a new advertising campaign?

I want to get involved in internet marketing. What investments need to be made in people, time and money and how does this impact the entire business?

Should I add a location and can my business handle the additional investment in adding the location?

What is the liquidation value of my business should I decide to discontinue my business?

Can my business be more productive and are we operating at peak efficiency?

Is there another business model that would be more effective?

Should I add another employee or is that just going to build additional expense with very little benefit?

Should I lay off staff and what impact will that have on the business?

How do I evaluate sales performance?

Is my overhead too high?

Are my selling prices where they should be?

Are my gross profit margins where they should be?

These are critical questions in business. Answers to these questions can make or break your company. An Interim CFO has the tools and the expertise to provide the quantifiable analysis that will make the answers to these questions much clearer. So the next time you have to answer any of the aforementioned questions, make sure your answer isn't "six-two and even".

noreply@blogger.com (CFO) — Tue, 30 Nov 2010 00:41:00 +0000

EPISODE26 - Cyber CFO Show 21 - Author: admin Posted: Sun Nov 28, 2010 9:17 pm... http://ow.ly/1adKPj

Pick One Strategy and Go For It!

noreply@blogger.com (CFO) — Sun, 28 Nov 2010 23:37:00 +0000

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!

noreply@blogger.com (CFO) — Mon, 15 Nov 2010 00:31:00 +0000

If you are thinking of starting a business... - Author: admin Posted: Sun Nov ... http://ow.ly/19YmOB

CFO Services - Selling Your Company to Employees

noreply@blogger.com (CFO) — Sun, 07 Nov 2010 20:48:00 +0000

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.

CFO Services – Explanation of Accrual Versus Cash Reporting

noreply@blogger.com (CFO) — Tue, 26 Oct 2010 01:54:00 +0000

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.

noreply@blogger.com (CFO) — Tue, 26 Oct 2010 00:39:00 +0000

Cash Needs - Author: admin Posted: Sun Oct 24, 2010 7:33 pm http://ow.ly/19Dle1