CFO Services – More than the numbers

Recently a client emailed me a complaint about two things:

• That he is losing touch with his customers because he decided to delegate
• Things are getting crazy, disorganized and disjointed. I liked it much better when we were more organized.

As an Interim CFO addressing these kind of issues is commonplace. Business Owners look to the CFO for direction and guidance.

With regard to my client feeling like he is losing touch with his customers I responded to him as follows:

In business you either go up or down. There is really no state of neutrality. Any business that does not try to grow usually goes down. If you strive for neutrality you are very likely to go down. Therefore you must continuously strive to grow. Having said that, as you grow you are going to continuously feel a disconnect with your customers. However there is a solution. It is called communication. I think on a consistent basis you need to call these "delegated customers" directly and get the feedback from the customer on how it is going and on how your company can do better. I know it is more work but it is part of managing the growing process. Your employees will never in a million years tell you that there is anything wrong with their service until it is blatantly obvious and then it is usually too late. Tell your employees in advance that you will be calling these customers and give these employees both positive and negative feedback as to the results.

With regard to my client feeling that his business is crazy, disorganized and disjointed and liking it better when things were more organized, I responded as follows:

I think you need to change your mind set a little bit here. When I was in the retail business I knew business was going well when things got a little crazy, disorganized and disjointed because that meant things are growing as planned. When things are not in that aforementioned state then believe me there will not be joy in organization there will be potential stress and loss of focus as being human we all get complacent. The challenge is as things get crazy, disorganized and disjointed to be ready with solutions and improvements so when the current set of circumstances happen again you will be able to avoid the crazy, disorganized and disjointed and move on to new things that cause more craziness, disorganization and disjointedness. Believe it or not that is the winning formula for running a successful business.

Being a Part Time CFO is not just about working the numbers, the metrics and the forecasts. Being a CFO means you need to have a thorough understanding of business ownership and in turn understand how the inner workings of business work.

Controlling Payroll Costs

As mentioned in a previous post the four major expenses for most businesses are payroll, rent, advertising and insurance. One way that the Interim CFO can work to control payroll costs is through the use of forecasting tools like CashTell. The beauty of using a forecasting tool for the purposes of controlling payroll costs is that you can optimize both the headcount and the labor hours for different levels of sales.

For example, when forecasting, several different possible business scenarios should be assessed and analyzed by both the business owner and the part time CFO. One of those many different scenarios is different sales volumes. When forecasting one must look at what happens to the model when different ranges of sales volumes are entered. A good forecasting model should be able to determine the optimum headcount and the optimum amount of labor hours for each level of sales. This is a great tool because with this information the business owner and CFO know in advance as sales go up or down how to schedule workers helping to maximize efficiency and manage payroll costs.

Many times when the word “labor hours” is used we think of mainly manufacturing, however managing payroll costs through labor hours can be done in all types of businesses. When I was in the retail business, store managers were given a set amount of labor hours each week for scheduling employees. They could not go over those allocated labor hours unless they had permission together with a logical reason. My forecasting tools determined those labor hours and then if at the start of the week sales were deviating from the forecast I would issue or withdraw more hours as needed. It was also interesting that although the store managers complained about the small allocation of hours that they got it was amazing how the job got done with more efficiency and no sacrifice on service.

Advisory Board

Even if you have a working partner that may fill one or more of these roles it is always a very good idea to have an advisory board. It is ok for you or your partners to fill these roles, but it is unlikely that all of the roles of the advisory board can be filled by the management of a small business. Even if all of the advisory board roles can be filled by management it is still a very good idea to have people outside of management to bounce ideas off of.

Today there are many opportunities to have an advisory board that will either cost nothing or very little. Develop a relationship with the following professionals and have them part of your advisory board:

1. CPA – You are going to need a CPA to prepare your tax returns and possibly to perform a compilation, review or an audit. Usually if you hire a CPA to do these things they will be part of your advisory board. Usually they will be on the advisory board for nothing if you give them the aforementioned tax preparation business and you develop a good relationship with them. CPA’s can also refer you to funding sources and other support services including referring to you more business.
2. Lawyer – You should develop a relationship with a good business attorney. It must be a business attorney. One of the perils of business is that it exposes you to legal situations. Certainly do not use attorneys if you do not have to and there are other opportunities to get more cost effective legal advice like Prepaid Legal Services and others, but you want to get an attorney on your advisory board. Therefore it is a good idea to develop a relationship with an attorney who you can trust and will bill you in a professional manner. I have seen some attorneys bill me $75 for sending a fax! It can get that crazy. However by developing the right relationship with the right attorney you can have a trusted and valuable advisory board member who you can call when the need arises for legal assistance. Lawyers can also be a source of support services, funding sources and may refer more business.
3. Insurance Agent – There are several situations in business that call for specialty insurance and special protection. A professional insurance agent will be able to identify perils and risks that need to be insured.
4. Part time CFO – By using a Part Time Chief Financial Officer you have the opportunity to get a number of financial services on an as needed basis. In addition you have a valuable advisory board member. Here are some of the CFO services a part time CFO can perform:

• Solving cash flow problems
• Determining cash needs
• Designing a plan to work with existing cash and other resources
• Structuring an exit plan
• Determining Business Value
• Optimize operations
• Drive results and drive the bottom line
• Contribute to business development
• Shape financial strategy
• Understand, identify and assess the risks of business ownership.
• Prepare the Financial portion of your business plan.

5. Technical or operations professional depending on your industry – This is where you add someone to your advisory board that has the operations or technical expertise related to your product or service. You may have someone in management but once again it is always a good idea to get perspective from someone outside of management if available.

These professionals on your advisory board may charge a fee. I would be leery of this. My suggestion is to do everything you can to build the right relationships and to promise giving business to these professionals down the line.

I have a business associate who says he never has or never worries about any problems in his business. The reason is he gives all problems to his advisory board and lets them figure out all of his problems and lets them assume all of his worries. Advisory Boards can be very helpful and it is worth the time and energy to build the right one.

One way to Clean up a Balance Sheet

As a CFO I am always trying to attain a clean balance sheet especially for my start-up clients who are looking for second round financing.

If you are an entrepreneur looking for outside investment capital it is a good idea to try and clean up your balance sheet. If you have current stockholders who put money into the company as debt ask them if they will convert the debt to equity. New investors who are contemplating putting new money into a company want the dollars to go to something that will move the business forward like machinery and equipment or Research and Development. They certainly do not want their new money going to service or payoff existing stockholder debt. Investors shy away from situations where the new money is going to payoff or service existing stockholder debt.

Asking existing stockholders to convert existing debt to equity is not an easy thing to do. Believe me, I have done it and I recognize the difficulty. You are asking people who stepped up to the plate, probably when the company was just an idea and put real money in the company to increase their risk. Furthermore, there was probably a legitimate reason for the stockholder to put money in as debt in the first place. However the facts must be faced. The company probably needs the new money in order to go to the next level. Cleaning up the balance sheet will help. Sometimes the company needs the money not only to go to the next level but to also survive!! If this is the case and the company needs the money to survive the existing stockholder has a lot of incentive to convert their debt to equity. If they do not convert and the balance sheet is unattractive, it is likely the company will not get the needed investment capital and it is likely the stockholder will not get their debt instrument paid.

Although the stockholder increases their risk by converting the debt to equity they are potentially increasing the value of their stock and giving the company a chance to get to the next level which was the dream that stockholder had when they originally put the money into the company.

What it means to Provide CFO Services

What does it mean to 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. Why not find someone who provides these high quality professional services on an as needed basis?

It is best to use a CFO who truly understands the risks of business ownership. A CFO who understands what it feels like to have to make a payroll on a Friday with no money in the bank account on Wednesday. A CFO who understands what it feels like to see employees sitting around or being disruptive. A CFO who knows what it feels like to have a lot on the line.

What are CFO Services? Well as I go through these CFO services please keep in mind that you can choose one of them, some of them or all of them and at any time. You certainly do not have to do everything at once. That is the beauty of the flexibility of having a Part time CFO. Also a good Interim CFO works in your office location

And now for the services….

The CFO should make sure you have good financial numbers. Making business decisions without good numbers is like a Doctor making a decision to operate on your ankle without X-rays. It simply shouldn’t be done. So the first thing to do is if your numbers are not right the CFO should make them right.

The Part Time Chief Financial Officer should also Identify, assess and mitigate risk. Whether you are Microsoft or the local pizza parlor your business has risk. The question is how severe are those risks? You should be able to work together with your Chief Financial Officer to Identify the risks in your business. The CFO should also assess the severity of that risk and if severe suggest actions to mitigate the risk. Severe risks in your business could be cash flow problems, low or no cash reserves, the need for financing, employee risks, inventory obsolescence risk, legal risk and personal liability risk just to name a few.

A CFO should be able to tell you when it is cloudy not when it is raining.

Business Owners hate surprises. They need to be prepared so they can review options and have time to fix whatever needs to be fixed. The last thing business owners want to do is go into fire drill mode and have no time to react. The CFO should have business forecasting and modeling tools that give the business owner the needed foresight to take action. Forecasting tools that give the business owner the time to react to both downturns and upturns in their business. For example Next Step CFO developed an exclusive forecasting and modeling tool called "CashTell".

There are several things that a good forecasting tool should do but let me hit the major points:

First of all any forecasting tool including CashTell is based on a solid set of assumptions. The beauty is the business owner can change those assumptions any way they want creating multiple what if scenarios.

A good forecasting tool can tell you how much cash you will have or need at any point in the future based on whatever assumptions you give it.

So if you want to know if you will have enough cash to survive a 20% decrease in business. A good forecasting tool can tell you that.

If you want to know if you will have enough cash to survive a 50% increase in business. A good forecasting tool can tell you that.

Can your business absorb the purchase of equipment, machinery or a new computer system? A good forecasting tool can tell you that.

A good forecasting tool also tells you what you need to do to increase cash flow. It isn’t always more sales.

A good forecasting tool helps determine key metrics to evaluate your business on a going forward basis.

In one sentence a good forecasting tool helps you figure out the strategies that need to be implemented that drive profits and cash flow. Then it is the job of the CFO to implement those strategies.

A good CFO should help you determine and develop metrics to evaluate your business. Metrics are quantitative parameters that help you evaluate the performance and productivity of every aspect of your business. Metrics are a terrific management tool.

The best CFO's will help you Drive results, contribute to business development, help shape your financial strategies, identify employee theft, improve controls and processes leading to operating efficiencies and also help you develop and execute exit strategies. After all someday you will be separated from your business.

I hope this was helpful to the small business owner in making them aware that the Part time CFO option exists and how they can help them.

Going concern opinions - A Tough Call for the CPA

It is a basic theory in accounting that a business should be considered a going concern which means the business will be in operation usually over the next 12 months. If a business is a Going Concern the business has little risk of liquidating or ceasing operations in the foreseeable future. Financial statements are prepared with this theory as the premise.

A Going Concern opinion is one of the most difficult opinions a CPA needs to render. A Going Concern Opinion is rendered by a CPA when it is the opinion of the CPA that the company is no longer a going concern and that there is considerable risk that the company will not be in business by the end of the next fiscal year. Material uncertainties must exist to lead the CPA to this opinion. These opinions are difficult to render because it is not good news for management, the company’s lenders, the company’s suppliers and creditors. Based on all of this dissatisfaction the CPA has to have as much evidence as possible to support this opinion. If the CPA does not issue a going concern opinion and the business liquidates or ceases operations within the fiscal year, the CPA will be at tremendous risk. The material uncertainty that exists could be something that is more evident like the strong likelihood of an unfavorable ruling on a lawsuit, or the strong likelihood of an unfavorable geo-political event.

Would CPA’s have less risk if they had access to financial modeling tools that can forecast with great accuracy based on a solid set of reasonable assumptions the future cash position of a company at different levels of sales volumes and expense levels when rendering going concern opinions? I think so. It not only reduces risk for the CPA, but provides a more solid basis for explaining to the client why a going concern opinion is being rendered.

Currently most CPA’s use metrics and similar indicators to help render their opinion. If financial modeling tools were available at a reasonable cost that identified with great accuracy the forecasted cash position, inventory position and liability position of the company at selected volumes of sales, selected levels of expenses, and selected levels of inventory in confluence with a solid set of reasonable assumptions I believe that would give the CPA greater confidence and more solid footing in rendering this difficult opinion.

Next Step CFO has such a financial modeling tool and it is called cashtell.

Learn From Your Competition

Most of you who read this post will have competition. Competition is what makes us better business people. Your first step in reviewing the competition is Know Who the Competition is! I can’t tell you how many people go into business without knowing who their competitors are and what they do. Not knowing who your competition is would be like a team from the National Football League preparing for the Super Bowl and not know who they were playing and not doing any scouting report. You are not learning who the competition is so you can worry and obsess about them. You are learning who the competition is so you can learn from them and develop strategies to compete against them.

One thing I always used to do is go to trade shows to seek out who my competitors are. Trade shows are a great way to stake out your competition. Get information from their booths and even speak to their representatives. Look at their advertisements; discover the different ways they market and communicate to the market place. See if you can figure out how their logistics work or if they use contract manufacturers. See if you can find out what their distribution strategy is. If you market regionally you should develop relationships with businesses that do what you do who are not in your market. I cannot overemphasize the abundance of information you will get out of those relationships.

Take what you learned from the competition and put together a plan on what things you will do the same and what things you will do differently. You need to figure out what separates your business from the competition.

A valuable CFO Service is to help and influence business owners to learn more about what their competition is doing and then help them figure out a strategy to compete against those competitors.