Blindsided By a Cash Flow Problem?

The best way not to get blindsided by a cash flow problem is to have either a 13 week rolling cash flow forecast or a 12 month rolling cash flow forecast.  I believe that the 12 month rolling cash flow forecast is better as it gives a longer range view with more “what if” analysis capability giving the business owner the ability to not only know a cash flow problem is coming but time to avert it!

When those tools are not in place the business owner can get blindsided by a cash flow problem.  Even if those tools are in place sometimes the cash flow problem although the forecast told you it was coming could not be averted or the business owner saw it coming and decided to take on risk because there was a great opportunity to take advantage of, that ultimately did not work out.  Whichever scenario occurred you are now faced with a cash flow problem.

As a CFO consultant one of the first things I tell my clients is that in order to successfully get through this cash flow problem you must be in control of each vendor situation.  To me that means to be as proactive as possible.  Let me explain.  Most business owners when they are in a cash flow problem do not communicate with their creditors.  They remain silent and in hiding and as a result the creditors are making the phone calls to them and dictating their various demands for payment.  What I am proposing is to now prepare a 13 week rolling cash flow forecast because since we are officially having a cash flow problem looking at the short term view is most advantageous.  With the 13 week rolling forecast you can determine how much free cash flow is available to pay bills.  Then the next step is to determine the absolute "must pays" making top on that list payroll, payroll taxes, sales taxes and any other fiduciary taxes.  The next step is to create payment plans for the creditors so that everyone gets not everything but at least something.  The next step is do not be silent, but to communicate with the vendors as early as possible letting them know how much and at what time intervals you are going to pay them. You dictate the terms.  You are in control!

Usually when you handle the situation in a proactive manner like the aforementioned strategy you get respected for it.  However, not always are they going to accept your terms.  Sometimes they meet you halfway; sometimes they do not accept them at all and demand payment.  You have to expect this to happen.  That is why you do not allocate all of your free cash flow to these payment plans up front.  Reserve some for the creditors who may be adverse. These situations have to be handled on a case by case basis. 

If you find yourself in the midst of a cash flow problem, being proactive puts you in control of a very difficult situation.  A Cash Flow Problem is never an easy situation, but I have seen too many situations where the business owner was not proactive and things went spiraling out of control.  A Part Time CFO with experience in these situations could be a beneficial resource to guide you through this stressful process.

Never Commit to Just One Source of Supply

As a Part Time CFO who performs CFO Services and an Entrepreneurial CFO to boot I understand the importance of developing good supplier relationships.
This is not a post about being disloyal to suppliers. Being and developing loyalty to suppliers can be a very profitable strategy in the long run because when the right supplier recognizes that loyalty it usually results in better pricing, better terms and higher profits.
This is a post about taking proactive measures and protecting your business in the long run. Having only one supplier for a particular business segment in your business is risky. When having only one supplier you are at risk for one or more of the following to happen:

• You are subject to more drastic changes in price and terms. Although you have general market forces working in your favor having one source of supply still subjects you to drastic changes in price or terms and you are not prepared to go anywhere else.
• You are subject to changes in quality of product. If your sole source of supply does not keep up with technology or simply loses their quality due to reducing quality control to save money, you are subject to quality reduction that will hurt your business.
• You are subject to being taken advantage of by suppliers who do not recognize loyalty. If I supplier does not really recognize loyalty. If a supplier always talks about "being your partner" without acting like it then you are subject to be taken advantage of and are not getting what you should from that supplier. See this article on Choosing Suppliers.
• You do not really know how competitive the sole supplier is with respect to price and terms if there is not a live example to compare them to. Although you may be familiar with the general market pricing, when you are doing business with a supplier there are deals being made in the back room. If you are only using one back room you are for the most part in the dark as to what is really happening in the market.
• If your business hits a downturn and the supplier squeezes you with unreasonable terms (like Cash before delivery or requires Letters of Credit) you do not have another source of credible supply. If you do not have at least one alternative supplier where you have established credit terms and there is a downturn in your business, that sole supplier that said they were your business partner will be turning the tables on you as soon as you get behind in your payables and asking for unreasonable payment terms.

Because I am an Entrepreneurial who has owned retail, manufacturing and service companies over the last 28 years I have seen all of these things in my own businesses. Be proactive and establish a credit and business relationship with more than one supplier in all of your business segments!

CFO Services - Executing the Exit Strategy

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

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

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)

1. 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?
   
   
2. 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.
   
   
3. 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

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?

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!