Sunday, January 16, 2011
CFO Services - Quick Cash Flow Metrics
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.
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.
Saturday, December 25, 2010
CFO Services - Don't Shoot From The Hip
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:
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".
Monday, November 29, 2010
EPISODE26 - Cyber CFO Show 21 - Author: admin Posted: Sun Nov 28, 2010 9:17 pm... http://ow.ly/1adKPj
Sunday, November 28, 2010
Pick One Strategy and Go For It!
As a Part Time CFO, I have clients who are either startups looking for investor money or are startups that are self funded and are putting together their first strategic plan. I am an entrepreneurial CFO so I understand the thought process that goes into the strategic plan. We see so much opportunity with multiple market channels to pursue.
As entrepreneurs we always think we can go after all the markets and all of the channels all at once. Create our strategic plan around attacking every possible opportunity. Fire all the guns at once! After all, why leave a stone unturned? The logic is if one or two of the market channels are doing well you can just focus more resources or all resources to those channel(s). However, in reality when we try to go after all market channels we dilute our resources and find that we are not successful at any channels because each channel individually deserved more resources and more attention in order to be successful. I can't tell you how many times I went kicking myself thinking about a specific market channel and saying "if I only had more resources I would have been successful in this channel". Knowing I would have had more resources if I did not try to pursue all the market opportunities at one time.
The challenge is convincing yourself and any investors why the channel you did not select is not the right strategy, however what your plan can ultimately show is you think one channel, let’s say "mom and pop retail shops" is the best opportunity in the short term (first 2 or 3 years) and then when the company has more resources or is ready for another round of financing it can incorporate "the big box retailers". Then down the road once after it has established itself and profited with big box retailers maybe the Canadian market channel can be pursued and then international and so forth. If it takes 3 or 4 years instead of 2 or 3 years to profit and be successful with the mom and pop retail shops then so be it. At least you preserved your resources so that you could survive the extra time it needed to profit in that market.
The other thought that goes through the mind of the Entrepreneur that makes going after all the market opportunities so tempting is beating any competitor to the punch. Once again you need to avoid this temptation. In my view if you are first to the market place with a product or service you should choose the channel that gives you the most brand recognition opportunity. That way you will always be perceived as the pioneer and being first in the market place when you finally enter that new market channel, even though someone else beat you to that new market channel. There is always a distinct brand recognition advantage in being first to the market place no matter what channel is pursued.
I know it is hard. I know you want to go after it all. I know you have good reasons to go after it all. Avoid those temptations. Pick the best market channel and pour all of your focus, energy and resources on that one channel and you will give your startup the best chance to succeed!
As 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!
Sunday, November 14, 2010
If you are thinking of starting a business... - Author: admin Posted: Sun Nov ... http://ow.ly/19YmOB
Sunday, November 7, 2010
CFO Services - Selling Your Company to Employees
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.
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.
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