CFO Services - Reducing Business Risk

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

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

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

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.

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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.

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:

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".