Monday, February 25, 2013

Interview with the CFO of the Boston Red Sox – Steve Fitch

On February 19, 2013 I had the pleasure of interviewing Steve Fitch who is the Chief Financial Officer of the Boston Red Sox. I want to thank Steve for taking the time and giving me the opportunity to interview him.

Steve actually began his baseball executive career as the CFO of the San Diego Padres. The opportunity came about right after the baseball strike in 1994. During the strike there were a lot of layoffs in the various executive offices of Major League Baseball (MLB) and when the strike was over, there were new opportunities. Steve answered a blind ad and interviewed with Larry Lucchino and got the job. When Larry Lucchino came to the Boston Red Sox through the Red Sox ownership change that occurred in 2002-2003, he brought with him many of the executives who worked for him in San Diego and Steve was one of them.

Steve's succinct definition of a CFO is to ensure a company is financially viable to move forward. However he does admit that the motivation of the Boston Red Sox is more about team performance than it is about making a profit, but was quick to point out that making a profit is still very important.

What he loves about his job is the product (baseball) is much more interesting to him than any product of any other company he ever worked for as he is a baseball fan as well as a CFO.

Payroll (player compensation and benefits) is the critical and largest expense for any sports franchise. As a key member of the budget committee Steve points out that his main job on that committee is to provide not only an overall expense number to hit but especially a payroll number to hit and then it is the job of ownership and baseball operations to develop the best team within that budget. Of course if there are any decisions to go over that budget or make any kind of course correction those decisions rest with the ownership. Steve shared a story where this ownership course correction was exemplified most vividly in December of 2006. Steve had just finished the budget process for the 2006 season. The very next day, ownership told him to redo the entire budget because ownership was in the process to pay a $50 million dollar posting fee for the rights to just talk to Daisuke (Dice-k) Matsuzaka. This posting fee only gave the Red Sox the rights to talk to Matsuzaka if they could eventually sign him to a contract that would be additional. The Red Sox ended up paying over $100 million dollars to get Daisuke. Daisuke recently signed a minor league contract with the Cleveland Indians. Steve also had to redo his long term forecasts recently when the Red Sox traded Adrian Gonzalez, Josh Beckett and Carl Crawford where over $200 Million dollars of payroll came off the books last August. By the way, after payroll the next largest expenses are facilities costs and travel costs, but these other costs are dwarfed by payroll.

Besides the Sabermetrics which are calculated by the baseball operations, I asked Steve what are the most important financial metrics in the business of baseball. He said that he asks a lot of CFO's the same question and he always gets back the same answer and in his business it is no different. It is either an EBITDA (Earnings Before Interest, Taxes Depreciation and Amortization) number or a cash flow number. Steve indicated that he actually calculates and reports multiple EBITDA numbers in many different ways because MLB requires it in order for them to make consistent comparisons on a number of parameters from team to team. Steve said there are various nuances to the way the various EBITDA numbers are calculated for MLB. From a cash flow standpoint, you can just imagine how fleet of foot Steve had to be with the Daisuke situation and as he points out there are situations similar to the Daisuke situation that can happen at any moment. It is an ever-changing and always evolving business!

In my business as a Contracted CFO performing CFO services the biggest challenge in forecasting is forecasting revenue. With Steve and the Boston Red Sox the biggest challenge is forecasting expenses. At least in the last 10 years, it is the expenses that are the most volatile and the revenues are the most predictable. The biggest revenue generators in order of size are the team's share of the national television contract, ticket sales, local broadcasting, advertising, concessions and licensing. I originally thought that licensing and advertising were higher in revenue significance but Steve let me know that was not the case. There goes my shot at being a CFO for a professional sports franchise!! Steve did cite that the revenue side could be a little more challenging to forecast as they move forward as in the last10 years you could pretty much bet that they would completely sell out every game, but he admits going into the 2013 season selling out every game with the significant changes made to the team is certainly not as predictable.

As CFO of The Boston Red Sox, Steve's biggest challenge is adhering to the plan that they set. Change in the sports business is the nature of the game. Steve takes on the responsibility of adhering to the plan even though there are a lot of things on the baseball operations and ownership side that he cannot control. But that is the challenge that he takes on passionately. He gets creative and works on other revenue streams as well as new revenue streams and works to eliminate any waste within the operation so that even if baseball operations has to make changes that defy the plan he is creating new revenue streams and eliminating waste to compensate for those changes.

Just like baseball is a team game, Steve gets the most satisfaction from his job in working with the whole team of executives and staff. He says "it is truly a team working environment"! As an example of that teamwork, one thing that Steve gets a lot of satisfaction out of which I am totally envious of is he received championship rings in both 2004 and 2007 when the Red Sox won the World Series.

From an IT standpoint the Red Sox use basic off the shelf software except they do have proprietary baseball information software which was developed internally.

I asked Steve if he would rather be a CFO in a sport with a salary cap as baseball is one of the few major sports that do not have a salary cap. He laughed and said that was a loaded question. I admitted to him that it was and we both shared a laugh.

Overall it was a great experience and once again would like to thank Steve Fitch, CFO of the Boston Red Sox for the opportunity to speak with him.

Saturday, October 13, 2012

What is your Biggest Fear?

As a CFO Consultant I have spoken with many business owners from many different industries. My main objective is to really drill down to what the business owner really needs and want. Not what I need and want, not what I think they need and want, but what they think they need and want and to determine their desired outcome. One thing I do that is very effective is to write down their exact words when they are telling me:

  • What their need and want is,
  • When they're describing their problem or;
  • When they're expressing a pain point;

This helps me drill down to the real need and want as I can keep the business owner focused by repeating their exact words.

Through my research and 28 years of business ownership and after drilling down from how they answer the question "What is your biggest fear or frustration in your business", I have discovered that my clients needs and wants 90% of the time fall into one or more of 5 categories to which I can help them.

These are not in a particular order of priority.

For the first need and want that business owners have, the clue I get is:

"I don't know if I am making money or not."

Now I would drill down even further, but it's likely the real need and want here is to have accurate and timely financial statements. Accurate and timely business decisions can only be made with accurate and timely financial statements. Furthermore, accurate and timely financial statements give a frame of reference as to what actually is going on and act as a scoreboard. Imagine going to a basketball game and they don't keep score. Would you really have a frame of reference as to what's going on? Sure you will have a gut feel but that's it. Your balance sheet, your P & L, your Cash Flow Statement, these are the scoreboards of your business. They give you that frame of reference as to what is going on.

The second need and want that business owners have, the clue I get is:

"My financials say I made $150 grand where the hell is it? It's not in my bank account!"

Now I would drill down even further, but it's likely the real need and want here is the business owner needs to know where their cash is going. Cash is the lifeblood of any business. Without cash the business is crippled. Many times cash ends up in hiding places. A couple of weeks ago a client had this exact frustration. Their cash was tied up in Accounts Receivable, excess Inventory, Equipment and paying their bills too quickly without the benefit of purchase discounts. Yes, paying your bills too quickly impacts cash flow. But the important thing is, he now understands where his cash is hiding and we have implemented strategies in each area to free it up and to reduce the chances of it hiding there again.

For the third need and want that business owners have, the clue I get is:

"At times my business is overwhelming!"

Now I would drill down even further, but it's likely the real need and want here is the business owner needs a strategic plan. A strategic plan defines the direction of the business and it defines the proper allocation of company resources to ultimately achieve the business owner's goals and objectives. The strategic plan also identifies the key drivers of the business. Without a strategic plan the business owner is operating their business by the seat of their pants, putting out fires on a day to day basis and running in place instead of moving forward. The most important point is not only developing the plan but the business owner needs to commit to implement it and execute it or it is all for not!

For the fourth need and want that business owners have, the clue I get is:

"I never have time to work on sales!"

Now I would drill down even further, but it's likely the real need and want here is the need for the business owner to start working on their business instead of in their business. The business owner must be the face of the company, the ambassador if you will. Their job is to bring business into the company and to schmooze and communicate with existing customers in order to maintain the existing base. What I find business owners doing is administrative functions and tinkering on the mechanics of their business. I can always tell when the business owner is working in their business because sales are choppy! If business owners can accomplish this one thing, and work on their business instead of in it, they will see more consistent sales, their sales will grow, their profits will grow and their business will be more valuable and more marketable.

For the fifth need and want that business owners have, the clue I get is:

"My employees can't do anything right."

Now I would drill down even further, but it's likely the real need and want here is the business owner needs to have people accountable in the organization. The most successful businesses that I have seen have people throughout the organization accountable for what they do. Why don't business owners make people accountable? Because of everything I have said. Number 1, when they don't have accurate and timely financial statements they cannot develop metrics to evaluate the performance and productivity of their business and make their employees accountable for those metrics. Number 2, when they don't know where their cash is going they don't think they have the resources to put the right people in the right places and to do the proper training to make people accountable. Number 3, when they don't have a strategic plan they don't know what the key drivers of the business are and therefore cannot make people accountable for those key drivers. And Number 4, if they are working in their business and tinkering instead of on their business and be the ambassador, they are not delegating responsibilities to make people accountable.

And when they don't do any one or more of these things the weight of the world falls on the shoulders of the business owner and it gets heavier and heavier. Then the business owner starts to work more hours, then they get burned out, then they fight with their spouse because their never around, then they start to hate their employees and finally they start to hate their business and that's when it starts to fall apart!

Saturday, August 25, 2012

Do you Know Where your Cash is?

Not knowing where cash is going is one of the challenges business owners have in their business. As a CFO Consultant many business owners ask me "I am doing all of this business, where is the money"?

Cash is the lifeblood of any business. It is the business's most valuable asset. Without cash the business is crippled. The business cannot operate effectively and trouble ensues. Business owners need to know where their cash is going because if it is going to or being tied up in unproductive places it will cripple the business. Cash, being a company's most valuable asset needs to be effectively utilized in order to produce the maximum amount of earnings and return on assets. The business owner needs to know where cash is going!

Cash can hide and become unproductive in one or more of the following places:

  • Accounts Receivable - When you don't have a credit policy that you adhere to, cash comes in slowly and gets hidden in accounts receivable
  • Prepaid Expenses - The psychology of some business owners is that they like to pay for things in advance so they can get the particular expenditure out of their mind. This is a potential hiding place and in most cases an unproductive hiding place for their cash.
  • Inventory - For retailers, distributors and manufacturers this is a common hiding place. Slow moving inventory must be sold so that the money can be reinvested in the inventory that does move.
  • Fixed Assets - Sometimes cash is tied up in Equipment, vehicles or machinery and the business owner does not realize the impact or makes the decision to pay cash for a fixed asset when the return on their inventory and services rendered is far greater than the cost of financing
  • Accounts Payable - Similar to the psychology of business owners with regard to prepaid expenses noted above business owners pay bills too fast and cash gets consumed prematurely and unproductively.
  • The Cash Conversion Cycle is too slow - The Cash Conversion Cycle is the time period between the outlay of cash to make a product or provide a service and the collection of cash from the sale of that product or service. The objective is to receive payment for the final product before paying for the inventory and/or expenses of production and/or the expenses of selling the inventory. If you understand your Cash Conversion Cycle you can create strategies and work with suppliers to most productively meet your needs.
  • Lower Profit Margins - Selling prices could be too low. One way to check if selling prices are too low is by the number of customer complaints. If at least 25 to 35% of your customers are not complaining about your prices then your prices are too low! Costs of services can also be too high and impact margins. Always negotiate with suppliers or streamline processes.
  • High Overhead - A high overhead base can always kill cash flow. Also check for high owner salary. Business owners can abuse their business by taking too much salary. What would an outside board of directors pay you as a business owner given their knowledge of all the factors and contingencies in the business?
  • Employee Theft - 80% of all theft is employee theft. No one thinks it can happen to them, yet it happens all of the time.

Take a look at this list and see where cash is hiding!

Friday, July 27, 2012

Business Owners, Work on your business not in it!

As a CFO Consultant one of the things I advocate and help my clients achieve is for the business owner to work on their business and not in their business. Business owners who adopt this philosophy not only increase profits, but also make their businesses more valuable to a potential buyer.
The philosophy of working on your business instead of in your business is achieved as follows:
  • Having the right people in place to assume the administrative and operational responsibilities and if you do not have the right people you must work to get them
  • The business owner must be the face and the ambassador of the company
  • The business owner must be responsible for bringing business into the company and working toward that end
  • The business owner must continuously communicate with existing customers in order to maintain those relationships
  • The business owner cannot have any administrative or operational responsibilities nor can they allow themselves to get immersed and bogged down in those responsibilities.
I was speaking with a potential client and he kind of snickered when I brought up the concept of working on your business instead of in your business. I asked him why he was snickering and he said because he knew some business owners who did this and when the 2008 recession hit they had to layoff their key people and now they are back to working in their business.

I told this potential client that if I were consulting those business owners there is no way I would have suggested to lay off their key people and abandon the concept of working on their business instead of in their business. First of all, what is needed in a recession are sales and to take the person responsible for bringing business into the company (the business owner) and putting them into the administrative and/or operational trenches is a terrible mistake and will drastically reduce the top line. Secondly, in a recession you do not layoff key top performers you layoff "B","C", "D" and "F" performers.

Part of a good strategic plan is working towards this concept of working on your business instead of in your business. A good Part Time CFO should have a good working knowledge of this concept and its implementation as part of their CFO Services.

Sunday, June 24, 2012

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.

Sunday, May 27, 2012

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!

Friday, April 20, 2012

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 3rd 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.