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One of the problems with business and cash flow forecasting is that once the forecast becomes 30 days old it is stale, outdated and most times forgotten.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!

CFO Services - Another Cash Conservation Strategy

As a Part Time CFO performing CFO Services it is my responsibility to identify all the ways a business can conserve cash. This includes providing cash savings guidance for services I do not perform. The best example of this is during this time of year I always advise my clients to have their year end tax planning meeting with their CPA or Income Tax preparer.

These year end meetings many more times than not help the business owner reduce their current year tax liability and conserve cash flow for the business. Certainly most of the strategies evolve around purchasing vehicles, equipment or some type of fixed asset before the end of the year, but there are other year end strategies especially for cash basis taxpayers that are discussed like paying as many expenses as possible before year end and the proper timing of the year end billings.

Virtually every CPA or Income Tax Preparer provides these year end tax planning sessions. They usually last no more than an hour and can even be done over the phone and it can be the most profitable hour in November/December that you will ever spend.

A CFO should have many resources to help the business owner through these challenging times. One of those resources should be good CPA’s and Tax Preparers. If you are in need of a good CPA please feel free to contact me.

Michael Barbarita

Next Step CFO

CFO Services

781-326-3822

yourcfo@nextstepcfo.net

CFO Services - An Option to Consider

As a Part time CFO I run in to situations where business owners are relocating. I always liked the strategy of owning the building you do business in. The way I look at it is you have to pay for facility costs one way or another you may as well build equity through the facility payment.

One mistake I made is with an insurance agency that I have an ownership interest in. I have had this equity interest since 1983. We kept leasing the same office space for years. We paid almost $700,000 in rent in 27 years. If at some point in the process we bought the property we would have probably still paid about the same in facility costs, but we would have enjoyed tax advantages and today we would own an asset that has resalable value. This is the typical falling asleep at the wheel scenario.

Even though the real estate market is down I still believe the right thing for business owners to do is own their building. SBA 504 programs are providing good financing options and believe it or not banks love to do them. The SBA guarantees a large percentage of the loan among other things so the banks are all in on that. However if you cannot finance a purchase today a lease with an option to buy can be a very productive strategy. Through a lease with an option to buy:

• You are not committing to a purchase
  
• You are controlling the property and it cannot be sold from you
  
• You can try the property to make sure it fits your business needs before you buy
  
• You have time to work toward a down payment
  
• You can lock in a favorable option purchase price in this current real estate market
  

Sometimes you have to make a nonrefundable payment for the option but in this real estate environment that can usually be negotiated. Keep in mind any nonrefundable payment you make toward the option should go toward the purchase price should the option be exercised.

With the aforementioned advantages of ownership a lease with an option to buy could give you the opportunity to purchase an asset for your facility dollars instead of accumulating rent receipts.

Exploring different avenues when locating can be one of the many valuable CFO Services.

CFO Services - Excess Cash

As a Part time CFO from time to time I get requests from clients as to what to do with excess cash flow. I know it sounds strange during these challenging economic times, but some companies do produce excess cash. This can occur if business is really good or just from a seasonal fluctuation in a seasonal business. When these situations occur we have a tendency to think only about putting the money in an interest bearing bank account. However, if you have seen money market and CD rates lately you know that if you can get an interest rate of 1% per year you are lucky and this does not seem to be changing anytime soon.

Here are some things that can be done with excess cash:

1. Call all Trade Vendors to see if they will offer early pay discounts. Some offer them as a matter of policy but I would make a phone call to them anyway to see if they would accept a higher discount. After all you may be inquiring at a time where they need cash.
2. Call the Landlord and see if he will give you a discount for prepaid rent.
3. Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
4. Pay down your line of credit as long as you can dip back into it and the bank doesn’t freeze your line as you pay it down.
   

If you think about points 1 thru 3 these are operating expenses you have to pay any way in the near future. It is not like paying the credit line which is additional dollars outside of ordinary operating expenses. That is why with respect to the credit line I suggest you make sure you can borrow back into it.

I think it is very likely that the aforementioned four points will yield appreciably better results than an interest bearing bank account.

CFO Services – Accurate Financial Statements

After being a Part time CFO for over 4 years now, I am seeing a trend that is not good and not productive for the business owner. The alarming trend is there are too many business owners who have inaccurate financial statements.

Many business owners want to know two things no matter how interested they are in financial information. That is they want to know what their sales are and they want to know what their net profit is. Even the most uninterested business owners in financial information want to know those two metrics. However, if the financial statements are not accurate you will not know those two metrics or if you do know those two pieces of information they will not be accurate.

Why does the business owner need accurate financial Statements?

To make better business decisions – How can you make business decisions on Collections, pricing, what vendors to pay, capital expenditures, inventory purchases and much more without accurate financial statements?

To get bank financing and to obtain leases – Banks will take you a lot more seriously if your financial statements can back up what you tell them. Furthermore when a banker sees inaccurate financial statements (and many financial types can usually tell inaccurate financial statements merely through looking at them) there is very little chance to get a loan.

To Keep Bank Financing - Many business owners have credit lines that need to be extended or converted to term debt. Without accurate financial statements, at the very best case you are going to make your banker nervous not to mention you may not get the credit line extended which requires you to payoff the credit line immediately.

Allows for better financial analysis – Without accurate financial statements there is no basis for solving problems or for strategic planning. For example without accurate financial statements you cannot solve cash flow problems nor do a business and cash flow forecast. You cannot determine with certainty whether a change in business model is going to work for you.

Estate Planning – If you are going to have an effective estate plan the accuracy of your financial statements are a critical part of the process.

Selling a business – The amount of earnings that a business has is critical to its valuation. Inaccurate financial statements will be discovered by the buyer during the due diligence process and your deal could be in jeopardy.

Shareholder Buyout or Disputes – Just like selling a business accurate financial statements are critical in any shareholder buyout or dispute. Similarly the following events also require accurate financial statements:

Employee Stock Ownership Plans

Litigation or Divorces

Shareholder Buy and Sell Agreements

A Part time CFO can be a very cost effective way to make your financial statements accurate and alleviate any problems you may have with any of the aforementioned events.

CFO Services - Inventory Planning For Profit

As a Part Time CFO where I have multiple clients, there are many clients when I engage with them for the first time that I find do not have an inventory plan/forecast. An inventory plan/forecast is an essential tool and is one of the essential CFO Services in order to manage cash flow and reduce risk to the business owner. Retailers especially need this tool because inventory to a retailer represents one of the retailers’ greatest risks, but the need for this tool also holds true in distribution and manufacturing companies.

An inventory plan or forecast is different from an open to buy plan. Most retailers have an open to buy plan by product classification. The open to buy is calculated by taking projected sales in the product classification (retailers usually use last year’s sales. They should work with a CFO to prepare a more legitimate sales forecast taking other economic, market variables and the retailer’s knowledge of the customer into consideration) and adding the desired ending inventory you want to have at the end of the period you are buying for and then subtracting the beginning inventory for the product classification. The result is how much you should buy or is known as your “open to buy”. You can use cost dollars, retail dollars or units in the aforementioned calculation. You can also include planned markdowns, average markups and other factors. I like to keep it simple and use units.

Example of “open to buy” calculation:

Product class	Calculation Item	Units
Phillips Head Screwdrivers	Projected Sales	500
	Add : Desired Ending Inventory	50
	Less: Beginning Inventory	100
	Open to Buy	450

Now there are other factors that retailers consider (justified or not justified) that increases their “open to buy”, for example:

1. How hot the buyer thinks the product will be (This will increase projected sales and therefore increase open to buy)
2. Sizes you may have to fill from beginning inventory to complete size runs or decisions to carry larger or smaller sizes to fit a certain customer segment
3. Colors you want to add because you think they will have greater consumer appeal
4. Merchandising plans that have higher stocking requirements to fill rack or shelf space properly
5. There may be a bad product mix or obsolescence in beginning inventory for the product classification and therefore the beginning inventory needs to be reduced to account for that
6. Better payment terms offered by supplier
7. Extra discounts from suppliers at certain quantities
8. Pressure from a supplier to buy more or they will threaten to open a competitor.
9. Pressure from a supplier to buy more who is giving you more advertising money
10. Pressure from a supplier to buy more because they have given you great support or provided you with favors in the past.
    

Do you see how you can overbuy? Do you see how easy it is to commit the greatest sin in retail? Some of these aforementioned examples are justified, others are not. All of these factors create more risk.

Items 1 through 5 above and are legitimate reasons for taking additional risk and increasing your open to buy if you really did your market/customer study homework. Item 6 above is legitimate only when you are considering the timing of shipments. Items 7 through 10 above are booby traps and are not legitimate reasons to go over your open to buy and take additional risk. In a future article I will explain why the booby traps are booby traps, but the purpose of this article is the absolute need for an inventory plan/forecast.

Let’s say that you have ice water running through your veins and you do not succumb to any pressure. You simply use your experience and knowledge and if you do go over your open to buy in a product classification you legitimately feel a product is going to be hot or you have to complete size runs or there are colors you believe will be in great demand or you have a new merchandising plan that has higher stocking requirements or your beginning inventory could be completely stale and you have to discount a lot of it. Even though you have these legitimate reasons for overbuying you are still assuming greater risk and you need to understand the extent of the risk you are taking and that is where the inventory plan/forecast comes in.

Most retailers just have their open to buy analysis by product classification and call it a day. However they are missing an overall top level inventory receipt plan and inventory forecast. Why does the retailer need an overall top level inventory plan and complete inventory forecast in addition to their open to buy by product classification? Because this plan/forecast gives the retailer a macro view to clearly see how overbought or under bought they are as well as to see what the impact on cash flow will be. This helps the retailer measure their risk and see what is really going to happen at the entire company level.

This plan/forecast starts with beginning inventory and then adds the inventory receipts on order and lists them by the month they will be shipped in and subtracts the costs of the projected sales by month to determine ending inventory by month. You will be able to see how the projected ending inventories by month compare to last year’s monthly ending inventories. However that is not enough. You may have overbought last year. The final test should be entering your inventory plan into a business and cash flow forecast and letting the projected cash flow tell you if you are overbought. In the business and cash flow forecast you must also plug in the proper months when the supplier invoices will be paid. If you find that the business and cash flow forecast tells you that you are going to be out of cash during the year then you are likely overbought and are assuming great risk. Here is an example of a sample inventory plan/forecast for a 3 month period:

Inventory Plan - Numbers in ($000)	Jan	Feb	Mar
Beginning inventory	$ 85.0	$ 90.0	$110.0
Add: Projected Receipts Product on order	40.0	60.0	70.0
Less: Cost of Goods sold on Projected sales	35.0	40.0	50.0
Ending inventory	$ 90.0	$110.0	$130.0

A/P Trade Plan - Numbers in ($000)	Jan	Feb	Mar
Beginning Trade Suppliers Accounts Payable	$50.0	$ 40.0	$ 60.0
Add: Projected Receipts Product on order	40.0	60.0	70.0
Less: Payments to Trade Suppliers (30 Days)	50.0	40.0	60.0
Ending Trade Suppliers Accounts Payable	$40.0	$ 60.0	$ 70.0

In this example the retailer may want to rethink purchases as inventory is rising. Certainly this could be gearing up for a busy period but even if that is true you must still assess if you are bringing inventory in too early especially if your trade terms are 30 days or less.

As mentioned, an inventory plan/forecast works best when it can be plugged into a business and cash flow forecast, but it is still useful to give the retailer the macro view of the impact of inventory ordered. The Trade Accounts Payable Plan should also be prepared as part of this inventory planning/forecasting process.

One of the CFO’s major responsibilities is to reduce risk. To the retailer inventory represents the greatest risk. I have seen many retailers overbuy their way out of business. The Chief Financial Officer (CFO) needs to guide the retailer through the inventory planning/forecasting process.

CFO Services - A Difficult Employee Question

As a Part time CFO I am often in a position to advise clients how to answer the following non financial related question:

What do you do with an inferior employee(s) when the business owner is virtually convinced that the employee market for the particular skill that the inferior employee(s) is in is so thinly populated and thinly skilled the replacement would either be worse or no replacement exists? Assume the inferior employees are not stealing. They just lack the talent, the ambition or they are just plain lazy and incompetent.

Many may say that it is impossible for a skill set in an employee market to be that thin. Many may say this is an easy decision and that you just get rid of the inferior employee(s).

These are all legitimate comments but what happens if the market is really that thin? What happens when the loss of the inferior employee results in a loss of business for an unknown period of time? What happens if the training costs to train the new employee who is being plucked from a thinly populated and talented market is expensive?

I have personally faced these types of situations in businesses that I have owned and they do happen contrary to many who believe that an employee market no matter what the skill set can be thinly populated and thinly talented. In the two specific situations I was personally involved in as the business owner I kept the inferior employees and as a result I believe I paid a higher price versus biting the bullet, letting go the inferior employees and paying whatever price I had to pay including lost business.

What I found was that inferior employees bring down other employees who are more talented, more ambitious and more willing to work. The inferior employees are the proverbial "Bad Apples" that spoil the whole bunch and as a result everyone goes down with them making the whole operation that much more inefficient, ineffective and dis-serving to the most important people in the process, the customer.

Believe me; I understand how tough the decision is to cut the cord. You know that you are going to spend a lot more sleepless nights while you lose business and do not have replacements. You will personally have to work more hours and this can be taxing especially when you already work crazy hours. It tears the very fiber of the business owner, but it is one of those unfortunate situations business owners encounter.

The key is take every precaution you can to prevent this during the hiring process and during the employee's first 90 days on the job.

Even though this is a non-financial challenge a CFO has more value to their clients if they can guide the client through this challenge and provide real life insight. It is the CFO who has prior business ownership experience that is best equipped to handle these situations. At the end of the day these non-financial insights can be one of many valuable CFO Services.

CFO Services - The Power of Control

I am a Part Time Chief Financial Officer. I was asked recently by a colleague,”when does a client become a client? Is it some particular CFO Service that they are looking for? Is it usually some problem the client is having whether it is solving cash flow problems, getting the business owner to know their numbers, Preparing a business and cash flow forecast or doing some strategic planning?” I responded by saying that certainly the potential client could be looking for specific CFO Services or for solving a specific problem, but the client really doesn’t become a client until they feel some loss of control of a particular problem in their business. For example a potential client may feel they have a cash flow problem, but if rightly or wrongly they can justify in their mind that they can solve the cash flow problem, they feel they have control of the situation and so they say “I can solve this one, why pay someone to solve it?” Of course, the potential client does not understand that a good CFO can identify potential problems, like cash flow problems before they occur. The potential client does not understand that through the use of the right business and cash flow forecasting tools a good CFO can tell the business owner that trouble is brewing and what to do to prevent the trouble. So it is all about the level and sense of control.

As someone who has owned retail, manufacturing and service companies for 25 years I surely can say one of the most uncomfortable feelings for any business owner is the feeling of a loss of control. It only has to be the feeling of a loss of control in one aspect of the business. It doesn’t have to be the feeling of a loss of control of the entire business. The fear and the risk of loss that you feel when you feel a loss of control can be numbing. Conversely, there is no greater feeling for a business owner than the feeling of having control over their business and being able to solve most all problems or issues that come their way.

The potential client underestimates the value of strategic planning. Through the strategic planning process that wonderful sense of control begins to emerge and when the planning process is through and it is then maintained on an ongoing basis that sense of control becomes a more permanent posture of the business owner and confidence ensues. One thing the potential client never underestimates is the power of control.