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!

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.

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!