Will You Know WhenYou Need Cash?

How Much Money does it take to run a Business?

 

Many business owners—whether they’re a start up entrepreneur or they’ve been in business for thirty years—ask themselves this very question when trying to figure out how much money they need to put into their business. The business owner needs to be able to determine if hey need to put their money into their business, get money from other sources, or if hey don’t need money at all whether their time horizon is in a month, a year, or five years. Knowing in advance how much cash they need or how much cash is available on different levels of sales volumes and expenses would give business owners much more precious time to react. I want to be told when it’s cloudy, not when it’s raining, and I say that as a business owner myself. Cash Tell is Next Step CFO’s sophisticated forecasting modeling tool. It tells business owners what their cash position will be at any point in the future, giving a great advantage to the business owner in preparing for whatever comes. Next Step CFO developed CashTell, and it is a tool exclusively available to clients of Next Step CFO.

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Identifying Metrics

Identifying key metrics to measure business performance for the business owner is an important CFO Service. I think there is a need for the Part Time CFO to identify metrics that are easy for the business owner to understand and to identify what is critical to the business in the following areas:

 

Sales

 

Gross Profit Margins

 

Employee productivity

 

Advertising effectiveness/Lead generation

 

Overhead

 

Fixed Asset Productivity

 

Interest Coverage

 

 

Every business/industry needs to take a unique look at the type of metrics that best evaluate performance. What may be an important metric for one business may be totally unimportant for another. Working together with the business owner to identify the critical metrics is the best way to go.

 

I also believe that you do not want to have too many metrics. With too many metrics things start to get complicated for the business owner to utilize and understand. Getting the business owner focused on the key metrics to measure his business performance will prove most productive in the long run. As the CFO sees the business owner utilize and understand the metrics presented, the CFO can introduce more metrics.

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Manage your Entire Business on One Sheet of Paper

Did you know business owners have the capability to manage literally their entire business from a single sheet of paper? A CFO can use metrics or key performance indicators to help the business owner put together a sort of Financial Dashboard. This Financial Dashboard is something many CFO’s share with their clients to help them identify key performance indicators in which to manage their business. What I’d like to ensure, however, is that the CFO shows the business owner how to use this tool more effectively to manage their business. Explaining to the business owner how to really use the financial dashboard may take a little more time and a lot more patience, but instilling that in them will go a long way in improving business productivity in general, and the productivity of the business owner individually. Using the financial dashboard to manage your business provides simplicity in the face of complex business problems, and also helps anticipate problems to circumvent future troubles.

 

I recently exhibited for one of my clients how in a simple metric called overhead per labor hour, a trend can show how well the business owner is doing managing their over head costs (which commensurate with managing their payroll costs). If you are not maximizing your overhead and payroll expense controls, giving a look at the way a metric trends can give you a quick indication. Probably the most productive way to visualize these trends is through the use of a graph.

 

Using the method of “finding benchmarks” is an okay strategy, but it will only take you so far. To “find benchmarks” means to find service or statistical bureaus that compile metrics from other companies in the same industry as your own so you can draw comparisons between yourself and your competitors more easily. Certainly, it’s useful and interesting information, but I personally believe no two companies are fully alike even if they are in the same industry. I suggest that all “benchmarking” be done internally, with the CFO, business owner, and advisory board all present to determine the most productive key performance indicators to track the target goals for each key performance indicator, and the way the business owner and CFO will use them to manage the business. Benchmarks are good to acknowledge, but I wouldn’t base my entire business strategy on them.

 

Of all the services provided by a CFO for hire, getting a business owner on board with the idea of using metrics to manage their business and teaching them to understand their uses is one of the most effective.

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Identifying Metrics

Identifying key metrics to measure business performance for the business owner is an important CFO Service. I think there is a need for the Part Time CFO to identify metrics that are easy for the business owner to understand and to identify what is critical to the business in the following areas:

 

Sales

 

Gross Profit Margins

 

Employee productivity

 

Advertising effectiveness/Lead generation

 

Overhead

 

Fixed Asset Productivity

 

Interest Coverage

 

 

Every business/industry needs to take a unique look at the type of metrics that best evaluate performance. What may be an important metric for one business may be totally unimportant for another. Working together with the business owner to identify the critical metrics is the best way to go.

 

I also believe that you do not want to have too many metrics. With too many metrics things start to get complicated for the business owner to utilize and understand. Getting the business owner focused on the key metrics to measure his business performance will prove most productive in the long run. As the CFO sees the business owner utilize and understand the metrics presented, the CFO can introduce more metrics.

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Your Competition can Teach You

I’m going to assume that if you’re reading this, you have competition out there in the business world. Having rivals out there makes us better business people. But to utilize the competition like any other business tool, your first step is knowing who they are. Too many people go into business with out understanding who their competitors in that business will be or how those competitors do business.   Such a blind leap into the business world is tantamount to an NFL team preparing for the super bowl not only without doing any research on their opponents, but without even knowing who their opponents will be. Studying your competition does not equal obsessing over them. If anything, being aware of your competition will allow you to learn from their mistakes with out having to make them yourself, and develop more productive strategies against them, therefore decreasing the time you spend worrying about them at all.

 

Trade shows are an easy place to hunt down your competitors. You can get information from their booths, look at their advertisements, and observe the different ways they market and communicate in the workplace, even speak to their representatives. You can possibly figure out if they use contract manufacturers or how their logistics work. If you can work out what their distribution strategy is, you can market regionally and develop relationships with businesses that do what you do who are not in your market. There is no overemphasizing how much information you will get out of those relationships.

 

Plan for your own business by using what your competitors taught you. Consider what things you want to do the same as they have and what things you want to do differently. The differences will be what separate your business from the competition, and you’ll want your business to stand out.

Influencing business owners to learn more about what their competition is doing and then helping them strategize against those competitors are valuable CFO services.

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The CPA’s tough call-Going concern opinions

A basic theory in accounting is that a business is considered a going concern if the business will be operating over the next 12 months. The business has scant chance of liquidating or ceasing operations in the future if a business deemed a going concern. This theory is the premise on which Financial statements are prepared.

 

One of the most difficult opinions a CPA will have to render is A Going Concern opinion. When the CPA feels that the company is at risk of going out of business by the end of the next fiscal year and is therefore no longer a going concern, they have to render A Going Concern Opinion. For the CPA to be lead to this final opinion, material uncertainties need to exist. Naturally, the CPA rendering a Going Concern opinion is bad news for all the company’s management, leaders, suppliers and creditors, so it’s difficult for the CPA to do. The CPA REALLY needs as much hard evidence as possible to back up their opinion because of all the dissatisfaction they are going to face. However, if the business does liquidate or cease operations within the fiscal year, and the CPA has failed to issue a Going Concern opinion, the CPA will then be at a tremendous risk them selves. The strong likelihood of an unfavorable geo-political event or ruling in a lawsuit, or something equally evident could be the existent material uncertainty.

 

I think these CPA’s can reduce their risk greatly if they have access to financial modeling tools that can accurately forecast the company’s future cash position at different sales volume and expense levels based on a set of solid, reasonable assumptions. In addition to reducing the risk for the CPA, good financial modeling tools provide a more solid explanation for the client as to why the CPA is rendering a Going Concern opinion.

 

For the most part CPA’s currently use metrics and similar types of indicators to aid them in rendering their opinion. I believe that the CPA would have much greater confidence in rendering their difficult opinion if they were given the solid foundation provided by access to financial modeling tools that accurately identified the forecasted cash, inventory, and liability position of the company at selected volumes of sales, levels of expenses, and levels of inventory at a reasonable cost.

 

Cashtell is Next Step CFO’s answer to such a financial modeling tool.

 

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What Does it Really Mean to Provide CFO Services?

 

No matter their place on the corporate ladder, no business (from start ups to those that have ten million in sales) can afford to pay a full-time CFO, nor is the full time assistance of a CFO necessary. What business owners should do instead is hire a part time CFO: a person with all the same skills as their costly full time counter part who instead provides the business owner with their services on an as-needed basis.

 

The CFO that really understands the risks of owning a business is your best choice as a business owner. Someone who knows how it feels to have no money in the bank account on Wednesday and a payroll to make on Friday is the person you want as your CFO. Someone who knows firsthand the same annoyance you feel watching employees causing disruption or just sitting around the office because they too have experienced it first hand—that’s a CFO you want to hire, because they truly understand the position you’re in as a business owner, having been there themselves.

 

The beauty of having the flexibility of a part time CFO at your dispense is that you can choose one, some, or all of their services at any time. You aren’t forced to select them all at once.

 

So what are CFO services every Chief Financial Officer should be able to and willing to perform?

 

Making sure you, the business owner, has good financial numbers. There is no way for a business owner to make good decisions with out good numbers. The first thing the CFO should do is make your numbers right if they aren’t already.

 

Specifically the Part Time Chief Financial Officer should be able to identify, assess and mitigate risk by working together with you. There is no question that your business, big or small, comes complete with risks. The only question is about how severe those risks are. The CFO should assess the severity of those risks and if they are severe enough, suggest actions to mitigate them. Severe risks can include anything from cash turbulence, low or no cash reserves, need for financing, to employee risks, inventory opulence risk, legal risk or personal liability risk.

 

You’ll want a Chief Financial Officer who will be able to tell you when it’s “cloudy”, not one that lets you know that it’s already “raining”.

 

This should come as no surprise—because business owners hate surprises. Business owners need time to review their options and fix whatever needs to be fixed, and to do that, they need their CFO to prepare them by eliminating as many surprises as possible. The thing business owners want the most is time to react, so the sooner they’re made aware of a problem, the better. Being made aware of a problem that’s already happening is useless to the business owner, because A) they already know and B) they can’t do anything to prevent it now. Business forecasting and modeling tools are a must for the worthwhile CFO to give the business owner the necessary foresight. Forecasting tools give the business owner time to react to downturns and upturns in their business. Next Step CFO, for instance, exclusively developed a forecasting and modeling tool called “CashTell”.

 

The major points a good forecasting tool should be able to perform include (but are not limited to, this is just a brief list of the bare minimum requirements of a satisfactory forecasting tool):

 

Being based on a set of solid assumptions the business owner can nonetheless change at any time, anyway they want through the creation of multiple “what-if” scenarios. All forecasting tools, including CashTell, work this same way.

 

Based on the assumptions you give it, a good forecasting tool will tell you how much cash you will have or need at any point in the future. For instance, a good forecasting tool will be able to determine your answer if you want to know if you will have enough cash to survive a 20% decrease in business. By the same token, it can also tell you if you have the cash to survive, say, a 50% increase in business.

 

A good forecasting tool can also tell you things like whether or not your business can absorb the purchase of equipment, machinery or a new computer system.

 

Your forecasting tool should tell you how to increase your cashflow. It isn’t always increasing sales that will increase your cashflow–a good forecasting tool can give you the answers regarding what else will help you.

 

And a good forecasting tool will help you determine the key metrics to evaluate your business on a regular basis going forward.

 

To sum up a good forecasting tool in one sentence, it allows you figure out the strategies that need to be implemented to drive profits and cash flow.

Once that’s been determined, your CFO can step in and implement those strategies.

 

Quantitative perimeters that help a business owner evaluate the productivity and performance of each separate aspect of your business are called Metrics, and metrics are an exceptional and necessary management tool! Determining and developing metrics to evaluate your business is something your part time CFO should be able to help you with.

A good part time CFO will work in your office location, and help you to get real results, contribute to business development, identify employee theft, shape your financial strategies (and exit strategies for when the time comes you are separated from your business), and improve the controls and processes that lead to the desired operating efficiencies.

Hopefully this proved helpful to small business owners by making them aware that a Part time CFO is an option that exists as an alternative to a more expensive and frankly not as sensible route.

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The Advisory Board

Even having a work partner that fills one or more roles will not replace an advisory board.   If you or your partners fill these roles, it’s not going to harm anything, but all of the roles on an advisory board being able to be filled by the management of a small business is unlikely. Even if you happened to be lucky and you could fill all those roles with your management alone, it’s a better situation when you have people outside of management to bounce your ideas off of.

There are many opportunities today to have an advisory board, and have it cost you very little, or even nothing at all. Developing a relationship with the following professionals and having them become a part of your advisory board is strongly advised:

1. A CPA – You’ll want a CPA to prepare your tax returns and possibly to perform a compilation, review or an audit. Usually if you hire a CPA to do these things they will be part of your advisory board. Usually they will be on the advisory board for nothing if you give them the aforementioned tax preparation business and you develop a good relationship with them. CPA’s can also refer you to funding sources and other support services including referring to you more business.
2. A Lawyer – You should develop a relationship with a good business attorney. It must be a business attorney. One of the perils of business is that it exposes you to legal situations. Certainly do not use attorneys if you do not have to and there are other opportunities to get more cost effective legal advice like Prepaid Legal Services and others, but you want to get an attorney on your advisory board. Therefore it is a good idea to develop a relationship with an attorney who you can trust and will bill you in a professional manner. I have seen some attorneys bill me $75 for sending a fax! It can get that crazy. However by developing the right relationship with the right attorney you can have a trusted and valuable advisory board member who you can call when the need arises for legal assistance. Lawyers can also be a source of support services, funding sources and may refer more business.
3. An Insurance Agent – There are several situations in business that call for specialty insurance and special protection. A professional insurance agent will be able to identify perils and risks that need to be insured.
4. A Part time CFO – By using a Part Time Chief Financial Officer you have the opportunity to get a number of financial services on an as needed basis. In addition you have a valuable advisory board member. Here are some of the CFO services a part time CFO can perform:

• Solving cash flow problems
• Determining cash needs
• Designing a plan to work with existing cash and other resources
• Structuring an exit plan
• Determining Business Value
• Optimize operations
• Drive results and drive the bottom line
• Contribute to business development
• Shape financial strategy
• Understand, identify and assess the risks of business ownership.
• Prepare the Financial portion of your business plan.

5. A technical or operations professional (which one depends on your industry) – You add this person to your advisory board for their operational or technical expertise as it’s related to your product or service. Once again, you might have someone in management who could fill this role, but it’s always better to get perspective from someone outside of management if it’s at all possible.

I would be leery of certain professionals on your advisory board charging fees. Do everything in your power to build the right relationships and if you can, promise to give business to these professionals somewhere down the line.

Advisory boards are critical to being a healthy, happy business owner. I have one associate who says he never worries about any problems in his business—he doesn’t have to. And he doesn’t have to because he gives all his problems to his advisory board and lets them figure it all out. For the amount of worries they can take off your shoulders, it’s certainly worth the time and effort to put together a good advisory board.

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Control Your Payroll Costs

Payroll, rent, advertising and insurance are the four major expenses for most businesses. An Interim CFO can work to control payroll costs one way by using forecasting tools like CashTell. You can optimize both the headcount and the labor hours for different levels of sales by using a forecasting tool to control payroll costs.

When forecasting, both the business owner and their part time CFO should assess many different business scenario possibilities. “Different sales volumes” is one of those scenarios. One must look at what happens to the model when different ranges of sales volumes are entered when forecasting. A forecasting model worth its salt should be capable of determining the optimum amount of labor hours for each level of sales and the optimum headcount. Because this information lets the business owner and CFO know in advance as sales increase or decline, the forecasting model is a great tool for deciding how to schedule workers, maximizing efficiency and managing payroll costs.

The word “labor hours” often brings to mind manufacturing exclusively, but in reality managing payroll costs through labor hours can be done in all types of businesses. To schedule their employees, store managers in the retail business when I was working in it were given a set amount of labor hours each week. With out exclusive permission granted by logical reasoning, these managers were not allowed to exceed those allocated labor hours. Those labor hours were determined by my forecasting tools. If at the start of a work week the sales were deviating from my original forecast, I would then issue or withdraw more labor hours as needed. The store managers complained about the small allocation of hours they received, however, interestingly the limits put on the labor hours got the job got done more efficiently than it ever had been, without sacrificing service.

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CFO Services:More Than Numbers

A client recently emailed me to complain about two things:

  • One-He’s losing touch with his customers because of his decision to delegate.
  • Two-He’s disorganized lately—things are crazy, disjointed—and he misses the days when he was more organized.

These are commonplace issues to address with an Interim CFO.

With regard to losing touch with your customer base, my advice is as follows:

You go up or down in business—and that’s it. There really is no middle ground here. If a business does not try to grow, they will eventually go down, so as a business owner you must always be striving to grow. The price of always growing is indeed always feeling that you are losing touch with your customers. There is, however, a very simple solution called communication. It might be harder work, but to truly better your company, communicating with the customer base is necessary. You should regularly attempt to call “delegated customers” directly for their valuable feedback on how things are going and how your company can do better. You can bet your life that your employees won’t be the ones to tell you if there is anything wrong with their service, so you won’t find out anything’s wrong without your customers’ feedback until it’s too late. Telling your employees that you will be calling these customers in advance will give them extra incentive to perform well, and knowing that they’re going to receive feedback instead of having it sprung on them will make them more receptive to both the positive and negative feedback of these customers, and in the end strengthen your employees’ performance.

With regard to feeling disorganized and crazy, and preferring a business that feels organized, my advice is as follows:

Frankly, you need to change your mind set just a bit. You want your business to grow, because there’s no such thing as neutral ground in business, and if you don’t grow, eventually you will start to go down. A bit of chaos is par for the course when your business is changing and growing. I used to be in the retail business, and when things started to get a little crazy, though of course it was a bit jarring, I knew that was in fact a good sign because it meant my business was growing as I’d wanted it to. There will be no joy in organization if it’s only feeling organized because your business is stagnant. It’s more likely that you’ll become more stressed and less focused than ever if you become complacent only to avoid feeling disjointed. The true test of how organized you are in reality when chaotic times of change hit, is how prepared you are to deal with those times. The winning formula for running a successful business is preparing oneself to avoid the crazy, disorganized and disjointed so that you can move on to new things that cause new craziness.

It’s not only about working with numbers, metrics and forecasts for a Part Time CFO, it’s also about understanding business ownership and in turn understanding the inner workings of business.

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