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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What an Angel Needs to See

Prepare for an angel or angel group by having the following ready:

• A 3 to 4 page (but no more than that) Executive Summary.
• A 10 to 20 page Pitch Deck power point presentation.
• Expect a lot of questions and be prepared to answer them.
• These guys are investing in you, so put them at ease with 6 to 12 character references!
• Names of potential and current customers.
• A Business Forecasting Tool and a Financial Model.
• How are you going to spend their money?
• The real economic levers in the business are?
• How do things look over the next 4 quarters?
• What are the hypotheses you are going to try testing?

If you have a Part Time CFO or an Interim CFO, they can help you figure out/put together the final 5 points.

Angels want to be secure in the knowledge that you fully thought through the project you are proposing financially. A financial model that addresses all possible contingencies and “what if” scenarios will help you prove this to them. Your financial model needs to show the angels when you will need cash and how much cash you will need. It also needs to show the angels the following:

• That you’re on top of the employee plan and the headcount.
• That you have a functioning Purchase and/or production plan.
• The costs related to your marketing and advertising plan are manageable.
• You know exactly where their investment is being spent and can show them/explain it to them very clearly.
• You are very comfortable with and highly knowledgeable of the metrics that will measure the businesses performance.

Every business/investment opportunity that angels look at, they realize will have a set of hypotheses presented by the entrepreneur because there are no certainties.   Before presenting them to an angel or angel group, the entrepreneur should carefully consider each hypothesis and prepare them to the best of their ability. Ask yourself what economic levers will drive your solution to the market, and what economic levers dictate that your solution to the problem at hand is the right answer, and you can tell the angel what hypothesis or solution to a problem you are trying to test.

A solid list of angel investors can be found on the Angel Capital Association website.

 

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The Best Ways to Manage your Cash

Because I’m an entrepreneurial CFO, I have real life experience with managing cash flow in a business.  I owned a chain of retail ski stores in the late 1980’s.  Due to the seasonality of that type of business I’d forgive you for thinking that the cash flow would be terrible in the summer time, but the reality is I never used my line of credit.

There were two main reasons(outside of expense control and  cash conservation strategies)I managed to avoid resorting to that for all those years:

Number 1: Closing half of our store locations every off season.   Our specialties were equipment, clothing and accessories all made for skiing. That was our area of expertise, and what our customers trusted us with. If we were to keep all our locations open year round by also selling summer goods (like most of competitors at the time), not only would we have had slow inventory turns, but we also would have had carryover of unproductive non-ski inventories preventing us from investing in what we did best (aka what the consumer also knew we did best).  Invest only in inventory that is productive (with lower unplanned markdowns and higher inventory turns) for cash flow and profits.  Avoid tying cash up in any unproductive inventory, because in the end that will only give you cash flow problems, unplanned mark downs and lost profits.

Number 2: I made sure that I would have very little merchandise every December 31st by running my inventory down. I ensured that I could purchase close out merchandise in January, February and March, then pay for it in October, by working with my suppliers.  January, February and March are strong periods in the ski business (especially if it snows locally), and as a result of my first two endeavors, I was always able to take my sales from those strong months to finance the summer. The months of August and September are the real start of the winter buying season, and every year at that time I would have a grand opening (closing my stores every summer allowed me to have a grand opening every year) and a major tent sale. These events combined easily covered the October close out bills.

If you own a seasonal business or if your business happens to have periods of low sales activity, you need to identify your business cycle, and this is something a CFO can help you to do. The business cycle as I am defining it here being the time between you receiving the inventory or raw material and you getting paid for the final product. Receiving payment for the final product before paying for the inventory and/or expenses of production and/or the expenses of selling the inventory is the ultimate goal. You can create strategies and work with suppliers (also things a CFO can assist you in doing) in the way that most productively meets your needs if you understand your business cycle.

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Exuberence

It may be hard to believe in the current economy, but one of my clients is actually having a really good year, and I believe that’s due to the fact that this particular client makes very unique and effective sales presentation.

 

Recently my client added some new employees in order to keep up with the demand and he asked me if he should buy a new truck. He said he thought it would make one of his new crews more productive.

 

I immediately went back to my own business experience, which prompted me to say,

“HOLD IT!”

When I had a peak in demand and was doing really well, I went overboard with capital expenditures. I added locations and product lines because I thought the huge spike in demand was never going to end.

This was a big mistake.

I told my client that we hadn’t even done any testing yet to see if our new employees were going to remain as permanent employees and he was here already thinking about buying trucks to make the hypothetical employees more efficient.

My client came back with the suggestion that he could take one of the new guys and let him go solo on the truck to do some lower end jobs. I held firm that what we should do was nothing and review this in another two months.

Two months is a good amount of time to let something of this nature sit, because we will see if we still have the same sales backlog, we will see if the new employees are working out, we will also have a better idea how as a business we handled this excessive amount of sales activity from a quality standpoint and we will know if it is profitable to do these smaller jobs. We will also have a better idea to see if there is time to market the smaller jobs for the truck strategy my client talked about. I told my client that business owners (me included) have a tendency to really over spend when times are good. They almost do it because they have the cash available to do it and things are going so well so they think they need to capitalize on this success without thinking that these great times are not going to last forever and the overspending still has to be paid for. As I told my client this he began to understand and he thanked me for putting the breaks on the idea. I told him you must be equally as disciplined in managing upturns as in managing downturns and you must never think you can afford something just because the cash is currently available. You must constantly look to conserve cash unless a real return on the investment can be forecasted with accuracy and all of the other areas of the business are stable and tested as cash is the lifeblood of your business.

This exchange between my client and I is just one more example of how it is a great advantage for a business owner to have an entrepreneurial chief financial officer. The entrepreneurial CFO can reflect back on the many real life business experiences and apply those experiences for the benefit of their clients.

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Overhead Calculation

The three components of cost are material, labor and overhead. Because many business owners don’t understand how to calculate overhead, or how to incorporate it into their analysis, I see a lot of business owners eliminating overhead from their cost calculations, which can lead to operating losses and cash flow problems.

If you are confused as to how to calculate overhead, the easiest way to do so is as a percentage of sales. Take all of the projected overhead expenses for the period (a month, a quarter, or a year) you want to analyze, and divided these projected expenses by the amount of projected sales. Going forward, if your projections are higher or lower than your sales by 10% or more you should recalculate the overhead rate based on your new projected sales, and you need to do the same thing if your projected expenses are off (because they’re higher or lower than they should be) by 10% or more. The sales dollars associated with each transaction or quote needs this percentage applied to them, or you need to perform the same calculation with last year’s actual results for overhead and sales on actual results instead of projected results. I myself prefer using projected results. There are other options for calculating overhead that also use labor hours and dollars, but I find using sales is the best option (unless the business is in the trades, such as a plumber or electrician, or it’s a manufacturing business, in which case I like to use labor hours, which makes more sense for these types of businesses because you simply assign overhead costs per direct labor hour and all you need do to know your costs is estimate the labor hours for a job).

When it comes to the calculation of overhead and incorporating overhead in cost calculations, there are many schools of thought. There are some people who avoid accounting for overhead altogether by saying, “The overhead will begin to be paid anyway, no matter how much the sales price exceeds material and labor, and that’s the only objective.”, and to them I say:

 

First of all, if sales aren’t actually high enough for you to employ this school of thought you are guaranteeing that you will NOT be profitable. You will eventually have to pay for all the fixed overhead, even if sales exceed material, labor, and variable overhead* by a few dollars, BUT the sales must be high enough and that is a HUGE risk.

 

Secondly, although an argument can certainly be made that any sale that covers some overhead is better than no sale at all, are you absolutely SURE there is no other sale that you could make that covers more or even all of your overhead that you’re not bothering to find because you justify just giving away your products and services as long as it covers some overhead?

*The business owner sometimes calls expenses which can be considered overhead but are actually expenses which are variable to sales overhead. These are things like credit card fees or gas fees if you need to travel to perform a service, and they need to be identified as variable overhead and incorporated as part of the expense component deducted from the selling price to determine profit before fixed overhead.

Every business owner really should know what the overhead component of their product or service is so that they have a grasp on what their true bottom line is on each and every transaction or quote. Knowing that bottom line on your every transaction, unless your expense or revenue projections are way off, will set you at ease by ensuring that all your costs are accounted for. At the end of the day the business owner can use their own discretion as to whether a sale that does not entirely cover fixed overhead is worth making. If it were me I must be extremely confident that there is no other sale to make that will give me a better return before I would accept a sale that only partially covered fixed overhead. For example let’s say you know with reasonable certainty that your business is in a state of low demand maybe due to seasonality or economic conditions. If I am convinced there is no other sale out there that is going to give me a better return or if I think the customer is worthwhile to keep because the customer will give me long term potential at higher profit margins then I would make the justification that I am at least covering some fixed overhead.

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Business and Cashflow Forecasting has Value

Do you, as a small business owner, see the benefit of business forecasting?

Do you see how the business forecast helps you to become proactive instead of passive and reactive?

Do you realize that the business forecast allows you to take a look into the business’s future using multiple what if scenarios allowing the small business owner to understand what is going to happen and arming the business owner with multiple strategies ready to implement depending on which scenario becomes reality?

Do you see how commonly asked questions like:

Should I add or cut a product line?
Should I add or cut a location?
Should I add or cut an employee?
Should I Lease or Buy Equipment?
Should I add a truck or van?
Will I need more cash in 6 months?

Could all be answered by simply having a business forecast?

Can you comprehend that you have the ability to solve virtually all problems with business forecasting?

These are all questions I have as a CFO.

And through experience I can guess that most business owner’s answers to every last one of those questions is a resounding NO.

Sorry for the rant, but I just do not understand why the value of business forecasting is underestimated by the small business owner. Fortune 500 companies and large businesses are always forecasting and they see tremendous value in it. To the Fortune 500 Company everything is about what is going to happen next and how can we strategize for what might happen next. Everything is about being proactive because if you are reactive the quality of decisions go way down and the value of your stock and the value of the company go down and people get eliminated! To many small business owner’s who have viable businesses the lack of business and cash flow forecasting will reduce the quality of their decisions and the value of their companies and they will be eliminated. Do you think these Fortune 500 companies would spend the huge amounts of time on forecasting if it was not important, if it did not add tremendous value, if it did not work? It is not valuable only to the Fortune 500 Company because they are big. It is valuable to the Fortune 500 Company because it is an effective way to operate a business!

Many small business owners will say “Gee I wish I saw that cash flow problem coming”. The point is, it would be very likely to identify a cash flow problem in advance with the right business forecasting tools. In addition, you will be able to avoid other problems like for example, inventory problems, because for each level of sales you plug into a forecasting model you will get an optimum inventory and receipt plan. If sales start to slip or increase, you will be able to adjust to a new and different receipt and inventory plan. It is widely known and accepted that the quality of decisions are much better if they are made proactively versus re-actively. Is there such an urgency to simply survive one more day in your business and block all possibilities for planning and for being proactive? Even if you wanted to do that and just survive another day there are part time CFO’s and business consultants out there who can do the forecasting and planning for you in order to give you the immediate and long term picture you need. I know, this sounds very self-serving because I do business forecasting, but as a small business owner who has owned retail, manufacturing and service companies all of my life I constantly relied on business forecasting and strategic planning to run my businesses and it was valuable.

The proper business forecast is a solid predictor of the future not because the forecast or person doing the forecast is some kind of soothsayer or gypsy lady that has ESP, but because one can enter multiple “what if” scenarios covering as many different likely possibilities as one would like. With each scenario a strategic plan can be developed. As any one of these scenarios start to unfold, the business owner can work the strategic plan devised for that unfolding scenario.

One of those scenarios that you want to look at could include something like “what would the financial picture look like if you cut or added an employee, cut or added a location, cut or added a truck, cut or added a product line, leased or bought equipment and what will the impact on cash flow be for anyone of those scenarios.”

And guess what, I have a solution for those small business owners out there who are only worried about the problems of the day and wants to be in reactionary fire drill mode all of the time. For those of you only worried about the problems of today, a business forecast can help identify how to solve those problems that are happening right now! The proper business forecast that prepares monthly projected income statements, balance sheet and cash flows encompass everything that is happening in the business and therefore can solve any problem and/or answer any questions. This includes identifying the best course of action and the softest landing for troubled businesses as well.

A client was having a cash flow problem and there were a number of factors on the surface that were causing the problem. They were:

1. Too much debt
2. Owners Salary too high
3. Selling prices too low

However while doing the forecast for a scenario where sales were flat to the previous year, the forecasted inventory receipt plan that correlated with those flat sales was much less than what happened the previous year. This forecast showed that inventory turns could improve by 1.5 times and this efficiency in inventory receipt and turns would increase free cash flow by $40,000 per year. This improvement would have never been made if the forecast was not done. Furthermore, finding this kink in the armor took pressure off the owner to have to reduce their salary and it took pressure off the business to have to increase prices too much in a competitive environment.

By the way I want to repeat something. The proper business forecast will have projected monthly income statements, monthly balance sheets and monthly cash flows all tying into each other. If your forecast does not have cash flows, then throw it out with the bathwater. It is no good!

Attention Small business owners. See the value in being proactive versus reactive. See the value in answering questions you ask yourself every day, see the value on putting together a strategic plan based on what the forecasts tell you, and for those of you who are just trying to survive one more day, see the value in solving today’s problems today through business and cash flow forecasting.

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The Best Place to Land

Distressed companies (companies which were always on the edge and then completely tip off it when the economy goes south, or very insolvent companies with a recent history of significant operating losses) present one of the biggest professional challenges I, as a part time CFO, have. Typically the owners of these companies never even admit that there’s a problem until it’s too late and they’re in deep trouble, so they usually haven’t prepared things like business or cash flow forecasts, or a strategic plan or exit plan. These companies are reactive instead of being proactive. Of course there’s also the small fraction of distressed companies who weren’t so avoidant of their own problems and were simply very unlucky. Business is, after all, 80% ingenuity and guts, but 20% dumb luck.

You always look for the softest landing possible when trying to work out the problems of a distressed company, and you have to be prepared for the owners of these companies to tell you this landing is their nightmare. It’s understandable that they would feel this way, considering the softest landing possible usually crushes the hopes and dreams the business owner had for their company (which is usually something along the lines of if they had to sell it, it would be for millions of dollars). Your job as CFO, in the case, is to crush those dreams, and it’s difficult.

The personal liability of the business is important to consider. Usually, the more personal liability exposure, the rougher you landing will be, because the more personal liability exposure the business owner has the less impact the corporation has to protect the business owner.

Here are three possible options to consider when you want to find the softest landing for an insolvent business (note that I briefly cover each option because I’m not an attorney, and I encourage everyone who is contemplating using any of these ideas to consult an attorney):

  1. Bankruptcy – I think we are all familiar with this one. This may have to be combined with personal bankruptcy of the business owner due to excessive personal liability incurred in the business. Another consideration with this route is also the cost. It can be expensive especially the business bankruptcy. Sometimes a bankruptcy filing can be used as leverage with creditors and also at times with hostile partners. You have two forms of business bankruptcy, which are Chapter 7 (a complete liquidation and closure) and Chapter 11 (a reorganization). With a Chapter 11 or reorganization one of the most important factors is will the trade supply you? This is when the business owner has to rely on whatever relationship equity they have built with the trade. Chapter 11 is only viable if there is some type of debtor in possession financing available or if operations can only be funded by paying current expenses and a very small piece of old debt.

    2. Private Foreclosure Sale – This is when there is a bank or other senior creditor in first position to be able to take all of the assets under a security agreement with a filed UCC. An acceptable offer is made to the senior creditor by an outside investor usually for less than what is owed the senior lender but probably for more than the senior lender would get if they liquidated the company. Only the assets of the company are simultaneously seized and sold to the investor in a private foreclosure sale. The liabilities are left in the old company. A deal is made by the outside investor with the current business owner for either equity in the new company or a job/consulting position or both depending on the business owners desires. Available cash before the foreclosure sale is used to pay down or negotiate with personal liability creditors. Another consideration with the Private Foreclosure sale is how the trade will react. On one hand the trade loses what ever the company owed them, but on the other hand they could perceive new management and new majority ownership and a new day to do business with someone who will pay.

    3. Strategic buyer – This is when you can find a buyer who is in the substantially the same business. A strategic buyer will be in a better position to work fast and also will pay the most while seeing an opportunity to expand their business. The strategic buyer buys all or selected assets and none or selected liabilities. The purchase price and earn out (there is likely to be an earn out as we are talking about a depressed business with an uncertain future) needs to exceed personal liabilities and any secured creditors with perfected security interests (filed UCC’s). The seller needs to be prepared to offer settlements to creditors giving priority to creditors with personal guarantees. This is not easy to do but can be a way out. In this option the trade knows the strategic buyer and although the trade knows they have probably lost the receivable they have a stronger company to do business with who they are familiar with.

    Once again, these are all complex strategies and every situation is different. Experienced lawyers must be obtained to see if any of these options is right for you. I have personal experience with all of these scenarios and it is important to review each option carefully to flag the risks and opportunities. These are 3 possible options to provide the softest landing possible for an insolvent company. The challenge here for the CFO is to explore all of the options available to the company knowing that each option likely presents unpleasant downsides for the business owner and you must identify the option that presents the least unpleasant downsides. Keep in mind that it is also likely that the worst thing you can do is nothing. Therefore it is important that the Chief Financial Officer stays focused on continuously influencing the implementation of the softest landing possible.

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Bookkeepers and CFOs

Recently I had a client prospect that was all but ready to hire me, but before he went through with it, he said, he needed to ask the opinion of his bookkeeper. The bookkeeper and I did not know each other; we had never even met, so naturally I thought it strange that he would need the bookkeeper’s opinion regarding me. Nonetheless, I allowed it—and then regretted it immediately as when next I checked in with my prospective client, he told me he no longer wanted to hire me because his bookkeeper had deemed that a part time CFO was unnecessary to him.

I was surprised, and felt a bit bad for the business owner, that he would allow his bookkeeper to make such a decision for him. I told him that in my experience there were only two reasons a bookkeeper would say CFO services were not required without previously knowing or at least meeting the CFO first:

1. The Bookkeeper is taking advantage of their employer by inappropriately utilizing the day to day responsibilities they have (quite possibly stealing).

2. The Bookkeeper doesn’t want anyone coming in to scrutinize their numbers because they fear mistakes in their bookkeeping will be exposed.
CFO’s and bookkeepers work famously well together, their jobs complement each other, so a bookkeeper that says no to you getting a part time CFO is unusual and rather suspicious. Typically, a CFO is thrilled to go into a situation where they know a bookkeeper is on staff to prepare numbers, and a bookkeeper is thrilled to have someone to check their numbers against who understands how they should work. For the most accurate financial numbers possible and the best chance of making good business decisions, it’s highly suggested that a business owner hire both a bookkeeper and a part time CFO.

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Business Risk

It’s invaluable that the business owner understands what Business Risk really means, especially in this economy.

The critical element that keeps your sanity as a business owner for whom risk hides behind every corner, is your assessment of that risk. Whether a risk is mild, concerning, or severe should be the evaluation that automatically pops into your head when you come across a risk—and that’s basically everything you come across as a business owner. Just opening up for business is a risk. Every single day you are likely to encounter at least one (but probably more than one) of these risks:

Hiring employees
Not hiring employees
Leasing equipment
Not leasing Equipment
Buying Equipment
Not buying Equipment
Purchasing inventory
Not purchasing inventory
Incurring debt
Not incurring debt

And by no means is that a complete list.

Whether you do something or you do nothing, every decision you make as a business owner carries risk. That’s why it’s so challenging to be one. It takes a specific mentality. Together with a CFO, a business owner must assess even what seem like the tiny risks to their business. When it turns out a risk is actually quite severe or otherwise intolerable then with the help of their CFO the business owner must mitigate it.

The CFO clearly plays an important role, no matter the size of your business, because they can be so helpful in the assessment and mitigation of risks to your business.

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