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CFO's who understand the risks of business ownership

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Give me a CFO who has owned a business before over anyone with a lot of practical experience and a lot of diplomas. The reason is the Chief Financial Officer who has owned businesses understands the business owners risk because they too have been there. Not only do they understand the risks and feel the risks, they can identify the risks more easily and quickly because they have an owners perspective.

Until you felt what it is like to have an unsuccessful sale in retail or to not be able to fill manufacturing orders because you did not have the right inventory or not having enough cash flow to make payroll, or the pressure of employees underperforming you don't really understand. These are just a few of the issues that only business owners worry about and stay up nights thinking about.

Employees and vendors do not worry about these issues nor do they have the owners perspective of these issues. A CFO who owned a business before not only has the financial and business acumen to be productive, but also has a mind set that only a business owner has and can perform like a business partner without owning stock. In short, it gives the business owner another set of business owner eyes and that is invaluable.

The CFO and Business Forecasting

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As I see it Business Forecasting is finding the right number of what if scenarios in order to identify enough possibilities of what is going to happen. A lot of business owners think that forecasting is like being a soothsayer in that business forecasting identifies exactly what is going to happen. No one can predict the future and there are too many different things that could happen to a business that will throw off the most sophisticated of forecasts. As I see it the role of the Chief Financial Officer in forecasting is to identify the top 7 or so likely scenarios and do a what if analysis on those 7 scenarios. One of the 7 scenarios should be a best case and a worse case. The proper forecasting tool to use is one that has a Profit and Loss, a balance sheet, cash flow, inventory plan and sales forecast all in one. These schedules can be broken down by quarter, month or even by week. Of course it needs to be adaptable to retail, manufacturing, distribution or service depending on the type of business the CFO is forecasting. The model also needs to identify where the risks and opportunities are and incorporate the key metrics. The great thing about this model is that as one number changes anywhere in the model all the numbers adjust. Next Step CFO uses this tool in business forecasting as a part of its CFO Services. It shows the business owner all of the risks and opportunities associated with any scenario and it allows for more thorough decision making and a reduction of risk for the business owner.

Getting Rid of Stale Inventory

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One area that my retail, manufacturing and distribution clients in my CFO practice need to do better and to understand better is getting rid of stale inventory as soon as possible. Business owners hate to admit when they make a mistake (i.e. when they buy or produce something that doesnt sell a dog). We all do it, I used to do it. It is a peril of the game. DONT TAKE IT PERSONALLY. However, fail forward fast. Which means once you know it will not sell get rid of it, allow yourself to use the cash from the sale to purchase more productive assets and more productive inventory. You know; the stuff that really sells. Dont worry about the margin hit!! Take the margin hit, otherwise it is almost a guarantee you will sell it for less somewhere down the line. By selling the slow movers as soon as possible you will get more inventory turns which will result in less inventory and more profit. It should be one of the CFO Duties to manage inventory turns and to impress upon the business owner the extreme benefits of admitting inventory mistakes as soon as possible, converting them to cash and buying more productive inventory assets.

Payback associated with the right operating system

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One of the CFO Duties should be to research and identify the right operating system for the business owner. The way I look at operating systems for my CFO clients is I identify which modules are to be purchased for necessity and which modules where if purchased will produce a payback. For most manufacturing and distribution companies internet based systems allowing sales reps to enter orders from any internet connection including their laptops has a significant payback through saving administrative time and using commission only reps to enter the data and do more of the administrative work. Another module with significant payback offered in most operating systems are web based stores. Once again for manufacturing and distribution business owners web based stores can produce a payback through its communication tools. For example, in a web based store all of the manufacturer or distributors customers can purchase products on line. You can offer special pricing to individual customers, but more importantly you can make them aware of special pricing deals, new product introductions and closeouts. You can also put deadlines on when those special pricing deal offers will end and the system does that automatically. This has a tremendous payback as customers can place orders more conveniently and with more information at their finger tips. You can also put deadlines on when those special pricing deal offers will end. The CFO can really help the client business owner with a more profound understanding of the payback associated with operating systems.

Why CFO's who work part time are valuable

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The most cost effective and productive way to use a CFO is on a part time basis. In other words a CFO Consultant. Back in the day, Chief Financial Officers were more commonly called controllers and controllers would pay a lot of attention to monthly closings, financial statement preparation and profit planning. With todays operating systems and more sophisticated accounting modules, CFOs can turn more of their attention to areas that are more productive to the business owner. For example CFOs can turn their attention to business forecasting, inventory planning and reduction of risk. These aforementioned productive CFO duties and CFO services do not take full time manpower. You can even add a number of other CFO services and it still will not require a full time CFO. When you hire CFOs on a part time basis they will not require benefits as most are of independent contractor status. These CFOs are also your CFO as long as you want to keep them. The Business Owner wont get a two week notice because they found another job. In closing CFOs who work on a part time basis are more valuable because they will tackle the most important issues in your business and with extreme cost effectiveness.

Should a CFO offer Business Plan Preparation as a CFO Service?

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I believe it is a valuable service to my CFO clients to offer business plan preparation. One of the key attributes for a CFO to have in order to prepare business plans is prior business ownership experience. With prior business ownership experience a CFO will have a better handle on the operational and marketing components of the plan. This experience will give him the ability to ask the right questions to the business owner and staff. The CFO already possesses the skills to prepare the financial portion of the business plan. The main purpose of a business plan is to put a company on the right track. Lots of times business owners say they are headed in a certain direction but as CFO when you start to peel the layers away you find that the company is going in an entirely different direction to what the Business Owner thinks. The business plan will help put the business owner in the direction he wants to go. In addition, business plans are of vital importance when the company is seeking additional financing whether the financing is coming form a bank, an angel or a venture capitalist. Since it is imperative that CFOs offer finding financing as a CFO Service, it only follows through that the CFO should be able to prepare the business plan.

Should CFO's Track Patents and Trademarks?

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I believe it is a valuable service when a CFO keeps track of the Patents and Trademarks for a company. Patents and Trademarks can get very complicated and therefore easy to lose track of especially if there are several. Understanding where each Patent and Trademark is in the process will be one less area for a business owner to worry about. Suggesting patents and trademark opportunities is another CFO Service that can be performed that would be helpful. If the company imports be aware that if a product has FDA approval that there can be some discounts on Duty and Tariffs on those imports. Also be aware that if a company is not registered with the FDA for certain products that shipments can be refused at customs. I learned about this when I was tracking a patent for a client. Another important factor in tracking Trademarks and Patents are understanding the costs. Legal fees can get way out of hand. Most recently I have used legalzoom.com and had a lot of success in filing a trademark at a quarter of the cost.

Personal Liability Risk To The Business Owner

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In my view identifying business risk and assessing that risk is the most important function of the CFO Consultant. Over the next few weeks I am going to be making a lot of posts on this topic. I was having lunch with a colleague of mine a few weeks ago and he asked me in what areas should a CFO or part time CFO identify risk? It was a question I really had to think about.

Since I think like a business owner, one of the first risks I am going to identify is Personal Liability exposure. The first things I investigate are bank loans and leases. If these exist there is a strong likelihood of personal guarantees. The next thing I look at is if there are any personal guarantees with inventory suppliers. This is one of the hidden risks. When one fills out the credit application to do business with a supplier, more times than not there is personal guarantee language in a separate section of the application. Anytime I am filling out a credit application for a client I always cross out that section. However, most people feel it is part of the application and fill it out. This is a major risk. If you cross it out and the supplier calls you back and requires it, you can assess at that point how important the supplier is and whether or not you want to take that risk. In most cases suppliers look at it as a bonus if the customer fills it out and do not address it if the customer crosses it out.

All fiduciary taxes such as payroll taxes and sales taxes must be paid. If left unpaid, this will create more personal liability. Unpaid income taxes will also create personal liability.

Company Credit Cards outstanding represent more personal liability risk for the business owner. The CFO should look at the possibility of one of the versions of the Corporate American Express Card that had no personal liability to the owner. I have recently got one for a client.

The overall risk that must be assessed regarding personal liability is what is the likelihood that the company will not make its loan payments, its lease payments or its inventory payments. Are these payments current? Is the current and projected cash flow strong enough to at least make these payments? If not, has the owner begun to use asset protection strategies to protect his assets should they come under attack?

CFO Duties

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I think the CFO's responsibilities and the CFO's duties can be narrowed down to three things. Those three things are:

1. Managing and forecasting cash

2. Identifying and assessing all risk and preparing plans to mitigate risk

3. Understanding the things that make the specific industry the CFO is engaged in unique.

For the part time CFO it is vital to grasp these 3 concepts as soon as possible. Once the Part time CFO has these 3 things under their belt they can play a major role in the success of the company and the success of the companys strategic plan.

Since cash is the life blood of any business the part time CFO must be really in tune with managing the day to day cash flow. When managing cash for troubled companies the CFO must prioritize what needs to be paid. Forecasting cash needs using a 4 to 6 week model works well and helps the Chief Financial Officer identify what needs to be paid and can mange the cash accordingly.

Identifying and assessing risk will really tell the business owner where the land mines are in their business. This is an invaluable CFO Service to the business owner. If the CFO can tell the business owner when it is cloudy instead of when it is raining, the CFO will be worth their weight in gold.

People often ask me why does a numbers guy need to know about the business and the industry in which they work? Knowing the business and the industry is critical in managing cash and in identifying risk. Without this knowledge managing cash and identifying risk would be like reaching for a light switch in the dark.

Risk of Under-Capitalization

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Lets face it, if a company is not properly capitalized it will have cash flow problems and it is destined to fail and poses great risk. Most entrepreneurs under estimate their cash needs. This is due to so many unexpected events that occur in the beginning stages of operating a business. I have never seen an entrepreneurs initial cash flow plan ever come close to actual. The prepared entrepreneur is constantly looking for more sources of capital even if he or she feels the cash needs are met. It is the responsibility of the CFO to look for these sources of capital. Staying on top of cash needs is a vital component of CFO Services and CFO duties.

What I see a lot of is entrepreneurs trying to survive with small cash resources and then when that runs out put in more cash. Most likely the new cash put in is a minimal amount and that runs out quick. It is a vicious circle and it is throwing good money after bad.

Entrepreneurs must be honest with themselves in projecting cash flow and then must be aggressive in obtaining the cash resources needed. Cash flow problems are the number one frustration for entrepreneurs.

Signs of Cash flow problems include inventory over buys or over production, rising accounts receivable with level sales, large capitalized costs and rising payables.

Why Should Business Owners Know and Understand the Value of Their Business?

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Keeping consistent track of the business value of your CFO client is a significant CFO Service. Business owners should be kept abreast of the value of their business on a quarterly basis. Business Valuation can be utilized and needed for the following purposes:

Obtaining financing

Company is being acquired or merged

Shareholder buyout or disputes

Personal Financial Statements

Employee Stock Ownership Plans (ESOP)

Litigation or Divorces

Conversion of Corporate Status from a C-Corp to an S-Corp

For Estate and Gift Tax Purposes

For purposes of the business Owners goal setting

Shareholder But and Sell Agreements

CFOs should calculate two different valuations. One valuation I will call the Book Valuation. This is the valuation that uses the traditional metrics like sales, EBIT, cash flow and assets. The second valuation that should be made is a valuation that a strategic buyer would pay. This is a buyer who is in the same business and will be able to take advantage of economies of scale and synergies. This buyer will probably pay a higher price than the book valuation. I call this the Synergy Valuation.

Legal Risk

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Many businesses never assess their legal risk and more importantly their exposure should legal problems develop. Since one can sue anyone for any reason it is hard to get your arms around all of the possibilities, but here are some main areas that can be looked at and assessed and is a valuable CFO Service:

1. Payroll and employees - Is the company paying 1099 wages when they should be paying W-2 wages? Is the company paying regular wages when they should be paying union or prevailing wages? Is the company current with payroll taxes and medical insurance premiums that they collected from employees? Are employees safe in the work place? Do some employees have special perks that other employees do not have? Is there risk of abuse?

2. Sales Taxes - Are all sales taxes current? Since these taxes are collected from the customer they must be paid. Certain trades must pay sales taxes upon the purchase of inventory and if their vendor does not add the tax to the invoice the Company must self impose the tax and pay it.

3. Business operations - Does the nature of the Companys business operations lend itself to legal risk with employees and with customers? For example a medical business by virtue of its operations is exposed to risk through patient care. A food business is always at risk of impacting a customers health with bad food. A contractor is at risk of damaging customer property through construction efforts. Of course these risks can be mitigated with insurance, but the question always is how much insurance?

4. Stockholder risk - Are the businesses partners in harmony with one another and can that harmony stay in tact for the foreseeable future? What lies ahead that may disrupt that harmony?

The aforementioned risks are the first things a CFO should look at when assessing what the legal risk is of a company. Of course there are countless legal risks but all must be assessed as to the probability of occurring.

Risk of Inventory

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A great Ski retailer in Massachusetts, Roger Buchika once said, the less you buy the more money you make. What Roger meant was that too much inventory can put you out of business quick. As a matter of fact the biggest mistake retailers make is over buying. Over buying can surely cause Cash flow problems and too much inventory poses a significant risk to the business owner.

Having too much inventory is not only the mistake of retailers. Manufacturers and distributors suffer from the same problem as well. A CFO responsibility and a CFO Service is to help the business owner recognize bad buys or bad produced products early. Once recognized, price them to sell, get the cash and then buy and produce good inventory that sells and turns quickly. Calculating inventory turnover ratios is a good indicator of how well inventory is moving. Another service the CFO can perform is to prepare expected or forecasted inventory turnover ratios for specific products and monitoring their performance to determine early enough as to whether that product is productive.

If your company has old or stale inventory look to move it immediately get the cash and re-invest it in more productive inventory.

The Risk of Foreign Currency

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Certainly foreign currency risk does not involve every industry and every business. Foreign Currency Risk really only effects businesses that either sell products or services in foreign countries or buy products and services in foreign countries. For example, right at this particular time given the weakness of the dollar and the strength of the Euro you are at tremendous risk purchasing products or services from a European source. What cost you about $1.00 around the year 2002, now costs close to $1.60. Some of this impact could have been minimized through hedging, but the dollar has been weak for quite some time and even the most accurate hedging programs will not outlast the current dollar drought. It is an important CFO Service and CFO Responsibility to put its client in a hedging program. The CFO knows that hedging programs can be formulated and found at most major banks.

Since I am a CFO that thinks like a business owner and given todays dollar weakness European investors will convert less Euros into more dollars to invest in US businesses. If you are selling your business you may want to consider a European buyer to maximize your purchase price. Of course if you are selling products or services the currency is currently in your favor.

Foreign currency risk can be significant especially when the dollar is extra weak or strong for an extended period of time. A business that has foreign activity needs to protect its downside when evaluating foreign currency risk as this one facet can cause Cash flow problems down the road.

Accounts Receivable Risk

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Slow collections of accounts receivable is something that needs to be recognized by a CFO and if not detected early enough can lead to Cash flow problems. Early detections of Slow accounts receivable is an important CFO Service. Performing the calculation of Days Sales Outstanding or DSO can give the CFO a good indication of the speed of collections.

Doing business with customers who are traditionally slow payers is bad business. You may think you know these customers personally and they would never stiff you. You may even expect that they are going to be late payers. In the final analysis these customers will burn you. Get rid of these customers unless they are willing to pay upfront for your product or service. It is not worth the receivable risk.

Speaking of which, I have had clients who will not do business with companies who are in bankruptcy because that bankrupt company did not pay my client. What these clients do not understand is that companies in Chapter 11 are prepared to do business on a cash in advance basis. Take advantage of that, make money and improve your cash flow. Dont hold a grudge because they stiffed you. Business is Business.

To enhance collections send out statements. Some customers wait for statements before they pay. Many a time I have seen customers return statements versus invoices with their payments to ensure proper credit. That means they paid from the statement and if the statement did not go out they would have never paid. Also, stay on top of customers through telephone contact. Even if you just leave a message the squeaky wheel get the grease.

A business must turn its inventory but is also must turn its cash. Collect your receivables and do business with people who pay!

Cash Flow Problems

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Before I continue writing about the various business risks I thought it was time to write a post on the causes of Cash Flow Problems. In a future post I will talk about how to alleviate Cash Flow Problems. In some of my previous posts I have mentioned some causes of Cash Flow Problems, but in this post I thought I would identify as many causes as I can. Cash Flow Problems are caused by:

1. Too much inventory.

2. Too much salary to owner or too many withdrawals by owner.

3. Doing business with customers who are slow paying or who do not pay at all.

4. High Overhead too high.

5. Too much interest expense on debt.

6. Undercapitalization from the beginning

7. Unexpected casualty not covered by insurance.

8. Excessive purchases of fixed assets and capitalized costs.

9. Operating losses

10. Paying bills too quickly

The above bullet points represent the key causes of Cash Flow Problems. As previously stated in future posts I will identify ways to alleviate Cash Flow Problems once these events occurs.

The Risk of Fixed Assets and Intangible Assets

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As a Part Time CFO Many times I see companys who do not use their fixed assets productively. What I really see is equipment or machinery not being used at all! Assets that are not used or not productive need to be sold. Turn these non productive assets into cash. Most business owners sit on non productive or no longer used fixed assets because they cannot get the price they think it deserves. Sell it and buy productive inventory or productive assets that will produce revenue! There is no point in sitting on assets you do not use. In addition many business owners sit on unproductive or no longer used assets because they may use them some day. More times than not this is a bad decision because they end up never being used.

Not paying attention to unproductive and no longer used fixed assets can cause cash flow problems.

One CFO Service that should be performed is a review of the company's intangible assets. Specifically trademarks and patents. Make sure all trademarks and patents are current and have not expired. Make sure you are aware of the expiration dates. Furthermore make sure you understand the value that the trademarks and patents have. Be on the look out for infringements of your trademarks and patents and address them by having your attorney write a letter to the violator who is infringing on that patent or trademark. Competitors are always trying to knock products off.

If you do not have trademarks and patents the CFO should challenge the business owner to see if special logos and processes should be trademarked or patented. Patents and trademarks can give a company a unique competitive and marketing advantage and needs to be looked at.

The Risk of Debt

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The major risk of debt is how the company's debt structure impacts cash flow? Many times a CFO will go into a company to find that they have a credit line to which they acquired during difficult times in the hope that business will come back. On those occasions the business owner got an unsecured credit line up to the maximum amount the bank or lending institution would offer. That is not the way to acquire credit. If you are going to acquire additional credit during a downturn in business you should borrow no more than 70% of accounts receivable and 50% of the cost value of inventory. If the debt you already have on the books already meets or exceeds those criteria then you will be at tremendous risk if you continue to borrow. In these situations look to cut expenses or see if vendors will extend additional credit. The part time CFO should provide debt management and debt acquisition services. This is an important CFO Service and CFO duty. A calculation to make with regards to debt is how many times does Income before Interest and Taxes (EBIT) cover interest expense. EBIT should cover interest expense be anywhere from 6 to 8 times, however different industries have different criteria.

The other risk of debt is personal liability. Virtually all bank debt and credit card debt has personal liability along with it. Another item the CFO should note is whether any of the companys debt is in technical default. A loan may not be in payment default, but it is good to know if a loan is in technical default. A loan is in technical default when a loan violates a covenant or a provision in the loan with the exception of non payment. If non payment provisions are violated then the loan is in payment default. Another CFO service is to identify if any loans or notes are due in the short term. It goes without saying that debt is a risk, it obviously can be major cause of Cash Flow Problems.

Risk of Employees

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A CFO Service is to analyze and assess the risk of employees. There are several angles in assessing this risk. One angle is certainly assessing risk from the competence and talent standpoint. Another Angle is assessing the risk of losing key employees, while still another angle is assessing employee handbooks and treating employees within the law.

Once a poor performing employee is recognized cut your losses and get that employee out of your organization. Having sub par performing employees is a major risk for a business. Not only are they a risk to the performance of a business but they can pose a legal risk as well. Sub par performers decrease the morale of the other employees and reduce overall productivity. Get rid of them!

It is a valuable CFO Service to suggest ways to keep key and high performing employees. The best ways I have seen to keep key high performing employees happy is to provide them with bonus programs that produce win-win situations for both the employee and ownership. The CFO should help develop a metric or group of metrics used to determine what the bonus or incentive program should be that would generate that win-win situation for key employees.

The risk of not having an employee handbook is huge. An employee handbook and following the provisions in said book ensures that you are handling all employees the same way. The worst situation you can have is treating one employee one way and another employee a totally different way. This leads to employee lawsuits and ugliness.

The ideal situation is to have an employee handbook, have all employees sign it and then follow its provisions.

On a final note, one of the best ways to motivate all employees collectively is to establish productivity games within the workplace where all employees participate to win a productivity game as a team. Once the team hits the productivity target they all win. Just like in a team sport when someone is not pulling their weight team members work to motivate those employees. Ted Castle at Rhino Foods in Burlington Vermont actually puts this plan in place and is tremendously successful at motivating employees.

Risk of Accounts Payable

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It is not that accounts payable itself is a risk it is the status of accounts payable that may represent a risk. The CFO needs to assess accounts payable from the standpoint of the tolerance of the vendors. If Accounts Payable is overdue how are the vendors reacting? When I was in the ski retail business the terms for product received in August was December 10 or January 10. If you were 30 days late you would get a call, but a quick explanation that you havent had any snow usually cooled the vendor for another 30 days. Sometimes you could even re-date some invoices until the following fall. I am not saying that this is the case in most industries, but you need to know what the vendor tolerance is.

From a housekeeping standpoint the CFO needs to make sure that all of the vendor invoices are entered into the system with proper amounts and due dates. If this is inaccurate you will get vendor phone calls that could have been avoided. It is always best when the company calls a vendor about an anticipated problem versus the vendor having to call. It usually impresses the Vendors credit manager when the Company initiates the call because it shows the company is on top of the situation and is proactive. An important CFO Service is to determine which vendors need to be called proactively and establish a payment plan for any past due invoices and a plan for paying for new merchandise.

Paying for new merchandise to a vendor you are behind with can get dicey. The reason is that if a vendor makes it difficult for the company to get new merchandise (for example requiring COD on new shipments) then there is a natural tendency for the Company to look to another vendor who will give the Company terms. When that occurs, the Vendor who you are past due with gets incredibly upset because they not only are carrying a receivable but they are losing business. The CFO needs to manage this delicate balance and needs to be aware of this dynamic.

The Risk of Key Operating Expenses

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The Key Operating Expenses for most (not all) businesses are Payroll, Advertising and Rent. The CFO needs to assess the risk to the company for those Key Operating expenses.

The CFO needs to have the business owner rank each employee on a 1 to 10 scale. If there are not enough 8, 9 or 10 rated employees that usually means that the employees are not very productive as a whole. This can weigh down a Companys progress and pose a great risk to the business. It is an important CFO service to challenge the business owner on the strengths and weaknesses of employees and if the weaknesses outweigh the strengths suggest ways to transition to better employees. As mentioned in a previous post regarding inferior employees, the business owner needs to cut their losses and strive for all 8, 9 and 10 rated workers. The CFO also needs to assess whether the mix of employees is too top heavy. Business owners tend to get top heavy especially if they are phasing out of the business. It is an effective CFO Duty to look at an organization chart (or create on if it does not exist) and assess where the risk of employees is.

How effective is the company advertising? Is the percentage of advertising to sales in line with industry averages? Sometimes it is extremely difficult to help the owner measure the effectiveness of advertising mainly because there is no tracking methodology to determine which advertising works best. Lots of times owners have a sense of what may work, but many times this is perception versus reality. One rule of thumb for the CFO in assessing the risk associated with advertising is to see what advertising form the company spends most of its money and challenge the business owner as to its effectiveness. Having an internet marketing plan with effective Search Engine Optimization needs to be incorporated in a marketing plan.

What is the current status of the building/office lease? How many years left in the lease and does the current facility still meet the company's needs? An important CFO Service is to assess the risk of operating in a facility that has a long term lease that no longer meets the business needs. In addition, it is important to know if there is a personal guarantee on the lease. If the lease expires in the short term, it is incumbent upon the CFO to put together a plan to transition to a new facility they will meet the needs of the business.

The Risk in the Sales Line

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One thing the CFO needs to assess regarding sales are whether the company is pushing to sell the most profitable products. Metrics can be developed to analyze this area. It is important that salesman know what products benefit the company most.

Another risk area on the sales line that a CFO should look for is whether salesmen can bring their sales with them if they were to leave the company. This in my view is a major risk as salesmen always have to be coddled if they can taker their business elsewhere. Non compete agreements with salesmen can help reduce this risk.

Another CFO Service is to analyze whether selling prices are high enough and to determine if sales rise or fall with reduction of prices. In a bad economy there is always a propensity to reduce prices. Many times I have seen where reducing prices was the wrong thing to do as money is left on the table. Your best customers who usually represent 80% of your sales will usually buy from you even if they can get a better price elsewhere because they trust you and appreciate the value in your products and services.

The CFO should review whether the company has adequate sales representation in all of the company's key market areas. If major market areas are left without proper sales representation this poses a major risk to the company.

The CFO should review if the companys selling prices are meeting gross margin requirements. A low margin could be a function of product mix sold, but it also could be a function of low selling prices.

Finally it is a CFO dutyto review how pricing looks as compared with the companys biggest competitors. An analysis can be done in this area to determine how the company compares price wise against its top3 or 4 competitors in the companys highest margin products.

Understanding of Law - An Important CFO Service

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One thing CFO's must be able to do is to read and understand legal documents. This is a very valuable CFO Service to any client. The client does not want to be in a position to have to call his outside attorney to read and interpret documents. The CFO should be able to read documents like:

Leases

Employee Handbooks

Confidentiality Agreements

Employee contracts

Non compete agreements

Promissory notes

Security Agreements

Loan agreements

Personal Guarantees

Being able to read and interpret these and other legal documents will save the client a lot of time and a lot money in legal fees. It is also important for the CFO to understand bankruptcy and how it works, whether your client is contemplating bankruptcy or a supplier of the client is filing bankruptcy.

Diversity in CFO Services

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In todays business world I think it is important for the Chief Financial Officer or CFO to be diverse in their capabilities. Since everything in business revolves around money and it is an important CFO Service and an important CFO duty to be responsible and manage money, the CFO really has to know a lot about business and business ownership compelling the CFO to be diverse. Even though the CFO is not an expert in marketing, manufacturing or in other aspects of a business it is helpful if they have knowledge in those out of focus areas of business. One way the CFO can do this is to develop a deeper knowledge in a particular facet of those out of focus areas.

For example, one area the Part Time CFO can provide some insight and really help clients is in certain aspects of marketing, particularly website marketing or Search Engine Optimization (SEO). A good SEO strategy can help the business obtain top positions on Google and other search engines giving the client an internet presence enhancing their current marketing strategy. Once again this is an example of the importance of diversity of a CFO.

One SEO strategy that will help you get top positions on Google is the use of an RSS Feed. An RSS feed allows new fresh up to the minute content to go into a website. A good example of an RSS Feed is Reuters who services many news related websites with up to the minute news around the world through an RSS Feed. The best way for a business to use an RSS feed is to start a blog about their business and write articles daily about their business using key word rich content. Most Blogs have an RSS feed connection and connect the RSS Feed from the Blog to your website and every time you write an article about your business and post it to your blog it will change the content of your website. When you change the content of your website the search engine crawlers index your site. The more you change the content the more you get indexed by the search engines and indexing increases your search engine ranking.

The Risk in the Supply Chain

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In the current economy it is important to know the financial condition of your major suppliers. What would happen if a major supplier goes out of business? It is important to have a back up supplier not only to protect against a major supplier going out of business but also if a major supplier decides to change your credit terms unfavorably, or cut you off to protect a larger customer in your market, or discontinues a product line that is important to you. I have seen suppliers do all of these things.

Always be on the lookout for a back up supplier. When you go to trade shows identify possible target suppliers and start to develop relationships with them. In the long run it can really pay off and you will be prepared when the unthinkable happens to one of your key suppliers.

Another good thing is to do a relationship check up with your suppliers. See how content or discontented they are with doing business with you. These checkups can give indications as to what their next move might be. A good CFO Service is to challenge the business owner about the strengths and weaknesses in the supply chain.

The Risk in Equipment

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There are three key areas in understanding the risks associated with a company's equipment:

1. Age how old is the equipment and does the output from the equipment still meet good quality standards. In essence, is the equipment obsolete?

2. Repairs Is the equipment susceptible to breakdowns and big repair and maintenance bills?

3. Productivity is the equipment still meeting efficient production standards?

One important CFO Service is to assess the risk associated with equipment. The cost to purchase equipment or a lease to acquire equipment is a major capital expense and an untimely purchase of equipment can cause cash flow problems. The CFO must perform an analysis on equipment performance for both quality of output and for production efficiencies. In addition an analysis of the repair and maintenance costs of the equipment must be made. Once these analyses are complete a comparison can be made as to what the monthly carrying costs of the equipment are and what the cash availability of the company is versus the repair costs, quality and production standards. Then the risk of the equipment can then be assessed as to whether or not to buy or lease new replacement or upgraded equipment.

The Risk in Partnerships

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When two or more people get into business together there is risk that needs constant assessment. Partners in business together must have the following characteristics:

1. Must be logical in their thinking. It is not all about one partner. Sometimes the logical business decision can disadvantage one partner over the other(s). It is critical that the partner being disadvantaged is logical in their thinking to separate what is right for the business from what is right for the disadvantaged partner.

2. Must eventually be at peace with all decisions. Although it is healthy to have different opinions and constructive arguments, eventually all partners must understand that a decision needs to be made and although it may be contrary to one partners opinion the dissenting partners must be at peace with the decisions.

3. Partners cannot be bitter if they get diluted. There are many times when a business needs more money and the partners have to ante up. Sometimes there are partners who do not have the money or do not want to invest in their business at the particular point in time when money is needed. These partners who do not participate financially cannot be bitter when their stock ownership gets diluted. If it only fair to the partners who are risking the additional capital that they get stock for the risk they are taking.

4. Partners must understand the rough and tumble world of commerce. Partners must be prepared for troubled times in the business. Exemplified by, lower salaries, difficult cash flow problems and personal guarantees. The character of the partners must be in harmony during these periods.

5. Only one person can run the company. It is a good idea for one partner to take the lead role in the business. Be viewed by the suppliers, customers and employees as the point person. Sometimes this can make the partners not taking the lead role feel inferior and bitter.

6. Not all partners are created equal with regard to salary. Partners must understand that different partners take different skills to the table. Some of those skills are more valuable to the business than others. The business needs to pay more money to the more valuable skill sets. You would not pay a store manager the same as a CEO. If one partner brings store management skills to the table that is valuable, but can be replaced with another store manager if the salary is out of hand. This is difficult for many partners to understand.

The CFO sometimes is called upon to act like a mediator of sorts in dealing with partner disputes, but partners need to go into these business deals with their eyes wide open.

The Importance of Business Forecasts

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It is an essential and responsible CFO Service and CFO duty to perform business forecasts. Many clients of Next Step CFO ask what purpose forecasting serves. Traditionally the CFO has been an historian, meaning telling the business owner what financial results happened in the past. Telling the business owner what the historical results have been. Business owners need to know in what direction they are headed. Tell the business owner what is going to happen in the future so that you can tell the business owner when it is going to be cloudy instead of telling them when it is raining. For the most part business owners already know where they have been. Today the Chief Financial Officer needs to tell the business owner in what direction the business is going in the future.

So what is the major question the business forecast answers? The major question answered by the business forecast is whether or not the existing business model is going to achieve the desired results. If not, you need to change the business model. A good CFO can prepare a forecast on the existing business model and then if that model does not work can prepare a forecast based on a model that does work. In order to do this the CFO must have knowledge of the industry and a sharp overall knowledge of business through having experience in owning a business. The CFO must also have accurate forecasting tools at his/her disposal.

Employment Liability Insurance

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Employment Liability Insurance (EPLI) is an essential insurance coverage that a CFO should recommend to their clients as part of their CFO Services. The risk of unstable and under performing employees is a great risk of a business owner and is something not always detected in an interview. EPLI gives the business owner coverage for losses plus defense costs for any Employment Claim which the insured employer committed wrongful acts to an employee. Wrongful acts include errors, omissions, misleading statements, misleading acts, misleading omission, misleading neglect, or breach of duty committed or attempted, or allegedly committed or attempted. Coverage includes claims for sexual harassment, claims under the family medical leave act and claims for inappropriately terminating an employee. You also may elect to have coverage if a third party harasses an employee. Please check with your clients insurance agent for specific coverages with your clients specific situation.

This insurance is relatively inexpensive when you consider the risk of employment claims.

EPLI Insurance is a great first step for the Part Time CFO to be proactive in protecting their client from the risks associated with having employees.

Inventory Purchases

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The part time CFO needs to make sure their client is considering all factors when deciding on which supplier or vendor to purchase inventory. This is a CFO Service that is sometimes forgotten, but can mean many dollars saved for the client if all considerations are factored into the decision.

When considering what supplier to purchase inventory from the following is what needs to be considered:

Price

Price breaks

Terms

Freight costs

Turnaround time

Minimum quantities

How does the vendor stand by their product

Restocking charges

How efficient is the product to handle

How efficient is the product packaged

How efficient is the product to use

What type of support are you getting from the vendor to help sell the product.

How flexible is the Vendors credit department

What products do the competitors sell

Can orders be cancelled without penalty

Looking for the best price is obvious, but understanding where the quantity discounts or price breaks are compared to other suppliers is important. Some suppliers offer free freight, so if you are not getting anywhere negotiating prices with the vendor ask for free freight.

Understand what the turn around time is and how quickly you can get product once ordered. Clients with Cash Flow Problems need to time their inventory receipts more precisely so turnaround time plays a greater role. What are the minimum order quantities? Once again this plays more of a role with clients with Cash Flow Problems because sometimes you just need small quantities.

It is very important that a vendor stands by their product. If something is wrong with the product either quality wise or technically the client must have assurances that the vendor will issue proper credit upon the products return. Understand what the vendors restocking fees are for product incorrectly ordered. Unless the client is in an industry where there are a lot of special orders, vendors should wave restocking charges.

Efficiency in handling the product is important for the receiving department. Remember, anywhere you can save costs throughout the entire process must be considered in the decision from logistics to manufacturing to merchandising/packaging to how efficient the product is to use. One of my clients is in the insulation business and although the pink panther insulation is more expensive, it is much easier to install making up for any increase in the price of the inventory.

The type of support that you get from the vendor to help you sell the product is a big plus whether they are free displays, marketing materials or coop advertising programs these programs tell you that the vendor is really interested in working with you. In the event the client runs into a cash crunch it is always nice to know that the vendor is willing to work with the client and that their credit policies are flexible enough to work through shifts in the economy or industry downturns.

Another consideration is what the competitors sell. Sometimes you can work a better deal with a vendor who is not with a major competitor because that vendor does not have much market share in the market the client serves.

One last rule: Do not over buy inventory as it is one of the most common reasons why businesses get in trouble. This is especially true for retailers. The flexibility to cancel orders without penalty helps prevent you from overbuying.

The Chief Financial Officer and Communication

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If the Chief Financial Officer or CFO is going to be successful they must have solid communication skills. It is even more important when you are a CFO Consultant because with multiple clients it can be challenging to communicate with multiple clients.

Rule number one for good communications is a good communicator is responsible for both the sending and receiving of communication. You cannot be a good communicator if you are only going to be responsible for what you send out. You must also be responsible for what you receive in to make sure what the other person is saying is understood. It is important for the Part Time CFO to identify the clients needs and wants and that is where good communication comes into play.

Where communication starts to break down is when one of the people engaging in the communication does not like someone else in the communication loop. This dislike gets in the way of agreement and understanding and their must be agreement and understanding if there is going to be good communication. On the other hand you can have people who like each other in the communication loop but who do not agree or understand each other and that results in another breakdown of communication.

Therefore the objective of good communication is to have a liking and respect for the person or people in the communication loop and to attain an agreement and understanding. Once these objectives are accomplished good communication will result.

Having good communication skills and also being able to impart good communication skills to your clients organization helps the CFO perform another valuable CFO Service.

Why Networking and the Part Time CFO

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It is of great importance that the Part Time CFO goes out and networks. The main reason is for the CFO to network and establish relationships with the best service providers. These service providers should cover many different types of services. With this network the Chief Financial Officer can provide their client with options. These options will allow the client to compare quality, service and price. These options will provide the cornerstone of a cost reduction program. Networking should include but should not be limited to finding the following services:

Financing services

Credit card Services

Payroll Services

Property Casualty Insurance Services

Medical Insurance Services

Factoring Services

Mortgage Services

Leasing Services

Logistics Services

Telephone and Cell Phone Services

Banking Services

Office Supply Services

Storage Services

Travel Services

Freight Services

Advertising/Web Services

Internet Services

Computer Services

Graphic Art Services

Real Estate Services

Recruiting Services

With contacts with as many service providers as possible your CFO Services will be more valuable.

Daily Bank Reconciliations

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What??? No not that!!! Why??? So says the bookkeeper. The CFO must stress the importance of daily bank reconciliations..

In these tough economic times and even when economic times are not so tough the business owner needs to know his cash position on a daily basis in real time. The only way to be certain of your cash position on a daily basis is to do daily bank reconciliations. If you have cash flow problems or cash is simply tight, the business owner cannot afford to find out that a customers check bounced 3 days after the fact when the bookkeeper gets the returned NSF check back in the mail. Meanwhile the business owner sent checks on that money already and risks bouncing an important check. If an EFT out of your account or a debit card transaction hits more than once due to clerical error by a vendor or bank what good is it to find out about it when you do the month end bank reconciliation. The important check you sent on money you thought you had just bounced. There are many other situations when you need to know changes to your bank balance in real time! The part time CFO needs to establish a policy of daily bank reconciliations and instill the discipline to make sure it gets done.

By having access to your banking transactions online, daily bank reconciliations should take less than 10 minutes per day. By doing this the business owner will know exactly how much money they have and can make decisions on what bills to pay with more confidence.

By the way you bookkeepers out there, when you do daily bank reconciliations the month end reconciliation is a snap!

The Chief Financial Officer and Strategic Partnerships

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During these challenging economic times, now more than ever businesses should be looking to develop strategic partnerships. Before I give you an example let me define what I mean by strategic partnerships. Strategic partnerships are developing relationships with the objective of pooling resources with the purpose of both partners obtaining more business or both partners cutting costs.

By way of example, let me use the food industry. There are all different types of food vendors but let me use a distributor of frozen cookie dough and a distributor of frozen appetizers. These are clearly non competitive entities. Both of these companies need frozen storage, both of these companies need more business. Why cant these two companies form a strategic partnership and share offsite storage costs or one company sublet frozen storage to the other if one of the companies already has onsite frozen storage. Both of these companies see accounts that can use both products so why cant they share leads and a finders fee would go to the referring company. Both companies use office supplies so once again to obtain bigger discounts both companies could pool their resources. Does one company have the financial resources to buy equipment that both companies can use? The bottom line is the possibilities are endless.

The CFO should assist the business owner in creating ideas for finding and negotiating strategic partnerships.

Retailers: Dont get stuck with Inventory

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It is a valuable CFO Service to solve inventory problems.

If you are a retail business there is only one thing that will bring you down real fast and that is too much inventory. In this current economic environment the cost of carrying inventory is even greater because with many banks not lending, capital is hard to get. If you overbought inventory identify the inventory that is slowest moving and reposition it on the sales floor and price it to move. You may also want to take a look at the signage in the store to make sure you are communicating clearly with your customers as to what deals you have. You may want to package items together as customers always like package deals. Yes, your profit margins are going to suffer, but with the cash you get from the sale of the slow moving goods you can use that cash to buy inventory that sells and therefore your inventory will turn quicker getting you into a profit position quicker.

During this process you may have to work with your inventory suppliers. Once again identify the slower moving merchandise and go to those suppliers to ask for extended dating. Sometimes certain styles and types of inventory that you bought may not be selling in your market, but may be selling in other markets. If that is the case it is possible that the supplier will buy back the inventory or replace it with faster moving goods and the supplier can sell your slow moving inventory in the other market where it is selling. The key to these supplier strategies is keeping the lines of communication open with your suppliers and the suppliers sales rep.

By the way I did not forget that suppliers get angry when you discount their product. This is where constant communication with your suppliers and their sales reps really helps. If you are identifying slow moving merchandise quickly enough then it is important to communicate with the supplier what your intentions are to alleviate the slow moving problem as soon as possible giving the supplier time to react and time to work with you to resolve the problem. The CFO who has experience in business ownership is going to be able to understand the business ramifications as well as the financial ramifications.

I know, it is not easy, but the critical component of the entire process is identifying slow moving goods as soon as possible, communicate with your supplier and cut your losses!

Exit Strategy It is inevitable

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Do you have an Exit Strategy? No matter how long you think you are going to be with your business there is going to be a day that you will no longer be with your business. Either you live longer and survive your company or your company lives longer and survives you. Your separation from your business could take any one of the following forms:

You sell the business to an interested third party

You sell the business to an interested family member

You sell the business to employees

You plan for an untimely death by funding a life insurance policy.

You cease the business operation and convert all assets to cash.

You file Bankruptcy

Through the use of strategic buyers and buyers who are looking for vertical integration opportunities a business owner can maximize value on the sale of their business. Even unhealthy businesses that are looking for a quick exit due to a distressed economy in their industry can maximize value in the same manner.

Any way you slice it, a business owner is much better off developing a strategic exit plan versus a seat of the pants exit plan which almost never maximizes value. It is a valuable CFO Service to help the business owner put together the well thought out exit strategy.

Product Cost

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Helping a client understand what their product or service cost is high on the list of valuable CFO Services.

Understanding product cost which includes the components of cost is very important to a business owner in order to price their product properly. I have had several clients who did not understand the cost of their product or service and actually sold their product or service for less than its true cost. Once the actual cost of the product was understood profits were being made. Another reason why it is important to understand product cost is controlling that cost. The only way you can control or reduce a cost is if you understand that it exists. If you do not know if a cost exists or what the cost is there certainly isn't any way you can work to reduce it or control it.

Understanding what a product or service costs is the first step in understanding how to price your product and have the proper knowledge of how competitively priced you can be. It also helps to reduce the risk of business ownership.

Pricing Your Product

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Creativity in pricing has never been needed more than during these challenging economic times. The Part Time CFO has to help the small business owner strategize their pricing program. I am a major advocate for small business and small business owners. The small business owner really needs to be creative as they are constantly going up against the big guy who is heavily discounting in order to obtain market share. In the meantime, the small business owner cannot compete because if they do they will be selling their product for near or below cost and that will bring them down. If you are a retailer you can at least put pressure on suppliers to speak with these bigger companies who are discounting and you can use special make ups and good close outs to compete. I know it is not easy, but be happy you are not a service operation where the only way you can compete is better service. My only advice to the service organization is to develop strategic partnerships (see my post on Strategic Partnerships). The right strategic partnerships will help you to keep pace with these big guys who are ruining the market and give you the best chance to compete.

There is a tendency for small business to expand their product lines in other areas during these difficult economic times. I think that is a mistake because you lose your focus on what you do best and there is always more of an investment in a new product or service than anticipated preventing the business owner from investing in what they do best. New product lines also dilute your advertising dollars.

The pricing strategy during these challenging economic times is one of the many valuable CFO Services.

Break Even Point

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I dont hear much about Break Even Points. Does anyone use them anymore? I know business owners want to hear about them and since I am a CFO For Hire and work for multiple business owners it is important that I listen to the business owner. During challenging economic times business owners want to know where their New break even point is. What I mean by New break even point is now that they have downsized and adjusted their expenses for this new economy it is time for us CFOs to recalculate the break even points and communicate them to the business owner. After this calculation the business owner will then know what monthly or weekly sales levels will need to be attained. It is also a good idea to provide what if break even point scenarios especially for different owner salaries and other moving target expenses. By the way, for the small business owner I usually calculate break even point from a cash flow standpoint versus a pure income statement standpoint.

It is an important CFO Service to provide break even analysis. Many times the CFO forgets about calculating break even points because they get tied down with other aspects of forecasting.

Collecting Accounts Receivable

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Establishing a system of collecting accounts receivable so that your receivable strategy is consistent and timely is critical to successful collections. It is incumbent upon the CFO to provide the direction to implement the Accounts Receivable Collection strategy. Here is an example of a strategy that if applied consistently and timely will lead to successful Accounts Receivable Collections:

Assume an invoice with terms of net 30 days

Between the 35th and 40th day contact the customer. If the customer is a customer you know pays within 30 to 40 days based on a history that you have with that customer then do not contact until the 40th to 50th day.

If customer does not return your call or you were not satisfied with the customers answer then send a 10 day Demand Letter, requiring payment within 10 days or account will be put in collection.

If not paid by the 11th to 15th day then put the account in collection.

I always use a collection agency that has a legal staff so that if the account is not collected using traditional collection methods legal action can be taken right away. Once again the key to the process is consistency and timeliness.

Accounts Receivable collection strategy is one of many important CFO Services.

Selling Prices Too Low?

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Are you maximizing the selling price of your product or service? One way to tell if your pricing is too low is by the number of customer complaints you get about prices. If the complaints about prices are diminishing or non existent your prices are probably too low. I had a client who was getting absolutely no complaints about their prices. As a matter of fact they were getting a lot of compliments. Come to find out they were selling there product below cost! The business owner usually has a good handle on what competitors are charging for their product or services. As a matter of fact most business owners price their products against competitors. However comments from the customer combines what the price of the product or service is with the value being delivered and therefore is the best barometer.

CFO Services - Business Plan Preparation

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Do you have a business plan?

Whether you are a start up or have been in business for 25 years, every business should have a business plan.

One great thing about business planning is it really gets you thinking about the direction you want to take your business. As a business owner as well as a CFO, I can tell you that business owners need to spend more time really thinking about the direction we want our business to go. Preparing a business plan provides the impetus to get you thinking about that direction.

Changes to the plan are encouraged as a business plan is not one of those things you write up once and stick in a drawer never to be seen again. A business plan is a working document that is subject to perpetual changes. It is the working document aspect of a business plan that makes it effective.

Business plan preparation should be a part of every CFOs arsenal of CFO Services.

CFO Services

One of the CFO Services I perform is to project what the cash position for a company is going to be at any point out in the future based on a variety of assumptions and what if scenarios. In order to do this I use an exclusive forecasting tool called "CashTell"

Here are some real life applications of "CashTell":

I have a client who wanted to know when his cash reserves would be high enough for him to leave the business and still get a paycheck.

I also had a client who wanted to know how much more of a credit line they would need if they added a line of active wear to their product offerings

I also had a client who wanted to know how much their cash position would improve if they closed a store. To find out more about "CashTell" Click Here

CFO's Why Companies Need Them

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One thing business owners hate is surprises. Unless of course the surprise is a pleasant surprise and then all is well. However, if the surprise is an unpleasant surprise it is enough to give a business owner gray hair at a very early age. Chief Financial Officers or CFOs need to tell the business owner when it is cloudy not when it is raining. This is a key role of the CFO. Reducing the element of unpleasant surprises is one of the main roles of a CFO. Identifying cash flow problems before they occur, identifying inventory overstocks or shortages before they occur are just a few trouble spots that can be identified.

Another reason why companies need CFOs is for identifying and assessing risk. Todays business owner wears so many hats and needs to make decisions quickly. Business owners need a Chief Financial Officer to help them identify and assess the risk associated with those quick decisions. Today's CFO can also do many things to help reduce the business owners risk. One example of this is looking into the Corporate American Express Card. Qualifying for certain classifications of corporate American Express Cards will just have corporate liability and no personal liability.

The Role of a CFO (Chief Financial Officer)

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I feel the need to always come back to the basics as sometimes the role of the CFO can get clouded by the demands placed on the role. The Part Time CFO has even more of a challenge to address what is a critical need in the business as well as addressing the basics.

The basic CFO Duties and CFO services that a Chief Financial Officer should focus on are as follows:

Drive the bottom Line

Project profitability

Enhance systems, improve controls and processes

leading to operating efficiencies

Manage cash and cash flow problems

Optimize operations

Drive results

Contribute to business development

Shape financial strategy

Understand, identify and assess the risks of business ownership.

Accomplish something for the business in an area that the business owner does not expect a CFO to accomplish something. (i.e. help the company with search engine optimization enhancing its internet presence.)

If the CFO excels in these areas he will add tremendous value for the business owner.

CFO And Public Speaking Skills

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In a previous post on my CFO-Chief Financial Officer Blog on Blogger.com I stressed the importance of the CFO to have good communication skills. One of the critical components of communications skills is Public Speaking. It is an important CFO Service to have good public speaking skills. The CFO must give presentations to banks, to clients, to venture capital groups and to boards of directors just to name a few. Good public speaking skills allows the CFO to not only better communicate ideas, strategies and concepts but also helps to sell those ideas, strategies and concepts.

There is no better teacher of Public Speaking Skills than Jacki Rose of Boston MA. Her website is http://www.jackirose.com. She does both group and private coaching and she will turn your presentations into compelling commentary that will get results. Give her a call. You will be glad you did!

Solving Cash Flow Problems - FREE REPORT

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Imagine for a moment that it is one year from today. What would have happened in the last year that would make you happy with your progress? How about if you were able to say that the cash flow in your business has improved dramatically and is no longer the issue it was a year ago! What kind of weight would be lifted off of your shoulders if that was the case?

There is nothing more frustrating, time consuming and at times humiliating than having cash flow problems in your business. In addition to the frustration, time consumption and humiliation the biggest impact that cash flow problems have to the business owner is the disruption and distraction to what the business owner is most productive in their business. The business owner gets so consumed by the cash flow problems they find it difficult to do anything productive and the business continues to backslide. When vendors start calling about late invoices, key Employees find out about your cash flow problems and they start looking for other jobs as they do not want to stay with what they perceive to be a sinking ship.

Next Step CFO has prepared a free email report called "Solving Cash Flow Problems" which identifies the areas in your business that are causing cash flow problems and how to solve the cash flow problems in each area. Click here for the Free Report

Do You Know If You Need Cash?

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How Much Money do I need to run my Business???

This is the question many business owners ask. Sure, startup entrepreneurs ask this question too, but I also want to address everyday business owners whether they have been in business for one year or thirty years they need to know how much money they are going to need to run their business. Their time horizon can be a month a year or five years, but they need to know if they have to put money in their business, get money from other sources or if they do not need money at all. If business owners knew in advance how much cash they needed or how much cash on hand that they had at different levels of sales volumes and expenses they would have time to react. As a business owner, I say tell me when it is cloudy not when it is raining. Next Step CFO has a sophisticated forecasting modeling tool called CashTell that can tell business owners what their cash position will be at any point in the future giving the business owner a great advantage in preparing for what is to come. CashTell was developed by Next Step CFO and is exclusively available to Next Step CFO clients.

CFO Services Identify Metrics

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Helping the business owner identify key metrics to measure business performance 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.

Learn From Your Competition

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Most of you who read this post will have competition. Competition is what makes us better business people. Your first step in reviewing the competition is Know Who the Competition is! I cant tell you how many people go into business without knowing who their competitors are and what they do. Not knowing who your competition is would be like a team from the National Football League preparing for the Super Bowl and not know who they were playing and not doing any scouting report. You are not learning who the competition is so you can worry and obsess about them. You are learning who the competition is so you can learn from them and develop strategies to compete against them.

One thing I always used to do is go to trade shows to seek out who my competitors are. Trade shows are a great way to stake out your competition. Get information from their booths and even speak to their representatives. Look at their advertisements; discover the different ways they market and communicate to the market place. See if you can figure out how their logistics work or if they use contract manufacturers. See if you can find out what their distribution strategy is. If you market regionally you should develop relationships with businesses that do what you do who are not in your market. I cannot overemphasize the abundance of information you will get out of those relationships.

Take what you learned from the competition and put together a plan on what things you will do the same and what things you will do differently. You need to figure out what separates your business from the competition.

A valuable CFO Service is to help and influence business owners to learn more about what their competition is doing and then help them figure out a strategy to compete against those competitors.

Going Concern Opinions - A Tough Call For The CPA

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It is a basic theory in accounting that a business should be considered a going concern which means the business will be in operation usually over the next 12 months. If a business is a Going Concern the business has little risk of liquidating or ceasing operations in the foreseeable future. Financial statements are prepared with this theory as the premise.

A Going Concern opinion is one of the most difficult opinions a CPA needs to render. A Going Concern Opinion is rendered by a CPA when it is the opinion of the CPA that the company is no longer a going concern and that there is considerable risk that the company will not be in business by the end of the next fiscal year. Material uncertainties must exist to lead the CPA to this opinion. These opinions are difficult to render because it is not good news for management, the companys lenders, the companys suppliers and creditors. Based on all of this dissatisfaction the CPA has to have as much evidence as possible to support this opinion. If the CPA does not issue a going concern opinion and the business liquidates or ceases operations within the fiscal year, the CPA will be at tremendous risk. The material uncertainty that exists could be something that is more evident like the strong likelihood of an unfavorable ruling on a lawsuit, or the strong likelihood of an unfavorable geo-political event.

Would CPAs have less risk if they had access to financial modeling tools that can forecast with great accuracy based on a solid set of reasonable assumptions the future cash position of a company at different levels of sales volumes and expense levels when rendering going concern opinions? I think so. It not only reduces risk for the CPA, but provides a more solid basis for explaining to the client why a going concern opinion is being rendered.

Currently most CPAs use metrics and similar indicators to help render their opinion. If financial modeling tools were available at a reasonable cost that identified with great accuracy the forecasted cash position, inventory position and liability position of the company at selected volumes of sales, selected levels of expenses, and selected levels of inventory in confluence with a solid set of reasonable assumptions I believe that would give the CPA greater confidence and more solid footing in rendering this difficult opinion. Next Step CFO has such a financial modeling tool and it is called CashTell.

What It Means To Provide CFO Services

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What does it mean to provide Chief Financial Officer Services? Companies from start up to 10 million in sales cannot afford nor do they require the services of a full time CFO. Why not find someone who provides these high quality professional services on an as needed basis?

It is best to use a CFO who truly understands the risks of business ownership. A CFO who understands what it feels like to have to make a payroll on a Friday with no money in the bank account on Wednesday. A CFO who understands what it feels like to see employees sitting around or being disruptive. A CFO who knows what it feels like to have a lot on the line.

What are CFO Services? Well as I go through these CFO services please keep in mind that you can choose one of them, some of them or all of them and at any time. You certainly do not have to do everything at once. That is the beauty of the flexibility of having a Part time CFO. Also a good Interim CFO works in your office location

And now for the services.

The CFO should make sure you have good financial numbers. Making business decisions without good numbers is like a Doctor making a decision to operate on your ankle without X-rays. It simply shouldnt be done. So the first thing to do is if your numbers are not right the CFO should make them right.

The Part Time Chief Financial Officer should also Identify, assess and mitigate risk. Whether you are Microsoft or the local pizza parlor your business has risk. The question is how severe are those risks? You should be able to work together with your Chief Financial Officer to Identify the risks in your business. The CFO should also assess the severity of that risk and if severe suggest actions to mitigate the risk. Severe risks in your business could be cash flow problems, low or no cash reserves, the need for financing, employee risks, inventory obsolescence risk, legal risk and personal liability risk just to name a few.

A CFO should be able to tell you when it is cloudy not when it is raining.

Business Owners hate surprises. They need to be prepared so they can review options and have time to fix whatever needs to be fixed. The last thing business owners want to do is go into fire drill mode and have no time to react. The CFO should have business forecasting and modeling tools that give the business owner the needed foresight to take action. Forecasting tools that give the business owner the time to react to both downturns and upturns in their business. For example Next Step CFO developed an exclusive forecasting and modeling tool called "CashTell".

There are several things that a good forecasting tool should do but let me hit the major points:

First of all any forecasting tool including CashTell is based on a solid set of assumptions. The beauty is the business owner can change those assumptions any way they want creating multiple what if scenarios.

A good forecasting tool can tell you how much cash you will have or need at any point in the future based on whatever assumptions you give it.

So if you want to know if you will have enough cash to survive a 20% decrease in business. A good forecasting tool can tell you that.

If you want to know if you will have enough cash to survive a 50% increase in business. A good forecasting tool can tell you that.

Can your business absorb the purchase of equipment, machinery or a new computer system? A good forecasting tool can tell you that.

A good forecasting tool also tells you what you need to do to increase cash flow. It isnt always more sales.

A good forecasting tool helps determine key metrics to evaluate your business on a going forward basis.

In one sentence a good forecasting tool helps you figure out the strategies that need to be implemented that drive profits and cash flow. Then it is the job of the CFO to implement those strategies.

A good CFO should help you determine and develop metrics to evaluate your business. Metrics are quantitative parameters that help you evaluate the performance and productivity of every aspect of your business. Metrics are a terrific management tool.

The best CFO's will help you Drive results, contribute to business development, help shape your financial strategies, identify employee theft, improve controls and processes leading to operating efficiencies and also help you develop and execute exit strategies. After all someday you will be separated from your business.

I hope this was helpful to the small business owner in making them aware that the Part time CFO option exists and how they can help them.

One way to Clean up a Balance Sheet

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As a CFO I am always trying to attain a clean balance sheet especially for my startup clients who are looking for second round financing.

If you are an entrepreneur looking for outside investment capital it is a good idea to try and clean up your balance sheet. If you have current stockholders who put money into the company as debt ask them if they will convert the debt to equity. New investors who are contemplating putting new money into a company want the dollars to go to something that will move the business forward like machinery and equipment or Research and Development. They certainly do not want their new money going to service or payoff existing stockholder debt. Investors shy away from situations where the new money is going to payoff or service existing stockholder debt.

Asking existing stockholders to convert existing debt to equity is not an easy thing to do. Believe me, I have done it and I recognize the difficulty. You are asking people who stepped up to the plate, probably when the company was just an idea and put real money in the company to increase their risk. Furthermore, there was probably a legitimate reason for the stockholder to put money in as debt in the first place. However the facts must be faced. The company probably needs the new money in order to go to the next level. Cleaning up the balance sheet will help. Sometimes the company needs the money not only to go to the next level but to also survive!! If this is the case and the company needs the money to survive the existing stockholder has a lot of incentive to convert their debt to equity. If they do not convert and the balance sheet is unattractive, it is likely the company will not get the needed investment capital and it is likely the stockholder will not get their debt instrument paid.

Although the stockholder increases their risk by converting the debt to equity they are potentially increasing the value of their stock and giving the company a chance to get to the next level which was the dream that stockholder had when they originally put the money into the company.

Advisory Board

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Even if you have a working partner that may fill one or more of these roles it is always a very good idea to have an advisory board. It is ok for you or your partners to fill these roles, but it is unlikely that all of the roles of the advisory board can be filled by the management of a small business. Even if all of the advisory board roles can be filled by management it is still a very good idea to have people outside of management to bounce ideas off of.

Today there are many opportunities to have an advisory board that will either cost nothing or very little. Develop a relationship with the following professionals and have them part of your advisory board:

• 1. CPA You are going to need 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. CPAs can also refer you to funding sources and other support services including referring to you more business.
• 2. 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. 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. 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. Technical or operations professional depending on your industry This is where you add someone to your advisory board that has the operations or technical expertise related to your product or service. You may have someone in management but once again it is always a good idea to get perspective from someone outside of management if available.

  These professionals on your advisory board may charge a fee. I would be leery of this. My suggestion is to do everything you can to build the right relationships and to promise giving business to these professionals down the line.

  I have a business associate who says he never has or never worries about any problems in his business. The reason is he gives all problems to his advisory board and lets them figure out all of his problems and lets them assume all of his worries. Advisory Boards can be very helpful and it is worth the time and energy to build the right one.
  

  Controlling Payroll Costs

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  As mentioned in a previous post the four major expenses for most businesses are payroll, rent, advertising and insurance. One way that the Interim CFO can work to control payroll costs is through the use of forecasting tools like CashTell. The beauty of using a forecasting tool for the purposes of controlling payroll costs is that you can optimize both the headcount and the labor hours for different levels of sales.

  For example, when forecasting, several different possible business scenarios should be assessed and analyzed by both the business owner and the part time CFO. One of those many different scenarios is different sales volumes. When forecasting one must look at what happens to the model when different ranges of sales volumes are entered. A good forecasting model should be able to determine the optimum headcount and the optimum amount of labor hours for each level of sales. This is a great tool because with this information the business owner and CFO know in advance as sales go up or down how to schedule workers helping to maximize efficiency and manage payroll costs.

  Many times when the word labor hours is used we think of mainly manufacturing, however managing payroll costs through labor hours can be done in all types of businesses. When I was in the retail business, store managers were given a set amount of labor hours each week for scheduling employees. They could not go over those allocated labor hours unless they had permission together with a logical reason. My forecasting tools determined those labor hours and then if at the start of the week sales were deviating from the forecast I would issue or withdraw more hours as needed. It was also interesting that although the store managers complained about the small allocation of hours that they got it was amazing how the job got done with more efficiency and no sacrifice on service.
  

  CFO Services - More than the numbers

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  Recently a client emailed me a complaint about two things:

  • That he is losing touch with his customers because he decided to delegate
  • Things are getting crazy, disorganized and disjointed. I liked it much better when we were more organized.

  As an Interim CFO addressing these kind of issues is commonplace. Business Owners look to the CFO for direction and guidance.

  With regard to my client feeling like he is losing touch with his customers I responded to him as follows:

  In business you either go up or down. There is really no state of neutrality. Any business that does not try to grow usually goes down. If you strive for neutrality you are very likely to go down. Therefore you must continuously strive to grow. Having said that, as you grow you are going to continuously feel a disconnect with your customers. However there is a solution. It is called communication. I think on a consistent basis you need to call these "delegated customers" directly and get the feedback from the customer on how it is going and on how your company can do better. I know it is more work but it is part of managing the growing process. Your employees will never in a million years tell you that there is anything wrong with their service until it is blatantly obvious and then it is usually too late. Tell your employees in advance that you will be calling these customers and give these employees both positive and negative feedback as to the results.

  With regard to my client feeling that his business is crazy, disorganized and disjointed and liking it better when things were more organized, I responded as follows:

  I think you need to change your mind set a little bit here. When I was in the retail business I knew business was going well when things got a little crazy, disorganized and disjointed because that meant things are growing as planned. When things are not in that aforementioned state then believe me there will not be joy in organization there will be potential stress and loss of focus as being human we all get complacent. The challenge is as things get crazy, disorganized and disjointed to be ready with solutions and improvements so when the current set of circumstances happen again you will be able to avoid the crazy, disorganized and disjointed and move on to new things that cause more craziness, disorganization and disjointedness. Believe it or not that is the winning formula for running a successful business.

  Being a Part Time CFO is not just about working the numbers, the metrics and the forecasts. Being a CFO means you need to have a thorough understanding of business ownership and in turn understand how the inner workings of business work.
  

  CFO Services - What Angels Need To See

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  If you are an Entrepreneur and you want to be prepared for an Angel or an Angel group you are best served to have the following ready:

  • An Executive Summary no more than 3 or 4 pages.
  • Pitch Deck 10 to 20 page power point presentation.
  • Be prepared for a lot of questions
  • 6 to 12 character references after all they are investing in you!
  • Names of customers or potential customers.
  • Financial Model and Business Forecasting Tool
  • Where is the money going to be spent?
  • What are the real economic levers in the business?
  • How does it look like over the next 4 quarters
  • What hypotheses are you trying to test.

  The Interim CFO or Part Time CFO can help you with the final 5 points.

  Angels want to know if you financially thought through the project you are proposing. You need a financial model that addresses all of the contingencies and possible what if scenarios. You need a financial model that shows the angels you know how much cash you need and when you will need it. You need a financial model that shows the angels that you are on top of:

  • Headcount and employee plan
  • Purchase and/or production plan
  • The costs related to your marketing and advertising plan
  • Where their investment is being spent
  • The metrics that will measure the businesses performance

  Angels know that every business/investment opportunity they look at is going to have a set of hypotheses that the entrepreneur is going to present as there are no certainties. Each hypothesis needs to be carefully thought out and presented. The Angel needs to know what hypothesis or solution to a problem you are trying to test. What are the economic levers that are dictating that your solution to the problem is the answer and what economic levers are going to drive your solution to the market.

  Speaking of angel investors there is a solid list of them on the following website Angel Capital Association
  

  CFO Services from One Piece of Paper

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  In a previous post on metrics I pointed out the importance of metrics and some of the metrics a business owner can calculate and track. However what I did not point out is how the CFO can use these metrics or key performance indicators to help the business owner literally manage their business from one piece of paper. A Financial Dashboard if you will. Many CFOs help their clients identify the key performance indicators in which to manage their business. Many CFOs use financial dashboards and share them with business owners. I am just not quite sure if the CFO is showing the business owner how to use this tool to more effectively manage the business. It takes time and patience but really explaining to the business owner how to use the financial dashboard and to instill the discipline to use it at least on a monthly basis can go a long way in improving the productivity of the business and also the productivity of the business owner. Managing the business from the financial dashboard not only provides more simplicity to complex business problems but it also helps anticipate problems and circumvent trouble.

  For example, I showed a client recently how a trend in a simple metric called overhead per labor hour can show how well the business owner is managing their overhead costs commensurate with managing their payroll costs. Looking at the way this metric trends can give you a quick indication on whether you are maximizing your overhead and payroll expense controls. Using graphs is a very productive way to visualize these trends.

  Finding benchmarks are ok but in my view they can only be taken so far. Benchmarks means finding service or statistical bureaus that compile metrics from other companies in the same industry so that comparisons can be made with others in the same industry. This is certainly interesting information, and it can be useful to a point but I am of the belief that no two companies are really alike even if they are in the same industry. Overall I believe that the benchmarking should be done internally and the CFO, business owner and advisory board should get together to first 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. Certainly look at the benchmarks, but do not use the benchmarks as the target.

  Getting the business owner to understand and on board with using metrics to manage their business is one of the more effective CFO Services that can be provided.
  
  

  Managing Cash

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  As an entrepreneurial CFO I am able to share real life experiences on managing cash flow.

  In the late 1980's I owned a chain of retail ski stores in the Greater Boston area. You might think that due to the seasonality of that type of business that the cash flow would be terrible in the summer time, but I never needed to use my line of credit.

  Other than tight expense control and cash conservation strategies throughout the year there were two main reasons why we never needed to use our line of credit:

  • First, we closed the stores in the off season. Our specialty was ski equipment, ski clothing and ski accessories. Those were the areas we were experts in. Those were the areas the consumer knew we were experts in. If we were to sell summer goods like all of our competitors did, we not only would have slow inventory turns, but we would also have carryover of these unproductive non-ski inventories preventing us from investing in what we did best and preventing us from investing in what the consumer was conditioned to know we did best. The sale of ski equipment, ski clothing and ski accessories. Tying cash up in unproductive inventory creates cash flow problems, unplanned markdowns and lost profits. Investing only in inventory that is productive with high inventory turns and lower unplanned markdowns creates cash flow and profits.
  • Second, I ran my inventory down so that I had very little merchandise on December 31. I worked with suppliers so that I could purchase close out merchandise in January, February and March and pay for it in October. As a result I was able to take my sales from January, February and March which are still strong periods in the ski business (especially if there is local snow) finance the summer. In August and September which is the real start to the winter buying season I would have a grand opening (because my stores were closed in the summer I could have a grand opening every year) as well as a major tent sale. These sales would easily cover the October close out bills.

  Understand that when you own a seasonal business or if your business simply has periods of low sales activity that you need to identify your business cycle. I am defining the business cycle as the time you receive the inventory or raw material until you get paid for the final product. 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 the business cycle you can create strategies and work with suppliers to most productively meet your needs.

  The CFO can help you identify the business cycle, put together operating strategies and work with suppliers to manage cash during slow periods.
  

  Exuberance

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  One of my clients is having a real good year. I know that is unusual for the current economic environment but this particular client makes very unique and effective sales presentations which has lead to his success.

  My client recently (within the last two weeks) 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 said hold it as I immediately went back to my business experience and how when I had a peak in demand and was doing really well how I went overboard with capital expenditures, how I added locations and how I added product lines as I thought the great demand was never going to end. This was a big mistake. I said to my client Exuberance as I thought of my own exuberance. I went on to tell my client that we have not even tested our new employees to see if they are going to make the cut as permanent employees and we are thinking about buying trucks to make them more efficient. My client went on to say that he could take one of the new guys and let him go solo on the truck to do some lower end jobs. I told my client that we should do nothing and review this in another two months. In two months 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.
  

  The Value in business and Cash Flow Forecasting

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  As a Part Time CFO I have the following questions:

  Does the small business owner see the value in business forecasting?

  Does the small business owner see how the business forecast helps you to become proactive versus reactive?

  Does the small business owner see how the business forecast allows you to take a look into the businesss 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?

  Does the business owner 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?

  can all be answered through business forecasting?

  Does the small business owner see how you can solve todays problems with business forecasting?

  I dont think they do!!

  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 owners 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 CFOs 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 todays problems today through business and cash flow forecasting.
  

  CFO Must Find The Softest Landing Possible

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  One of the biggest challenges I have as a Part Time CFO is working with distressed companies. These are companies that are very insolvent and have had a recent history of significant operating losses or were companies that were always on the edge and then developed more significant problems during the current economic downturn. These are usually companies whose business owners never admitted there was a problem until it was too late. These are usually companies who did not prepare business or cash flow forecasts or a strategic plan or exit plan. These are usually companies who are reactive versus proactive. Since in business is is 80% ingenuity and guts and 20% luck. These could be companies that were simply not lucky. Most of the time the softest landing possible crushes the hopes and the dreams of the business owner and it is not an easy position for the CFO.

  When working in these situations you look for the softest landing possible. 95% of the time the softest landing possible is viewed by the business owner as a nightmare. This is understandable because the softest landing possible usually isnt selling the business for millions of dollars which is the dream of most business owners.

  The personal liability situation of the business is an important consideration when seeking the softest landing possible. Usually the rule of thumb is the more personal liability exposure the harder the landing. This is usually the case because the more personal liability exposure the business owner has the less the impact the corporation has to protect the business owner.

  I am going to write about 3 possible options when a business is insolvent that may provide the softest landing. I am going to explain each one only briefly because I am not an attorney and I urge everyone contemplating these options 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 which is a complete liquidation and closure and Chapter 11 which is 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 be funded by only 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. 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 UCCs). 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.
  

  Bookkeepers and the CFO Work Great Together

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  I had a prospective client/business owner recently who was ready to hire me. He said before he hired me he had to ask his bookkeeper their opinion. The bookkeeper had not met me and did not know me and although I thought it was a strange way to operate I said that was fine. When I followed up with the prospect he said that the bookkeeper thought that a Part time CFO was not needed and based on that, the business owner said he was not going to hire me.

  I was surprised by this. I felt bad for the business owner on how he would let the bookkeeper make such a decision. I told this prospective client and business owner that in my experience there were only two reasons why a bookkeeper would say no to CFO services without knowing or meeting the CFO:

  1. The Bookkeeper is acting very inappropriately in the day to day responsibilities of their job (possibly stealing) or;

  2. The Bookkeeper is afraid to have their numbers scrutinized in fear that inadequacies in the bookkeeping will be exposed.

  The point is that bookkeepers and CFO's work famously well together. They compliment each other. The Part Time CFO goes into the engagement happy when they know a bookkeeper is on staff preparing the numbers and the CFO and bookkeeper work together to make sure the numbers are right so the best business decisions can be made for the client. The Bookkeeper and CFO are a powerful combination in terms of helping the business generate accurate financial numbers. That is why when a bookkeeper repels a CFO who they do not even know or never met, that should raise the eyebrow of the business owner.