I come across entrepreneurs with ideas often. The enthusiasm and passion they have for their new idea product or service is inspiring and uplifting to see. These situations aren’t start-up companies yet because the ideas are still just that, nothing has been put into motion yet. When things start being put into motion, that’s when a start up company begins.

I notice one problem is that very often an entrepreneur will think they can sell just their idea to an investor. For instance, an idea for a new widget that will solve a specific problem in the medical industry, even if its supported by a poll of doctors who all say it will work, is still just an idea, it’s not tangible. Without even a prototype of the widget any investor would question if the widget could even be produced. If they give the entrepreneur the benefit of the doubt that the widget can be made, the investor will then question the cost the widget can be produced at—no one has any way of knowing for sure because not even a prototype has been produced. An idea can’t get a contract manufacturer to identify anyone who may be able to produce the widget either. There’s plenty more that an idea alone will not get you, but I think I’ve made the point I wanted to make, which is that an entrepreneur must create as much real, tangible evidence as possible that their idea will be successful before presenting it to an investor.

The entrepreneur’s objective is to get the maximum investment from their investor for the minimum equity when they do present their idea (which we’ve covered needs significant tangible evidence to back it up). Naturally, if your idea has a lot of holes in it, you’re going to get a really low investment (or no investment at all). Investors will not invest in half-formed ideas. Investors will invest in a solid business plan, investors will invest in a good business model that shows strong management, investors will invest in fully formed ideas supported by tangible evidence of their success, investors will invest if they believe they’re going to make back 5 to 10 times what they invested in your idea in five years.

This is where a part time CFO comes in and is really helpful to the entrepreneur for getting their idea to a place where they can sell it. All the things investors want to see to make your idea look like a good or great investment—the business plan, cash flow forecasts, accurate finances, strategic plans, a strong management team—a CFO is qualified to help you with all of them. A CFO can even help you to find investors and come up with your pitch for when you present your deal to them.

Why is it important to a business owner to know their numbers?

The one thing successful business owners have in common is that they all know their numbers. 

What does it mean to know your numbers?

It means knowing and understanding your operating costs per hour.

It means knowing and understanding your gross margin percentage on key products.

It means knowing which products make you the most money and which products make you the least.

It means knowing your inventory, your inventory turns ratio, and understanding when its slow moving.

It means knowing your direct laborers average wage rate

It means knowing how many days your receivables are outstanding

It means knowing when to time your disbursements and how many days your payables are outstanding

It means increasing the overall accuracy of your decisions

It means improving the productivity and performance of your business because you are able to evaluate the productivity and performance of your business.

It means knowing the metrics associated with your advertising campaigns

It means being aware at all times of how much cash you have on hand.

It means knowing your monthly debt service.

It means knowing if your capital expenditures are productive, and if so, how.

It means answering a question with total confidence when an employee or a vendor needs a decision because of your knowledge about the most important numbers/metrics in your business.

To be on top of almost all business scenarios, maintain a stronger sense of control over your business, and most importantly to reduce the risks of running a business, a good business owner should know their numbers. 

Do you dare to dream?

If you knew you couldn’t fail, would you dare to dream?

I’m prying in an attempt to put you in the mindset of my clients, business owners and entrepreneurs. Many of you are already there without my help, but for those of you who aren’t, understanding this mindset it will help you understand the rest of this post. Entrepreneurs like my clients take that risky leap, making what others would deem dreams their reality. Creating and running a business involves taking risks most others would not take. It’s the job of CFO’s like myself to reduce that risk. When a business owner puts the onus of risk reduction on their CFO, it gives them more time and freedom to find and create opportunities.

I have a lot of clients, and the most successful ones have this in common—they know their numbers (meaning they understand their cash flow, their costs, and they have at least a basic understanding of their balance sheet. Obviously this is the kind of knowledge that helps you make better business decisions, therefore reducing your risk factor.

It all starts with accurate financial statements, and for those you’ll need a bookkeeper to accurately maintain your books and records, or you will absolutely run into trouble. Strong sales will cover a lot of mistakes, but eventually those sales will slow down and the strategies you choose to get you out of those bad times are based on your financial analysis. If you have bad numbers, you’re done before you can even start.

In good or bad times, accurate financial statements are what enable good business decisions, while conversely, any decisions you make with inaccurate information are going to be ill informed and simply bad. Once in a while I come across people who claim that they don’t make any decisions based on their financial statements anyway, therefore don’t need to worry about the accuracy of those statements. I counter that argument by pointing out that they’re using a management style called “flying by the seat of your pants” if they really don’t take their finances into account at all when making decisions for their company. I also like to point out that their completion immediately has the edge if they consider their finances even a smidge more than the “flying by the seat of your pants manager”. Honestly people who make that argument always get crushed in an economic downturn or when sales slow down.

Knowing your numbers will put you, the business owner, in control of your decisions and greatly diminish your chance of risk—important because the free spirit of the entrepreneur is especially prone to risk.

I was recently asked by a colleague, “When does a client become a client? Is it a particular service they’re looking for? Is it the particular problem they’re having?” Certainly if the potential client is looking for a specific CFO service, or looking to solve a specific problem I can help, but that potential client doesn’t become a client until they feel that they’ve lost control of a particular problem in their business. The potential client may feel that they have, for example, a cash flow problem.   If they can justify rightly or wrongly that they are in control of the situation, if they can say in their mind, “I can solve this problem, why pay someone else to do the same thing I can do on my own?”—then they are not going to be a client, they don’t feel out of control of their situation. They don’t understand at that point the benefit of a good CFO who can identify potential upsets, such as cash flow problems, before they ever occur.

As a CFO with 25 years of business ownership experience in retail, manufacturing, and service companies, I can tell you confidently that the most uncomfortable feeling for any business owner is the feeling of not being in control. It doesn’t have to feel like you’ve completely lost control of your entire business, it only has to feel like a loss of control over one small aspect of your business to leave you feeling shaken and off balance. The risk of loss, however small, and the sense of dread that comes with feeling powerless in any aspect of your business can numb you. The flip side of this is that when a business owner feels fully in control of their business and capable of solving any problems that come their way, they feel the best they’ve ever felt.

Strategic planning is what the potential client in the example does not yet understand. That wonderful feeling of control begins with the strategic planning process, and through that process it is maintained as the norm for how you feel in regards to your business, allowing you to become a truly confident business owner.

It’s true that most questions I am asked as a part time CFO are financial in nature, but there is one non-financial question I do get question very often because of its very tricky nature.

“What do I do with inferior employees when the market for their skill set is so small and unskilled, if I’m lucky enough to find a replacement, they’ll probably be even worse than who I have now?” And this is in a situation where the employees are not stealing or otherwise underhanded, but are simply incompetent due to lack of talent or ambition.
Most people would hear this question probably say to just bite the bullet and fire the incompetent employee/s. That’s a legitimate response, and would probably even work out a lot of the time when the job market is not as sparse as the employer had originally feared. Unfortunately, there are many more instances where the job market is, in fact, just as bad as it had seemed—and not only that, but the loss of the fired employee results in a loss of business, and the training for the replacement (if you managed to find one) is extremely expensive.

In businesses that I have owned, I have faced these types of situations personally. Contrary to what those who think getting rid of the inferior employee is a no-brainer believe, an employee market can be thinly populated and thinly talented, however, in the end, those people have the right idea. I recall two specific situations that I, as the business owner, held on to inferior employees. The results were extremely negative both times, so even though you may really lose a lot by letting the inferior employee(s) go, it’s still worth the consequences to get them away from your business.

Your other, more talented and ambitious employees will be brought down by your one less than stellar employee. They’re like the proverbial “bad apple” in your basket that spoils your whole bunch. The way these inferior employees drag everyone down with them can jeopardize the effectiveness of entire operations, which is a disservice to your customers, the most important cog in your machine.

Cutting the cord isn’t easy, I know that first hand. You are going to lose business because there are no replacements in that skimpy job market. You yourself are going to have to work more hours, no matter how crazy your hours already are. You are going to spend many sleepless nights agonizing over this decision, and then because you made this decision and have to work way overtime you will spend many more sleepless nights. It’s one of those unfortunate necessities of running a business-you’re definitely going to come across this situation, and the right decision-letting inferior employees go despite the consequences you are guaranteed to face- is the tough one.

Taking every precaution you can to not get stuck with an inferior employee during the hiring process and during your new hire’s first 90 days working for you is the key to avoiding the situation altogether. It isn’t fool proof, but the more attentive you are during the hiring process, the less often you’ll find yourself in this difficult situation.

This is a rare non-financial challenge for a CFO, but even so it’s important they guide their clients through and, if they have business ownership experience, offer their real-life insight to help.