Among my clients are many self-funded startups forming their first strategic plan and startups looking for investor money. As an entrepreneurial CFO I understand that multiple market channels reveal themselves as opportunities when creating a strategic plan.

Entrepreneurs always like to think that we can go after all the market channels at once. We want to create a strategic plan that goes after every possible opportunity we see. Why should we leave any stone unturned? Aren’t we giving ourselves our best chance of at least one route working out if we follow as many routes as possible? Why shouldn’t we fire all our guns at once? There is a logic to spreading out our resources—if one or two channels are doing well, we’ll focus our power there for now.

The reality of going after all market channels at once is diluted resources, and failure in all channels because each channel required more attention and more resources to be successful than any one entrepreneur can provide if they’re spreading it all out among different channels. I ended up kicking myself too many times thinking about certain market channels, and how they would have been successful if only I had had more resources, all with the knowledge that I would have had all those resources had I not attempted to pursue all the market opportunities I saw at the same time.

In order focus on one market channel, you need to convince yourself and your investors that the channels you did not select were not the right strategy, but what your plan ultimately shows you is that your one selected channel, let’s say it’s called “mom and pop retail shops”, is the best short-term (2 to 3 years) opportunity for your service/product, and when your company as acquired more resources and financing it can incorporate another channel in “the big box retailers”. Then even further down the road after it’s established itself and profited with “big box retailers”, maybe the Canadian market channel can be pursued, and then later the international market channel, and so on and so on. Don’t worry if it takes closer to 3 or 4 years than 2 or 3 years to be successful with the “mom and pop retail shops”. The important thing is that you preserved your resources, which is what made it possible for you to survive the extra time it took for you to profit in that market.

Beating any competitors to the punch is another incentive to try and claim every market channel at once. Still, you have to avoid this line of thinking. You should choose the channel that gives your brand the most opportunity for recognition if you are first to the market place with a new product or service. If you stick with that plan, you will always be perceived as the pioneer of that market place when you finally enter a new market channel, even if someone else beat you to the new market channel. Being the first to a market place, no matter which it is, will always give you a distinct brand recognition.

It’s hard to resist going after it all. Everyone has a good reason for attempting it, but you need to realize biting off more than you can chew will only result in you losing it all, and avoid the temptation. Pick the single best market channel, and focus all of your energy and resources there alone—it’s the best chance your startup has to succeed.

“Six-two and even.” was the famed answer former Boston Red Sox Manager Joe Morgan often gave when he was questioned for certain decisions in a game. This expression, of course, doesn’t really mean anything other than saying he had no real answer, his decisions were not based in anything logical, but rather on a gut feeling.

Too many small business owners take following their gut a bit too far. They go in without proper information or analysis and can’t make quantifiable or sound business decisions. A CFO can help business owners to kick the habit of always shooting from the hip, with the help of tools such as forecasts and financial dashboards, which provide critical guidance to the mos commonly asked questions, such as:

Will I have enough cash to get through a dip in my business and what kind of dip can I withstand without needing more cash?

What will happen to my business if I invest in a new product line and what will be the impact on cash flow?

What will happen if I maintain the status quo and keep doing business like I have been?

Should I discontinue a product line and dropping this line make me more profitable?

Should I buy a truck or new piece of equipment?

What will happen to my business if I try a new advertising campaign?

I want to get involved in internet marketing. What investments need to be made in people, time and money and how does this impact the entire business?

Should I add a location and can my business handle the additional investment in adding the location?

What is the liquidation value of my business should I decide to discontinue my business?

Can my business be more productive and are we operating at peak efficiency?

Is there another business model that would be more effective?

Should I add another employee or is that just going to build additional expense with very little benefit?

Should I lay off staff and what impact will that have on the business?

How do I evaluate sales performance?

Is my overhead too high?

Are my selling prices where they should be?

Are my gross profit margins where they should be?

Depending on how you answer, these questions can make or break your company. With a CFO’s assistance, and through utilizing their forecasts and financial dash boards, a business owner greatly increases their chances of answering these questions the right way, and not with “six-two and even.”

Quick cash flow analysis for clients is something I’m called upon to do as a Part Time CFO. Often this is very difficult because when it comes to cash flow there’s usually a lot going on. The first places I look for a good sense of what’s happening is Days Sales Outstanding, or DSO, and Days Payable Outstanding, or DPO. The average number of days a company takes to collect their accounts receivable is the DSO.   The number of days it takes a company to pay its trade creditors is the DPO. You’ve probably identified at least one source of your cash flow problem if you pay your trade creditors appreciably faster than you are collect your receivables.

By taking your accounts receivable as the numerator and total credit as the denominator, then multiplying that quotient by the number of days you are tracking you will get your DSO. More specifically, you can take the accounts receivable off your balance sheet. The total sales in most companies usually end up being their total credit sales, but if a certain percentage of sales that you know are COD can be specified, you can determine credit sales by deducting that from sales. The number of days you’re tracking is represented by the number of days. If you want to determine your fourth quarter DSO, for instance, you’d take accounts receivable as of the balance sheet on December 31^st as your numerator, then assuming all your sales for the fourth quarter are credit sales, you’d take your total sales off the income statement and put it in the denominator. Finally you’d multiply all that by the 92 days that make up the fourth quarter.

By taking your Trade Accounts Payable as the numerator and Cost of Sales as your denominator, then multiplying that quotient by the number of days you are tracking you get your DPO. More specifically, you can take your trade accounts payable off your balance sheet or accounts payable detail, and the cost of sales off your income statement. Trade Accounts Payable amounts are the amounts you owe to your inventory vendors, not your expense vendors (such as the phone bill). The number of days you are tracking is represented by the number of days. If you want to determine your fourth quarter DPO, for instance, you’d take December 31^st’s balance sheet and use the trade accounts payable as your numerator, then for the denominator you’d use your cost of sales for the fourth quarter. You’d then multiply that quotient by 92 days (the number of days in the fourth quarter).

When making a quick assessment of a cash flow problem, the DSO and DPO are the CFO’s go-to metrics.

If I told you that a baseball set of bat and ball together cost $1.10, and then I said the ball cost one dollar less than the bat, how much would you say the ball costs?

If you said 10 cents, you fell for the same trick as many before you, and you are wrong. If you said the ball costs 5 cents, you saw through my monetary trick, and you are correct. The knee-jerk reaction for many is to say the ball is 10 cents, but if that were the case, the total cost for the baseball set would be $1.20. If you stop to really think about it, the problem is simple; you just have to remember it’s “the ball costs a dollar less than the bat”, not “the ball costs a dollar less than the total price”. So if we know that whatever the ball costs is a dollar less than whatever the bat costs, and the total cost of the set that we can’t go over is $1.10, we can simply say, “A dollar is part of the cost of the bat, so take that away and I have $0.10. Luckily, that number splits in two evenly, leaving me with the answer: the ball costs $0.05, because that leaves $1.05 left in the $1.10 total for the cost of the bat, and $0.05 is exactly a dollar less than $1.05.”

This whole example serves to show just how easily financial numbers can play tricks on you. A Part Time CFO understands all the little tricks numbers can play, and helps business owners interpret financial statements correctly. When a business owner sees through the tricks numbers play and truly understands their financial statements, they make better business decisions.

If a company is making money, the P&L will look good, but the cash flow could actually be very poor if the cash cycle (the time between the out lay of cash for inventory and the receipt of cash from customers) is too long. You need to compress this cycle, which may involve negotiating with the trade for better terms or getting faster accounts receivable turnover by first getting more strict company credit policies. Another possible solution would be to extend the payroll from weekly to bi-weekly or possibly even monthly if it’s legal where you are. It could also be that some clients are over buying inventory, and so would need an inventory purchase and receipt plan.

To get an even better grip on all of the tricks that can fool you into thinking your profit accurately represents your cash, watch this 6 and a half minute clip:
Profit Does not Equal Cash Presentation

Understanding the equity section of your balance sheet leads to yet another trick financial numbers can play on you. The difference between assets and liabilities are given values in the equity section. A balance of high equity can deceive you if intangibles (such as patents and trademarks, goodwill, or non-competes) or fixed assets that depreciate in their actual value faster than the accounting depreciation calculation (such as equipment or machinery).

You P&L’s most accurate gross profit margins can still play tricks on you. Often, what should be put in direct cost of the product or service is put in cost of goods sold, and vice versa. Many business owners in the trades (like plumbers, electricians, manufacturers, construction workers, etc.), for instance, don’t put direct labor in cost of goods sold. That omission from cost of goods sold will lead to an inaccurate over statement of gross profit margins, which in turn will lead to bad decisions for business.

Helping business owners understand these tricks and therefore enable them not to get fooled and in trouble is a CFO Service that should be done early on with clients. The sooner business owners recognize these tricks financial numbers play, the sooner they can start making safer, more informed, and all around more productive decisions for their business.