Cash Flow Management

First Step In Starting a Business

July 10th, 2010

Business Plans - A Brief Overview

Today I am going to talk about business plans. The need for a business plan is a highly debated topic. In my view it is a must no matter how big or small your company is. This is an often ignored component of a person starting a business. However, not only should it be done when starting a business, but it also should be done no matter how long you have been operating your business. It does not have to be some long elaborate document if you are preparing it for your own benefit and not for funding. If you are preparing the business plan to get funding you must prepare a complete plan, but if you are preparing a plan to give you an operating basis then at a minimum your business plan should include an executive Summary and a Marketing Plan. I say you should at least do this. With the exception of the marketing plan there is no need to go into great detail. At the end of the show I will give you the reason why you should have a business plan.

An Executive Summary – Today I am going to give you an overall checklist for your executive summary. The executive summary is the most important part of your business plan because it is the first impression you are going to make on the reader. It sets the tone for the entire plan and it tells the reader whether they should read on or not. The executive summary should be 2 to 3 pages and there should be no more than one paragraph about each of the following topics:

• Overview - Emphasize the most compelling and gripping item of your business.
• Top Management – Who are you and what have you done before. If you are the only employee list your advisory board.
• Market – How big is the Market and how fast is it growing.
• Customer Need / Customer Pain – How big is the customer need and give evidence
• Product or Service innovation – How is your product or service better
• Go to Market Plan – Include Staffing, distribution and pricing
• Why now? – Why is the timing of your product good now?
• Competition – Who is the competition, how big are they and what are their strengths and weaknesses.
• Financials – Summary of P & L for 3 to 5 years and what are your capital needs if you are looking for funding.

Marketing Plan – The Marketing plan is the most important component to your plan. Do this section well. The marketing plan is the business. You can sell anything if you market it right. Have someone who you respect in business to review your marketing plan and listen to what they have to say.

Market Planning:

● Do you sufficiently understand your markets, your customers and the competitors?

● Do you have a firm grasp on the customer needs for the next three years?

● Does your current product portfolio keep pace with expected technology changes?

● Do you have a three year product and services plan?

● Do you have the right skills internally to be able to answer these questions objectively?

Sales Planning:

● Do you have a cost effective sales process in place for the next three years?

● Where do you have to evolve to in terms of processes and sales models?

● Do you have the correct sales organizational structure in place for the next three years?

● Do you have documented processes?

● Do you have an effective online sales strategy both internally and for our customers?

Once again I would prepare a complete business plan, but at a minimum if you could just do the executive summary as I outlined and the marketing plan, you will at least completed what I consider to be the bare minimum.

To obtain a terrific FREE E-Book written by Jack Derby of Derby Management entitled “Writing the Winning Business Plan” go to:

http://www.derbymanagement.com/our-services/business-planning/

Jack is an Angel investor and Venture capitalist so he has the perfect perspective in writing business plans. (read more)

Starting A Business? Get an Advisory Board

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, especially if you are just starting a business. 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 management nor is it wise to do so. 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:

CPA’s
Lawyers
Insurance Agents
Part Time CFO’s
A Technical or operations person

When we come back after our 80 second break I will go over each member that I am suggesting be on the advisory board and where they would have value. We will be right back

Ok we are back – Once again here are some of the members you could have on the 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. CPA’s can also refer you to funding sources and other support services including referring to you more business. A CPA also can give great business insights.

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. Don’t let me get off on that tangent because I will be here for days talking about legal bills. 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 but can also give you sound business advice and can identify risks at the same time. It is important to have an insurance agent because when someone comes up with a unique idea the insurance agent can ad input as to whether the idea will require insurance or if insurance is even available. I used to run a tents sale which was a four day retail sale that occurred in a tent outside of the stores. I never knew that weather insurance was available, but I had an insurance agent on my board and that is how I knew it was available. One year a hurricane hit one week after the sale!! I decided not to buy the insurance that year. Sometimes it is better to be lucky than good!

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 because the CFO will have insight as to the financial ramifications of any idea proposed by the Board.

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. Do not feel the need to establish the entire group all at once, maybe for now you just have a CPA and an insurance agent and you can begin with them while you are developing other relationships with a lawyer or a technical person.

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.

Another creative way to create an advisory board is sometimes referred to as a “Mastermind Group” This is a group of 4 or 5 business people who become advisory board members for each other. For example you would meet once per month and each meeting is dedicated to only one members business. There is also an organization called Vistage and these are groups of CEO’s from different industries who get together and discuss each others businesses in an objective way.

Another great way to get business advice is through non-competitive peers. When I was in the Ski Retail business I belonged to a buying group. The buying group was made up of fellow ski retail business owners from around the country and of course since most of them were in many different states and therefore were not competitors. I always used to solicit the opinion of many of my comrades in the buying group. You can also do this by simply going to national trade shows. Certainly there are some business segments like manufacturing where everyone in the country is a competitor, but if you are in that situation you can go to trade shows and visit or have an employee visit your competitors booths. You will be amazed at the feedback and ideas you will get from buying groups and trade shows. (read more)

Managing Expenses

If you are starting a business the preservation of capital is critical to whether you will be successful or not. This means managing all expenses, but especially the largest expenses. In most businesses the largest part of their expense base is Rent, Payroll Advertising and Insurance. Focusing on managing these expenses will provide you with the biggest bang for the buck.

Rent- Business owners think it is impossible to re-negotiate the rent because you have a lease, but the landlord does not want to lose a tenant, especially a commercial tenant where they would have to do another build out and/or deal with the cost of vacancy. Most landlords understand cash flow problems because many of them have experienced cash flow problems themselves through real estate downturns. What I found to be the best way to negotiate with the landlord is show them your financial statements and show them what concessions you need in the short term based on the financial position of your business. Then show the landlord how you are going to pull through the difficult times and how his rent concessions are necessary in order to pull through. Be as open as possible. If you have to, you can add the concession money to the back end of the lease or you can add another year to the lease as a way to give the landlord something for the concession.

Payroll - There is usually always a way to cut payroll, whether it is by laying off employees or reducing employee hours. Certainly you work to keep your "A" players and let go the inferior workers. In retail, another strategy to cut payroll hours is to change the store opening and closing times so there is only one eight to nine hour shift.

Advertising - I don’t like cutting advertising, but there are ways to cut advertising without making a dramatic impact on sales. If you have been tracking what works for you, then of course you will know what to cut by eliminating the advertising that is not working. Other ways to cut is by reducing sizes of ads, changing from 4 color to 2 color printing, developing more of a web presence using search engine optimization strategies or doing more 10 second cut-ins on the radio versus 60 second spots. If you have not been tracking your advertising then you must make difficult, uneducated choices as to what to cut. Consider this. The better job you do in cutting Payroll, Rent and Insurance the more you will have for advertising and if you monitor your advertising you can be sure to put those additional dollars toward the most productive advertising.

Insurance – Start with health insurance. Get quotes from 4 health insurance providers. What I found is that although rates are basically the same, you will find one creative provider who will figure out a way to cut your Medical Insurance cost to the lowest possible amount. You may also have to reduce the employer paid portion and put more of the cost burden on the employees.

Get quotes from 4 commercial insurance providers. Commercial insurance carriers get very competitive and usually sharpen their pencils on General Liability insurance policies. If you have an umbrella policy, reassess the need to continue it.

Here is an example:

I had a client in the construction business that had an umbrella policy that was costing them $17,000 per year. However the only reason for the umbrella was to bid on huge commercial jobs. The previous year they never won a bid of any of these large commercial jobs. They were not even close. Large commercial jobs were not the market that they could compete in. Their sweet spot was mid range jobs that did not require they carry an umbrella. We dropped the umbrella and saved $17,000.

Most business owners wait until there is a downturn in their business before they assess the size of their overhead. Assessing the size of overhead should be an ongoing process no matter how good or how bad business is. The key to managing overhead is to review your P & L every single month and if an expense is higher than it was the previous year you need to find out why. The next step is to pick 3 expenses every month and get competitive quotes to stay on top of changes in price in the marketplace for that product or service. (read more)

Collect Your Receivables

For those of you who are starting a business I need to prepare you for collections. I would like to talk about doing business with slow paying customers and establishing a credit policy.

Lots of my clients continue to do business with customers who are slow paying or who do not pay at all. Sometimes they do it because they know the customer personally. Sometimes they do it because the customer has been with them for years. Sometimes they do it because business is bad and they need to keep people working and they will do anything to get business. Whatever the reason it is a bad business practice to do business with customers who are slow paying or do not pay at all.

Here is an example:

I once had a client who did business with many of his long time customers who always paid slowly. When I first went to the client’s office they had $150,000 in over 90 day receivables from these slow paying customers out of a $250,000 total receivable balance. These customers were even slower to pay than previous history, but since they were long time customers no action was taken. Times were tough and these customers knew by blowing off my client’s bill nothing would happen. I immediately put all of these customers in collection and we refused to do business with them in the future. Some of these customers still came back to us and paid COD. Overall, collections improved dramatically.

There is no rule of thumb to determine when a customer is slow paying. It is different for every business and the business owner needs to determine in a policy how many days past due is considered to be a slow paying customer.

Establishing a system of collecting accounts receivable so that your receivable strategy is consistent and timely is critical to successful collections. 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 customer’s answer then send a 10 day Demand Letter, requiring payment within 10 days or the 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 with the same staff that did the original collection and is familiar with the case. I only do business with collection agencies that take no more than a one-third fee and have a legal staff. Once again the key to the collection process is consistency and timeliness.

If you are starting a business I hope I was able to convince you to make a credit policy and stick with it. (read more)

Choosing Suppliers

Before you start a business, make sure you have lined up all of your suppliers, especially if you are a retailer. Many times suppliers protect larger establishments in the market place.

Today I would like to give you a check list of items to consider when selecting a supplier. Remember every item I am going to point out and discuss is negotiable:

* Price - that one is obvious

* Price breaks - Price breaks are the quantities needed to be purchased for lower prices to take place

* Terms - When do you receive the product and when do you have to pay for it.

* Freight costs - Who is going to pay the cost of transportation

* Turnaround time - How quickly can you get reorder product. Understand what
the turnaround time is and how quickly you can get product once ordered. Companies 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 companies with cash flow problems because sometimes you just need small quantities.

* Minimum quantities - are there any minimum quantities that need to be purchased upfront as well as are there any minimum quantities that need to be purchased in a reorder

* How does the vendor stand by their product? Does the vendor have any warranties or guaranties to you and the end consumer? How do you think the supplier would handle a recall? It is very important that a vendor stands by their product. If something is wrong with the product either quality wise or technically the retailer must have assurances that the vendor will issue proper credit upon the products return. Understand what the vendor's restocking fees are for product incorrectly ordered. Unless the company is in an industry where there are a lot of special orders, vendors should wave restocking charges.

* Restocking charges - Are there any restocking charges should product be returned?

* How efficient is the product to handle - How efficient is it to bring the product through your warehouse, is it easy to ticket and price?

* How efficient is the product packaged - Is the product easy to display? Does the product fit in your merchandise plan? Is the package appealing to your customer? 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. For example, although the pink panther insulation is more expensive, it is much easier to install and more recognized in the construction industry making up for any increase in the price of the inventory.

* What type of support are you getting from the vendor to help sell the product i.e. sales reps at big sales events, co-op advertising or signage - I used to get a significant amount of money from suppliers for co-op advertising by just running specials for a week of their product in the store. Does the vendor offer special displays and fixtures that they are willing to put free product on to help pay for the display? In other words vendors could charge for the display but fill the display with free product in order to help pay for the display. 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 you run into a cash crunch it is always nice to know that the vendor is willing to work with you and that their credit policies are flexible enough to work through shifts in the economy or industry downturns. That leads me to

* How flexible is the Vendors credit department. Are they people you can develop a relationship with or are they hardliners and difficult people to deal with? It is important that the philosophy of the company's credit department is to be flexible during difficult times. You will probably need their help some day.

* What products that the vendor sells do your competitors sell? This is always a sticking point. You may decide not to carry a supplier’s product that another consideration is what the competitors sell. On the other hand 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 you serve.

* Can orders be canceled without penalty? I need flexibility here, if inventory is not selling the way I expected it to sell I need to be able to cancel orders without a penalty. I hate all these penalties and charges that some suppliers throw at you.

Looking for the best price is obvious, but understanding where the quantity discounts or price breaks as 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. Have you ever heard of asking a vendor for markdown money? Markdown money is partial credit from the vendor for product that has poor sell through. If you are a credible business and can show the vendor that you gave every effort to sell the product and it did not sell through have the vendor share that responsibility.

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 in doing business with you. These checkups can give indications as to what their next move might be.

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 and those Starting A Business. Your CFO should prepare an inventory plan. The flexibility to cancel orders without penalty helps prevent you from overbuying. Don’t let suppliers lure you into excessive quantities of inventory!!! (read more)

The Risks in Partnerships

Today I am going to be talking about all of the ramifications of becoming partners with another person. When starting a business many individuals seek partners and partnerships.

Partnerships can be a terrific way to pool resources and a great opportunity to increase your capital reserves. However there are some things that you need to know about having a partner that are very important. When two or more people get into business together there is risk that needs constant assessment. However, more importantly there is and should be an extensive thought process as to whether or not it is a good idea to partner up in the first place. Getting involved in partnerships is a major decision in one's business life.

Partners in business together must have the following characteristics:

* All partners must be logical and unbiased 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(s) being disadvantaged is logical in their thinking to be able to separate what is right for the business from what is right for the disadvantaged partner. If this is not the case the partnership is in for some rough going. Is your partner or partner to be logical and unbiased in their thinking? It is critical that they are as you will see in all of the other characteristics that I talk about.

* All partners 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 partner's opinion the dissenting partners must be at peace with the decisions in order to bring the group back to harmony. If this does not happen grudges are formed leading to further problems in the partnership. This especially happens when there are only two partners in a 50-50 partnership (sometimes referred to as a dual suicide) and there is a one to one tie in a decision that needs to be made. One partner wants to go one way and the other partner wants to go the other. The first thing to do is to see if it makes any sense to do a hybrid of both decisions. This means take something from each decision to make a final decision. If that does not make sense then the partners need to collectively determine if one partner has more expertise in the area being discussed than the other partner. This is when egos need to be cast aside. If one partner has more experience and expertise in a particular subject then it is usually best to go with the decision of that partner. Once again you are assuming that the partner with the expertise is logical in their thinking. If the issue is still not settled, then each partner has to look at the risks and opportunities of each point of view. When that is done and egos are cast aside and the risks and opportunities of each point of view are carefully evaluated, then one partner usually sees the other point of view. Can you do this with your partner or partner to be? Are you at peace when your decision is not accepted? Is your partner or partner to be at peace when their decision is not accepted?

* Partners cannot be bitter if they get diluted or when the ownership structure changes. There are many times when a business needs more money and the partners have to ante up or look outside for other funding sources or even close the business. Sometimes there are partners who do not have the money or do not want to invest in the 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. One reason a partner may become bitter is the partner who is not putting up money may have been the founder of the business and is now being diluted to where they are a minority stockholder. This is a difficult pill to swallow for a founder. However, it is only fair to the partners who are risking the additional capital that they get additional stock for the risk they are taking. Dilution can also happen when none of the company's partners do not have the money to keep the business going and need to go outside to get money. The dilution when going outside tends to anger minority partners but it is only fair and it is part of the rough and tumble world of commerce.

* Partners must understand the rough and tumble world of commerce. Partners must be prepared for troubled times in the business. Exemplified by, lower salaries, dilution, difficult cash flow problems and personal guarantees. The character of the partners must be in harmony during these periods. One thing most partners do not understand is personal liability. Normally, business partners have to put up personal guarantees to get loans, credit cards and leases. Of course the partners should do everything they can to avoid personal liability, but there are situations where it is the only way to move forward. When all partners sign a personal guarantee it is almost always joint and several which means that all partners are personally liable for the entire amount of the debt. As a result, it is conceivable that a minority partner could get stuck with 100% of the debt. All partners must be aware of this and must agree in writing on how the personal liability exposure of all the personal liability scenarios is handled. In other words just because legally one partner gets stuck, an agreement needs to be reached beforehand on how the partner who got stuck is going to get reimbursed for the other partner's share of the loss.

* Your Partner must be as passionate about the business as you are. If your partner(s) does not feel the passionate fire about the business and that burning desire to succeed at the same level that you do then it is best not to go into partnership. If every partner isn't sharing the same enthusiasm and the same commitment level then friction is likely to develop because it will show in the effort exerted. Many partnership problems stem from one partner not thinking the other partner is carrying their weight. More times than not this starts with the energy level which is fueled by the passion the partner has for the business. If it is not the same as yours it is almost a certainty that you will not think your partner is carrying their weight. You will develop resentment and then trouble ensues. By the way, if you do not feel a passionate fire about the business you are starting or if you do not have a burning desire to succeed then forget about finding a partner, you are best served not starting a business at all. In future articles I will address the attitude you have to have when starting a business.

* Not all partners are created equal with regard to salary and work hours. 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. This is difficult for many partners to understand. Partners think that they are all equal when it comes to salary. You would not pay an assistant store manager the same as a CFO. Comparisons need to be made as to the open market value of each partner in order to determine the proper salary. It is highly improbable that each partner will work the same amount of hours in the business. Some partners simply have more things they have to attend to outside of the business. Both the role the partner plays in the business and the hours worked make it improbable that you both should command the same exact salary. These things need to be discussed up front and agreed upon in advance of the relationship. How profit ultimately gets split is a different story. Profit should be split based on the percentage of ownership in the company and have nothing to do with salary and hours worked.

* Only one person can run the company and the day to day of the business. It is a good idea for one partner to take the lead role in the business. That way one person will 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. Before the partnership begins, this issue needs to be addressed. Although it is important for the suppliers, customers and employees to have one point person, the suppliers, customers and employees need to know that you have a partner(s) so they understand how decisions that may have been made can be changed.

* There is no room for "I told you so". If either you or your partner(s) or prospective partner(s) are "I told you so" people the partnership is doomed to fail. For example, let's say that you are in a 50- 50 partnership with one other person. Let's assume for this example that a very difficult decision has to be made relative to the hiring decision of a key employee. Let's also assume that you think person A is the best choice and your partner thinks person B is the best choice. Let's also assume that you go through the logical steps outlined earlier when there is a gridlock between partners. Let's assume that after that logical process your choice (Person A) is chosen and eventually hired. Your partner grudgingly agrees. Person A turns out to be a problem employee and a bad choice. Your partner tells you repeatedly that they told you so and that it was a stupid decision to go with person A. How do you like that? Partners have to realize that bad decisions are going to be made in a business and no matter which partner was leaning which way the worst thing one can do is say I told you so. It will create bitterness and will destroy the partnership.

* I am sorry but majority rules. When one or more partners control the majority the majority rules the day. No matter how unfair one thinks that is. It is simply an absolute law in business. Yes, that means the majority can make all of the decisions and if you are a minority partner you are going to have to live with that no matter how much money you put into the venture. Some partners cannot deal with this fact and before you enter into a partnership with someone please make sure they understand the consequences and think through all of the possibilities that can occur because of this absolute rule!

It is important to note that these partnership parameters laid out in this article includes offering employees stock options or grants. When you offer employees stock options or grants they are partners! If you do offer employees opportunities to own stock then make sure it is at least vested. Vesting means that they have to work a certain amount of time or certain very specific goals are achieved before they actually are a stockholder.

The best thing to do with this information regarding partners is to review all of these points with your potential or current partner beforehand and document what you have agreed to so that when these situations come up and emotions get high you can refer back to what you agreed to in calmer times. Partners need to go into these business deals with their eyes wide open and need to take into account all the factors that are involved in partnerships.

Here is my final word of advice. When you go into partnership with one or more people you need a partnership or stockholder agreement and make sure the points covered in this article are covered. Believe me, this is a must. (read more)

Understanding Personal Liability Exposure

One thing that business owners never put much stock in, is knowing exactly where they are personally liable. Many business owners think that the corporation protects them from everything. This could not be further from the truth. The corporation protects you from most things, but not all things.

In my view identifying, assessing and mitigating risk is the most important functions in my role as Part Time CFO.

One of the first risks I am going to identify for the new business owner is Personal Liability Exposure. The first things I investigate are bank loans, equipment leases and property leases. If these exist there is a strong likelihood of personal guarantees. Although the corporation is the primary guarantor of the loans or leases it is inevitably backed by the business owner's personal guarantee. The next thing I look at is if there are any personal guarantees with inventory suppliers. This is one the hidden sneak up on you type of risks. When one fills out the credit application to do business with an inventory supplier, more times than not there is personal guarantee language in a separate section of the application. One way to flag this is if you have to sign twice on a credit application, one of those signatures is probably a personal guarantee. Anytime I am filling out a credit application for a client I always cross out the personal guarantee language section and do not have the client sign that section. However, most business owners feel it is part of the application and fill it out and when they do, they become personally liable and exposed on their inventory purchases. 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 the business owner signing the personal guarantee as bonus security and they do not care if the the customer crosses it out.

Here is another area of personal guarantee that goes unnoticed.

All fiduciary taxes such as payroll taxes, payroll withholding, withholding's of medical insurance premiums and sales taxes must be paid. If left unpaid, this will create more personal liability especially for whoever is the treasurer of the corporation. Unpaid corporate income taxes may also create personal liability.

Company credit cards outstanding represent more personal liability risk for the business owner. The business owner or CFO should at least look at the possibility of one of the versions of the Corporate American Express Card that have no personal liability to the business owner. I recently got one for a client. They are not easy to get, but it is well worth looking into to see if you qualify.

Generally speaking the business owner usually thinks nothing of the personal liability exposure in the areas I just mentioned until the business is in trouble and someone alerts them to the exposure. Whatever services the business owner needed whether it is a bank loan, inventory, a credit card etc..., they needed it and that is fine, but what I am saying is at least know your exposure. In other words I understand why you signed the personal guarantee, but it is critical that you are aware you signed it and that you know where you have personal guarantees. For example, if you know you have a personal guarantee with an equipment lease and your cash flow dictates that you can pay either a telephone bill or the equipment lease payment but not both, by knowing you have a personal guarantee with the equipment lease, in my view it is wise to pay the equipment lease first. It just makes sense for your own protection.

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, its credit card payments or its inventory payments or whatever payments there is personal liability exposure? Are these payments current now? Is the current and projected cash flow strong enough to at least make these payments? If not, has the owner begun to research and utilize asset protection strategies to protect their personal assets should they come under attack? These are the questions you need to ask yourself. So the suggestion is, if you currently own a business or if you are starting a business, identify assess and mitigate your personal liability exposure. If you are not in business as of yet understand that the corporation is not going to fully shield you from personal liability and understand the areas where you will be personally liable. If you have a business partner make sure they understand what the personal liability exposure is and how you are going to share that risk. (read more)

Starting a Business

The eagle asks the question while teaching their young to fly:

Why does the thrill of soaring have to begin with the fear of falling?

My answer is:

If it were not for the fear of falling there would be no thrill of soaring.

When you achieve success in business you experience the thrill of soaring. However there are many times along the way that you fall on your face! The most unexpected things in the world happen when you start and operate a business. Things that you never think could happen in a million years. Some are Positive things, but also negative things. This blog will not eliminate those negative things from happening. This blog will only serve to reduce those negative things from happening allowing you more opportunity to create the positive things to happen.

In this blog I will try and capture all of the challenges along with recommended solutions to do everything I can to help you achieve that thrill of soaring.

Below is link to a podcast I did that provides a good start to the challenges of starting a business:

Podcast on running your business like a business

And to you "All of the Luck and Success in the World in Starting a Business!!" (read more)

Tags: First Step In Starting a Business, Starting A Business
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Cyber CFO Podcasts

July 10th, 2010

EPISODE24 - Options For Troubled Businesses - Cyber CFO Show 19

This show explains some options for troubled businesses. After listening you still need to consult an attorney, but the show at least makes you aware of the possibilities when your business is distressed, insolvent or troubled. (read more)

EPISODE23 - Running A Business Like A Business - Cyber CFO Show 18

Giving some tough love to the Entrepreneur who needs to run their business like a business. This is great also for first time business owners. (read more)

EPISODE22 - Value of Business and Cash Flow Forecasting - Cyber CFO Show 17

Trying to wake up the small business owner to the value of business and cash flow forecasting. (read more)

EPISODE21 - Overhead Calculations in Cost - Cyber CFO Show 16

Many Business Owners frequently overlook incorporating overhead and labor burden into their product cost calculations. This episode shows you how (read more)

EPISODE20 - Risk of Employees Continued - Cyber CFO Show 15

The Risk of employees, Getting rid of sub par performers, providing incentives for good employees, information on benefits and the importance of an employee handbook (read more)

EPISODE19 - Risk of Employees & Contract Manufacturers - Cyber CFO Show 14

Having employees and hiring a contract manufacturer (read more)

EPISODE18 - Cash Flow Problems and Strategic Partnerships Cyber CFO Show 13

The Cyber CFO discusses other sources of cash flow problems and the value of forming strategic partnerships. (read more)

EPISODE17 - Cyber CFO Interview WBNW

The Cyber CFO, Michael Barbarita was interviewed on a local Business Radio Station WBNW 1120 AM on 04/16/10 (read more)

EPISODE16 - Unexpected Events - Cyber CFO Show 12

Underestimating cash required for a new venture, Unexpected events and Cash flow problems with fixed asset purchases. (read more)

EPISODE15 - Employee Theft - Cyber CFO Show 11

Employee Theft or Embezzlement Information and examples of employee theft. (read more)

EPISODE14 - Proactive in Discovering Cash Flow Problems - Cyber CFO Show 10

The importance of being proactive in discovering cash flow problems and dealing with too much debt. (read more)

EPISODE13 - Know Your Competition - Cyber CFO Show 9

Know your competition and how to go about learning about and learning from competitors. (read more)

EPISODE11 - The Business Plan - Cyber CFO Show 8

The Business Plan - What is needed as a bare minimum to manage your operations and how to get information on how to prepare a complete Business plan in order to raise Capital. (read more)

EPISODE9 - Having an Advisory Board - Cyber CFO Show 7

Advantages of Having an Advisory Board for your business and who to have on your Advisory board (read more)

EPISODE7 - Slow Paying Customers - Cyber CFO Show 6

How to handle slow paying customers and monitoring key expenses (read more)

EPISODE6 - Inventory Can Kill You - Cyber CFO Show 5

Having too much Inventory and Controlling the Owners salary (read more)

EPISODE5 - Finding the Right Suppliers - Cyber CFO Show 4

A Checklist on Finding the right supplier for your business (read more)

EPISODE4 - Choosing A Business Partner - Cyber CFO Show 3

Information on what you should look for when choosing a business partner. (read more)

EPISODE3 - Personal Liability Exposure - Cyber CFO Show 2

Information on Personal Liability exposure of a business owner (read more)

EPISODE2 - Introduction Cyber CFO Show 1

Description of the Show and background of the host. Cyber CFO, Michael Barbarita (read more)

Tags: CFO, CFO Services, First Step In Starting a Business, Starting A Business
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Core CFO Services

May 15th, 2010

In my view there are 3 CFO Services that encompass the majority of the needs of a business owner. They are:

1. Improving Cash Flow
2. Business and Cash Flow Forecasting
3. Development of Key Performance Indicators

Improving Cash Flow

The majority of reasons why a Part Time CFO gets called is to improve cash flow or to solve cash flow problems. Many times the business owner waits too long as they do not want to admit there is a problem or they do not want to think about it. There are many causes of cash flow problems. Here are a few:

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. Overhead too high.
5. Too much debt.
6. Undercapitalization from the beginning
7. Unexpected casualty or occurrence
8. Employee theft or embezzlement
9. Excessive purchases of fixed assets and capitalized costs.
10. Operating losses
11. Paying bills too quickly
12. Selling prices too low / not knowing what your product or service costs.

It could be one or a combination of several the above factors. It is the job of the CFO to identify the cash flow problems and work to solve them.

Business and Cash Flow Forecasting

Business and Cash Flow Forecasting gives the business owner the following benefits:

1. It helps identify expenses that can be cut
2. It helps identify business risk
3. It helps you to become proactive versus reactive
4. It helps you to view multiple “what if” scenarios
5. Knowing what your cash requirements will be in the future
6. Answer questions that so many business owners often ask like
a. Should I add/deduct an employee?
b. Should I add/deduct a product line?
c. Should I buy new trucks/equipment?
d. Should I add/deduct a location
e. Will I run out of cash and when?

Key Performance Indicators

Key performance indicators many times referred to as metrics or KPI’s are ratios or a concise piece of analysis that assesses or evaluates a particular part of the business. This part of the business being assessed or evaluated is either a critical part of the business or a part of the business that tells much of the story.

Key performance indicators are different for every business. They are also very likely different for companies in the same industry. Some examples of Key Performance Indicators are:

Quick Ratio – Current Assets divided by current liabilities – A measure of the company’s liquidity

Direct labor Costs per hour – Payroll plus Labor Burden divided by the number of direct labor hours – A measure of direct labor costs per hour.

Fixed Overhead Rate – Fixed Overhead divided by sales – A measure of your total fixed overhead.

Profit Margin by Product – Sales less cost of sales divided by Sales – A measure of profitability by product.

Inventory Turnover – Average 12 month* Inventory divided by 12 month * Cost of Goods Sold – A measure of how efficiently you are selling inventory.

* This Metric could be used for any time period.

I hope you can start to see that these 3 CFO services are truly the core of what the CFO does.

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Information From a CFO

December 13th, 2009

A Little Brick and Mortar Mixed with the Virtual at CPA for Small Business

As I discussed in my last post, CPA for Small Business, LLC has experienced quite a bit of growth the last two years and that the volume of work has been high over the last twelve months. As a result,... (read more)

Clients Come First, I’ll Write Virtual CFO Blog Post When I Can, Changes Coming

OK, it’s been a month and a half since my last Virtual CFO Blog post. I probably should have taken the advice Bill Seaver (social media guru at MicroExplosion Media) gave me in April and written a post explaining why... (read more)

Staffing a Growing Entrepreneurial Business –Culture, the Secret Sauce

Merriam-Webster.com defines culture as “the set of shared attitudes, values, goals, and practices that characterizes an institution or organization”. I define culture as the secret sauce that makes your company unique and differentiates it from the competition. It is the... (read more)

Staffing a Growing Entrepreneurial Business – A Good Dilemma to Have

“If your company isn’t growing, it’s dying” (Old business adage) Over the last couple of weeks, I’ve had conversations with several of my Virtual CFO clients about the growth of their businesses. One of the main topics of discussion has... (read more)

After a Break, The Virtual CFO Blog is Back

I just looked at the Virtual CFO Blog and noticed that I hadn’t posted anything since April 6th. Well, that’s about to change. But I want you to know that there are several good reasons I haven’t blogged in almost... (read more)

Support for My April 22 Haiti Trip

Over the last three weeks, I have had a number of clients and friends ask how they could support my mission’s trip to Haiti later this month. I wrote a support blog a few weeks ago, but the trip I... (read more)

Small Business Accounting Personnel – Chief Financial Officers

Chief Financial Officers (CFOs) are the top financial managers at small businesses. CFO’s provide small business owners with high-level financial management, analysis, and advice. At many firms, the CFO is the right-hand man/woman to the owner. Generally, the owner takes... (read more)

The Virtual CFO is Going to Haiti in April and Would Like Your Support for the Trip

As you are aware, one of the worst natural disasters to hit the western hemisphere occurred in the Haitian capital, Port-au-Prince, on January 12th of this year. The current estimate of the death toll of the earthquake is 217,000. Time... (read more)

Small Business Accounting Personnel - Controllers

A controller is responsible for the functional accounting duties in a company. In small and entrepreneurial businesses, a controller is often a bookkeeper who possesses an accounting degree. In these firms, the controller often assists the owners with financial management... (read more)

Small Business Accounting Personnel - Bookkeepers

Bookkeepers are usually the first professional accounting personnel that you’ll hire at your small business. Bookkeepers are responsible for the functional activities of your company’s accounting, such as payroll, accounts payable, accounts receivable, invoicing, etc. There isn’t really a standard... (read more)

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CFO Information

December 13th, 2009

No Turning Back

Small businesses are more pessimistic about the economy. (read more)

Oversold Today, Undersold Tomorrow

The short-term impact of cloud computing is probably overstated, but its long-term impact is underestimated. (read more)

Building a Playpen for Derivatives

Economist George Akerlof argues for more derivatives regulation. (read more)

Why the SEC Settles for Settlements

Allowing companies to opt for "neither admit nor deny" agreements, the regulator can generate more lawsuits, according to chairman Mary Schapiro. (read more)

Mercurial Markets Cost Money

The stock market's plunge on May 6 put a chill on IPO activity. (read more)

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Cash Flow Management

December 12th, 2009

Cash is the lifeblood of any business. Without cash a business cannot survive. Two critical services performed by the The Part Time CFO are:

1. Solving Cash Flow Problems
2. Forecasting Cash Flow

Cash Flow Problems are caused by:

Too much inventory.
Too much salary to owner or too many withdrawals by owner.
Doing business with customers who are slow paying or who do not pay at all.
Overhead too high.
Too much debt.
Under capitalization from the beginning
Unexpected casualty or occurrence
Employee theft or embezzlement
Excessive purchases of fixed assets and capitalized costs.
Operating losses
Paying bills too quickly
Selling prices too low / Not knowing what your product or service costs.

Take a look at this list. Which area do you think is your biggest cash burner? Even if you do not have a cash flow problem you should assess your risks in all of these areas. If you do have a cash flow problem you should assess which areas are burning the most cash and work to address it.

Business Forecasting and forecasting Cash Flow is another important CFO Service. Business owners should know in advance if their business is going to require additional cash so they have time to obtain it or better yet knowing what cash needs are in the future will give the business owner the time to manage the business more effectively potentially circumventing the need for the additional cash. A CFO can provide you with the forecast and the best strategy to go forward.

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CFO Services

December 12th, 2009

Bookkeepers and the CFO Work Great Together

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.

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CFO Must Find The Softest Landing Possible

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 isn't 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 UCC's). The seller needs to be prepared to offer settlements to creditors giving priority to creditors with personal guarantees. This is not easy to do but can be a way out. In this option the trade knows the strategic buyer and although the trade knows they have probably lost the receivable they have a stronger company to do business with who they are familiar with.

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

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Calculating Overhead

There are 3 components of cost. These 3 components of cost are material, labor and overhead. As a Part Time CFO, I see a lot of business owners eliminating overhead from their cost calculations. This can lead to operating losses and cash flow problems.. Usually the reason the business owners misses overhead is they do not understand how to calculate overhead nor do they know how to incorporate overhead in their analysis.

The easiest way to calculate overhead is as a percentage of sales. Take all of the projected overhead expenses for the period you want to analyze. The period can be a month, quarter or year and divide these projected expenses by the amount of projected sales. As you go forward if sales are lower or higher than projections by 10% or more you should recalculate the overhead rate based on the new projected sales. The same recalculation needs to be done if your projected expenses are off higher or lower by 10% or more. This percentage needs to be applied to the sales dollars associated with each sales transaction or quote. You can also simply take last year's actual results for overhead and sales and perform the same calculation on actual results instead of projected results. I like to use projected results. Other than sales there are other ways to calculate overhead using labor dollars or labor hours, but I like to use sales.

There are many schools of thought regarding the calculation of overhead and incorporating overhead in cost calculations. Some do not like accounting for overhead in their cost calculations because they say no matter how much the sales price exceeds material and labor, the overhead will begin to be paid and that is their only objective. I say a couple of things about that. First, sales better be high enough otherwise if you employ this school of thought you will guarantee yourself you will not be profitable. Even if sales exceed material, labor and variable overhead by just a few dollars you will eventually pay for all of the fixed overhead but the sales must be high enough and that is a huge risk. Second, an argument can certainly be made that a sale that at least covers some overhead is better than no sale at all, however are you sure there is no other sale out there that you are not making that covers more of your overhead or all of your overhead or do you justify giving your product and service away just to make a sale knowing it is covering some overhead?

Note I added the term Variable Overhead above. Sometimes there are expenses that a business owner calls overhead, which can be considered overhead but are actually expenses that are variable to sales. Expenses such as credit card fees or gas where a service performed is going to require going to a specific location need to be identified as variable. Variable overhead should be incorporated as part of the expense component deducted from the selling price to determine profit before fixed overhead.

My view on overhead is that the business owner needs to know what the overhead component of their product or service is so that they know what their true bottom line is on each and every transaction/quote. Unless your expense and/or revenue projections are way off, knowing the true bottom line on every transaction will give you the piece of mind that all costs are accounted for and that the bottom line on the transaction/quote is credible. At the end of the day the business owner can use their own discretion as to whether a sale that does not entirely cover fixed overhead is worth making. If it were me I must be extremely confident that there is no other sale to make that will give me a better return before I would accept a sale that only partially covered fixed overhead. For example let's say you know with reasonable certainty that your business is in a state of low demand maybe due to seasonality or economic conditions. If I am convinced there is no other sale out there that is going to give me a better return or if I think the customer is worthwhile to keep because the customer will give me long term potential at higher profit margins then I would make the justification that I am at least covering some fixed overhead. Otherwise make sure your selling price covers all three components of cost which once again are Material, Labor and Overhead.

Calculating Overhead is one of many important CFO Services.

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Exuberance

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.

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Managing Cash

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.

CFO Services
CFO
Next Step CFO
CFO
CFO Services Boston MA
Business Forecasting
Cash flow Problems
Chief Financial Officer
CashTell
CFO Blog
Cash Flow Management
CFO Boston MA
Part time CFO
Interim CFO
CFO Duties
CFO Consulting

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CFO Services from One Piece of Paper

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 CFO's help their clients identify the key performance indicators in which to manage their business. Many CFO's 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.

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CFO Services - What Angels Need To See

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

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CFO Services - More than the Numbers

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.

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Communicate to your Investors

Many founding entrepreneurs of privately held companies do not communicate well with their investor stockholders. I have seen this many times and this is a recipe for disaster. What happens is the founding entrepreneurs are afraid to be the bearer of bad news and so they either do not report any bad news or sugar coat bad news and by doing so keep important information from the investor stockholders. Many times investor stockholders wake up one morning and find out the company is going out of business and their stock is worthless. This sets up the founding entrepreneur for liability as well as angry stockholders who lose confidence in the founder.

The rule of thumb is to communicate consistently with your investor stockholders good news and bad news and do not sugar coat the bad news. Your investor stockholders may have creative ideas to address whatever the issue causing the bad news is.

It is the role of the CFO or Interim CFO to guide the founder in this area and to make sure all of the news whether good or bad is being communicated clearly and to assist the founder in consistently communicating to their investor stockholders.

Michael Barbarita
Next Step CFO
Dedham, MA 02026
Tel: 781-326-3822
Fax: 781-329-6668
Web:CFO Services

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CFO Services - Inventory Management

One of the most important CFO services is good inventory management. Poor inventory management can cause cash flow problems that are irreparable. Over buying inventory if you're a retailer or distributor and over producing inventory if you are a manufacturer is one of the mortal sins of business because of the cash flow problems it can cause. One of the things that the forecasting tool called "CashTel" can do is identify the optimum inventory receipt and manufacturing plan for any level of sales that you project. This information helps you to know what adjustments to make to inventory receipts or production as sales fluctuate in the real world. It puts a measure of control on the inventory flow.

CFO Services Do you know if you need more Cash?

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

This is the question many business owners ask. Sure, start up 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.

By the way, if your bank has you on what is called Financial Covenants, knowing what your cash needs will be and if you are still going to be in compliance with those financial covenants shows your banker that you are on top of your business. Financial Covenants are parameters and metrics that your bank requires you to meet in order for your loan to be in compliance. If you miss a financial covenant you are probably in technical default on your loans. One example of a financial covenant that you may be under is what is called interest coverage. Interest coverage is how many times does your net income cover interest expense. If your covenant is that net income must be at least 5 times your interest expense and net income is currently at 4 times interest expense then you blown your covenant. A good forecasting tool can show if you are going to stay in compliance with your covenants in the future.

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CFO Services and Where the Business Plan Fits In

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 Interim CFO, I can tell you that business owners need to spend more time really thinking about the direction they want their 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 a relic 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 the business plan effective. At a bare minimum your business plan should include an executive summary, employee and headcount plan, a marketing plan and your perspective of how you are different from the competition.

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

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CFO Services - Executing the Exit Strategy

On previous posts I spoke of Exit strategies and the importance of having a solid exit strategy, but an as extension of that post I wanted to put together a checklist for the business owner to help them understand what they have to think about. By the way, these are tough things to determine.

Determine the value of your business
Determine how much money you need to live and be comfortable
Determine when you want to leave your business
Determine how you want to leave, meaning do you want to sell to a 3rd party? Do you want to sell to a family member? Do you want to sell to a key employee or partner?
Use your advisers like a CPA, Lawyer or Part time CFO to help you make these decisions
Build value in your business by keeping and motivating key employees
Work with your advisors to put together your estate plan and prepare a plan as to what will happen to your business should you die suddenly

This is an effective list for the CFO to lead the team of business owner experts in executing the exit strategy.

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Solving Cash Flow Problems - FREE REPORT

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

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Selling Prices Too Low?

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.

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Collecting Accounts Receivable

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 customer's 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.

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CFO's who understand the risks of business ownership

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 owner's 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 under performing 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 owner's 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.

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CFO and Business Forecasting

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.

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Should CFOs get involved with Search Engine Optimization (SEO)?

Does this sound a little out there? One of the CFO Services that I think adds real value to the business owner is a CFO who understands Search Engine Optimization (SEO). Who said that CFOs are all about the numbers? In today's business world the CFO has to provide services for their client that go beyond the numbers that really assess risk and find opportunity. In today's High Tech world giving the business owner guidance on SEO and getting them to the top of Google can really provide another opportunity for the business that did not previously exist. The thing that makes SEO suited for the CFO as part of a CFOs Duties is the detail orientation of a successful SEO plan. By understanding the components of a successful SEO plan and by properly delegating the plan to the right people the CFO can help the business owner generate more business and have added value as a CFO.

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Getting Rid of Stale Inventory

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 doesn't sell - a dog). We all do it, I used to do it. It is a peril of the game. DON'T 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. Don't 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.

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Payback associated with the right operating system

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.

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

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. Lot's 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.

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

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 Owner's goal setting

Shareholder Buy and Sell Agreements

CFO's 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.

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Should CFO's Track Patents and Trademarks?

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.

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CFO Duties

I think the CFO's responsibilities and the CFOs 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 company's 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.

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Personal Liability

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?

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Legal Risk

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:

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?

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.

Business operations - Does the nature of the Company's 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 customer's 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?

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.

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Risk of Under-Capitalization

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 entrepreneur's 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.

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Risk of Inventory

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.

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The Risk of Foreign Currency

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 it's 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 today's 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.

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Accounts Receivable Risk

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. Don't 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!

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Cash Flow Problems

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:

Too much inventory.

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

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

High Overhead too high.

Too much interest expense on debt.

Undercapitalization from the beginning

Unexpected casualty not covered by insurance.

Excessive purchases of fixed assets and capitalized costs.

Operating losses

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.

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The Risk of Fixed Assets and Intangible Assets

As a Part Time CFO . Many times I see company's 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 companys 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.

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The Risk of Debt

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 company's 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.

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Risk of Employees

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.

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Risk of Accounts Payable

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 haven't 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 Vendor's 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.

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The Risk of Key Operating Expenses

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 Company's 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 it's 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.

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The Risk in the Sales Line

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 company's 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 duty to review how pricing looks as compared with the company's 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 company's highest margin products.

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Understanding of Law - An Important CFO Service

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.

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The Risk in the Supply Chain

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.

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The Risk in Equipment

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

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

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

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.

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The Risk in Partnerships

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:

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.

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.

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.

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.

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.

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.

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The role of a CFO (Chief Financial Officer)

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.

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Diversity in CFO Services

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.

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The Importance of Business Forecasts

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.

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Employment Liability Insurance

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 client's 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.

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Inventory Purchases

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 vendor's 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.

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The Chief Financial Officer and Communication

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.

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Why Networking and the Part Time CFO

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.

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Daily Bank Reconciliations

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 customer's 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!

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The Chief Financial Officer and Strategic Partnerships

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 can't 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 can't they share leads and a finder's 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.

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Retailers, Don't get stuck with Inventory

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 supplier's 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!

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Exit Strategy, It is inevitable

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.

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Product Cost

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.

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Pricing Your Product

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.

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Break Even Point

I don't 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.

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CFO and Public Speaking Skills

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!

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CFO's : Why Companies Need Them

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 CFO's 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 the CFO can identify.

Another reason why companies need CFO's is for identifying and assessing risk. Today's 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 owner's risk. One example of that is looking into the Corporate American Express Card. Qualifying for certain classifications of corporate American express card will just have corporate liability and no personal liability.

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Why CFO's who work part time are valuable

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 today's operating systems and more sophisticated accounting modules, CFO's can turn more of their attention to areas that are more productive to the business owner. For example CFO's 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 CFO's on a part time basis they will not require benefits as most are of independent contractor status. These CFO's are also your CFO as long as you want to keep them. The Business Owner won't get a two week notice because they found another job. In closing CFO's 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.

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