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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