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As a seasoned CFO with over 30 years of experience as a financial executive working with a wide range of businesses, I’ve seen that cash flow problems often stem from poor Accounts Receivables (A/R) processes. If you’re making any of these common A/R mistakes, I recommend you fix the situation ASAP!
• Having incorrect information in your system – As they say: garbage in, garbage out! Make sure that part numbers, prices and other details are entered correctly in the first place. And don’t forget to input price changes when they occur.
• Taking your time getting bills out – If you want to be paid on time you need to make billing a priority. Ideally, what you sell today gets billed tomorrow, so your customers have an invoice in front of them immediately. This way if your terms are X days from delivery of the goods, your customer has plenty of time to process their payment before it’s due.
• Sending out error-filled invoices – Your customers will reject incorrect bills. Some of the most common invoice errors that I see are:
• Wrong part numbers – Either the wrong part altogether, or the wrong variety or container size of the correct item.
• Wrong quantity – Billing for more or less than what was delivered, or misestimating how far along a job is for a progress-based bill.
• Wrong prices – Especially when the customer has been promised something other than your standard prices.
• Wrong sales tax amount – Taxing a non-taxable item (or vice-versa), or applying the sales tax rate from the wrong city or county.
• Ignoring customer balances – Are they paying their bills on time? Have they exceeded their credit limit?
• Avoiding collections – What often happens is that a company gets into their “busy season,” and the Accounting department struggles to keep up. Instead of reviewing the aging reports and making timely collection calls, they put statements in the mail and hope for the best.
• Failing to build relationships – Few bookkeeping professionals understand the value of building positive relationships with the Accounts Payable people at their customers’ sites. But the reality is, these relationships can get your bill in the first pile of bills to pay after the “must pay” items (such as electricity)—not in pile number six.
Need help getting your A/R processes in order? Give me a call. As your part-time CFO, this is one of the many services I provide.
Your Chart of Accounts can be an important tool to help you monitor your business and make intelligent decisions. Or not. It all depends on how things are set up.
The “generic accounts setup” should just be a starting point
Every business’ Chart of Accounts will include some of the same general accounts, such as cash, accounts receivable, assets, equity (hopefully), accounts payable, income, expenses, cost of goods sold (COGS), payroll taxes, etc.
However, I recommend that businesses never operate with just a generic Chart of Accounts, particularly when it comes to income and expenses. To really make your Chart of Accounts work for you, take the time to set up the accounts that are specific to your industry and how you want to monitor and manage your business.
What exactly would you like to be able to track and analyze? What level of granularity will help you determine how different aspects of your business are really doing? You need accounts that track this information
Example: Structural Concrete Contractor
Say you’re running a construction contracting business specializing in structural concrete services. To set up your Chart of Accounts, start with the “generic” recommendations for construction contractors and then customize from there. Some of the things you may want to track include:
• Labor costs by pay category – To give you an understanding of your regular time pay, overtime pay and fringe benefits costs.
• Materials expenses by material type – Ideally your Chart of Accounts will mirror the details in the “Schedule of Values” (i.e. a breakdown of what it will cost to complete the job) that you use to create your bids.
In other words, don’t just lump rebar, concrete, wood and other materials into one “materials” account. If you do, then if you go over on materials, figuring out why will take a lot of work. Tracking materials expenses based on the same line items that are on the Schedule of Values lets you easily make an item-by-item comparison of actual to plan and quickly pinpoint the problem area.
Having this information available is helpful even if you don’t have any overages. When you’re three months into a six-month project, this data will help you determine if you’re ahead of the game or behind.
• Indirect costs – Think about how indirect costs impact how you want to track the performance of the job, and set the accounts up accordingly.
Need help getting your Chart of Accounts set up right? Give me a call and put my broad experience to work for you.
Before your fiscal year began you went through a full planning process, creating a business plan and the detailed budget (including anticipated revenue and expenses) that goes with it. But if you’re not sitting down once a month to compare actual results to projections, that budget is not doing you much good. In fact, you’re missing out on these 5 key benefits that monthly budget monitoring can provide:
1. Gain a clear understanding of where things stand – Ensure management can clearly see both problems and positive trends in real time, rather than being surprised at year end. In comparing actual to budget, look to see if revenue and expenses are in line with your plan and in line with each other. For example, if your revenues dipped by 10% versus budget, did your variable expenses drop as well?
It’s also important to look at sales by product line and anticipated seasonality. If revenues are way ahead of budget due to the unexpected success of one highly seasonal product, what will things look like when the season ends?
2. Hold sales accountable for performance – If they’re exceeding budget, the sales team should be getting public recognition as well as increased commissions. If sales are off, the sales management team will know they need a new game plan to get on track.
3. Avoid cash flow problems – Any variance from budget can impact your cash flow and cash flow forecast. While dips in sales create obvious problems, unanticipated increases can, too. For example, if sales soared to 35% above the projected level, would you have the resources in place to support it. ?
4. See where your staffing levels should be – For manufacturing and operations, be sure to compare actual labor and materials with what was expected, and then compare this with sales to see if things are correlated. Variations may suggest the need to change your investment in raw materials or adjust staffing levels, such as by adding an additional shift.
5. Identify issues with your cost of goods sold (COGS) – Even if you’re on target with your overall revenue figure, if your COGS is higher than expected for this level of sales your gross profit will still be down.
The bottom line is, monitoring your budget on a monthly basis will give management a clear understanding of the current month’s results, how the company is performing year to date, and whether you’re ahead of the game or falling behind.
Considering selling your business? The time to start building value is long before you put the company on the market. To position your company so it will sell at the highest price, here are some of the things you should do: Create a 3-to 5-year business plan with projected financials. Include a narrative of what you expect to happen and the resources that will be needed to get there. Be sure your projected cash flow statement ties to your projected income statement and balance sheet.
• Assemble a strong management team. What I often see in small businesses is that the owner or CEO is the “face” of the company and, in effect, its only intangible asset. To sell the company you need to have a strong management team in place that customers and vendors are comfortable doing business with.
Give your managers authority to make decisions, and ensure that customers, vendors and other outsiders have a chance to get to know them. Help your managers develop strong reputations within your industry, such as by joining and participating in your trade association.
• Acquire strong vendor contracts. This is especially important if you’re a reseller. Can you get advantageous pricing and/or terms? Would they be willing to grant territorial exclusivity?
• Create 5 years of adjusted historical financial records. Start by identifying any unusual or non-recurring expenses that can be added back in. The goal is to show what the trues results of operation would have been if the company had been run “by the books” and didn’t have these unusual transactions.
For example, if you own both the company and the facility in which it operates, and you have a sweetheart rental agreement that gives you above-market rents, you should adjust the records as though only market rate was paid. Or if you’ve been paying high salaries to family members who aren’t really providing services, adjust the records to remove them from the payroll.
One thing to keep in mind here is that a business’ selling price is often determined by a multiple of expected cash flow. Pay close attention to this, and look at steps you can take now to increase your cash position .
Don’t wait until you have an interested potential buyer to start getting your ducks in a row. And if you need help with any of this, give me a call. As your part-time CFO, I’m here for you.
Fall is in the air. Which means that it’s time for football…falling leaves…and your annual corporate check-up. What exactly is a corporate check-up? It’s a chance to review what took place over the past year, take a hard look at actual versus plan, assess your company’s overall health, and get ready to start planning for the next fiscal year.
How do you conduct a corporate check-up?
Schedule a meeting with senior management, including your company’s CEO, COO, CFO and VP Marketing/Sales. Distribute copies of this year’s strategic business plan (you do have an annual strategic business plan, right?), and have a frank discussion about the following:
• Did you achieve the goals that you laid out in your plan? Why or why not?
•Did your implementation plan turn out to be workable and realistic? If not, what happened that you did not anticipate?
•Did new, unforeseen opportunities arise? If so, did you succeed in taking advantage of them? Why or why not?
•Did you have the right employees to allow your company to succeed?
•Did you have the necessary working capital to grow and thrive? Where do things stand now?
•How strong were your relationships with your major vendors? Where do these relationships stand now?
•How solid were your business processes and IT systems? Did any issues arise?
•Were you able to provide formatted financial reports that everyone from senior management to outside lenders understood and had confidence in?
•Did you make use of weekly dashboards to more effectively manage your business?
The answers to these questions will help you assess the business’ health and inform your strategic business plan for next year. In analyzing the answers, pay close attention to patterns in the things that the company seems to be doing right and areas in which you need to improve. What are the underlying causes of the problems you faced? For example, if you did not have the right employees, what areas did this impact?
Why is an annual corporate check-up so important?
Of course, since conducting an annual corporate check-up takes time and effort, you may be tempted to skip it. Don’t give in to this temptation! This exercise gives the entire team a chance to step back, take a “big picture” look at what’s been going on, and see things that aren’t always obvious when you’re enmeshed in the day-to-day challenge of running a business.
Want to bring in an outside expert to provide a fresh point of view in the corporate check-up process? Give me a call. As a part-time CFO, this is one of the many services that I provide.
In business, as in life, there are “good” surprises and there are “bad” surprises. Winning an unexpected award is good. Discovering that you’re not in compliance with an important regulation is not.
Over the years I’ve seen that many undesirable situations arise because of poor planning, inadequate oversight and controls, and so forth. For example:
Your reported earnings require significant downward adjustments. This is often caused by under-accruing for vacation or holiday pay, bad debts, or your self-insurance reserve. This can happen when (a) someone is cooking the books, or (b) the person handling your financials does not have the expertise to get it right.
• The value of your inventory is grossly overstated. Sometimes this is caused by not having a reliable perpetual inventory system (see “5 Signs that You Need Better Financial Controls”). In many industries, obsolescence is a big issue. Electronics that were fully sellable two years ago at full price may be fairly worthless now. Your financials need to reflect this.
• Your strategic plan did not adequately plan for your growth. Now you’ve got a huge order that you can’t fulfill or you’re sitting on the sidelines watching your competitors take advantage of new market opportunities that you can’t, because you don’t have the resources to do so.
• You’re blindsided by technical obsolescence issues. You failed to plan for the fact that many aspects of your business can be affected by technological changes. For example, obsolete IT systems can become unreliable or inadequate, resulting in a significant negative impact on your operations. Your product and/or product delivery system can become obsolete. If you were selling music via CDs and didn’t see the MP3s coming—or were relying on MP3s and didn’t see the streaming paradigm coming—your sales would take quite a hit.
• You’re losing money on every sale. You could be buying something for $110 and selling it for $105, thinking that you bought it at $90. How can this happen? Not issuing purchase orders can do it. A manufacturer that is using cost accounting standards can also incur this result. Quite often, your actual numbers for raw materials, labor, overhead, etc., turn out to be higher than the standards upon which your cost numbers are based.
Need help ensuring that you’ve got the right people and systems in place to avoid these types of unpleasant surprises? Give me a call. As your part-time CFO, I have the expertise you need.
I often speak with business owners who thought they had appropriate cost and financial controls in place, only to be blindsided when they discover they do not. Here are 5 signs that your financial controls might not be adequate:
1. You get an overdraft notice from your bank. This is always bad news. The likely culprits include:
• Higher than expected labor costs, which were not being properly tracked.
• Poor A/R collections, with no controls to recognize problem accounts.
• Data entry errors that made it look like you had more money in the account.
• Bank reconciliations that are not taking place in a timely manner.
2. Inventory numbers in the system don’t agree with the physical count. While some minor variances are often to be expected, these numbers should never be significantly off.
In addition to theft, the likely culprits include:
• Data entry errors – With no controls in place to catch them.
• Receiving shortages – Instead of counting items when received, Receiving assumes the packing slip is correct.
• Shipping errors – With no double-check that the correct items and quantities are being shipped.
3. Inventory values in the system don’t reflect reality. Instead of keeping a detailed perpetual inventory, some companies make the mistake of relying on gross profit percentages to track the value of inventory on hand.
For example, they assume a 35% gross profit margin on everything in category X. If they sell 1000 items from category X for $1.00 each, they subtract $650 from the inventory account. But if the actual gross profit margin on some of these items is not 35%, the inventory values in the system will be incorrect.
4. Profits on completed jobs are lower than expected. This is an indication that better financial controls are needed at every step of the job, from estimating through delivery. A weekly financial dashboard showing a snapshot of how the project is doing on key metrics, coupled with a monthly job cost schedule that drills down into the details, can be very helpful here.
5. You’re paying for people who don’t exist or time that wasn’t worked. This type of fraud is usually discovered when someone notices payroll is higher than expected. Ensuring you have a good time system, and having someone in management other than the Controller review paychecks before they are distributed, can help avoid these situations.
Want to bring in an outside expert to review your financial controls and recommend areas for improvement? Give me a call. As a part-time CFO, this is one of the many services that I provide.
One of the biggest accounting challenges faced by small businesses is caused by the fact that these organizations are small. When you’re running a big corporation with a large accounting department, it’s relatively easy to follow accounting best practices regarding separation of duties. But when very few people are involved with processing transactions, the business owner or a member of senior management needs to get involved with key aspects of the accounting process. This includes ensuring that a broad range of financial controls are in place.
Here are the financial controls that I believe are most important for small businesses to have:
• Cash Management – Bank reconciliations should be prepared on a monthly basis by someone other than the person who handles the banking, and then reviewed and approved by senior management. Companies that are victims of embezzlement schemes typically do not do monthly bank reconciliations at all, or do not have these documents properly reviewed.
For money coming in to the company, deposits should be made daily. For money going out, checks should be signed by owners or senior managers; the use of signature stamps should be eliminated or greatly minimized.
• Purchasing – Purchase Orders should be issued for all purchases. In addition, all new accounts with vendors or suppliers should be approved by the owner or a member of senior management. The person approving this account formation should also be responsible for informing the vendor that your company requires Purchases Orders for all orders, and providing the vendor with a list of personnel who are authorized to pick up purchases from Will Call.
• Inventory – When shipments arrive, the person who signs for the delivery should also note this receipt in the Receiving Log. While this is a very low-tech, “old school” tool, it is an excellent way to force the warehouse personnel to turn in the receiving paperwork. Of course, incoming shipments should only be accepted when they come with the proper paperwork. Similarly, outbound shipments should only be processed when they are accompanied by a delivery ticket or delivery receipt (which will become the customer’s receiving documentation).
Periodically completing a physical inventory is extremely important. Whether you do this once a month or once a year, you need to reconcile the physical inventory counts back to the balance in the account ledger to see if the variance is higher than what you’d expect with normal inventory shrinkage.
• Accounts Payable – When the accounts payable clerk goes to process an invoice for payment, he or she should match up the invoice with the purchase order and receiving document. Item descriptions, number, quantity and price should all be compared. The accounts payable clerk should indicate somewhere on the invoice that they have performed these steps and that they have approved the invoice for payment. Many organizations use a rubber stamp that has a spot for the person to initial to ensure this step takes place. If the invoice is for a service that does not create a receiving document, the invoice should be given to the department head responsible for ordering the service and they should indicate their approval on the invoice as well.
Once the checks have been printed, a list of all checks with the payees and amounts, along with the stack of approved invoices, should be given to the check signer. The check signer should be either the company owner or a member of senior management who is not involved with the rest of the accounts payable process.
• Payroll – Every time you hire a new employee you should have a profile sheet that shows who the person is, their rate of pay, assigned department, etc. Then someone other than the payroll clerk – preferably the owner or a member of senior management – should be the one to get the employee set up in the payroll system. When the payroll is being processed, the owner or a member of senior management should review an input sheet or edit report to ensure accuracy. Take your time with this step, because it’s a lot harder to fix the payroll after you push the “accept” or “send” button than before!
These are the most important financial controls for small businesses to have in place. If you take care of every item on this list, you should be in pretty good shape.
Want to bring in an outside expert to review your financial controls and recommend areas for improvement? Give me a call. As a part-time CFO, this is one of the many services that I provide.