Your business is growing, and week after week you’re finding yourself asking your part-time CFO to put in extra hours. It’s time to make the leap to a full-time CFO! Here are six key things you should look for when hiring for this critically-important role:
Industry expertise – While a good CFO’s skill set should enable this person to transition from industry to industry, the reality is that many industries have unique needs. Look for someone who either already understands yours, or is willing to take on the challenge of learning all about it.
Education and background – Do they have a CPA? Are they experienced in all or most of the things you will need them to do, or just a subset of this? For example, you may need your CFO to do more than manage the financial aspects of the business; the CFO is often the one who oversees IT and Human Resources as well. Which means you’re looking for someone with a strong enough understanding of these areas to be able to hire and manage the right people…and the energy to do so.
Ability to manage change – In a growing company the CFO is often called upon to help get everyone on board with changes that need to happen, and then manage the change process as it takes place. Look for a CFO who has successfully done this in the past.
Problem solving abilities – Ask the job candidate about their top accomplishments in the past five years. Their answers will likely shed some light on their problem-solving skills, as well as their willingness to tackle new challenges and learn new things.
Soft skills – As with all new hires, excellent communication and interpersonal skills are vital. Once they crunch the numbers, for example, will they be able to communicate useful, actionable information to you based on their findings? Will their management style fit in with your company culture? Will they contribute valuable viewpoints and expertise to the management team?
Computer skills – At most companies, the CFO will need to be current in Microsoft Office products, including Excel, PowerPoint and Word…and how all of this works in the Cloud with Office 365.
The right CFO can make a big difference for your company. Unfortunately, as some of my clients have learned the hard way, the wrong CFO can make a big difference, too—through bad advice, shoddy work or even outright criminal activity, such as embezzlement. The lesson here is you must take the time to find and hire the right person. Don’t just fill the seat!
Big companies often have big staffs and the ability to manage many things in-house. Small businesses and start-ups take advantage of the tremendous value that outsourced professionals bring. For a fraction of the cost of bringing a full-time employee on board you can have a highly experienced expert on your team.
Who should you be hiring? What I’ve seen is that most small- to medium-sized companies benefit from the services of the following:
• Business Transaction Attorney – Your business transaction attorney can help you form a corporate entity, and then ensure that this entity remains in compliance with board minutes, state filings, etc. on an on-going basis. Your attorney can also provide advice on day-to-day legal matters, such as contracts and regulatory compliance. When it comes to contracts, keep in mind that if their attorney wrote it, it’s written in their best interests…not yours.
• Tax Accountant – Look for an experienced CPA who is familiar with your industry. Your tax accountant will provide tax planning and services, and be available to help you with special projects as they arise.
• Insurance Broker – A good insurance broker will start by spending the time necessary to really understand your business and then create an appropriate risk mitigation plan for you. Your broker can obtain quotes from reputable carriers that understand your industry, and help you take advantage of the carrier’s safety programs and discounts for best practices.
• Banker – Unless you have so much capital that cash flow is not an issue, your banker can be your business’ lifeline to both fixed term and revolving working capital loans. A banker will also tailor your banking services to your company’s needs, such as by providing remote check deposit services, zero balance accounts, and more.
Like the other professionals on your outsourced team, a good banker will take the time to know your business and its CEO and Senior Management Team. This enables your banker to tailor your loan covenants in a way that will help your business grow.
• Part-Time CFO – Much more than “just” a “numbers person,” a CFO is a business person with many skills. Long before you have the need for a full-time CFO, you can bring in a part-timer (like me!) and start reaping the benefits of a CFO’s expertise.
Your part-time CFO can help you develop a strategic plan, review your finances to help you understand if you’re adding value to your company, identify and eliminate wasteful spending, and much more. This person can even help you assemble the rest of your outsourced team of seasoned pros!
If you’re running a manufacturing or construction firm, it’s important to know whether you’re “winning” or “losing” from a production standpoint. How many units did you produce? How does this compare to your goal?
Ideally you should be tracking this every day. This way if things aren’t going well, you’ve got time to take action before things get too far out of whack.
To track this information, I recommend using a daily key performance indicator (KPI) report card. Distributing this daily gives everyone from top management to your foremen and supervisors a clear understanding of where things stand.
Calculating your KPI goal
Of course, in order to determine your “units produced” KPI goal you need to first understand your fixed and variable costs. Knowing these lets you calculate your break-even point.
Let’s do the math. If, for example, your fixed costs are $400,000/month and your gross profit is 20%/unit, your breakeven point is $2,000,000/month in sales. If your sales price is $200/unit, this translates to 10,000 units per month. On a simple 20-day month, this means your daily production KPI goal is 500 units.
Of course, most people don’t go into business to just break even. Say you want to clear an operating profit of $200,000/month. Now you need to make and sell another 5,000 units/month (250 units/day), which makes your daily production KPI goal 750 units.
Matching your production goals to your workforce (and vice versa)
I believe that for most businesses the best way to approach this KPI is by looking at how many units you want to produce each day given the work force that you have. Why? Because typically most businesses are more successful if they can keep their workforce relatively static, rather than letting it fluctuate wildly based on variable production needs. This lets you avoid going into overtime mode because you don’t have enough people, or end up with the expense of excess capacity.
Yes, reaching the ideal production level per man hours employed can be easier said than done, but it’s certainly a worthy goal. And having a daily KPI report card can help get you there!
Need help getting a daily KPI report card in place? Give me a call. As your part-time CFO, this is one of the many services that I provide.
You’re starting to think about selling your business. Your neighbor’s cousin just sold her company and got eight times EBITDA (earnings before interest, tax, depreciation and amortization) for the sales price. “If eight times EBITDA is the going rate for business sales,” you think to yourself, “count me in!”
Don’t fall into the “rules of thumb” trap
While your neighbor’s cousin may have sold her business based on a “rule of thumb” multiplier, you should not. Each business has its own challenges, and a multiplier applied to someone else’s business may not be appropriate for yours. Plus, the actual value of your business is dependent on a number of factors, not just a multiple of an easily-derived number. Potential buyers will want to look at your cash flow streams for a certain number of years, your operations, industry-specific and broad market factors, and more.
If you rely on anecdotal “rules of thumb” to derive a sales price for your business you’re likely to either leave money on the table or price yourself right out of the market. Hiring an investment bank or business broker to help you with the valuation can be a very good idea.
Don’t wait until the last minute to prepare to exit
Regardless of how you plan to value your business, it will be worth more if you plan ahead. For example, what can you do now to…
• Increase earnings – When you provide potential buyers with historical data, you’ll want the sales and expenses reflected in that data to look good.
Keep in mind that when talking about maximizing profitability, most people generally think that increasing sales volume is the answer. This is not always the case. Sometimes a better approach is to shrink the company. A smaller company can narrow its focus to just providing the services or products that can be sold at the highest gross margins.
• Get your operations in top shape – This includes having strong financial controls and appropriate policies and procedures in place, strengthening your customer base, and more.
• Make yourself less important – You need to have a team that can carry on the business when you’re no longer there. If you are the sole face of the company, few people will want to buy it.
• Retain key employees – A deferred compensation plan can encourage key employees to stick around after a sale.
Need help with any of this? Give me a call! As your part-time CFO I’m here for you.
A while back I was working for a firm in the oil business. We had an “exclusive vendor” supply contract with an independent petroleum refiner for certain service stations. We committed to ensuring that these service stations would purchase an agreed-upon amount of the refiner’s gasoline over a five-year period, and that they would only purchase the refiner’s brand gasoline. In exchange, the refiner covered the costs associated with branding these service stations, and paid for a national advertising campaign for their brand of gasoline. It was a “win/win” for everyone involved.
Should you pursue exclusive relationships with your suppliers?
Many organizations find it beneficial to enter into exclusive vendor contracts whereby they agree to make a particular supplier their only supplier for a given set of products or services. The potential benefits include better prices, better service, marketing assistance, and the ability to sell products that have brand recognition.
On the other hand, there is one major drawback: Exclusive vendor relationships make you dependent on one supplier, which always carries certain risks. As with any decision, you’ll want to analyze the pros and cons of each particular situation before moving forward.
What can you do to nurture your supplier relationships?
What I see in the field is that most businesses know who their top five customers are, and place a lot of value in that. But they don’t realize that it’s just as important to recognize who their top five suppliers are, and value them in the same light.
Whether or not you have exclusive relationships with your suppliers, your vendor relationships are just as important as your relationships with your customers or your bank. Some of the best ways to nurture these relationships are to:
• Be loyal.
• Provide adequate lead times.
• Pay your bills on time, and within the agreed-upon terms.
• Honor any volume-based purchase commitments.
• Be pleasant to work with and treat them fairly.
• Keep them informed about what’s going on in your company.
• Communicate about any issues that may be preventing you from honoring your commitments. For example, your needs have changed and your primary supplier is not offering what you need. Or maybe other suppliers are now offering better pricing. Give your primary vendor an opportunity to work things out with you.
Your vendor relationships are like partnerships. They want you to be successful so you can continue to buy from them. And you want them to do well so they can continue to meet your needs.
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.
If wish I had a dollar for every time someone told me that their business’s financial challenges are unique! Chances are, however, that a given business’ issues are not unique. What I’ve seen is that across all industries and business types, at some point most organizations face the following:
• Eroding margins or pressures on margins – This can be caused by changes in competition, the costs of acquiring or producing the product, or other things. In relatively new industries the pressure often comes when others enter the marketplace. In mature industries, you tend to see consolidation, so that the family-owned businesses are now competing against much larger players
For example, when the big box office supplies stores entered the market, many local players went out of business. Suddenly these small businesses were trying to compete against a company that could set their retail prices below the wholesale prices that were available to the rest of the market.
• Government regulations – There might be a slew of onerous government regulations that affect your business decisions. You may have to spend a considerable amount of money to get into compliance with environmental laws, such as purchasing trucks with cleaner burning engines. Minimum wage laws may be making your company uncompetitive in your market. Record keeping regulations can be taking up many hours of staff time. If you’re struggling with government regulations, you’re certainly not alone.
• Inability to support growth – As I’ve discussed in the past, many companies fail to budget for growth and plan for the resources and infrastructure needed to accomplish their goals. If you’re doing a great job of bidding and obtaining projects but don’t have the work force, production capacity, physical space or working capital to deliver, you’re going to be in a world of hurt.
Across all industries, businesses strive to provide their services at a competitive rate and create ongoing relationships with clients who value what they provide. In my mind, making this happen comes down to service, service, service. You’ve got to get the order right each and every time. Train your staff to understand the products well enough to be able to provide solutions to your customers’ questions. Make sure everyone on the team, from the order taker to the delivery person, takes the time to thank the customer. And so forth. Because lousy customer service can kill your sales…which can make all of the other financial challenges discussed here irrelevant.
Lawsuits…fires…theft…fraud…injuries…cyberattacks…workers comp claims. Without careful planning, one disaster can destroy your business. To ensure that your business is protected, you must have the right types of insurance in place, with policies that offer adequate coverage levels for your needs.
Earlier this year I wrote about how to shop for insurance for your business. This month I’d like to address what it is that you are shopping for.
Insurance policies that most businesses should consider
Be sure to talk to your insurance broker about:
• Property and General Liability Insurance – A must, this protects your property against physical damage and your company against claims of bodily injury or property damage.
• Workers’ Compensation Insurance – Required in California if you have one or more employees. Be sure to see my previous article on “How to Control Your Workers’ Comp Premiums.”
• Vehicle Insurance – Mandatory if your company owns and operates any motor vehicles.
• Health Insurance – As of this writing, this is mandatory for companies of a certain size.
• Directors and Officers Insurance (D&O) – Protects your corporation’s directors and officers from personal liability in the event of a claim against the business.
• Key Person Life Insurance – Can be important if your business depends on the knowledge or expertise of a particular person.
• Employment Practices Liability Insurance – Provides coverage against employment-related claims, such as discrimination, harassment or wrongful termination.
• Business Interruption Insurance – Covers the loss of income that your business suffers after a disaster.
• Cybersecurity Insurance – Helps address the damage after cyberattacks and data breaches.
• Professional services firms – Errors & Omissions Insurance (also known as Professional Liability Insurance) to protect against negligence claims based on mistakes your company made or your company’s failure to perform.
Industry-specific insurance needs
• Petroleum industry – Environmental coverage in case there’s a spill.
• Construction industry – Policies to fulfill bonding requirements.
• Manufacturing industry – Product liability insurance.
Insurance is not a “set it and forget it” item
Because changes in your business often warrant changes in your insurance coverages, annual reviews with your insurance broker are a must. You’ll want to discuss the impact of:
• Purchases or sales of assets (including vehicles and equipment)
• Changes in sales volumes
• New products or services offered
• Leases ended or entered into
• Changes in key personnelOther significant changes
Need help sorting through all of this and working with the insurance broker to get the right coverages in place? Give me a call! As your part-time CFO, this is one of the many services that 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.
Pity the poor accounting department.
When business is booming and everyone is high-fiving that sales went up 25%, management starts to think about hiring more production staff to handle the extra volume. But the impact of the extra sales volume on the accounting staff is often ignored.
However, when revenue drop off, the staff reductions often hit the accounting department first. With optimism running high that sales will get back on target, no one wants to cut sales, customer service or production staff. So the accounting team takes the hit…even though they still have a great deal of work (such as processing payroll and ensuring the lights stay on) that’s not tied to sales volume at all.
Inadequate accounting staffing levels can hinder your company
Consequently, whether their company is growing or shrinking, many Controllers and Accounting Managers feel like they’re just treading water. With staffing levels inadequate for the volume of work to be done, analysis and other high-level tasks take a back seat to keeping up with the basics, such as creating invoices and paying bills.
In situations like these, there’s a lot that may be falling through the cracks. For example:
• No one is looking at the likely impact of shrinking sales on projected cash flow, and how this will affect operations. Will you run into a problem with your bank on your loan covenants? Will you be able to continue taking advantage of “early pay” discounts from your vendors? Will you make payroll?
• Internal control processes are not being followed. When something doesn’t look quite right, no one is taking the time to investigate why the numbers are what they are. Or even worse, perhaps no one is taking the time to look at the numbers closely enough to even notice that they don’t look right.
• You’re in danger of growing yourself out of business . No one is looking at how increased sales volumes will affect your staffing and working capital needs.
The solution: bring in a part-time CFO
A part-time CFO can help right-size your accounting department, working on an hourly or project basis to get all of those high-level accounting tasks handled. They can create and review the reports, do the analysis, provide oversight, help the Controller prioritize tasks, address projects that are important to senior management, and much more.
Want to learn more about the difference a part-time CFO can make? Give me a call! I’m here for you.