Don Welker's Financial Minute

Your company is in growth mode, and you’re having a hard time keeping up. You’re definitely past the point where as the CEO you can do it all: manage multiple departments, cultivate banking relationships, keep an eye on the vendors, and much more. Things are slipping through the cracks, and you just don’t have time to give sales or operations the attention they need.

Meanwhile, you’re not receiving accurate and timely financial statements. Neither is your bank, which is not making them happy. And your budget…well, what budget? Who has time to create a proper budget?

If you recognize yourself in this scenario, it’s time to bring in an experienced part-time CFO to significantly lighten your load. Some of the many services that a part-time CFO can provide include:

• Developing a strategic plan, goals and budgets – Work with senior management to create a comprehensive strategic plan, as well as goals for this year and the next four years. Then create a detailed budget based on these plans and goals.

• Analyzing all the numbers – Look at the trends, review profitability by service or product line, monitor the budget, and more. Analyze your firm’s overall financial health, and provide expert advice as to where to go from here.

• Supervising the Accounting, HR and IT Departments – Plus work with department heads to identify areas for improvement and implement trackable solutions for these issues.

• Improving your accounting processes – Help your senior accounting personnel expedite the month-end close to ensure you get accurate and timely financial statements. Create easy-to-use dashboards that give you real-time financial data for effectively managing your business. Develop a template to also capture the information that lenders require.

• Identifying and eliminating wasteful spending – See where your money is going, including looking at whether or not you’re getting the best prices from all of your vendors, and right-sizing the Accounting Department.

• Providing valuable introductions – Bring in already-vetted professionals as needed, such as lawyers, CPAs, insurance brokers and marketing experts.

• Maintaining your banking relationships – Help you obtain necessary financing, and then ensure all loan reporting requirements are met.

Having a part-time CFO on board can give you and the rest of your senior management team more time to grow sales, improve operations and strengthen customer relationships. It also enables you to get better information, which leads to better decisions and even more success.

If you’d like to explore this idea further, give me a call. Part-time CFO services are what I provide!

Whether your company is in growth mode or trying to deal with flat or diminishing sales, there’s a good chance you depend on credit from your bank to help you pay the bills. Which is why I’m always surprised to see how many companies do things that ruin their banking relationship!

Bankers are generally very cautious people. They need to feel completely confident that the money they loan to you will indeed be paid back. Do one of the following actions, and run the risk ruining your banking relationship:

• Provide misinformation or no information. The quickest way to lose your credit is to surprise your bankers. The worst way is to lie to them. If your company is struggling, the best time to tell your banker that there’s a problem is as soon as you become aware of it.

• Add to your debt. In most cases, borrowing money from other sources (outside of trade payables) without your banker’s approval or consent will violate your loan covenants.

• Break the law. Your banker will not be happy if you incur a significant regulatory violation by failing to comply with a law, such as not reporting or properly resolving a hazardous spill, or getting slapped with a class action lawsuit because you didn’t comply with labor laws.

• Miss your previously reported earnings projections. Say your bank has raised a concern about your repeated failure to hit your leverage ratio, and you have assured them that this quarter you’ll hit the numbers. If you don’t, they might get “lender’s fatigue” and give up on you.

• Use corporate assets to buy luxury items. If your banker sees that, while you’re seeking to continue to expand your loan base, you’re using corporate funds to buy luxury boats, planes or cars, they’ll think twice about approving another loan.

• Miss reporting deadlines. It is vitally important that you provide accurate and timely financial statements, and be proactive about telling your banker if something is amiss.Most of the things on this list are typically covenant violations. Always keep in mind that your banker has the right to call your loan—and demand immediate payment—for any covenant violation, regardless of its magnitude. When that happens, I can tell you that it’s really not a pleasant position to be in.

Need help proactively managing your banking relationship? Give me a call. As your part-time CFO, this is one of the things I can do for you.

They say that an ounce of prevention is worth a pound of cure. This is certainly true when it comes to sales tax audits.

In the Ideal World: Things to Do Before You Start Selling Products
The best way to survive a sales tax audit is to do things right in the first place! This is true whether you’re running a start-up or you have an existing business that’s considering expanding into another city, county or state.

Here’s what you need to do…

• Understand the applicable laws. Familiarize yourself with the sales tax laws that relate to you and the areas in which you plan to conduct business:

• What is the current sales tax rate?
• What transactions are taxable?
• Under what circumstances are sales exempt from sales tax?
• What documentation is required to exempt sales from sales tax? Be sure to keep all of these properly filled out and signed documents in one central file.
• When and how do you need to report and pay the sales tax?

• Ensure you apply the appropriate tax. Have a procedure in place to monitor, track and apply changes to tax rates in all of the places in which you are doing business. Use accounting software that allows you to easily manage multiple sales tax tables, exempt certain customers from paying sales tax, and get a report of who you’re exempting so you can easily double-check that you have proper paperwork on file.

• Pay all taxes on time. Especially if you’re dealing with multiple sales tax entities, have a system for ensuring nothing falls through the cracks.

In Reality: Things to Do When You Find Out You’re Being Audited
If you’ve done all of the things listed above, then your audit preparation is complete. You’ll just have to walk the auditor through the sales tax return and provide them with any requested documents

If you haven’t done these things, you’ll want to try to postpone the audit. Go back through all your records and get your ducks in a row. For example, if you’ve exempted sales transaction and don’t have signed resale certificates on file, go back to your customers to get them.

Need help preparing for a sales tax audit or putting a robust sales tax system in place? Give me a call. As your part-time CFO, this is one of the many services I provide.

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.

Running into cash flow problems? Here are six steps you can take to increase your cash position:

1. Speed up collections. Take a close look at your accounts receivable aging report. Identify the slow pay customers and come up with a plan to address them. Perhaps you haven’t been speaking to the right person, or your senior management needs to get involved by called their senior management.

If you can afford it, consider offering customers discounts for early pay. While I don’t generally recommend this, sometimes it’s warranted if your margins are high enough.

Of course, the fastest but most expensive way to speed up collections is to factor your invoices. If you can afford it, this is always an option.

2. Increase inventory turns. Review your product line by item to get a good understanding of your sales by month, quarter and year. Take a look at your vendor’s minimum order sizes and the delivery lead time for each item. Based on all this data, take steps to ensure you don’t carry excess inventory.

In addition, have a plan to get rid of slow moving or soon-to-be-obsolete items, and insist on having firm order commitments before granting sales people’s requests to bring new products into your inventory.

3. Reduce your investment in fixed assets. Review your utilization of existing fixed assets. Are there things that you’re not really using that you could sell to generate some cash? For example, say you’re a grading contractor. You have heavy equipment and a fleet of pickup trucks. Business has dropped 30%. You’ve already reduced your staff. Do you hang onto all that idle equipment for when business turns back around, or bite the bullet and liquidate it?

4. Negotiate payment terms that match your cash flow cycle. If it typically takes 120 days from the time you purchase raw materials or inventory items to the time you collect payment from your customers, but your vendor expects payments in 30 days, your cash flow will quickly get out of whack. Talk to your vendor, and see what kind of terms they can provide.

5. Obtain a working capital line of credit. While there’s a cost associated with this, a line of credit provides an immediate improvement in your cash position.

6. Develop and adhere to an honest operating budget. Resist the urge to splurge on ego-related items such as an expensive company car, or to run personal expenses through the company account.

In addition, I recommend that you avoid having an “always buy” mindset when investing in fixed assets. Sometimes leasing is best.

Need help with any of this? Give me a call! As your on-call CFO, I’m here for you.

Every business needs a variety of insurance policies. Understanding how to shop for insurance will ensure you get a good price on the right coverage for your needs.

Start by Doing Your Homework
Here’s what I recommend:

• Network – Get to know 5 insurance brokers with solid reputations.

• Identify carriers – Determine who the top insurance carriers are in your industry. Find out if your trade association endorses particular carriers.

• Check coverage requirements – Make a list of all the insurance coverage requirements in your agreements with customers, suppliers and lenders.

• Research coverage options – See what is available for the type of policy you need, and then make a list of “must haves” and “can live withouts.” For example, if you’re shopping for health insurance for your employees, is a PPO a must, or will an HMO be fine?

• Improve your metrics – Premiums are often calculated based on a formula. Find out what this formula is and then gather your historical data that relates to it. Determine if there’s anything you can do to improve your metrics before you start getting bids, then develop a projection of these metrics for the upcoming policy year based on your understanding of the formula and any changes you intend to make.

• Qualify for discounts – Learn what best practices and procedures need to be in place in order to take advantage of all available discounts. If you’re not already doing these things, start doing them now.

• Avoid surcharges – With many types of insurance, events that are considered to be outside the norm will result in surcharges. Understand what typically causes surcharges for the type of insurance you’re researching, and look at ways to avoid them.

Then Solicit Bids
By this point you should have a thorough understanding of what’s out there and what you need, and a projection that includes estimates of the metrics that the insurers need to know.

Reach out to two or three of the brokers on your list and ask for quotes. Be specific in your communications to ensure you’ll be able to make “apples to apples” comparisons once the quotes come in – in terms of both the assumptions that the insurer uses to calculate the quote and the specifics of the coverage provided. Evaluate the quotes, and move forward!

Need help shopping for insurance for your business? As your part-time CFO, this is one of the many services I provide.

Hoping to get a loan? As I said in a previous article, “Is Your Loan Package Ready for the Spotlight ,” lenders only fund loans when they’re comfortable that you’ll be able to pay them back. Having an excellent loan package is critical for convincing them that you’re credit-worthy, and one of the key elements of a successful loan package is the business plan. Your business plan shows where your company has been and where it is going in terms of sales growth, business opportunities and more. Here’s what that plan needs to include:

• Business description – A few paragraphs that explain what you do, including a brief description of your key products and services, an overview of your industry, and a sentence or two about each of the key members of your management team.

• Historical financials – Three years of historical financials (Profit & Loss Statement, Balance Sheet and Statement of Cash Flow).

• High-level sales/marketing plan – This needs to include a detailed 3- to 5-year sales forecast by major product lines that shows projected sales units, average sales price, average costs, and average gross profit per unit sold...and narrative that explains how you’ll make it happen.

How does your projected growth compare to your industry’s projected growth? How will you achieve your projected sales growth? For example, do you plan to introduce new products, find new markets for existing products, implement new processes that will improve profitability, or what?

What actions will you take to support the projected sales volume? How will this sales volume impact your working capital requirements, staffing, production capacity, vendor relationships and other infrastructure issues?

Projected financials – Three to five years (depending on the desired loan length) of projected financials based on this sales/marketing plan, all presented on a quarterly basis for each year. In addition to the Profit & Loss Statement and Balance Sheet, this includes:

• Operating expenses with labor build-ups by department. If you’re saying that you’ll have four years of 8% year-over-year growth, they’ll want to see what type of staffing you’ll need to support it.

• Debt and debt payments needed to support this growth.

• Capital expense budget outlining projected capital expenditures by year.

• Statement of Cash Flow that ties all of this together.

Need help putting together a business plan that includes everything investors and bankers want to see? Give me a call! As your part-time CFO this is one of the many services I provide.

I was recently reading a list of famous quotes from Ben Franklin when I was struck by how timeless much of his advice is. While the business world has changed tremendously, these truths about business success have not.

“If you would know the value of money, go and try to borrow some.”

Borrowing money for your business is not easy. For example, according to Biz2Credit’s October 2016 Small Business Lending Index, in October 2016 big banks approved just 23.5% of small business’ loan requests, small banks approved 48.7%, alternative lenders approved 59.5% and institutional lenders approved 63.1%. In other words, 37 to 76% of applicants got turned down.

As I’ve written about before in “Is Your Loan Package Ready for the Spotlight ,” lenders are quite picky about what loans they’ll approve. Managing your cash flow is therefore vital. Making the most of the cash you have minimizes your dependency on lenders.

“Remember that credit is money.”

Maintaining a strong credit rating is like having cash in the bank. Businesses extend credit to those who pay their bills on time. If you can prove your creditworthiness, vendors will be more likely to give you favorable terms, and lenders will be more likely to approve your loan requests.

Of course, you also need to be aware of the flip side of this issue. Do something to wreck your credit worthiness, and you can quickly find yourself unable to access the money you need to run your business.

“Beware of little expenses; A small leak will sink a great ship.”

On one level, this advice gets back to the need to have a budget and financial controls in place. But on another level, this is about managing the mentality and culture.

For example, one area that’s often out of control is office supplies. There’s a storeroom stocked with a nine-month supply of paper and pens. Employees are allowed to “redecorate” their desks with designer in-baskets, and soon everyone wants to personalize their workspace in this way. You get the picture.

While excess spending on office supplies probably won’t sink the ship, this “no limits” attitude will quickly spread to much bigger expenses...and before you know it, your bottom line really is affected.

Conclusion

Want to augment Ben Franklin’s advice with the advice and counsel of an experienced CFO? Give me a call! As a 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.