Increasing Company Value Chapter 8 - Aug 31, 2010
Posted by: Terry J. Eve in Articles
The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month I discuss increasing company value.
Company value has two basic components, Intrinsic and Extrinsic value drivers. Company value is ultimately determined by a multiple of anticipated cash flows, typically defined as EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization). The multiple is ultimately based on the anticipated return on investment and includes a risk premium, that is the higher the perceived risk of the investment, the higher the required return and thus the lower the multiple of EBITDA.
So let’s look at the intrinsic value drivers first. Intrinsic areas to consider are Policies & Procedures, including an Employee manual(s), Accounting and Finance Policies, an Internal Control review, and monthly financial statements that are timely and accurately prepared. Additional items would be agreements with key employees, Non Compete, Non Disclosure, Non Solicitation, and Confidentiality agreements. Further considerations may include properly protected Trade Marks, Service marks, and Patents. Finally are the corporate books up to date, are there shareholder agreements, but sell agreements and key man protection?
Why are the intrinsic value drivers important? Simply put, they reduce the risk to a potential buyer of a company and this increases the multiple of EBITDA they are willing to pay for a given company. Accordingly, everything else being equal, these intrinsic value drivers can push up the value of two similar companies with the same earnings.
Extrinsic Values relate to the financial performance of the company, its industry, past and projected growth, and the economic outlook in general. The growth potential, key management personnel and how the company will move forward are key external valuation drivers. Another consideration are artificially reducing (or increasing) EBITDA. Determining the normal and customary costs Vs the costs of the company can be an add back (or reduction) to the EBITDA number. These extrinsic value drivers drive the cash flow of the company, the key valuation metric. Further, this is an area where a part time CFO can impact your business by increased profitability, additional growth, and increased cash flow. Every dollar of increased profit is multiplied by some number and thus increases the company’s value.
Ultimately, companies have a range of values. These are Fair Market Value, Investment Value and Synergy Value.
· Fair Market Value is typically the lowest valuation is defined in part by IRS guidelines, and is used primarily for gifting, ESOPs, and other internal transfers.
· Investment Value is the amount and investor will spend and is based on an anticipated return on their investment (ROI). This is typically more than Fair Market Value, and less than Synergy Value.
· The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month I discuss accurate and timely financial reporting.
One thing I consistently see in well run companies is accurate and timely financial reporting. Among other things this increases the intrinsic value of the company. Why is this important and how is this accomplished?
Accuracy is the key to assuring you are basing your decision on correct information. Can you imagine purchasing inventory only to find you already had a significant quantity on the shelf? Perhaps it can be returned with shipping and restocking fees, but shouldn’t the inventory listed in our monthly closing have been right? And backing up that question, why isn’t it correct? Where was the break down? How much time elapsed between the time you got the information and when you had to make the purchase decision? It could well be that the information wasn’t available when the decision was made.
Perhaps this is not a great example, but it demonstrates my two key points: 1) Financial information has to be current to be useful for decision making and 2) The information needs to be correct in order to use the information to make informed decisions.
The preparation of accurate and timely financial statements each month requires a process. A calendar should be established and items that can be addressed each day prior to the end of the month should be done to reduce the pressure on the other accounts. Depreciation, prepaid expenses written off to the P&L and certain accruals can be done prior to the end of the month in order to have them off of the closing list when crunch time comes to the monthly closing calendar.
Another example of timing is Accounts Payable. Accounts payable should be one of the last accounts closed for the reporting period. Why? This allows the invoices for items related to the prior month to be recorded in the correct period, thus improving the accuracy of the financial statements. A good cut off for inventory so that costs are in the correct period is also required to improve financial statements. This process needs to occur throughout the system to assure accuracy.
Like any process top gain time in the closing schedule you need to run some elements and reconciliations concurrently. This is best done by assigning certain account reconciliations to multiple people in the accounting department. Further, no longer do you need to wait for credit card and bank statements in the mail. Now with electronic banking, these reconciliations can be done throughout the month and simply tied out with the final on line statement.
Take a hard look at your closing process. Like any process it can be analyzed and improved. Layout a calendar, assign responsibilities and put together a closing binder each month with the reconciliations. These simple but often overlooked steps will assure accurate and timely financial statements each month.
Your CFO and Controller should work together to accomplish accurate and timely reporting first, so that time can be spent analyzing the numbers, not just preparing them.
Raising Operating Capital Part 3 Chapter 6 - Jun 28, 2010
Posted by: Terry J. Eve in Articles
The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month is the last of several articles on raising funds for the Small Business.
Remember, Never! Ever! Run Out of Cash, NO MATTER WHAT! But that is often easier said than done, so this month we will continue our discussion on why a good business plan is required to source funds as we look at sourcing outside investment capital. It should be noted that the cost of capital models generally show that equity investments are the most expensive forms of capital. I won’t bore you with the math at this time, but it has to do with a number of factors including the risk premium associated with ownership investment Vs other types of capital investments.
Investors
We will discuss three sources of outside capital. They are used at different stages of the enterprises development. Early investors invest in management. Later stage investors invest in potential synergies, market expansion, processes and systems. All look for the exit strategy and anticipated ROI for the funds invested over the time horizon leading up to that exit.
Accordingly, following are sources of outside financing for various applications and stages of developments:
1) Angel Investors (Early Stage)
2) Venture Capital Investors (Development Stage)
3) Mezzanine Financing and other hybrid financing vehicles (Various Stages)
4) Private Equity Groups (Later Stages)
Each of these groups has planning horizons and expected returns on investments during that time frame. Again, the business plan must clearly articulate the information they need to initially assess the investment. Part of the goal is to answer the questions they may ask in the document. This is particularly true of the planned exit and timing. Let’s look at these areas separately.
Angel Investors
Remember, Never! Ever! Run Out of Cash, NO MATTER WHAT! But that is often easier said than done, so this month we will continue our discussion on why a good business plan is required to source funds as we look at sourcing debt financing from outside the company and its owners.
Outside Debt Financing
Family and Friends can be used for more than cell phone discounts! They can be a great source of financing, particularly in the early days of the company, when other lenders are less that sold on the future of your organization. They believe and trust in you, when no one else does or will. They know your passion and desire and they know where you live too! In short they are investing in you, not the company.
Outside lenders and investors do not have that luxury. A good business plan goes a long way in letting them know that you have given significant thought on what you are doing and the expected outcomes of that effort financially.
Your banker is also interested in how you view your company, its competitors and your SWOT analysis. It helps them in their risk assessment and creates the benchmarks they need to assist in the approval process. This along with the borrowing base associated with larger loan transactions, can be garnered in part from the forecasts. Further, in today’s market, the owner’s personal credit is part of the evaluation by the lender. Being able to clearly communicate with a lender is the first step in a successful loan application.
I had lender set up a significant ($500K) financing facility, including a Letter of Credit backed by the facility, based on a succinct executive summary of the business plan and financial projections. They also acknowledged they knew we would need more capital, but that they wanted us to meet the initial projections prior to funding the next tranche of capital. Finally, what I like to hear, it was one of the best applications the underwriter had ever seen! And this was a money center bank!!!!!
Finally, remember the lender does not want to be your business partner and as part of this philosophy, they do not want to fund consistent operating losses. This is not their role. Rather, lenders are used to provide working capital and long term asset financing to fuel the company’s growth. Today banks expect your company to rest the line of credit for at least 30 days annually. A good banker will see of a part of that facility should be “termed out”, i.e. converting part of the line to a term loan for a base level of funds that are used to fund inventory and receivables to a level that make it impractical to pay off (rest) the line of credit each year.
Next Month in Part 3 of this subject of sourcing capital, we will discuss equity considerations including angel investors, venture capital and private equity groups.
Raising Operating Capital Part 1 Chapter 4 - Apr 25, 2010
Posted by: Terry J. Eve in Articles
The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month will be the first of several articles on raising funds for the Small Business.
Remember, Never! Ever! Run Out of Cash, NO MATTER WHAT! But that is often easier said than done, so this month and for the next couple of months we will take a look at sources of capital and what is needed to source that capital.
Sources of Capital
There are basically 3 sources of operating capital for a business.
1) Debt
2) Equity
a. Owner Investment
b. Outside Investment
3) Internal Operations
Interestingly enough, the starting point of raising funds from any of these sources is the same, the Company Business Plan.
Business Plan
Depending on which of the options are selected, the content, detail and supporting information can vary, but the basic elements should contain at least the following components:
1) Goal Clarity – This can be a topic by itself (and has been....
Posted by: Terry J. Eve in Articles
The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month I will discuss the finances of a growing business. Rule 1 of the finances of a growing business: Growth requires capital, cash specifically. It is totally possible for a company to grow itself out of business, that is create insolvency as a result of growth. Growth consumes capital, perhaps lots of it. Why? Let’s investigate. The Sales Cycle There is a lead time from the point of sale to the point cash is received. If your company carries inventory that needs to be acquired first. A service business must have personnel to deliver the services. Consider this: We buy Inventory on day 1, assume our inventory takes 45 day to turn and we pay for it on day 30. We carry the inventory cost for 15 days. On day 45 we sell the inventory and will collect that money in 45 days too. Note that these two amounts indicate that we have an average of 45 days in inventory and A/R. So this means it will take 60 days to get repaid for the cash outlay for the inventory the 15 days after payment net 30 and the 45 days to collect the receivable. Over that same 90 days we will incur 90 days of payroll (1/4 year!), 90 days of rent and 90 days of general overhead. All incurred prior to collecting the money on the sale that pays for all of these expenses and costs. Get the picture? This is not sustainable without adequate capital. Once you collect the money, you buy more inventory, and incur more payroll overhead. And that doesn’t calculate the need for money for capital expenditures (Cap ex). Have your capital expenditures been properly budgeted and have you calculated the ROI on the invested cash? More money out the door in anticipation of future profits. So consumption of cash includes: 1) Increases in Accounts Receivable 2) Increase in Inventory 3) Increased net working capital 4) Payroll, General & Administrative overhead and other expenses 5) &nb....
Posted by: Terry J. Eve in Articles My last blog discussed what I would put in “My New Book” if I were to write one. This year’s Blogs will follow this theme and this month's blog deals with the topic “The Role of the CFO”. Why does every business regardless of size need a CFO? To answer that question, we will look at the role of the CFO and relate that role to the requirements of all businesses, regardless of size! Control Function The first area is known as the control function. This area is generally operated by accountants known as, are you ready for this, Controllers. This function is primarily responsible for the accuracy and timeliness of the financial reporting of the organization. They oversee the system of internal control and assure expenditures are properly authorized, and that internal controls are functioning as designed. Checks and balances, assuring proper authority and assuring transactions are properly recorded are all part of this area of responsibility. So does your company have an adequate control function? Here is the test: 1) Are your financial statements produced monthly without errors? 2) Do your accounting processes adequately segregate duties that would minimize the chance of an intention or unintentional error or irregularity going undetected? 3) Do you have a good understanding what the numbers mean? 4) What interpretation of the numbers do you have? Need? These are but a few of the functions in the Control Function that a CFO typically oversees. Further as mentioned last month, this function provides the information required to perform the next function, Finance. Finance Finance is the function that assures the business has the capital required to meet the business plan. Using the financial statements prepared by the accounting department control function, the Finance function forecasts the needs of the business and is responsible for assuring the organizatio....
Posted by: Terry J. Eve in Articles I had a restless night the other night and the recurring thought was to write a book to entrepreneurs about small business finance and accounting. I also had some cutesy title, that I can not recall. But that got me thinking, if I was to write such a book, what would be the content? So my blog for 2010 will cover some of the topics in my “new” book as they relate to the entrepreneur on finance and accounting topics. So hopefully this will help you sleep better at night, even if I don’t! Chapter One The difference between Finance and Accounting Coming up in the school of business, I remember sitting in a finance course and the finance professor saying that you could fund purchases through retained earnings and the accounting professor said, no you cannot spend retained earnings. Who was right? The answer, both! Accounting Accounting is all about creating the numbers on the Balance Sheet, Income Statement and Cash Flow Statement, preferably in accordance with Generally Accepted Accounting Principles. Accounting is headed by either the Chief Accounting Officer (a relatively new role in companies) or frequently in the old school, the corporate controller. The control function in a company is responsible for assuring the financial policies are enforced in order to control costs and produce accurate and timely financial statements. They produce financial and cash forecasts and help “impel management toward the attainment of the company’s goals and objectives”. So who does this in your company????? Anyone? Do you have accurate and timely financial statements? If not, how do you run your business? Really, how do you!?! Accounting tells you where you have been, what revenues were earned, what money has been spent and assures the expenditures and expenses incurred are made in accordance with company policy. Accounting prepares the financial statements and assures they are in accordance with generally accepted accounting principles. They deal with the outside accountants and auditors and are an essential part of businesses large and small alike. Finance Finance is the function of assuring the business has the capital needed to meet obligations and provide the fuel (Cash) needed to grow the business. The focus is the Balance Sheet. The strength of the balance sheet drives the ability of the company to borrow money, thus the comment by the finance professor. While the retained earnings is not the same as cash and generally not even close to the cash balances, this is the amount of assets over liabilities accumulated over time, and a healthy net equity balance portends a strong balance sheet. Balance sheet ratios are key to understanding the overall strength of the company. The liquidity ratios such as the current ratio (Current assets divided by Current Liabilities) and Quick or Acid Test Ratio (Current Assets less inventory and prepaid expenses divided by current liabilities) and leverage ....
Posted by: Terry J. Eve in Articles What is your Company’s Culture? Some years ago, I participated in a company team building event. It was a timed event that allowed us the opportunity to assemble a puzzle as a team. The outcome was interesting and spoke to the nature of our organization. We were termed as a FIRE! FIRE! FIRE! company as a management team. No time to get ready, and we had better have used a shot gun, because we didn’t aim. Think about it, yes we got our target, but was it the optimal approach? If we agree that Ready, Aim, Fire is the optimal structure for preparing and targeting an objective prior to execution, then we will look at a couple of other company culture styles and the pitfalls related to each approach. Ready Is you company a planning organization? Do you gather the facts and analyze the numbers when making a decision. Do you move on at that point or do you want more and more information in order to reach a “perfect” decision? Reality Check: there are no perfect decisions because there is no perfect information required to make that decision. One company I worked for called this “getting ready to get ready”! Or in the parlance of this discussion, this is a Ready, Ready, Ready company culture. This culture makes it difficult to get a simple decision made. And if it is a major decision, forget about it. Don’t get me wrong, planning, gathering facts and running numbers are a critical first step, but must lead to the next, not become the end game. This can be overcome by setting traps for the management team, assigning responsibilities and deadlines for a decision. Still waffling? Then the leader needs to call the question and lead the group to the next step, AIM. And if the leader is the problem? They must recognize that no decision is a decision. Do you really want to operate by default? AIM OK what is the target? My last blog was on Goal Clarity, and that is in large part how we establish the target. This is the point where we assess risk and return. Can we really reach the objective, and what happens if we miss? Do we have one sho....
Posted by: Terry J. Eve in Articles I have heard it said, “If you don’t know where you are going, you won’t know when you get there.” (Author Unknown) Another adage is “If you don’t know where you are going, any road will get you there.” (Lewis Carroll) Another is “If a man knows not what harbor he seeks, any wind is the right wind.” (Seneca) And then a couple from one of my favorites Yogi Berra “You've got to be very careful if you don't know where you're going, because you might not get there.” And finally “When you come to the fork in the road, take it!” So what is goal clarity and why is it important? And finally, how do you use goal clarity to drive your business? Ron Willingham in his book “Integrity Selling for the 21st Century” makes the point that Strong Goal Clarity is a common trait of highly successful people. He lists the following questions to ask yourself: “1. Do I continue to write down clear, specific goals? 2. Do I revise and update my goals each month? 3. Are My goals are consistent with my values? 4. Do I feel worth of achieving higher goals? 5. Do I break my goals down into small daily steps?” Posted by: Terry J. Eve in Articles Most if not all businesses of any size can always use more cash. I am fond of saying "Even General Electric rations capital!" Why, because cash is a finite resource and cash is required to invest not only in the future of the business, but also to meet current obligations. However, where do we "Find" cash? Particularly in this market, with businesses struggling and frequently operating at a loss, banks not be an option. And further, outside investment not only dilutes the investment of the founder and owner(s), it is the most expensive form of "Finding" cash. That is right, when you run a model regarding the actual cost of capital, it is most likely that additional equity investment is the most expensive source of cash. This is frequently overlooked because it does not run through the P&L as a cost. So where else can we find cash? The company's balances sheet! That's right; you may have had it all along and just not know how to "unlock" the cash reserves in your balance sheet. Let's look at a few key areas. Accounts Receivable (A/R) I have a client whose largest account has intentionally stretched their payment terms to 60 days in order to conserve cash. Many other companies are working to 45 - 60 days as well. And guess what, they probably didn't ask you permission! For example, if you have a company that has gross revenues of $3,650,000 this means you company averages $10.0 thousand per day in revenue. Assuming 30 day terms, your accounts receivable "Days Revenue Outstanding" (DRO) should be 30 meaning your balance in accounts receivable should be $300,000 (30*$10,000 per day). But if customers are stretching their payments, A/R may grow to 45, 50 or even 60 days. This means your A/R Balance will grow to $450K - $600K under these circumstances. Ignoring the fact that an account receivable is a financial instrument that loses its value over time (meaning the increased potential for bad debts as a result of a growing A/R balance due to slower payments), you have become your customers' bank! You now have cash flow in the amount of $150K to $300K tied up in accounts receivables above your standard terms. Encourage your customers to pay to terms! Consider adding service charges! Perhaps consider early payment discounts 2/10 net 30, but be strict and don't allow them to take the discount if they don't comply. Inventory Inventory can grow just like A/R. Let's say you normally carry $500K in inventory each month. Did you reduce your spend when business volume decreased? What is your inventory turn now? For example, if you carry a $500K inventory and turn it 4 times per year, but business slows and now you turn it 3 times per year, you now have too much inventory for the current volume of sales. Add to that the occasional tendency not to reduce inventory purchasing as quickly as the decline in sales and you slow the inventory turnover to 2 times a year very quickly. So in our example if inventory needs to be $375K to maintain an inventory turn of 4, but has grow to $750K instead at a turnover rate of 2, your business now has $375K in cash tied up in extra inventory. Add to that the possible risk of obsolescence, cost of insurance and other elements and you have substantially reduced the available cash in the company. The Answer: Reduce A/R through better collections and focus on getting the money in the door and reduce inventory purchasing until the balance is in line with sale volume. A reduction of receivables and inventory flows directly into your cash balances, dollar for dollar! Accounts Payable This is the last area we will touch. Just like people are slower paying you, you need to look at your payment policies as well. Some companies pay ahead of terms, does yours? Do you really know? If your electric bill is due on the 15th, do you pay it then or just "get it out"? Many companies, just "get it out". So the first thing to look at is, are we paying anything ahead of when it is due? The second area is key vendor relationships. Can you negotiate preferred terms? This may also require a higher credit limit. Can you negotiate improved / lower pricing? Note that I am not suggesting a unilateral decision to stretch terms, but rather getting key vendors to partner with you to help relieve some of your stress on cash. These business discussions tend to strengthen the ongoing relationships and improve vendor relations at a difficult time. And if vendors don't want to work with you, consider other vendors! Don't know how to quantify the impact of these adjustments and implement the process necessary to achieve these goals? Your B2B CFO can help and that's why we say: Cash. We help you get it. TM Posted by: Terry J. Eve in Articles When considering succession planning for a closely held business there are a number of interrelated issues, such as: A) Is it a family operated business? B) Are you the Owner actually the business? C) What area besides Sr. Management may require a succession plan? and D) How do you identify & qualify successors? Family Owned and Operated Turning over the reigns of a family owned business can be fraught with possible pitfalls. If the family member does not have the required skills, training, or desire, can you really hand over the company to them, just because they are a family member? At a recent seminar the speaker, Mr. Chris Curtain of Banker's Advocate, said to consider the "See you at 30" rule when considering the introduction of family members to firm management. That is to have the family member work in industry outside the family business to allow them time to develop skills and a separate identity prior to becoming part of company management. For example, if the family member plans to have a finance or accounting background, perhaps a stint in public accounting or banking will help prepare them for their future duties within the family enterprise. If the position requires technical training, allow a third party to bear that cost and then interject fresh ideas and thinking into the company at the time they join the company business. By age 30, the family member should be better prepared professionally and viewed more positively by company "non" family members as a contributor. You Are the Business This is a tricky problem to solve and may take a long time to make sure you get it right. If you are the business and you leave, there is no business. Typically this is related to the owner being a "One Man" band in a key area of company operations. Frequently this is sales, and customer relationships. It may be because of certain expertise and professional designations. It may mean that the only exit strategy is to simply "close the doors" to a lifetime effort. The solution is to identify the things that can not be easily replaced and develop those skills and transfer the knowledge to new individuals within the firm. I would suggest that due to the nature of this investment and the "portability" associated with someone who is trained (and then could potentially set out on their own or join another firm), that agreements are put in place to protect the company and the shareholders. Formal agreements essentially handcuffing the individual to the firm are a key consideration. Can you imagine getting to the point of retirement, having spent several years in preparation, only to have your planned successor walk out the door and become a competitor? What other areas need a successor? One business I know lost a key sales person in an automobile accident. The division never fully recovered from the loss. What are the key people in the organization where the company lacks depth? Have you given any thought to what happens if that person suddenly leaves the company? Having a plan, possibly including key man life insurance, is critical to keep the organization on track. You don't want an employee to hold too much leverage either. So a succession plan protects the company from a number of possible problems. How do you identify and qualify successors? Start with an organization chart of the entire company. Identify the individuals that hold the key positions. In a normal career path, what would be their likely next step? Are they the right person for that role? If not, who is? If they are not in the company now, how will you source that person? What are the qualifications, job descriptions, and training that will be required to replace each key position? And then who back fills the holes they leave? What is the expected time to fill the vacancy and how will you bridge that time gap? From the organization chart map out each of the key positions, identify possible replacements and when they may be ready to take the position, such as 1) Now; 2) 1-2 years; 3) Over 2 years; 4) Not at all. Define and document the requirements in detail including job descriptions, special training and other qualifications for the role in question. Build a career path for other employees to attain the elements necessary to become a successful successor. For example, you have a dynamic sales team with a V.P. of Sales that has a demonstrable track record of success and he leaves for greener pastures. Now what? A good succession plan would show 1) Who is presently ready; 2) Who may be ready and 3) the time frame when others may be ready. You select the best prepared or decide to hire outside and execute the decision. Without this eff.... Posted by: Terry J. Eve in Articles Question: When do I need to consider hiring a CFO for my business? Answer: Now, every business needs a CFO and can now have an affordable solution utilizing a B2B CFO®. Question: OK, but what will a CFO really do for me? Answer: An Excellent Question. Consider the following in your day to day business: Question: OK, I think I get it, but tell me more about this cash flow hole, we seem to have a really big one! Answer: This is common in growing businesses. A business frequently "leads with it's chin" in order to grow the business. They in vest in people, plant, and inventory and then convert those upfront investments to sales that grow accounts receivable. All of these things drain cash. From start to finish there can be a significant length in the cash cycle. I spoke with a banker about a recently purchased business that they financed and the purchaser was about to go into default without having made the first payment. A definite working capital issue that is avoidable. Your CFO will have a good cash forecast, help manage receivables and collections and assure you have adequate and proper financing in place to grow the business or know when to throttle down a bit to keep from running out of cash. A growing business is a great thing, as long as you don't grow yourself out of cash and ultimately out of business! Question: There is so much on my plate; I guess I really do need someone to help keep tabs on the things that I could lose sight on, am I right? Answer: Precisely the point. I had one client recently tell me that he was glad I was watching the things I had on our agenda for the day, because he didn't have time to focus on those issues due to revenue growth and delivery during the peak of his business cycle. As previously mentioned, that is a reason the CFO is needed. And don't forget about other day to day activities that need to be monitored, including taxation, business planning, etc. Question: But what about my C.P.A., can't he do this for me? Answer: Not realistically. The roles of a C.P.A. and C.F.O. are different. The C.P.A. focuses on year-end financial reporting and tax returns and may not be available as needed during peak work periods like tax and audit seasons. Much of the work done by the C.F.O. would impair the independence of your C.P.A. and would prohibit them from issuing either reviewed or audited financial statements. Further, B2B CFO® partners do not do tax returns or other compliance reporting that would require their signature on a return. Finally, those C.P.A.s that do pursue this type of work do not have the resources of a National firm to back them up. Question: But can I really afford a C.F.O.? Answer: Not to be coy, but can you really afford not to have one? After all, who has the strategic advantage, a company your size with a solid financial platform and advisor or one without? Remember too, B2B CFO® will do a no cost or obligation phase one analysis to determine if and how we can help solve your business problems along with a report and the proposed cost. As your professional "Minder" we are not miracle workers, but with a cumulative knowledge base in excess of 3,000 years, there are very few if any financial issues we have not encountered along the way and we have .... Posted by: Terry J. Eve in Testimonials Terry is a highly competent, high integrity, accountable guy that is helping taking our business to the next level. I trust him. Thomas Scannell, Founder/CEO Bougainvillea Growers International Posted by: Terry J. Eve in Articles What are they and do I really need one? You are driving down the road behind the wheel of your car. How fast are you going? Do you have enough fuel! Are you headed in the right direction? How is the engine performing? Is the engine's temperature & oil pressure OK? Are there any warning indicators? In short, how do I know if everything is working as necessary to get me to my destination? Quick answer, you look at your dashboard for these answers and more. Also consider this, can you imagine driving your car without it? And in business it can be the same tool. A Dashboard for your business will help you identify the key indicators to let you know your business is either on track or that you need to take corrective action. The speed indicator is revenues, your other indicators are key metrics & measures, and your fuel CASH! Typically the update frequency is weekly, but in more sophisticated systems it can be real time. Each dashboard is designed specifically for the business. Metrics for one business are not the same as another's and while some elements may be the same, others are significantly different. A professional firm is different from a manufacturer and a retailer with inventory different yet again. So it is critical that the person designing the dashboard and the person using the dashboard agree on the content, how it will be gathered and maintained and ultimately the cost as it should not exceed the benefit. And much like an automobile manufacturer changes the dash periodically in a car to make it better, so should your business dashboard be a living, working tool that is continually improved over time. Let's look at some of the more common elements and a few variances for different industries: Revenues: This measure should generally be as follows, current week, month-to-date, quarter to date, year-to-date compared to the same period's budget and prior year actual. This is how fast the business was planning to go and whether it is picking up speed or losing pace. Operational Metrics: These measures can vary greatly by industry. For example in a restaurant the number of covers (people), the average check size, and influencing conditions like weather should be checked daily and charted to display trends. In professional services firms (law firms, engineers etc.) utilization (percent billable to percent available) and realization (percent collected Vs percent earned) are keys to profitability. And in almost all businesses, labor hours, overtime, and head count are key metrics to measure and follow. How about your accounts receivable? What are your days of revenue outstanding at the end of the week, your cumulative ageing, and estimated bad debt and collection problems quantitatively? Cash: Cash is what fuels or throttles down the growth of business. How much do you have on hand, what is the available amount of credit on your credit facility, how much do you need next week, and is there enough to meet those needs???? Remember this axiom, Never; don't Ever run out of cash, Never! Cash is a key indicator and while for certain measures weekly are enough frequency, the daily cash balance is something worthy of consideration too. And do you know the bank balance, the book balance or both? Do you know the difference and why that is important? Interpretation: And that brings us to the final point; can you properly interpret the data? How do you know a long term trend rather than mere weekly aberration? Just like when you learned to drive a car, learning to read and interpret the dashboard is critical to using it successfully. So not only can your CFO help develop and implement the dashboard, they can also help you interpret the information and react appropriately to what lays ahead. B2B CFO® has approximately 3,000 years of experience to help identify, monitor and solve your business problems. Let us help you keep your business on the road to success! Posted by: Terry J. Eve in Articles Strategies for Thriving in a Down Economy One of the uses of the term "Bullet Proof" is when you train a horse not to buck and bolt at the sound of gun fire. In the outdoors, a horse that is steady when the rider is firing his gun, perhaps at something preying on live stock or even threatening the horse and/or rider themselves, can make the difference between life & death. So too "Bullet Proofing" your business in 2009 can make the difference between the life & death of your business. Many businesses grow and thrive during bad economies. You may have heard the stories about people in chauffeur driven Cadillacs during the Great Depression, not just the executives of big industry, but successful every day business people, thriving during the Great Depression! So how can you position your company to not just survive, but grow in this economy? Here are items to consider to ‘Bullet Proof" your business for 2009: •1) Focus on your customers Your customers are the reason you exist in the first place. If you are not spending time with your customers your competitor is. Improve customer service at all levels and seek out the customers of competitors who may be looking for a new supplier after the failure of your there existing vendor relationships. Expand the amount of business you are doing with your existing customers too. Stay close and don't allow anyone else the opportunity to go after your customers. •2) Expand Market Share Look for opportunities to expand your share of the market. Can you expand your geographic footprint? Are there other potential customers where you need to knock on their door? Are some of your competitors vulnerable and if so perhaps you can acquire their customer list? As the weak companies fall away from the market, there is an opportunity expand your company's share of the market. •3) Watch Your Accounts Receivable with an Eagle Eye Accounts receivable can be defined as a financial instrument that declines in value over time. Make sure all customers pay on time in accordance with terms. When cash flow slows down, so do vendor payments, so don't fall victim to the "excuses" about why you did not get paid on time. Learn who does Accounts Payable at your customers, build relationships and use those relationships to get paid on time. Watch for variations in your customers' normal payment routine and swoop in like an Eagle at the first sign of trouble! Proper use of collections can also help avoid losses. •4) Target Marketing Expense, don't eliminate it Many companies reduce their expenses in this area just at the point they should be getting the word out about their company to the market place. The key is targeting the marketing effort to maximize the return on this investment. Not all marketing is the same, so critically evaluate what is working and what is not. Generating business from the internet? Then hire a good SEO firm to improve the organic ranking of your key search words. Is your company advertising in magazines or newspapers? How do you track the results? •5) Bring Training in House, don't eliminate it Are you trying to reduce training costs? Bring them in house. Many programs can be licensed directly to the company and taught by a facilitator in house. This is the time to invest in your customer service and other training to assure you stay a step ahead of your competition. Use training to create a competitive advantage for you company. People are your key asset, invest in them and treat them as such! •6) Control Costs and Expenses Examine all costs and expenses by line item. Have cell phone plans and other telecommunication expenses been review recently? These prices change constantly. Are you taking advantage of cost savings associated with high speed data lines including what can effectively be free long distance? It is a good time to review benefits too. Are you taking advantage of the premium savings associated with Health Savings Accounts (HSA)? Bench Mark your costs, do Process Flows to eliminate lost time. Check the adequacy and cost of your Property and Casualty insurance. •7) Manage Cash & Working Capital Working capital encompasses all of the firm's current assets and liabilities. We d.... Posted by: Terry J. Eve in Articles Analyzing General, Administrative, Sales and Marketing Expenses The final areas to look at are the company's General, Administrative and Marketing expenses. A line- by- line look at this area can also result in significant profit improvement opportunities. To mention a few: Budgeting Take these items and create a budget for variance analysis. This will allow you to identify negative trends and other problems in order to take corrective action. Identify the drivers and metrics for your business. Combing these into a dashboard will help assure profit improvement solutions remain in place. With average experience in excess of 25 years, the CFO services partners of B2B CFO can help lead the profit improvement process in your company by helping you rationalize your business in order to achieve repeatable and sustainable profit improvement. Contact me to find out more about the different profit improvement solutions we offer. Posted by: Terry J. Eve in Articles The Profit Improvement process Part II Analyzing the Cost of Revenues Proudfoot Consulting, a global consulting group, says it this way: "All work is a process and all processes can be analyzed and improved.". They believe that operating costs contain waste in excess of 30%. Additionally, some quality consultants have identified up to an additional 30% in cost reductions through improved Quality Management techniques such as "Getting it Right the First time," a technique attributable to the late Philip B. Crosby. That means that operating costs can be significantly reduced. The sale of goods & services is best measured by the cost and resulting gross profit margin. How do you compare to others in your industry? Benchmarking gross profit is critical when looking for profit improvement solutions. Evaluating if your business is in line with best practices and the resulting financial performance is a critical step in the profit improvement process. 1. What are the components that make up your cost of producing revenue? a. Are these costs comparable with others in your industry? b. Are your costs organized in a fashion that allows for proper measurement? c. Do you properly calculate and use overhead burdens? d. How can you impact these costs? 2. Are your payroll costs properly computed & associated payroll burdens properly determined and applied? 3. Can you reduce raw materials or inventory costs? Typically every dollar saved in this area drops directly to the bottom line! I work with clients to assure we can identify the true costs affecting their margins, and help them determine the best course of action to improve profitability. We analyze product lines and other component parts of their cost of generating revenues to properly identify opportunities to maximize profitability. Posted by: Terry J. Eve in Articles When our firm was updating the services we provide, I was asked to author the area of profit Improvement. I am going to publish elements of that discussion over the next few weeks. Profit improvement requires a comprehensive analysis of the income statement starting with revenues, understanding and reducing the cost of producing those revenues and the analysis and reduction of general and administrative expenses. The first area we will look at is revenues. Next we will look at the cost of producing revenue and finally General & Administrative expenses. Profit Improvement is frequently not as difficult as it may seem, provided management is committed to the goal. In essence profit improvement occurs when revenues are increased, costs are decreased, or preferably both. So what is the Profit Improvement process? It is a line by line analysis of your profit and loss statement that looks at each component to identify opportunities to increase revenues or reduce costs. It also means benchmarking against other similar businesses and creating a planned budget to identify variances for corrective action going forward. Revenues The first step in the profit improvement process is to look at revenues. Revenue Improvements come from several areas. Posted by: Terry J. Eve in Testimonials I am very pleased with the professionalism that Terry Eve has brought to our company. Mike Lee, President Blue Horizon Jet Charter Posted by: Terry J. Eve in Articles In my last blog entry we talked about getting the direction set for the company. Vision, Mission and Business Planning coupled with a detailed financial plan/budget with metrics help the C.E.O. set course for his organization. But now that we have set the course, how do we add velocity? 1) Tactical planning – This is where the rubber meets the road. Who is going to do what and by when are the key elements of a good tactical plan. Too many business plans are well thought out and are left to collect dust on the shelf. Don’t let this happen to yours. Make assignments to personnel and couple the completion of tasks to a due date. Finally make sure they are measurable. For Example: Who: John Smith Action: Contact 20 customers to discuss their current needs for our products By When: November 30 2) Use well made budgeting – Take time to put numbers to your plan. This will tell you the needs for capital and allow time to source the capital if it is not generated internally by the business. Tie in key metrics, average customer order size, average value per SKU Head count, etc. This allows a better data for variance analysis. Timely and accurate financial reporting are a must. Did you know that monthly financial reporting makes a business more valuable than one that reports financial information quarterly? So accurate monthly financial reporting not only gives you the information you need to make better decisions, it also enhances the value of your company. 3) Proper Financing – Do you have the right financing in place to execute the plan? a. Assure you don’t run out of cash b. Use the right financing for the situation c. Know when to find outside investment 4) Monitor and forecast future cash needs, no surprises! Do you use a cash forecast? Where is cash coming from? Where is it going? I like to use 13 week rolling cash forecasts to see where a business is going for the next quarter of a year. A financial forecast is a great way to tie in the operations of the business. 5) Build solid banking relations Build relationships so that when you need them, they are there. This means no surprises to you lender. If things are tight or not going as planned, sit down and discuss it, also what are you doing about it. I had a sit down meeting with a client and their banker and the banker not only appreciated the meeting, but also was impressed by the actions that we had already taken to address the business situation. The result was working together to reduce company inventory, apply that to reducing company debt and set the company up for an exceptional following year. The banker made an informed decision and the banking customer made good on their business plan. A defi.... Posted by: Terry J. Eve in Articles Alignment of business goals with the actions needed to achieve those goals are essential to an organization's success. Have you defined the expectations clearly? Can your employees talk about the company's Vision and Mission as well as the company's core values? Why is that important? First is the importance of goal clarity. It is essential that the goals be documented and posted for regular review. Tracking methods need to be in place to monitor progress as the organization pushes towards the goals. And celebrations are in order when the goals are reached or better yet exceeded. Goals need to be attainable, quantifiable and have assignments of "By Whom" and "By When". Goals should also reflect those responsible, accountable, involved in conferring and those who need to be informed. Second, documenting the company's vision, mission & core values tell the employees where the company is going and how they can take part. Employees need to live out the mission and core values so that the customers receive what they believe they bought in terms of products, services, and quality of service. These standards become nonnegotiable when providing customer service and allow all to take ownership of customer satisfaction Finally incentives should be aligned so that employees participate in the achievement of the company's goals. Incentives will drive behavior, so assuring everyone is going in the same direction is critical to the company's success, i.e. achieving the stated goals. Part-Time CFOs can help your organization reach it maximum potential by helping you clearly define your goals and putting the tactics in place to assure these goals are achieved. It is essential to have direction first. Next time we will discuss how to add velocity! Posted by: Terry J. Eve in Testimonials
The Finances Of A Growing Business Chapter 3 - Mar 31, 2010
The Role Of The CFO Chapter 2 - Feb 28, 2010
My New Book Chapter 1 - Jan 27, 2010
Ready Aim Fire - Oct 24, 2009
Goal Clarity - Aug 28, 2009
Finding Cash In All The Wrong Places 663 - Jul 18, 2009
Succession Planning Where Do We Go From Here - Jun 24, 2009
Faqs Of A C.E.O. About Chief Financial Officers - May 16, 2009
Testimonial - Bougainvillea Growers International - May 10, 2009
Dashboards - Apr 19, 2009
Bullet Proof Your Business For 2009 - Mar 3, 2009
The Profit Improvement Process Part Iii - Feb 13, 2009
The Profit Improvement Process Part Ii - Jan 28, 2009
Profit Improvement Process - Jan 20, 2009
Testimonial - Blue Horizon Jet Charter - Nov 2, 2008
Then Velocity - Nov 2, 2008
First Direction - Sep 23, 2008
Testimonial - Building Environmental Consultants, Inc - Sep 23, 2008
Hollace Bailey, President
Building Environment Consultants, Inc.
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