B2B CFO^® (602) 296-6888

Starting the Voyage

When taking the reins of a business, often it is incredibly intiminating.  Will I take this ship and it's cargo on to the shore or will I successfully navigate this port and steer it to its profitable destination?

Almost always, the answer is in the planning, whether it is for piloting an ocean going vehicle or guiding a business to success.   Have you done adequate planning?  These questions should help:

• Do we have timely, accurate financial information?  Without an accurate understanding of what assets the company has, its debt load and the income effect of its decisions, it is guiding a ship through dense fog without any radar or other instruments.

• Do we have accurate cash-forecasting?  A company can be making a profit and run into a crisis when it unexpectedly runs out of cash.  This can occur due to large purchases of inventory, a slowing of payments of accounts receivable or other actions of the company which do not take into account the available cash to finance them

• Do we have access to sufficient sources of liquidity?  Just as an ocean going liner needs sufficient fuel, all companies need sufficient liquidity to profitably complete its voyage.  How are you going to fund your company's operations?  Has your bank committed to meet your needs?  Do you have enough invested in the company?  Make sure your plans are adequately fueled by the cash you need to execute them.

• Do we understand our cost drivers, and do we understand the links between our operating plans, financial plans and budgets?  Do we even have budgets?  Understanding the cost drivers of the company, such a quality control, packaging, certain manufacturing operations and items that create necessary costs to operate and how to control them, is critical to the success.  Just like understanding the tides at sea, understanding what is buffeting your business is critical in steering it.

• Can we identify investments that may no longer be meeting our financial objectives?  So many businesses have become emotionally attached to various units and hope that somehow they will recover and become magically profitable again.  Know what makes you money and get rid of the ones that don't.

• Do we have the right strategy in place to attract and retain the talent we need?  Not only today but for tomorrow.  If you don't have superior talent working with you, you end up doing it all yourself and the results are not often pretty.

If this sounds complex, that’s because it is. The successful companies often turn to specialists for guidance in analyzing where their organizations are now and how best to safely steer to the planned destination.

Call us to help you get there safely.

Everyone has some “Bernie Madoff” in them.  It is said that for the “right price”, many people might compromise their values.  Fortunately, the vast majority of us have high moral and ethical standards so fraud is not even a consideration.  For those very few who have a feeling of entitlement, how do we protect ourselves from them?

Occupational fraud comes in a variety of types and forms.  It can be perpetrated by many individuals within an organization.  The term “occupational fraud” may be defined as: “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”  According to a study published by the ACFE (Association of Certified Fraud Examiners) in 2008:

• Occupational fraud schemes tend to be extremely costly.  The median loss caused by occupational frauds in this study was $175,000.  More than one-quarter of the frauds involved losses of at least $1 million.

• Occupational fraud schemes frequently continue for years before they are detected.  The typical fraud in the study lasted two years from the time it began until the time it was caught by the victim organization.

• Lack of adequate internal controls was most commonly cited as the factor that allowed fraud to occur.

• Small businesses are especially vulnerable to occupational fraud.  The median loss suffered by organizations with fewer than 100 employees was $200,000.  This was higher than the median loss in any other category, including the largest organizations.

• Occupational frauds were most often committed by the accounting department (29%) or upper management (18%).

It should be noted that many cases of fraud go undetected, and those that are identified, may not be reported to the police or the extent of the loss may not be fully discovered.

While it’s impossible to detect 100% of fraud because collusion can bypass normal company controls, it is much less expensive to implement sound internal policies and controls than it is to investigate and prosecute.  According to the ACFE 2008 report, fraud was discovered in small businesses 42% of the time through tips (employees, customers, suppliers, etc) and 29% by accident.  Only 16% of the time was the fraud discovered through the company’s internal controls.  The study also found that the median duration was 24 months with 52% of the perpetrators being with the company for over 5 years.

So what steps can a small business owner take to minimize the frequency and magnitude of fraud?  Here are some key tips:

1.       Develop a formalized mechanism for fraud to be reported.  A fraud hotline needs to be implemented and its purpose actively communicated to all employees.  There should also be a procedure where specific managers are identified as confidential contacts, enabling employees to report their concerns or suspicions.  This procedure needs to be documented in writing and should require that more than one manager investigates the allegation.

2.       Educate employees as to what constitutes fraud and the cost to the company.  While this sounds like common sense, it highlights to the employees the need to be observant and their responsibility to report their suspicions.  Make it very clear to the employees that ALL fraud detected will be reported to the police for further investigation and where applicable, the company will prosecute the offender.

3.       All employees MUST take their vacation time.  In many cases, fraud will be detected by someone else performing the duties of the individual perpetrating the fraud.  Therefore, employees who are hesitant and/or resistant to take their vacations should be watched very carefully.

4.       Rotate job responsibilities.  Once again, fraud becomes more difficult if the perpetrator does not have constant and sole access to certain data and processes.

5.       Develop stronger internal controls which include proper segregation of duties.  Since many small businesses have limited staff, it becomes increasingly difficult to define strong controls.  For this reason, the ACFE report stated that only 16% of fraud was discovered through the company’s internal controls.  Many small business owners delegate too much authority to their bookkeepers and/or controllers.  Beware of weaknesses in your systems and implement the following controls:

a.  The owner (or someone else within the organization) MUST continue to review key financial reports and records.  All disbursements should have vendor invoices attached to the check stub with the manager/supervisor responsible for the expenditure approving it before payment.

b.  The person who signs the checks should NOT be the one who performs bank reconciliations.  Detailed bank reconciliations should be reviewed and initialed by either the owner or an outside accountant who is familiar with the process.

c.  The person responsible for billing needs to get an approval from someone outside of the accounting area in order to process credits to customers.

d.  All suppliers added to the system need to have an approval by the manager requesting the product/services, in addition to that of the bookkeeper or controller.  If the bookkeeper or controller is the one adding the supplier, the owner needs to approve it.

e.  A report of additions and deletions of customers and suppliers should be reviewed and approved regularly by someone outside the accounting area.

f.  Accounting systems should have security permissions prohibiting accounting personnel from making certain changes to financial data. 

6.       Before hiring new employees, perform background and credit checks.  Many companies will perform a background check on key employees.  However, 87% of the cases reflected the perpetrator had no previous criminal record.  The #1 reason for occupational fraud in small businesses was due to financial pressures of the perpetrator.  Therefore, credit checks can be a stronger indicator than the background check.

7.       Be aware of employees living beyond their means or expressing personal financial difficulties.  In 77% of the occurrences discovered and reported to the ACFE in their 2008 survey, individuals  living beyond their means (41%) and personal financial difficulties (36%) were the key reasons fraud was perpetrated by  employees of  small businesses.

When it comes to fraud and the controls to deter and detect it, don’t bury your head in the sand.  Take control and derail fraud before it rears its ugly head.    It can happen to you.  Can your company afford to lose $150,000 (or more)?

If you don’t have expertise in this area, bring in a professional to take a look at your systems and controls.  The investment will probably be the best return your business will ever see.

The Race Across America (RAAM) is the toughest cycling endurance event in the world; a non-stop, continuous race in which cyclists race 3,000 miles from Oceanside, CA to Annapolis, MD.  RAAM participants face challenges beyond cycling that include scorching heat, violent winds, and even tornadoes, altitude, and the dark of night, sleep deprivation, navigation, and mental acuity.   Because of the demands on the riders, crew and equipment – being ‘RAAM Race Ready’ requires tremendous preparation beyond fitness.  It requires a strong foundation, proactive scenario planning, and practice.  Navigating ‘through the elements’ is the most critical aspect of your plan - as it doesn’t matter how fast you ride if you are off course. 

How do you navigate through unforeseeable challenges?  You can’t always execute predictably as there are always variables that you can’t control - but the key is to have a strong foundation.  The same holds true for business.  As I prepare for RAAM, I am reminded of the very same principles that I deal with in business.  Having a solid foundation and understanding your true financial position is a critical step to increase the value of your company and maximize your chance to ‘weather the storm.’

Many companies that I visit have a general idea of their financial position but really haven’t looked close enough and asked the right questions to truly understand the real strength of their foundation. As a result they end up being reactive to situations which utilizes more resources and ultimately will cost a lot more money. 

Below are the most critical parts to build a strong business foundation.

Cash is probably the number one area of concern in any business yet so often cash management is very low on the priority list.  Many business owners track cash by keeping an eye on their bank balance.  In order to succeed we need to record data daily in order to prepare proper cash flow projections. Cash flow projections are the key to making smart, profitable decisions.  Well managed companies utilize these tools to proactively navigate challenges through early detection and proper planning.

Next up is accounts receivable.  What is the real value and true collectability?  Having old or invalid receivables on your books reduces the quality of your business not to mention lowering your cash flow and eligible collateral.  A potential buyer will discount a business without a clean and current accounts receivable aging and a bank will most certainly lower the amount of available credit to you.  This is an even greater area of concern during a growth spurt.  Proper training and procedures are necessary to successfully manage receivables to provide greater financial clarity.

Another very misunderstood area is inventory.  How much of your inventory is really saleable and when?  Maintain inventory for only your top selling items.  Scrub your inventory often and closeout any slow moving or obsolete inventory.  Knowing what to buy and how often is definitely an art but one worth the investment.  Inventory that sits on your shelf may actually be costing you more than it is worth.  Building an order process to help you control your inventory and preserve cash is a tremendous asset.   

Knowing the true condition of your assets is critical to building a strong foundation but there is another area to watch.  The silent killer in the business foundation is overhead.  How solid is your infrastructure?  Do you have the proper systems in place to provide the greatest efficiency and proper visibility to your business?  If not your overhead cost is likely much higher than it could be. 

Is your business RAAM RACE ready?  Knowing the true strength of your foundation is the critical first step.  Call for your free business checkup - it doesn’t matter how fast you are going if you venture off course!

Small businesses in today’s economy have found that the rules associated with borrowing money from a Bank have changed significantly in the past two years.  It’s no longer a simple matter of bringing you prior year’s tax return into you bank and acquiring the funds you require.

Fortunately, banks are still lending.  Small banks, in particular, still have funds available for loan to small business owners.  It’s a matter of proving to the bank that you are creditworthy.  This requires some preparation on your part.

You need to have a business plan.  A well written business plan will help you in communicating to others that you know what you’re doing, where you want to be, and that you’ve done enough research.  You need to include information about your products or services, the industry analysis you’ve completed, and you will need good financial data.

Bankers will be looking at certain aspects of your financial plan very carefully.  They will want to see your prior year tax return, and they will review your personal credit rating.  Beyond those things, though, the banker will need to see historical financial statements to establish credibility for the business.  These financial statements will include actual historical results as well as forward looking projections (typically 2-3 years).  You will need to provide an income statement, balance sheet and cash flow statement.  The projections are important because they will illustrate your anticipated cash shortfall and will help the banker understand and document the amount needed and the specific intended use of the funds.  It’s critical that you are able to show the banker how you intend to use the funds. 

Don’t be surprised if you are asked to provide a Global Cash Position that reflects not only the business for which you are seeking a loan, but your personal net worth and any other companies you may own as well.  A banker today will want to take a deeper look into your overall liquidity rather than limiting their review to the individual business you are presenting in your request for funds.

It is also likely that the banker will want to ensure that you have some “skin in the game”.  In other words, if you anticipate needing $1M to reach breakeven, the banker may ask you to cover $100-200k with your personal funds.

Your personal credibility will be a factor too.  It’s easier to qualify for a loan if you have been doing business with the bank for a period of time and have a relationship with your banker.  A long time client who already has a good relationship with their bank is in a much better position to request a loan than a brand new customer who has no history with the bank or banker.

Increase Your Profitability

Gross Profit (or gross margin) is a very important financial measure in almost every type of company. It is the profit from sales before sales and marketing, research and development, administrative expenses, or interest and other expenses.
 
An important sub-component of Gross Profit is Direct Margin: 

• Direct margin equals sales less direct costs. For a manufactured product direct cost normally includes direct labor, raw materials and subcontracted costs. For distributors or retail, this is the cost of purchasing the product for resale. For service firms, this is a bit trickier. But normally would include direct labor, materials, subcontractors, supplies and other variable costs that are directly attributable to the completion of the service.
• Gross Profit is direct margin less the cost of the operational overhead required to manufacture the product, provide the service or distribute the product. The key word is operational overhead. It is very important to separate operational costs from administrative expenses, sales and marketing expenses and other expenses.

Therefore, Gross Profit Optimization is the process of optimizing, or maximizing the profits from producing the product or service. Here are the steps:

• Identify the direct costs. Set up separate ledger codes so you can track them. For example, most firms do not properly track labor. They put it all in one bucket. Direct labor should only include time spent producing the product or service; all other labor should be coded to indirect labor, including breaks, vacations, holidays, paid time off (PTO), seminars, training, meetings, etc. Indirect labor is overhead and should be coded as such.
• Calculate the cost of each direct cost input as a percent of sales.
• Develop detailed strategies on how to lower each of the direct costs. Assign teams, responsibilities, and timelines for achieving specific cost reduction goals. Often the goals will be a percentage of that direct cost to sales. If direct labor has been running 20% and materials 30% of sales, develop specific action plans to bring labor down to 18% and materials to 28%. This will bring 4% directly to the bottom line. Detailed labor analysis and carefully planned purchasing strategies are required to achieve these results.
• Identify direct margins down to the product line and item level. Fix or get rid the items that do not add value to the company.
• Continue to track the direct cost/sales % over time to monitor your results and make sure you hit your direct margin targets. Review the prior month % trended against the last 12 months and dig into the details if the margins don't look right. 
• Analyze the overhead costs (including the indirect labor) and set additional cost reduction goals for these expenses. Tackle the big ones first. Compare your costs with industry averages to benchmark your operations to your peers.
• Calculate the gross profit % of sales and track over time. If you improve your direct margins and reduce your overhead, gross profit will improve. 

By breaking down your margins and developing specific strategies for each category of cost, you should be able to add substantially to your bottom line! 
Question:  Do you have Gross Profit improvement goals and a team assigned to meet those goals?  If not, you are most likely not as profitable as you could be. 

ESOP’s may be used as a means to allow shareholders with management responsibilities in a closely held company to gradually sell and ease out of the business (exit strategy) over a number of years and reward employees with a benefit tied to corporate performance (i.e. - stock value increases).

Implementing and administering ESOP’s are very complex and can wreak havoc if not properly structured. ESOP’s are not for the faint of heart and before pursuing down this road owner(s) should clearly understand the benefits and pitfalls of an ESOP and look at other alternatives carefully.  ESOP’s are qualified (i.e. tax qualified) defined contribution employee benefit plans that primarily invest in the stock of the employer. If a company performs poorly the value of its stock falls and so does the employee’s retirement account value.  There are DOL, IRS and fiduciary rules that MUST be adhered to throughout the entire lifecycle of the ESOP that can be onerous to the owners especially if the ESOP fails or cannot be sustained.  ESOP’s can be costly to form and maintain!

ESOP’s are not for companies that are volatile or subject to major swings in profits. Commodity product companies typically are not good candidates. Employer contributions are usually required annually, and if not paid the ESOP Trust may fall into default on its obligation to the company unless provisions provide otherwise. Finally, ESOP’s almost always leverage the company (leveraged buyout). That’s just one more thing to worry about with bankers. There are also the GAAP accounting rules which are confusing at best.

However, a properly structured ESOP has many benefits for owners wishing to exit the business and for employees committed to staying on for the long haul.  ESOP’s allow the selling shareholder to sell stock to the employees via an ESOP Trust.  In the simplest of terms, the ESOP Trust is obligated to pay the selling shareholder for the value of the stock sold to the ESOP Trust, which holds the stock for employees until employees retire and cash out.  Employees vest in their account overtime. Therefore they must stay with the company to benefit. This is one of the main selling points of an ESOP, employee retention. The proceeds of the stock sold by the selling shareholder usually is tax deferred (section 1042), essentially indefinitely as long as certain IRS rules are adhered to.

The company is allowed to deduct dividends paid and any contributions (required) made into the plan providing a nice tax shelter. The tax savings may be sufficient to payout the selling shareholder over time.

Determining whether an ESOP is right for your company requires careful investigation by experienced ESOP and accounting professionals.  Setting up an ESOP may take from three to nine months and can be costly.

If you need assistance with ESOP’s or finding qualified ESOP professionals please contact me at 480.403.1483

Many companies develop strategic and operational plans only to have their value dissipate due lack of accountability.  Creating an accountable organization is an ongoing continuous process. 

“Accountability is a concept with several meanings. It is often used synonymously with responsibility, answerabilityand other terms associated with the expectation of account-giving. In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies including the administration, governance, and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.” (Wikipedia).

The owner is accountable to a number of stakeholders of the company, individuals or companies that may not have an ownership interest but have an interest in the success of the company.  Stakeholders include vendors, bankers, and employees as well as the customers who depend upon the product or services.  The managers need to be accountable for the promises and performance of the company against plans and projections.  To be held accountable, stakeholders must be able to compare actual performance to the promises made, comprehend how performance differed between the promise and the actual, and communicate changes to future performance that the company will implement from that point.

“Comparing” requires timely generation of financial statements and any other standards used as Key Performance Indicators (KPI’s). “Timely” means that they are produced after period end so that management can affect the next operating period.  “Period End” because some measures might have weekly timelines, some monthly and still others quarterly.  In the restaurant industry, nightly P&L’s are generated to monitor performance.  Financials generated the middle of the following month can’t be used to affect performance in that month.  To compare, the goals and indicators need to be side by side for easy comparison.  Without this specificity, you have only set up potholes for failure.

“Comprehending” means understanding the root cause of differences.  Changes in sales, the product mix of the sales, staffing – all of these impact the differences between the budget or forecast and the actual performance.  Often times increases in sales are not accompanied by comparable increases in profitability, so understanding why the bottom line is better, or worse, is important in changing behaviors later.  9 times as much time should be spent on analyzing the results as is spent preparing the comparison data.  Since timeliness is important to affecting current behavior, having your CFO prepare the data quickly and efficiently is key to driving organizational change.

With the crystal clear expectations set from the beginning, Accountability means going public.   Communicating is publicly acknowledging both the successes and the failures of performance, creating a system of notification and dialogue regarding results.  Communicating results requires dialogue to confirm that the message was transmitted and questions have been resolved.  Most importantly, Management must communicate an action plan to change behaviors to continue or to improve performance in the next period.  Invite feedback – look for people who are actually doing the work to reflect on their performance, their feedback may contradict the numbers, and add context or provide explanations that numbers alone can’t provide.  Most importantly communication provides connection – enabling people to connect their performance to the overall performance of the company.  Communication occurs verbally and visually –signs, graphs or pictures help to reinforce the message.

Preparation, Execution and Accountability – the three most important aspects of your 2010 plan.  Your CFO is a valuable resource in developing the plan, providing actionable goals to enhance execution and providing the comparisons and analysis for holding individuals accountable.  All companies need a CFO, most don’t need one full time.  With your B2BCFO, you have a seasoned professional available when you need a CFO.

If you are fortunate enough to find that your business has moved back into a growth phase or you are beginning to see accelerated growth in early 2010, congratulations.  This is good news and could signal a reduction of the impact of the recession on your bottom line.  It also means you’ve got to keep a close eye on your bank account. 

Increases in revenue are good, but if not monitored carefully, the improvement to your bottom line may be less than you anticipated.  Please find a few scenarios below to consider:

• Revenue is increasing, but not as fast as unit sales – you may need to review the profitability of your individual products to ensure that you are focusing the right amount of attention on each product.  If you’re seeing movement in low end merchandise, consider motivating your sales force with stronger incentives around growth in your higher profit product lines
• Gross revenue is up, but gross margin isn’t – is it time to review your vendor pricing and put some components up for bid?  Have you seen an increase in vendor control over pricing, necessitating a review of end consumer pricing?  Are you experiencing an increase in unit costs associated with volume reduction in 2009?
• Revenue and Gross Margin have increased, but profits remain stagnant – Have you reviewed your staffing to ensure that the number of employees make sense, and their salaries are competitive?  Have you seen contractual increases in facilities expenses?  Are accruals appropriate, or is their a possibility you’re building up some balances on the balance sheet?  Do you have adequate internal controls established to minimize the potential for employee theft?

Even if all is well on the income statement, you may want to take a closer look at your balance sheet.  Some items to consider include:

·         Cash – Do you have enough cash to sustain the growth?  In other words, if sales continue to accelerate and you need to hire additional employees, or purchase components for manufacturing or goods for resale, will you be able to meet demand?

·         Accounts Receivable – Are you collecting quickly enough?  Are there vendors that aren’t paying you in accordance with your terms?  Is customer billing prepared and distributed in a timely manner?

·         Accounts Payable – Do you pay your vendors on terms, or “as soon as the bill arrives”?  While it’s important to maintain your credit rating, there is no real need to pay an invoice until it’s actually due (unless you receive a discount for early payment).

Taking the time to understand these items may save you from a lot of headaches down the road.  In addition, if you are still looking at a future cash shortfall in spite of your attention to these details, the time to start seeking a line of credit is now.

The centerpiece of the bill, a top administration priority, is a tax credit designed to encourage hiring.

Companies that bring on employees who have been out of work at least 60 days would not have to pay their 6.2% share of federal payroll taxes for the rest of the year. If the worker is still on the books in a year, the business owner would receive an additional $1,000 tax credit.

Is this enough to encourage small business job growth?  Some argue that firms won't hire unless there is a real need regardless of the incentives.

(Excerpts from the Wall Street Journal)

Large companies employ top executives in sales, operations and finance.  They provide the strategies and management expertise required to bring in customers, competitively produce the firm's products or services and provide the financial management and planning required to maximize the firm's profitability and growth.

Small and mid-market companies also employ top sales and operations executives, but not financial executives.  The majority have bookkeepers or controllers who process financial transactions and generate financial reports. But, they cannot provide the financial strategies or offer the level of financial sophistication, problem solving, and strategic financial management these companies need to maximize profitability and growth.

Companies without a CFO are at a disadvantage.  Many small and mid-market firms have sophisticated operations and complex cost and financial challenges like large companies.  They need the expertise of a senior financial executive… but not full time. Nor can they afford the cost of a full time CFO.  These firms often seek financial advice from their CPA firms who provide tax, reporting, and general financial guidance but do not have the corporate experience and specialized skills that CFOs excel in.

B2B CFO^® provides CFO services on an affordable, part time or as needed basis and is the largest CFO firm in the U.S. focusing on small and mid-market companies.  With over 145 partners in 39 states, B2B CFO^® provides small and mid-market companies with the financial management they need to prosper.

What are the benefits a B2B CFO^® partner brings to small and mid-market companies?  Cash, profitability, and growth:

In Summary, a B2B CFO^® partner,

• Allow Start-ups, small, and mid-market companies the advantage of a CFO.
• Help drive revenue and profitability that far exceeds the cost of their services.
• Help reduce "administrivia" so Owners/CEOs can focus on leading their companies.
• Help Companies without a CFO gain significant competitive advantage and improve profitability.

CASH. WE HELP YOU GET IT.^TM