B2B CFO^® (602) 296-6888

Steve Jobs said it all; “A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets.”  This from a CEO whose company recently hit an all time high in stock price, in a severe recession.

The path Apple Computer took can benefit a number of small and mid sized companies who are facing a downturn and listen to the gurus that preach cost cutting as the salvation of all.  The fact is if you cut costs and downsize, how are you going to meet your competition that is taking market share from those who are pulling back?

Companies cannot cost cut their way to prosperity.  Companies prosper by providing their customers with exceptional products that customers want.  Notice I did not say demand.  It would be an unusual customer that demands a time machine, but if you could deliver one, you could not keep up with the demand.

Make an effort to do these five things:

1. Get the right team on your side.  If a sports team experienced a losing season, would they react by finding the least expensive, least experienced players?  Of course not.  So why as a business person would you want to drive away your “expensive” experienced employees and advisors, while bringing in or keeping a bunch of rookies that are going to cost you much more in the long run?
2. Promote your best products.  What are you good at delivering?  What service do you provide or product you make that is the example of what you do best?  How can you top those products?  Promote the ones you are best at delivering and the ones customers appreciate the most.  Build on them.  Apple’s I phone and tablet computer are not really all that different but one serves customers’ needs better than the other.
3. Attack in the areas where you are strong while others retreat.  The best time to exploit weakness in competitors is when they hesitate or retreat.  The best time to gain market share is when competitors show a lack of nerve in protecting it.
4. Stop waiting for the past to reappear.  I hear often “that business used to be a great money maker for us.”  By waiting for something to occur, we miss major opportunities that other more forward looking competitors understand and capitalize on.
5. Understand who pays your bills.  “Well, the customer just needs to understand that…” is not a phrase that successful people utter.

Cost cutting is a plan if you have let costs get away from you or your business model has drastically changed.  It is not a plan to grow your company or prosper without major other changes to your company.

Financial statements are created to give business owners and stakeholders insight into the financial condition of their business. Performance measurements and ratio analysis help us analyze financial statements and identify financial trends in the business.  Ratios also allow you to compare your company's current data to the company's historic financial performance, financial goals as well as other companies' results. They are typically expressed as a percentage, multiple, or a dollar amount.
 
Often dashboard reports include performance measurements and other key performance indicators, giving management a convenient snapshot of  critical business data and trends without having to dig through the financial statements.  Performance measurements and ratios analysis fall into four main categories:
Liquidity ratios- the company's ability to meet its financial obligations
Profitability ratios- ability to generate earnings as compared to   
   expenses and other costs
 Leverage ratios- measures the use of debt in financing the 
   company's operations and assets
 Efficiency ratios- operational measurements on the quality of assets, 
     liabilities, and cost control
 
It would be burdensome to review dozens of performance measurements on a monthly or quarterly basis. It is therefore important to decide which performance measurements are most meaningful to your particular business. It is critical that the ratios are calculated on a consistent basis and there is agreement among the business managers that the correct data is being used in performing the calculations.  Below is a sample of two ratios in each of the above categories. 
   
Liquidly ratios
Acid Test or Quick Ratio=(Current Assets - Inventory) /Current Liabilities
This is a measurement of the liquidity position of the business.  It measures a   
company's    ability to meet short term obligations in an emergency situation.   
Inventories are removed from current assets     since it is unlikely that inventory will be 
able to be sold for full value in a short amount of time.  A ratio of 1:1 is considered        
satisfactory unless a majority of your assets are in accounts receivable and the timing 
of their collections lag the timing of your payment of accounts payable.
 
Net Working Capital = Total Current Assets - Total Current Liabilities
This is more a measure of cash flow than a ratio.  The results of this calculation 
should be positive.  Bankers look at Net Working Capital over time to determine a 
company's ability to weather a financial crisis.  Loans are often tied to minimum 
working capital requirements.
       
 Profitability ratios
Return on Investment (ROI)  = Net Profit before tax / Equity   
          (note: some analyst include long term debt with equity for this calculation)
ROI calculates the percentage return from your business on the funds invested.  The result of this calculation can be compared to alternative risk free investment (i.e. CDs, bank savings account, Treasury Bills).  Business owners want to make sure they are receiving a sufficient premium over a risk free investments to justify the risks and effort they are making in operating their business.

Breakeven Sales=Total Operating Expense/ Avg. Gross Margin %
This is an important measurement that calculates the sales necessary to realize a breakeven bottom line.  The calculation reflects how a decision to add fixed costs or changes to the gross margin percent impacts the sales volume that yields zero profit.

Leverage Ratios
Capitalization Ratio=Long Term Debt / (Equity + Long Term Debt)
The Capitalization Ratio measures the percentage of the company's capital structure that is supported by debt versus owners' capital.  Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it correspondingly harder to obtain credit.
 
Fixed Charge Coverage  = (Earnings before Interest & Taxes + Lease   
                                                payment) / Fixed Costs
This multiple indicates the number of times a firm's operating income exceeds its fixed payments. Fixed Charge Coverage is a measure of a firm's ability to meet contractually fixed payments. A high coverage ratio indicates significant flexibility for making payments in the event that business conditions deteriorate and earnings decline. Payments used in calculating fixed costs usually include interest, lease payments, preferred dividends, and principal payments on debt.  

Efficiency ratios
Sales to Working Capital Ratio = Annualized Net Sales/(Accts.  Receivable 
                                                             + Inventory - Accounts. Payable) This ratio measures the cash investment required to maintain a certain level of sales volume.   It is useful to track this ratio over time, enabling management to measure how changes in working capital policies impact sales.  These policies can include increasing or decreasing inventory levels and customer credit extension policies.  This ratio can also be useful for budgeting purposes, giving management an indication of future cash requirements at certain assumed sales levels.
 
Accts. Receivalbe Turnover Ratio =Annualized Credit Sales/Avg. Accts. Rec.
This is the ratio of the number of times that accounts receivable are collected throughout the year.  As with other ratios, tracking the results over time may highlight changes taking place in the business or general economy. A high ratio may indicate a credit policy that is too tight.  A low or declining ratio could be an indication of a collection problem, potentially resulting in bad debt write-offs.
 
Understanding and using performance measures not only help you better understand your business, they give you insight into how other financial professionals evaluate your business.

Over the past few years, I have been involved in a number of transactions involving the purchase and sale of businesses. The process for each transaction is very similar, the owner decides that it time to sell. Usually with the assistance of an advisor, they put together a summary of the business, several years of financial statements, and a few key documents. The advisor markets the business and receives a non-binding letter of intent or indication of interest. Then the real action begins- time to perform due diligence and negotiate a contract. During that process, nearly everyone is surprised by something uncovered by the buyer, almost always negative in nature. What happens? The buyer no longer trusts the rest of the information provided, the offer gets reduced, and nobody is happy.  So, how do you keep this from happening?

Preparation begins long before the business is marketed for sale. An owner should be running their business with the end-game (exit strategy) in mind all along. That means, the financial statements are being scrutinized by someone other than the preparer on a regular basis. The corporate books and records are kept up to-date. Minutes of shareholder and board meetings are prepared each year. Unfortunately, that’s more the exception than the rule.

So, you’ve decided to sell the business but have been rather lax in the recordkeeping department. Time to perform your own due diligence. Engage a professional to provide a typical due diligence checklist before hiring the advisors. Assemble all of the documents that are likely to be requested. Review all of the asset accounts to make certain the detail agrees with the financial statements. That means, performing a physical inventory and adjusting the quantities in the system to actual counts. Review the costs of the major items to make sure they are accurate. Review your accounts receivable listing and write-off the uncollectible accounts. Review your corporate documents and bring them up to date. Obtain copies of all loan agreements, lease documents, data processing contracts, software maintenance agreements, and computer software licenses.

In some of prior transactions I’ve seen, due diligence uncovered some of the following items:

• Inventory quantities were overstated by 30%
• 15% of another inventory was obsolete
• Several customers were also vendors. The company had recorded both the accounts receivable and payable, but had not offset them causing an overstatement of the assets being purchased
• Multi-year commitments for data processing and long-distance contracts were discovered (the buyer had expected significant savings in this area)
• There was only one Microsoft Office license for every five computers the company owned

The point of performing this time consuming task before offering the business for sale is so that when you have reached a tentative deal with a buyer, they are not disappointed and you as the seller are not surprised. The due diligence and contract negotiation process will go much faster and there will be a much smaller chance of the buyer walking away. Total professional fees on both sides will be much lower. If you are considering exiting your business, a two year head start allows the owner to fully prepare themselves and the business for sale. A B2B CFO^® is an expert at assisting business owners in the process and quarterbacking the numerous advisors that can be involved. Give one of us a call if you would like to learn more about how we can help you Find the Exit^TM.

Woodbridge Group Closes Sale of WETLabs Inc.

Tuesday, February 2, 2010

Woodbridge Group is pleased to announce the sale of its client, WETLabs, Inc. to an undisclosed strategic buyer.

WETLabs is an Oregon-based manufacturer of underwater instrumentation products that measure optical properties of water in oceans, lakes and streams. WETLabs operations will remain in Philomath, Oregon.

"We are happy with the deal we were able to negotiate for our client, which included a mix of upfront compensation and future payments that will allow the two major owners to realize their goals going forward," said Ney Grant, senior dealmaker on the transaction.

WETLabs’ wide range of optical measurement products are used by a variety of governmental agencies and commercial users to measure and understand aqueous environments across the globe.  The need to understand the earth’s water environments is increasingly important in this era of environmental degradation and climate change. As part of a larger company WETLabs expects to accelerate the implementation of its mission.

Woodbridge Group, Inc., an international M&A firm, was founded in 1993 to provide divestiture and acquisition services to middle market companies. Contact a B2B CFO for more information about how our Partners can help you Find the Exit... http://www.b2bcfo.com/partners/gbergmark

The President has called on Congress to create a new Small Business Lending Fund that will transfer $30 billion from the Troubled Asset Relief Program (TARP) to this new program to support small business lending. The proposal would be to use the Small Business Lending Fund to offer government capital investments to community and smaller banks with an incentive structure to support new small business lending.
The program would be available only to banks with assets under $10 billion. The theory behind this is that these banks conduct the highest percentage of their lending to small business, accounting for 50 percent of all small buiness loans nationwide while making up only 20 percent of all U.S. bank assets. According to the Independent Community Bankers of America (an advocacy group for the nation's nearly 8,000 community banks), over 98% of the nation's banks have assets of $10 billion or less. The new program would be separate from the TARP program to encourage greater participation, since the banks would not face the notorious TARP restrictions such as limits on executive compensation and dividend payments, as well as requirements that TARP banks give stock warrants to the Treasury.

With the core function of the new Fund being to offer capital to qualifying banks with incentives to increase small business lending, the proposal is structured to entice banks to increase lending immediately. The government capital would come with  an initial dividend rate of 5%. By increasing their small business lending over 2009 levels over the next two years (on the basis of new lending beginning January 1, 2010), banks could receive a 1 percentage point decrease in their dividend rate on the capital for every 2.5% increase in business lending, down to a minimum dividend rate of 1%. Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending. After 5 years, the dividend rate would be increased to encourage timely repayment. 

Banks would be eligible to receive up to 3 - 5% of risk-weighted assets in capital investment from the new Fund. Banks with less than $1 billion in assets would be eligible for up to 5% of their risk-weighted assets and banks with $1 - 10 billion in assets would be eligible for up to 3%.

The Administration is counting on the Fund's $30 billion to be leveraged by the participating banks when increasing lending, resulting in new lending amounting to several times over the $30 billion in capital provided to the banks.

Will the new fund get through Congress? If so, will banks participate? Is the demand there for quality small business lending amidst a weak economy? Time will tell, but one thing is for sure--to have a chance for a real impact, the Fund needs to be put into place quickly.

The aforementioned Independent Community Bankers Association (ICBA) issued a news release on February 2, 2010 supporting the Small Business Lending Fund proposal stating that " this new $30 billion small business fund would help small businesses fuel local job creation and economic stability. In fact, every dollar of capital that goes into community banks has the potential to be leveraged eight to ten times--a substantial and positive impact for both small businesses and our communities". 
It should be well worth the time of Main Street America to follow the developments of this new plan.

                                The Psychology of a Corporate Turnaround

          This is a case history of a distribution company turned around from a net operating loss of approximately $7.0 million to a net operating profit in excess of $23.0 million. Following are thoughts on the psychology and management  of the  human resource asset in a turnaround:

1.      Know your people 

     Within the first two months, it is very important to objectively assess the individuals in your workforce – especially the managers. In my turnaround experience you can place workers into three groupings :

A.      Those who are not aware of any problems or are part of the problem in the organization. Hopefully these people represent a small group.  The psychology of these individuals must be addressed. If  individuals in this group do not positively change their mindset regarding the organization’s goals then it is wise that they be replaced. Recessionary times are good to “ cherry pick “ the labor pool with the goal of your company upgrading certain key positions.

B.      The largest group is usually those who realize there is a problem but are not sure how to solve the problem. Also, some might be too timid to offer a solution. These individuals  are in search of strong leadership and are  concerned with staying employed. This is a group you need to spend some time developing and training. This is a large swing group who can help you either win or lose the turnaround game.

C.      The last group is your most important asset. These are the people, hopefully some are in management, who buy into and help with  your turnaround strategy. You should cultivate these individuals.

2.      Positive Attitude is Important  

     It is important to infuse a positive attitude within the organization. This becomes very important since usually a negative overall attitude permeates  a company with losses. One must concentrate on staying positive and upbeat with the workforce.

3.      Training for profitability is critical  

       Training the workforce in the proper way to work and to work towards profitability is critical. To successfully accomplish a turnaround the leader must put training in place to have everyone properly striving for  financial stability in the organization. One also wants the people to feel successful since  success does breed success just as failure breeds failure.  You want the positive momentum toward profitability to continue.

4.        Have everyone focus on the turnaround  

         Keeping everyone focused on the ultimate goal is difficult. The management team should develop, monitor and constantly adapt a three year plan to achieve increasing profitability.  Break the three year plan into quarterly segments. Win each quarter ! Having everyone in the organization accountable for their actions or inactions is critical.

       Do not overlook the importance of your people’s talents and their desire to be on a winning team in a turnaround situation. Sometimes it is easier to turn an organization around financially than turn the people’s mental outlook around positively. Remember turnarounds are as much psychological as financial.

If you're a typical small business owner, you spend more of your time working on today's issues than tomorrow’s potential. That may keep the doors open for now, but what about when you're ready to retire, or no longer have the will or energy to run your business?

As mid to large businesses grow, owners typically realize they'll need to find a way out, but most small business owners do not have an exit strategy. Rather than simply selling inventory and closing the doors, the suggestion is that small business owners can increase their wealth by capitalizing on the goodwill or customer base they've built up. Here are some key businesses practices that many entrepreneurs overlook, but can help keep the company buffed up and ready for the marketplace.

Document the Business Process

You can't sell a business that is in your head. So, you need to write it down. Entrepreneurs don't typically like dealing with details and the fine points, but you must document how everything works in your organization. For example, spell out the roles of management and employees, not titles, but their actual responsibilities. Or describe a typical customer visit. Franchise companies list these types of details; a small business owner can use the same tactics to show the value of their company to a potential buyer.

Set Financial Goals

You cannot sell a business that is not making money. And, how do you know if you're growing if you don't know where you started and where you're going? Once you've set some target goals, measure them on a regular basis. Look at the internal processes of your business and make sure they are still working for your customers and your company alike. You may be pleasing customers, but are you making money? Know what your return on investment is, so you can explain it to those interested in buying your company.

Have a Marketing Budget and Business Plan

Many small business owners don't allocate money for marketing. A marketing plan, with a corresponding budget, is a critical component for attracting and keeping customers. One rule of thumb is to spend the equivalent of one staff salary on your marketing and advertising. Think of it as your "silent" employee working 24/7. Market awareness of your brand and demonstrated customer loyalty can dramatically increase the value to potential purchasers. Marketing is the last thing you cut even if times are bad

Keep track of customer information

Often, the most valuable aspect of a business to a potential buyer is your customer list, especially if your potential buyer is a competitor. Keeping track of customer contact information including name, address, phone number and email (along with permission to contact them electronically) is a must. Being able to deliver customer profiles and buying habits to a new owner demonstrates how well your business is run and makes your customer list invaluable. If business owners don't have customer data, they'll be in trouble.

Keep employees in the loop

Your staff represents your company to customers and buyers alike. Make sure they know your goals. Communicate with your employees and ask for ideas. They can help you dress the business up for sale. If you've decided to sell because the business is in trouble, let them know. It is unlikely to be a surprise and few things demoralize a staff more than having to rely on water cooler rumors. Try to avoid staff salary cuts if possible. Your people are the face of your business and a salary cut may backfire. Try looking at your business processes and finding ways to save money instead.

Get professional advice

Identify the areas of your operation that need improvement and look for specialized help to simplify your processes. Make sure to test them before the potential buyer does. There are consulting professionals on a part-time basis who have knowledge implementing transition strategies for businesses and can help you.

So, don't ignore one of the most vital elements of your business plan, the exit strategy. With careful planning and monitoring from day one, your last days of business can bring rich rewards.

FOR IMMEDIATE RELEASE

MEDIA CONTACT

Ania Kubicki

ANGLES Public Relations

480-656-8388 

E: b2bcfo@anglespr.com

ADVICE FROM B2B CFO FEATURED IN

WALL STREET JOURNAL’S COMPLETE SMALL BUSINESS GUIDEBOOK

B2B CFO, the only CFO services firm featured in the book, quoted in Chapter 9 “Handling Your Company’s Finances”

Phoenix, Ariz. (BUSINESS WIRE) DATE—The Wall Street Journal’s Complete Small Business Guidebook, published on Dec. 29^th 2009 by Random House is quickly climbing the charts of most popular reads.  B2B CFO, the nation’s largest CFO firm that exclusively services the needs of small and mid-size businesses, was featured along with other leading national resources in the 258-page book.  

Author Colleen DeBaise, who currently serves as small business editor at The Wall Street Journal, turned to B2B CFO for insight on cash flow strategy for her chapter on “Handling Your Company’s Finances.”  In this chapter, DeBaise discussed cash flow projections and operational finances and included a sample chart frequently used by B2B CFO Partners that outlines how to prepare and what to do to survive budget deficits.  

DeBaise pulled from key experts in the nation to bring together best practices when starting a small business.  “From writing business plans to creating exit strategies, we pulled advice from key experts to bring our readers a comprehensive resource,” said DeBaise. 

“Being included in this high-profile resource for entrepreneurs was a great way to round up 2009 for our firm,” said Jerry L. Mills.   In January 2010, B2B CFO has grown to 146 Partners across 39 states.  Each Partner is a seasoned financial executive who serves as CFO to growing businesses on as-needed basis.  Together, B2B CFO Partners work with more than 500 businesses in the nation with combined annual sales of more than $5 billion.   Now in its 22^nd year, B2B CFO has experienced steady growth and emerged as the leading resource providing CFO solutions to small and mid-market companies.

Serving as CFOs to hundreds of clients, the B2B CFO Partners know first-hand the challenges that business owners face when it comes to operational finances.

“Small and mid-size business owners regularly turn to B2B CFO’s Partners for advice on finance and cash flow,” Mills said. “Cash is the bloodline of a business, and having a firm grip on your company’s finances is the key to growth.”    

Mills and many of the B2B CFO Partners regularly dedicate time to educate business owners on financial matters.   Mills is a frequent speaker and contributor and has been featured on many national media networks including FOX Business, Fortune Small Business, Smart Money and many others.  Mills is also the author of The Danger Zone - Lost in the Growth Transition, and Avoiding The Danger Zone – Business Illusions, both business non-fiction books that help entrepreneurs understand and build a strong financial strategy.

 “We’re excited to be featured in the Wall Street Journal’s Complete Small Business Handbook and to continue helping entrepreneurs turn their dreams into sustainable, growth-oriented companies,” added Mills.  

The Wall Street Journal’s Complete Small Business Guidebook is listed at $15 and is available online at www.amazon.com. It is also available as an eBook, formatted for mobile devices.

ABOUT B2B CFO^®

Headquartered in Phoenix, Ariz., the firm was founded in 1987 by Jerry L. Mills. B2B CFO^® is the nation’s largest CFO firm serving entrepreneurial, growth and mid-market companies with revenue under $75 million.  The firm’s partners have an average of 25 years of experience and each individual partner is a senior level executive with a broad range of expertise.   Please visit online at www.b2bcfo.com

###

Note to editors:  high-resolution image of the headshot is available upon request.  Interviews, press materials, and any additional information can be obtained by emailing ania@anglespr.com 

B2B CFO, the only CFO services firm featured in the book, quoted in Chapter 9 “Handling Your Company’s Finances”

Phoenix, Ariz. (BUSINESS WIRE) DATE—The Wall Street Journal’s Complete Small Business Guidebook, published on Dec. 29^th 2009 by Random House is quickly climbing the charts of most popular reads.  B2B CFO, the nation’s largest CFO firm that exclusively services the needs of small and mid-size businesses, was featured along with other leading national resources in the 258-page book.  

Author Colleen DeBaise, who currently serves as small business editor at The Wall Street Journal, turned to B2B CFO for insight on cash flow strategy for her chapter on “Handling Your Company’s Finances.”  In this chapter, DeBaise discussed cash flow projections and operational finances and included a sample chart frequently used by B2B CFO Partners that outlines how to prepare and what to do to survive budget deficits.  

DeBaise pulled from key experts in the nation to bring together best practices when starting a small business.  “From writing business plans to creating exit strategies, we pulled advice from key experts to bring our readers a comprehensive resource,” said DeBaise. 

“Being included in this high-profile resource for entrepreneurs was a great way to round up 2009 for our firm,” said Jerry L. Mills.   In January 2010, B2B CFO has grown to 146 Partners across 39 states.  Each Partner is a seasoned financial executive who serves as CFO to growing businesses on as-needed basis.  Together, B2B CFO Partners work with more than 500 businesses in the nation with combined annual sales of more than $5 billion.   Now in its 22^nd year, B2B CFO has experienced steady growth and emerged as the leading resource providing CFO solutions to small and mid-market companies.

Serving as CFOs to hundreds of clients, the B2B CFO Partners know first-hand the challenges that business owners face when it comes to operational finances.

“Small and mid-size business owners regularly turn to B2B CFO’s Partners for advice on finance and cash flow,” Mills said. “Cash is the bloodline of a business, and having a firm grip on your company’s finances is the key to growth.”    

Mills and many of the B2B CFO Partners regularly dedicate time to educate business owners on financial matters.   Mills is a frequent speaker and contributor and has been featured on many national media networks including FOX Business, Fortune Small Business, Smart Money and many others.  Mills is also the author of The Danger Zone - Lost in the Growth Transition, and Avoiding The Danger Zone – Business Illusions, both business non-fiction books that help entrepreneurs understand and build a strong financial strategy.

 “We’re excited to be featured in the Wall Street Journal’s Complete Small Business Handbook and to continue helping entrepreneurs turn their dreams into sustainable, growth-oriented companies,” added Mills.  

The Wall Street Journal’s Complete Small Business Guidebook is listed at $15 and is available online at www.amazon.com. It is also available as an eBook, formatted for mobile devices.

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 ratios such as the debt to equity ratio, total debt divided by equity. Number of days in inventory and number of days revenue outstanding in accounts receivable measure how much “cash” is tied up in assets on the balance sheet. And the number of payables days tell how fast you pay your vendors.

This information is used to drive the capital structure of the company. Can the company afford to take on more debt? If so, how much? Can cash be “cranked” out of the balance sheet realistically and if so, how?

So the finance function uses the information provided by accounting to work with the bank and/or investors to assure the company has the funds needed to meet the demands of the business. It looks at the present and future plans and combines these elements into a financing package to meet those demands. Running out of cash is never an option.

So who performs this function in your company? Anyone? If it is you, then who is driving the business? If it is not you, then who? Cash getting tight due to growth? Who arranges the financing?

Editors Note: This is where a part-time CFO can help.  Whether an accounting or a finance issue, we have the experience to address your company's needs. In fact, maybe these varied subjects are good topics for my “new” book! Watch for the next chapter!