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Does your business have working capital problems? Let's take a look at what working capital involves. Basically working capital falls into four main areas. These are:

1. Cash
2. Accounts Receivable
3. Inventories
4. Accounts Payable

There are many reasons why a business will have working capital problems. As a business owner, it is critical for you to determine why the situation exists, and correct the problem immediately. So how do you determine why you would have working capital problems? Here is a short list of some of the usual causes of this issue.

1. Not enough sales, therefore not enough cash
2. Past due receivables are increasing
3. Customers are paying short, due to quality issues
4. Staff has been added to process orders and/or invoices
5. Detailed information on inventory is not available
6. Slow turnover in Inventory lead to larger investments and risk of obsolescence
7. Interest incurred or late payment penalties from vendors
8. Over purchasing

To avoid problems in working capital, the business owner should spend time carefully looking at what is going on in the business at this level. At the end of every month, a "financial dashboard" should be prepared for the business owner that gives you the vital statistics in the areas needed to monitor working capital. For instance, each month you need  information on aged receivables, receivable days, inventory levels by category, inventory turnover, and days in payables. These statistics should be compared month by month to determine if the problem is getting better or worse. Action should be taken immediately when the numbers show a trend that will be bad for the company.

Monitoring working capital is not a difficult thing to do. A simple report put together every month will focus management in the right areas, and help to move the business into better times. B2BCFO can help business owners monitor their working capital by putting together simple, easy to understand reports that get to the heart of the matter. Tackle this problem early, and working capital will not be a problem.

The Need for Driver-Based Continuous Planning

Do you know the effects on your company if sales increase by 10%, 20%, etc.?  Do you have the cash to fund the growth?  What happens if a new competitor forces you to cut prices or a key supplier pushes through a significant cost increase?  Especially with the ongoing economic crises all of us have been challenged to develop planning systems that react more quickly than ever before.  Do you have the right tools to respond?  This month I will challenge you to consider tossing out the traditional annual budget and instead move to a dynamic driver-based rolling forecast.

Successful companies of all sizes are facing pressures to make planning systems more immediate and responsive. The old way thinking was to sit down with the team in Q4 and come up with next year’s budget.  Once finalized it was set in stone and loaded into the accounting system.  That works fine if your business model is static and predicable. However, old ways of doing business are continuously

challenged by competitors, customers and the ongoing economic crisis.

The once a year Uber-process that  produces a one size fits all scenarios budget is on the way out in favor of new approaches such as driver- based continuous planning, a discipline for developing plans and decision making promoted by such organizations as the Beyond Budgeting Round Table and planning gurus like Rob Kugel at Ventana Research.

Pulling from the literature, the table below presents the differences between budgeting,

the historical discipline, and driver-based continuous planning, another way of thinking promoted

in this article.

In contrast to traditional budgeting, driver-based continuous planning or rolling forecasts is all about

scenarios, lots of them. If you can’t predict the future, the next best thing is to set up

scenarios that let you explore how you might behave (or decide) if things are better

or worse or just different. Unlike budgeting where you care about who changed what

number, scenario analysis is about understanding what’s behind the numbers—the

most critical assumptions, volume and rate impacts, and especially what’s driving material

changes to the P&L and cash flow.

The deliverable of scenario analysis is actionable knowledge. By analyzing a specific

scenario and comparing it to a baseline case or other scenarios, the management team is

better able to evaluate best courses of action.  Where there is an immediacy to the

issues—e.g. to proceed with a capital project or change pricing—the deliverable is decision

making. Because it’s decision and action focused, robust scenario analysis is the

most critical underpinning of continuous planning.

The functionality you need for effective scenario analysis goes beyond simple budget

versioning. Here are criteria to consider:

Real time feedback.  when you change a value, all elements of the financial model—the

P&L, balance sheet, cash flow, financial ratios, performance metrics—should update immediately.  For example, with driver-based continuous planning if a volume increase is being contemplated, you will know immediately the effects on revenue, materials, payroll, margins, etc.

Maintenance across scenarios.  Rolling forecasts should support adding, modifying and deleting line

items across selected scenarios in a single operation. Calculation and update of financials after structure changes should take only a minute or two, at most.

Robust comparison at the line item level.  Budgeting focuses on amounts in accounts. Driver –based continuous planning is about in depth comparison of scenarios and differences in values at any level of detail, especially at the line item level where the most significant inputs and modeling occur. Where the underlying data or links are available, scenario comparisons should reveal variances in

underlying unit activity drivers and rates.

Summary

Driver-based continuous planning provides companies with a strategic advantage by providing business owners real time actionable information that extends far beyond the capabilities of the traditional budget.             My partners and I are experts at creating driver-based rolling forecasts.  Call me and let’s discuss scrapping your budget and moving to a more strategic and action based system of planning for the future.

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Contributions by Rand Heer and Ben Lamorte, Alight LLC.

Whether you are planning a personal strategy, a business plan or a production process, I have found that strategic planning follows the same steps.   The first step in this process is to decide what is important.  What is your mission, your vision, your values?  What are the guiding principles you will use to filter every decision you make?  At B2BCFO® our values are honesty, integrity and objectivity.  Once this is understood it is then easy as a firm, as well as for an individual partner, to align any decision against this value statement and make the right decision.

The second step in the process is to have well thought out goals.  If you are going to be constructing a building, you start with a clear idea and visual of what the building looks like. You have the engineering drawings, blueprints, elevations, site plan, all of which are necessary to build the building that was envisioned by the customer.  This same concept applies to a personal plan. Do you want to retire? When would that be?  How much in assets would you like to have to maintain what lifestyle?  All of these questions and many more, help develop your plan. 

The third factor in the plan is to align the various systems necessary to achieve the goal.  By systems we mean such things are your HR policies, how you hire, train, motivate and compensate your employees.  Do you have the tools, processes, technology in place to facilitate the goal attainment?  Do your overall company policies align with the values you wish to follow and help you achieve your goals?  I was recently in a retail office supply store attempting to return a defective product, a charger for a laptop computer, which broke within two weeks of buying it.  When we spoke to the service people they told us that unless we had the originally packaging for this $99 item they could not refund or replace the item.  The reason for this was that they could not in turn get compensated from the supplier.  Therefore if they could not get their $99 back then I could not get mine.  I am not sure what their mission, vision, values and goals are as an organization, but I do know that customer service is not one of them and for $99 they lost a customer for life.  On the flip side, one of my clients is a manufacturing operation.  One of their value propositions is that no defect will knowingly leave their shop and should there be a problem in the field their value statement is to fix the problem within 24 hours.  They operate in all 50 states, but hey take pride in telling story after story about how they solve these problems. But not just that; they learn from the story telling so that the same situation will not be repeated.  Their systems are correctly aligned to their value statements.

I believe the next step is the most critical and the one where many organizations fail.  This step is the execution of the plan.  You may have the best plan, systems and policies, but if those responsible for executing the plan are ill-prepared and do not take the initiative, are inefficient or do not follow up, then the plan can go awry.  In a normal business process there are millstones that need to be met for the process to flow on time.  Going back to my building example, there is site work to be performed, followed by the foundation, then structure, interior building systems, then on to finish work.  Each and every one of these separate tasks needs to be mapped out, contracts need to be negotiated, and timelines need to be established and process to be managed.  If any one falls behind, the entire project is at risk.  The same is true for the overall business plan or a personal development plan.  Each step needs to be understood, laid out and executed, all being mapped against the timeline of the goal.  If this does not happen then the entire plan is at risk.

The fifth and final step in the process is to step back and take a realistic look at the business, the project or the personal plan.  This should occur on a reasonable and ongoing basis.  I recommend to each of my clients to look at their business process and evaluate at the end of any project how they did.  Did the work come in on time and on budget?  What take-a-ways can we learn from what just happened?  This is true for the business or personal plan as well.  Great organizations continually review and apply these learning’s to the process.  To borrow from Jim Collins; make sure you have the right people on the bus and make sure they are in the right seats.  When looking at the business overall it is important to not just look at internal processes but what is happening in the industry or the economy overall and what effects will it have on your business.  Then rework the plan and start the cycle all over again.  Based upon the work of Gary Harpst this is how excellence is created and maintained.

As we enter the holiday season, I thought that I would address not-for-profit organizations.

Ever wonder why so many not-for-profit organizations struggle?  The number one reason is that they think that they are a non-profit organization.  There is a difference.  While they both are focused on accomplishing a particular civic or charitable mission, the not-for-profit functions like a business.  

A not-for- profit knows and acts like it needs to make a profit in delivering the mission of the organization.   A non-profit thinks and acts like it is not supposed to make any money.  What’s the result of these different philosophies?  The not-for-profit makes money that enables it to grow and further deliver on its mission.   The non-profit struggles to maintain the status quo and often disappears.  If you were a philanthropist, how would you want your organization or foundation operated?

Business as usual?  That cliché is no longer an option in today’s economic climate.  Companies of all sizes (private and public) have had to rethink the way that they do business in order to compete profitably or at least be able to survive.  The economic recession of 2001 forced many CEO’s to re-examine their markets and what it takes to retain a competitive edge.  Through the globalization of the marketplace, countries like India and China became a viable resource, and companies could not remain profitable when focused strictly on employees and suppliers in the domestic U.S.  Subsequently, the current recession struck and panic spread worldwide.  Every company struggled to find ways to reduce costs and continue to maintain market share.   Those companies demanded reduced pricing from their suppliers which brought deflated gross margins to those vendors and added more pressure to operating results.  The domino effect was a swift reduction in employees which sent the unemployment rates skyrocketing. 

So what’s the future?   

The future will require many businesses to utilize outside consultants in a more proactive way.  It will be a number of months (if not years) before consumer confidence responds and CEO’s will be motivated to add employees (if ever).  They will need the services of individuals and firms to perform necessary functions on an outsourced basis, also known as business process outsourcing.  Outsourcing will embrace everything from sales professionals (either directly selling or managing the sales force), financial professionals assisting the Company to strategically navigate through difficult times, HR, IT services, Marketing, Operations and more.  In fact, it has been widely published that many of the unemployed executives today will be unable to obtain suitable employment and will begin their own businesses, most likely consulting in their field of expertise.  The day of having a staff of full-time employees responsible for each of the company’s functions is in the past.

Some of the benefits of outsourcing are:

• Reduction in payroll costs and related employee benefits and payroll taxes.
• Reduction in R&D costs.
• Increased efficiency through specialized resources that will meet the immediate needs of the business.
• Ability to implement projects quickly.
• Reduced capital costs (cash investments) by renting/leasing equipment of outsourced firms.
• Allows strategic growth of the business even with limited internal resources.

Steps to take!

The proactive CEO will recognize this shift in the way business is transacted and will begin to build his/her own “power team” of outsourced professionals.  This selection process is as important as if they were hiring full-time employees.  It needs to address the technical skills, related costs and fees of such services versus a full-time employee, ensure a level of trust and confidence and be aligned with corporate strategic goals and initiatives, etc.

The initiatives that need to be implemented are:

• Identify which facets of your business will require strategic assistance from outsourcing.
• For each of these areas, develop a detailed checklist of your requirements, which should include but are not limited to technical expertise, industry background, term and scope of services and budgeted cost of services versus hiring a full-time employee.
• Begin to interview several individuals/firms that you feel will be a good compliment to your business needs.  Be sure to not only address the items from your checklist, but to evaluate your ability to comfortably interact with this person/firm and your initial level of trust and comfort.
• Once you’ve made your selection(s), work with the professional to define and refine your business strategies along with specific timelines for completion.  In very few instances, would you need to sign any long-term contract with the consultant.  You should always have the flexibility to utilize the consultant to support the ebbs and flows of your business.  That is a significant benefit in using outsourcing versus full-time employees.  The ability to control your manpower utilization and thus your costs of operations.
• Develop a formalized work plan to monitor progress and performance.  As with any full-time employee, you must be able to evaluate, manage and measure the value of the consultant to your business.

Prior to the recent string of economic recessions, business owners and CEO’s only had to understand their business and industry in order to be successful.  In today’s new world, that alone is not enough.  They will need the ability to tap into the expertise of other professionals, in a way that rewards them with cost effective solutions and the ability to be competitive in an aggressive marketplace.  Properly utilizing the skill sets and specialized resources of consultants to match the business strategies is the new focus.

Many business leaders, both large company fortune 500 leaders and small to mid-sized entrepreneurial leaders have been dealing with an economic environment unprecedented in their lifetime.  These daily challenges are complex, yet, in order to lead their companies successfully through these challenges business leaders must adjust and refocus continually.  Ram Charan, in his excellent book, Leadership in the Era of Economic Uncertainty, says leaders will need to make changes in how they manage day-to-day.  Charan says the challenges demand “management intensity; a deep immersion in the operational details of the business and the outside world combined with hands-on involvement and follow through.”

This kind of “management intensity” cannot and will not happen until the leader is willing to redeem a vital and precious resource--time.  Notice that I said redeem.  According to Merriam-Webster’s Online Dictionary, redeem means “to buy back; repurchase”.  In other words, in order to focus and manage the areas of the business that are vital to survival and growth, the leader will have to buy the time to do so, repurchase the time from other areas, and make the most of every opportunity.

While managing with intensity is absolutely crucial, the CEO must also buy up the time to regularly meet with key customers and promote his company’s vision to potential customers through high level marketing and contacts.

Following are four suggestions that will greatly assist the CEO in redeeming their time while managing with intensity.

1. Plan your week in advance and set your business priorities.
2. Set apart a block of time early in the week to meet with your key people (Operations Manager, Sales Manager, etc.) and review their priorities for the week.
3. Develop a set of daily, weekly, and monthly flash reports that incorporate key financial measurements which accurately reflect the current health of the business, pinpoint areas of needed improvement , and measure progress toward company goals.  These reports can be reviewed quickly for rapid decision making and corrective action.
4. Buy, read, and digest the book Time Tactics Of Very Successful People by B. Eugene Griessman.

In the preface to his book, Griessman tells how he once asked Stanley Marcus, legendary retailer and chairman emeritus of Neiman-Marcus, “What do the wealthy, powerful, and famous people you know have in common?”  He answered, “They all have 24-hour days,” and then further explained, “The world has expanded in almost all directions, but we still have a 24-hour day.  The most successful people and the most unsuccessful people all receive the same ration of hours each day.”

The most successful CEO’s will be those who make the most of their time.

As a Partner with B2B CFO® I am an "as needed" CFO.  We are here when you need us and when we are here we will give you 100% of our efforts.

What we are not is a Part Time CFO, Fractional CFO, or an Interim CFO.   Those terms indicate I will only help you part of my time, you can divide me up, or I will be here for a project then I am gone.  This is not who we are.

I had a phone conversation with one of my clients a short time ago on a Saturday.  He needed me and he called.  I gave him the input he needed and helped him in his situation.  I was there when he needed me.

Honesty is doing the right thing.  Integrity is doing the right thing when no one is watching.

In recent weeks it has come to my attention that many businesses are suffering due to fraudulent business practices.  Fraud can involve employee theft, misuse of expense accounts, and unauthorized use of funds.

Recently, I have consulted with two businesses who are suffering from the effects of fraud.  Both companies lost well over one million dollars due to the fraudulent business practices of individuals within the organization.  The fraud involved trusted employees who took advantage of weak internal controls.  Unfortunately these incidents occurred before I became involved with the company as my skills could have helped in these situations.

Fraud caused extreme trauma in these companies.  One company had to lay off a substantial portion of the workforce and the other continues to struggle with cash flow, two years after the crime was committed.

Companies who have not been victimized by fraud can reduce the likelihood of its occurrence.  With the help of some of my colleagues I have developed a list of 20 questions to determine if a business is at risk.  If there are warning signs we can help install the necessary internal controls to prevent fraud from destroying your business.

Contact me to discuss how I can help you.  We at B2B CFO® have over 3,400 years of cumulative knowledge to assist businesses in detecting and preventing employee theft and fraud.

Ratio analysis.  Sounds like a fascinating topic.  Something I really need to spend my time on.  Right.... 

Most business owners react the same way.  And no wonder.  Ratio analysis can be dry as dust, impenetrable, complex and confusing.  But it's also a really good way to perform an "Executive Physical" on your company.  If you don't want to read about all the ratios, you can see what 6 top B2B CFOs told Inc. Magazine about ratios, or you can call me now for a free ratio analysis of your company - no strings attached, and a look at some simple ways to track this information.  Make the call.  Your banker will thank you...

Inc. Magazine article on ratios for business, featuring six B2B CFOs on a variety of industry types: Inc Article

And for those who like to do it themselves, here are the top ratios you should be looking at:

RATIO HEAVEN:

Net Profit Margin

Net Pretax Profit ÷ Revenue

The bottom line -- the amount you have left after every other expense is taken out.  Varies with industry and over time, but should be at least 5%. Otherwise, you might just want to open a pass book savings account.

Gross Profit Margin

Gross Profit ÷ Revenue

Gross profit is your revenue minus what it costs to make your product.  Maximize this because you've got to make enough to cover the overhead - or you might as well close the doors.  You cannot make it up on the volume!

EBITDA Margin

EBITDA ÷ Revenue

Many companies use this as a shorthand measure of cash flow. EBITDA is earnings before interest, taxes, depreciation, and amortization.  You add back these items because they don't use cash and because they are so variable for each company  Thus EBITDA gives external analysts a better way to compare you with peer companies.

Return On Equity

Net Income ÷ Total Equity

The return your shareholders are getting on their investment.  Better be in the 15% plus range, or else why would investors take a risk with you?

Return On Assets

Net Income ÷ Total Assets

Net income generated for each dollar of assets. It's especially relevant for capital-intensive industries, like manufacturing.  Tells you whether that shiny new laser that everyone insisted you needed was worth it.

Interest Coverage Ratio

EBITDA ÷ Interest Expense

This ratio shows roughly how easily you can repay your debts.  Crucial ratio for a banker - they love it when it's 6.0 or higher.

Debt to Equity Ratio

Total Liabilities ÷ Total Equity

What you owe compared with what you own.  Also key for a banker who does not want to be the fall guy.  If you don't have much equity, the bank is exposed to higher risk.  Think of your house.

Inventory Days

(Inventory ÷ Cost of Goods Sold) x 365

The amount of time it takes to convert inventory into sales.  Varies by industry from 12 days in frozen foods to 45 days in manufacturing.  If it's more than 90 days your expensive "stuff" is gathering dust and losing value.

Accounts Payable Days

(Accounts Payable ÷ Cost of Goods Sold) x 365

The number of days, on average, you take to pay your bills.  Typically around 40 days, you want to take advantage of creditor terms without sendng messages that you can't pay bills.  Look at the trend.

Accounts Receivable Days

(Accounts Receivable ÷ Sales) x 365

The number of days, on average, your customers take to pay you.  Probably around 30 to 45 days depending on industry.  Break it out by aging buckets and pay close attention if the trend is up.

Current Ratio

Total Current Assets÷Total Current Liabilities

The amount of cash (or assets that can be turned into cash) on hand.  May be less in retail or in service companies, but 2:1 is viewed as good.

Quick Ratio

(Cash + Accounts Receivable) ÷ Total Current Liabilities

Similar to the current ratio, this is a good measure of a company's short-term cash position. Generally should be 1:1.

With all ratios, the only way to see the big picture is to develop a trending dashboard that allows you to quickly  review progress and highlight exceptions.  You can plan to improve, but ignorance will kill you. 

For a professional and complimentary review of your ratio perforamcne contact David Kirkup, Partner at B2B CFO on 404 348 0326 or dkirkup@b2bcfo.com.