B2B CFO^® (602) 296-6888

I learned this expression early in my life, not as a farm hand or even by having cows in our suburban yard, but as a CPA.  Although dairies have been plentiful in the greater Puget Sound and most other parts of our country, I have only had the opportunity to saddle up with a stool and bucket once in my life to milk a cow.

Here are a few of the warnings I was given by someone more familiar with the job:

• Cows kick and they kick hard. They can knock your teeth out and give you a concussion. Be sure you're working with a nice, gentle and well-trained cow, or have experienced supervision.
  
  
• Watch your feet. A cow typically weighs around 1,000 lbs. If she steps on your foot, those 1,000 lbs will easily break your toes.
  
  
• You may also get smacked in the face (sometimes the eye) by her tail. This is not harmful, but it can be inconvenient and annoying. If this happens, be sure to wash your face and eyes--there's a good chance there's manure and bacteria on the tail.
  
  
• Just because the cow's getting milked doesn't mean she has good manners. Don't be surprised if she drops a "cow pie" in the middle of her milking.

There are comparisons between over-milking a dairy cow and a “cash cow”.  If your company has produced buckets of cash and you have been dutifully clearing the corporate udders, you may be doing harm to the company.  Just like over-milking a cow can cause stress on the animal that weakens it, so does removing the cash and profits from a company.

Some of today's cows are unnaturally milked dry up to 3 times a day. Did you realize that the life of an average cow is shortened by 4/5 (80%) due to excessive milking and calving?  That means it would live a natural lifespan 5 times greater if it was not treated to these excessive stresses.

Your company also produces milk, in the form of cash.  Cash is the key component of working capital and working capital is the life blood of any company.

When business owners strip away all the cash or profits from the company, there is nothing left to use when the cash flow from profitability dries up.  I have seen owners who insist on taking every dollar of cash/profits out of the company for their own personal use, every year.  This may be possible with S corporation tax structures, dividends and compensation but it is not healthy for the company.

Bankers frown on removal of all the profits by the stockholders in the form of cash because they know it is required to operate and maintain liquidity when an economic downturn arrives or the company experiences significant losses.

This past year one company that I am an owner in went from having its best fiscal year ever in 2008 in terms of profits and cash flow to losing a significant amount of revenue and incurring a loss through 2009.  We survived without using our credit line or pouring personal cash back into the entity.  Without the foresight to preserve working capital and cash we would have been out of business along with our competition.

Sometimes advisors encourage owners to remove cash from the entity to protect it from any potential legal action or for funding other investments.

Despite the fact that the business owner operates the company to create profits and cash flow, stripping it all out can lead to a similar shortened life span of the company.  Although you may not get your toes stepped on by the 1,000 lb donor or have a “cow pie” dropped into your lap, the affects of an over-milked “cash cow” can sometimes be just as painful or unpleasant.

Remember that cash is king is business and a requirement to keep the company alive and strong.  Resist the temptation of taking out more than a reasonable amount of cash and prepare for the times when cash is not being generated so freely.

That advice alone has allowed certain companies to weather the 2008/2009 depression/recession.  If you haven’t been slapped yet by this “economic tail”, remove your hands from the udders of your corporate funds and let the company maintain a healthy reserve of cash to keep you competitive and lengthen your business’s lifespan.

Many golfers calculate their handicap, with the most analytical also counting their putts per round.  A friend of mine had the lowest average putts per round one year on the PGA tour – lower even than Tiger Woods.  That sounds very impressive, but my friend didn’t win any major tournaments that particular year.  He retired from the pro tour a few years later.  Though one element of his game was at the top of his profession, helping him win his share of tournaments over his career, several other metrics were not operating in concert to keep him in the game.

What is it about life that we keep tabs on everything from our IQ, credit score and cholesterol level to our investment portfolio annual return, miles per gallon and Mulligans?  Everything that we consider important in life and business is measured by a metric or key performance indicator (KPI).  Do you care more about your total weight or percentage of body fat?  Both are important.  But if your body fat percentage is low, you are willing to carry more weight due to muscle mass.

Some factors give us one degree of perspective, but without others we still don’t know the total picture or how -- or why -- it needs to change.  Metrics are important in life, school, health and sports.  How much do you use them in business to determine what is going well and what needs to change?

Here’s how SearchCRM.com defines a business metric:

A business metric is any type of measurement used to gauge some quantifiable component of a company's performance, such as return on investment (ROI), employee and customer churn rates, revenues, EBITDA, and so on. Business metrics are part of the broad area of business intelligence, which comprises a wide variety of applications and technologies for gathering, storing, analyzing, and providing access to data to help enterprise users make better business decisions. Systematic approaches, such as the balanced scorecard methodology, can be employed to transform an organization's mission statement and business strategy into specific and quantifiable goals, and to monitor the organization's performance in terms of achieving those goals.

Current ratio, debt versus equity and gross profit by inventory item are common ways of assessing the health of your business.  What is your company’s sustainable growth rate?  Do you know what really drives your company and the way to assess wise strategy? Or do you look only to sales, cash and profits as the primary indices of success?

Each business is unique in what should be measured.  Every industry has it own common KPI. In life, some metrics are common and some are unique to an activity.  Humans don’t measure their personal “miles per gallon,” but they certainly measure their car’s MPG. 

Are you measuring the results of your company in terms of productivity, profitability and efficiency – and if so, are you doing in a way that drives you to make the most significant changes required to best your competition, attract the best customers and reward the best employees?

The role of the Chief Financial Officer includes determining the most significant metrics for the company.  The Chief Executive Officer relies on those measurements to make decisions that impact elements of the metric to improve results.  If you need help gaining a perspective on what measurements you should be monitoring in your business, give me a call.  As a B2B CFO^® I specialize in helping determine the vital metrics for your company.

“Primping the Bride”

A few months ago as a daddy I was able to walk the most beautiful bride down the aisle.  My 24 year old daughter got married and I had the honor to escort her to the groom, and give her away with our blessings.  From the time they are born we, their parents think about the day our children will get married and try to prepare them for that day.  We teach them values, protect their honor and pray for the spouse that one day will become part of our "extended family". My prayers were answered and I not only got a new son-in-law, my daughter married a wonderful man.
 
When we think about our businesses the thought of selling is sometimes put off.  We may wish to purge the business from our lives at some point due to stress, but usually they are also our "babies".  We nurture them, mold them and hope one day a suitor will come to pay the price to take control of our company.
 
A couple of years ago I spoke to a large group of business owners in Cabo San Lucas on the topic of "Primping the Bride", in terms of preparing their business for sale. I used the analogy of how the bride takes hours or even days to prepare herself for her wedding day.  Her nails, makeup, hair, just the right gown, shoes, veil and even her undergarments, all get fussed over and chosen to be the "perfect" one for her wedding. Business owners also need to take time to prepare their company so that it looks its best, when the suitors come a calling.   

Preparation for the sale of a business entails making sure all the legal issues are settled, agreements located or created, accounting records cleaned up and prepared for the auditors, assuming audits are not occurring currently.  Many other decisions weigh on the owner as how to make sure the "courtship" of the suitor does not leave the "bride" at the alter.   

The buyer's due diligence teams will scour the books, review the inventory valuations, assess the internal controls, competition and systems, processes and staff you have assembled.  It will be the time when appearances will be judged, but your business will be scrutinized more thoroughly than the human bride ever will be.
 
As I was helping one client prepare their business for sale, I insisted that they took a physical count of the entire inventory and then made sure that each item was accurately valued.  We found that the actual value of the inventory was worth much more than the company had been carrying on their balance sheet.  The effect of this change also increased the profits as we adjusted the inventory upward.  The cash the seller was able to derive from the ultimate sale rose substantially due to both of these changes, as it increased the EBITA or cash flow derived from the business, as well as the physical assets.
 
Where are you with respect to your business?  Have you started the process to "Primp" your company? If you need help making sure that the most critical items are attended to so that your trip down the aisle doesn't end up without the marriage (sale) taking place, let me know.

 
My years of experience and that of my B2B CFO® partners can assure you that we know what needs to be done for the suitor to buy with confidence. Your company will not only look its best, but the infrastructure will be in place to maximize the cash flow now and demonstrate that the value supports the asking price.

Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash.   (Definition from WikiAnswers.com)
 
 
Working Capital (WC) is as essential for business operations of your company as blood is essential for the operation of your body.  You and your company can not live without either blood or working capital. You will be in serious danger if you don't have enough in your system.  Cash is critical and the King, but working capital is the measure of liquidity of assets that can be converted into cash within an annual operating cycle.   
Without the ability to convert assets to cash via the sale of inventory, collection of accounts receivable or short term notes, liquidation of investments or other form of conversion the working capital will not become cash.
 
If assets or liabilities are considered current (meaning convertible within 12 months for creation of cash or use of cash) they are taken into account for computing working capital.  The net excess of Current Assets minus Current Liabilities equals working capital.  If Current Assets minus Current Liabilities yields a negative number, there is no working capital (there is a deficit of working capital).
 
What does this mean to business owners and what can they do about it? The seven Cs of working capital management are listed below:
 
Classification is important for accurate financial statements and the computation of working capital. Make sure that all non-current assets AND liabilities are reflected as such.  Otherwise, you may be overstating or understating working capital and this may work against you in the computations your banker may use.

Collectability is also critical to consider.  If you have notes or accounts receivable listed as current assets that will NOT be collected within 12 months they may be computed as working capital but the liquidity may not be realized.  Inventory must also be managed to make sure it is convertible to cash though the sales process.  If it is not sold, excess inventory will accumulate. The result is that inventory will not become converted into cash and the value of this element of working capital can not be realized.
 
Capitalization may be one of the most significant considerations regarding assets in calculating working capital.  Sometimes assets are expensed when paid and yet they actually benefit the next 12 months, like insurance premiums.  If the prepaid insurance is not capitalized and the expense pro-rated over 12 months, the current expenses may be overstated and current assets understated.  This will result in an UNDERSTATEMENT of working capital and the prepaid asset may be overlooked by your banker.

Computation of working capital properly is essential to know if you have enough to operate your business with the cash you will need.  Improper computation with inaccurate financial statements can KILL you or lead your banker to think you don't qualify for expanding your line of credit.
 
Creation of working capital requires either infusion of capital as equity or long term debt, the sale of fixed assets or increasing profitability.  Profitability should be your focus if you don't wish to raise equity capital, increase your long term debt or liquidate your operating equipment.
 
Cease the risk of working capital disappearing from your balance sheet. Employee theft (of either: cash, inventory or time), writing off uncollectible receivables (from under-managed accounts or sales to the customers who are not credit worthy) or operating losses (not making a profit) all consume working capital. Guard your working capital.

Control is the key to managing your working capital and thereby having a sufficient amount to operate or expand your business.  Choices you make within your business can dramatically preserve or increase your working capital, which will fund your needs. These choices made properly will allow your banker to understand that your company DOES meet the requirements for your credit request.
 
An average adult body requires 10 pints of blood to remain healthy.  How much working capital does your business require? Do you have enough to not only stay alive but to grow your business?
 
As B2BCFO partners we are experts in the management of Working Capital.  If you need help evaluating your working capital or getting a better understanding of what you can do to impact the working capital though any of the Cs listed above, let me know!