Posted by: Larry J. Strauss in Articles
"Why Do I Need to Outsource Anything?"
Now, that's a good question. After all, you're probably an entrepreneur and, as such, you are a successful individual who can handle many different aspects of the company. You came up with the initial concept of your company, right? And perhaps you built it from the ground up. You are also the best salesperson for the company. Sure, you had to hire additional salespeople, but you may feel no one is as good at selling as the owner… (and you may be right).
But, at some point, you have found (or you will find) you can’t have your fingers on everything in the company. The first time you see this may be when your employees cannot create or manufacture the product or provide the service you wish they could. It is just not the way you would do it. You may step in to demonstrate how it should be done.
Later, you'll look at the financial results and wonder why you didn’t achieve the results you thought you would. This may come as a surprise when your outside CPA prepares your tax return. You may say to yourself, "Why didn't I know this sooner?" or "Wasn't there anything I could have done to improve my results?”
If this sounds like you, it's time to step back and understand you could have known your results sooner. You could have done something to improve those results. However, unless your company is the exception, you simply won't have the expertise on board to help you analyze, interpret, and alter tactics.
Your bookkeeper or controller has enough to do just to process transactions: pay the bills, send out invoices, collect the receivables, and get the employees paid. They don't have the time to prepare, analyze, and interpret monthly financial statements. In addition, your controller may not be trained to do more than they currently are. That's where a chief financial officer (CFO) comes in to play.
Regardless of the size of your company, you need a CFO. It is important to understand you most likely do NOT need a full-time CFO. What you do need is some.... Read more...
Posted by: Larry J. Strauss in Articles
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.
- 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:
|
CASH AND PROFITABILITY
|
|
- Timely & Accurate Financial Statements
- Banking and Lending Relationships
- Working Capital Improvement
- Analysis of factors affecting profitability
- Cash Flow Projections
- How Can They Help Your Company?
The preparation of timely and accurate financial statements is critical to the success or failure of a business. The Chief Executive Officer, owner, partner or a member of the senior management team of a business must review the financial statements and have a good understanding of them. Visualize a funnel, with all the daily activities and costs of a business - sales, production, distribution, advertising, promotion, warehousing, engineering, research, accounting and administration - dropped into the top of this funnel, with timely and accurate financial statements coming out the bottom of it. Each and every internal and external stakeholder in the business - owner, shareholders, partners, management, employees, suppliers, landlord, bankers, legal counsel, consultants, leasing companies, federal and state tax agencies, credit agencies, potential buyers and/or sellers of the company - all depend upon and have a vested interest in the issuance of timely and accurate financial statements, the review of the financial statements and an understanding of the financial statements.
The preparation of timely and accurate financial statements creates confidence, credibility, reliability and business awareness of the owner and senior management in the eyes of bankers and other financial institutions and investors who provide cash and working capital to the business. Bankers and other financial institutions are more apt to provide the necessary cash and working capital when they have confidence the owners and senior management know what's happening in the business. The greater the level of confidence bankers and other financial institutions have in timely and accurate financial statements, the easier and faster it is to obtain the necessary cash and working capital at attractive interest rates, with satisfactory covenants, terms and conditions and the easier it is to increase cash and working capital as the business grows. This is especially valid when the business experiences ups and downs during the various economic cycles of the domestic and worldwide economy.
The internal review of financial statements and especially management's understanding of the financial statements are critical elements in making proper strategic and operating decisions regarding the business. Timely and accurate financial statements provide key financial ratios and trends, in comparison with previous months and years and in comparison with industry peers. The understanding and analysis of these factors provide owners and management with the ability to anticipate cash and working capital needs before events occur in the business. There is nothing worse to owners and management than to find themselves with inadequate cash and working capital to grow the business when an opportunity is presented to it. Understanding financial statements, financial ratios, inter-relationships among the various business functions - sales, production, warehousing and inventory control, engineering and accounting - is the key to a successful business. It enables the business to better budget the future and not find itself in the difficult and sometimes insurmountable situation of having no cash nor working capital to fulfill its objectives and insufficient or no time to explore options to obtain cash and working capital.
Timely and accurate financial statements understood by owners and management, enable them to look at "what if" scenarios. What is the impact on cash, working capital and profits if the business grows 15%, 20%, 25%, 50%? What is the impact on cash, working capital, expenses and profits if greater promotional programs are offered to customers? What is the impact if the business expands distribution domestically and internationally? What is the impact if t.... Read more...
|
