What is a Virtual or Interim CFO?

This interview with John Y. Lafferty of CFO-Pro explores some of the most beneficial services he offers his clients. John is one of the most experienced Interim CFOs in the country. We’re going to be talking about CFOs and start-up businesses in general and how you get involved in starting up a company properly with proper financial support.

Interviewer: Today we’re going to be talking about this whole idea of outsourcing a CFO. First of all, give us a little background about your business. First of all, how did you get into this business, and did you always want to be a CFO?

John: I started my career in public accounting with Arthur Andersen. I had no idea that I would eventually be a CFO type, but after a number of years there, I went into venture capital, which at the time was the largest institution VC firm in the country. After several years there, I decided to peel off in the industry and be the financial guy and was in a number of privately-held enterprises. I also had the opportunity to run some businesses during that time. Eventually, it became pretty clear to me that the hours I was putting in on a salaried basis were just too much, so I thought ‘why don’t I go out on my own, do what I do, what I knew how to do best and provide financial management services to business owners.’ That’s what I’ve done.

Interviewer: It’s interesting because a lot of companies go out and they’ll hire a mediocre CFO and they’ll pay them full time and they really don’t need that; they need somebody focused on the most important things. Maybe you can give our audience a few tips on what’s there to be appreciated when it comes to high-quality CFO services and how can a fractional CFO person like yourself really get a company properly on track?

John: I’m going in and focusing on what is bothering that business owner; what does he feel his key issues are on the financial side of the business. One of the things that they don’t pay any attention to is break-even sales. They don’t know ‘at what point do I have even sales to cover all of my expenses.’ Beyond that, that becomes profits. They don’t understand the formula nor how to calculate it. That’s something I can help them with within a matter of minutes because when I look at their P&L statement, I can quickly see that there may be some line items that are misclassified. They’re going to need to be above what they call the line or below the line; that’s the gross profit line. Once they’ve understood that, then I say let’s assume you wanted to spend $10,000 on a marketing initiative, the same formula is going to answer the question ‘how much in sales do I have to generate to cover that cost.’

I also look at how many days of sales are in accounts receivable and also in accounts payable. The larger that gap is, the tighter their cash flow is. If they’re collecting receivables in 70 days and paying vendors in 30, that’s a wide gap and so I encourage them to chase those receivables, get that down to 45 days, stretch your vendors a little bit, maybe up to 40 days. There’s one other item that I point out and the way I approach it is let’s assume you can improve your margin by 1% and if you got $10 million in annual sales, that 1% is worth $100,000. If you improve that margin by 1%, that’s $100,000 to your bottom line. Maybe you don’t need it in the business or you take it out and invest it elsewhere. That’s a key thing to begin to understand in terms of watching your margins, managing them, and knowing what it really means to do them.

Want to know more about CFO Services? Give John a call at (630) 269-7646.  

Using Breakeven for Decision Making

The term breakeven sales means the dollar amount of sales that exactly covers all expenses resulting in zero profit.

Let’s look at the following example:

Cost of Goods Sold (variable)400,000
Gross Profit$ 600,000
Gross Margin60%
Overhead (fixed)400,000
Operating Income$ 200,000
Operating Margin20%

To calculate your breakeven point, take your Overhead and divide by your Gross Margin. In the example $400,000 / 60% = $666,667. That means $666,667 in sales need to be made to breakeven.

Not sure of the calculation? Sales of $666,667 x 60% = $400,000. Subtract the Overhead of $400,000 and you are left with zero profit.

Break Even SalesApplying Breakeven to your business

Assume that your average weekly sales is $19,231. At the end of week 35, cumulative sales for the year will be $673,085, or just past breakeven.

That means for the final 17 weeks of the year, 60 cents out of every sales dollar will be bottom-line profit since all overhead has been covered. This is an enviable position to be in. Leverage it for your business by giving sales people incentives to sell above your weekly average weekly sales rate. It’s a win-win for both employer and employee.

Funding initiatives

Assume that you are considering a new marketing initiative that costs $10,000. The amount of additional sales needed to cover this added cost is calculated using the breakeven sales formula:

$10,000 divided by 60% Gross Margin = $16,667

The key question is not whether to spend $10,000. It is whether the initiative will bring you at least $16,667 of added sales. And, how you will track those sales to prove it.

You can make the same calculation when investing in new technology or hiring the next employee. Just remember to factor in any annual costs. A technology purchase may be a one-time investment, but a new employee should be considered an annual cost. Added sales must repeat in succeeding years when you add people or other resources that come with recurring costs.