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.
You can’t fix a problem you can’t see
As discussed in my previous article, cash flow mismanagement is a common problem among small and mid-sized businesses. Many owners do not have the experience to precisely pinpoint where cash flow mismanagement has occurred, nor the background to develop plans designed to counter those cash flow issues.
Cash Flow Analysis and Financial Statements
A typical small or mid-sized business owner can spend hours examining his or her company’s financial statement, and nevertheless fail to see the underlying causes of cash flow problems, whether they be mismanagement of receivables, problems in pricing strategy, erosion of margins, escalating operational costs or other cash flow problems.
Reviewing the same financial statements, I will spot red flags in cash flow that to my eyes just about jump off the page. The experience I’ve gained as a high-ranking officer of corporate finance departments makes the errors almost instantly recognizable.
What’s more, having witnessed similar cash flow problems countless times in my years as an Interim CFO, I can not only pinpoint the problems, but expeditiously lay out a strategy the business owner can employ to help counter the cash flow quandary.
Of course, helping business owners recognize and overcome a cash flow management problem they are currently experiencing doesn’t necessarily help them down the line, when problems with cash flow are likely to crop up again.
Learn to Read for Cash Flow Issues in Financial Statements
That’s why I take the time to teach the business owners with whom I work how to accurately “read” their financial statements for potential cash flow red flags. I can show the owner I’m counseling what lies behind those numbers. Those business owners who are serious about understanding their own financial statements begin to have their eyes opened to cash flow threats. They come to more fully grasp what they should be looking for in financial statements as the enterprise evolves.
Build a Custom Financial Reporting Template
For many business owners, I also build customized templates specific to their individual businesses. Each template provides a schematic that enables critical figures to be pulled from the company’s financial statement and more carefully tracked over time. The template is a way of ensuring a current problem doesn’t become a recurring one.
Does your company have cash flow problems that would benefit from analysis? Put me to work and I’ll ensure your small cash flow problem doesn’t become a fatal one.
Read on to learn the common ways cash flow is mismanaged — and what CEOs can do about it.
An all-too-common source of trouble for small and mid-sized businesses is the failure to successfully manage cash flow. Cash flow is the lifeblood of a business, and if it’s not managed properly the company won’t survive for long.
What are the most common ways cash flow is mismanaged?
Cash Flow Mismanagement: Receivables
The trouble begins with failure to adequately manage receivables. When receivables get out of hand, running 60 days or more, your customers are using money that should be yours.
That cash flow failure in turn leads to trouble paying your own suppliers and vendors, who may respond by asserting that if they are not paid in a timely fashion, they are going to start shipping goods cash on delivery. The message from those suppliers essentially is, “We’re not going to be your banker.”
Cash Flow Mismanagement: Pricing Strategy
Cash flow management problems can also result from the inability to price your goods and services correctly.
In many cases, companies experiencing problems are under-pricing products and services. Even a tendency to slightly under-price can cause cash flow problems over time, as that slight differential inexorably builds up to a substantial cash flow shortfall.
Compounding the problem, this cash flow situation cannot be quickly rectified. The difference can’t be made up in one price increase, as it will likely be too much for customers to tolerate. Reviews of pricing must be tackled on an annual basis.
Cash Flow Mismanagement: Paying Attention to Margins
Companies tracking cost of goods sold, or cost of sales, must recognize those are direct costs — such as raw materials and subcontracts — related to sales. Accept a price increase from one of your vendors, and your margin has just been eroded. That can only be overcome by cutting costs elsewhere, or increasing pricing.
Whether you cut costs or increase prices will vary on a case-by-case basis, but either scenario presents obstacles. Most small businesses are hesitant to hike prices. But conversely, there are only so many ways you can cut costs.
If cash flow problems are not addressed, they will only fester and become even bigger issues. Typically, cash flow management issues result from inexperience. The business owner has no experience in analyzing cash flow problems. That‘s why it‘s important to either consult with a seasoned expert in these matters or hire an interim CFO. I’ve dealt with scores of companies with cash flow challenges, and have been able to counsel CEOs in making strategic financial decisions that have altered their companies’ fiscal trajectories.
Does your company have cash flow management issues? Let’s address those problems together, before your company’s lifeblood is drained.
This month, we continue to profile the work that John Lafferty has done to refocus and maintain the financial stability of various companies. As you read through these profiles, ask yourself, “Does this sound like an issue that my business is having”?
Week 3 – Keeping On Point–Online
Place: Around the World (international business)
Company Type: Web-based Venture
The Situation: One of the first companies to make successful use of the explosion of the internet was, despite their solid marketing and massive initial success, having difficulty in managing their cash flow and meeting consumer demand. Instead, they were dealing with a high cash burn and an inability to remain objective when faced with directing their company.
What happens when a company can no longer keep objectivity at the forefront of their business? What is the first step to remedying this lack before it disturbs the management and operations?
The John Lafferty Solution
Enter hands-on professional, interim Chief Financial Officer (more commonly referred to as CFO) John Lafferty. Putting his strong directional style and leadership qualities to use, he applied his business savvy to serve as an interface between this web-based business, and audit and venture capital firms.
The CFO-Pro Solution: Acting in his role as financial mentor, Mr. Lafferty helped to provide “the objectivity necessary to obtain a new round of venture capital funding.” He also streamlined the tracking of cash flow by directing the financial reporting and realigning the delegation of duties and reporting within the company. The refocused company was so successful in fact, that shortly afterward; a larger competitor purchased it for a handsome sum exceeding $100 million.
Confusion over the direction of your business and keeping it successfully on track can create much tension. You need to have the right financial guidance to give your business solid direction and ease the tension. With the knowledge that help is but a phone call away, your success can be assured and sustained. Contact John Lafferty at 630-269-7646 or JLafferty@CFO-Pro.com today!
To reiterate, there are four main types of financial statements: the balance sheet, the income statement, the cash flow statement, and the statement of shareholder’s equity. Balance sheets were our first topic of discussion this month; last week we covered income statements; now it’s on to cash flow statements.
There is a difference between profit — what your company actually makes — and cash. Profit is the overall money your company earned for a given time period, which, as we discussed in our last blog, is what the income statement tracks. Cash is the money you actually have immediately available to you, which is what the cash flow statement tracks. It records the inflow (money coming in) and outflow (money going out, e.g., expenses, purchasing, etc.) of cash in your business and how it’s being used. The SEC states, “A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement.”
Now you may be asking yourself why is it useful to have a cash flow statement, or why to bother going over it. For you and your investors, it’s the most informative financial statement there is–for the simple reason that having one of these allows you to pinpoint exactly from whence your cash surplus, or deficit, is coming, giving you the immediate opportunity to adjust your business as necessary. Or, as financial writer Reem Heakal succinctly put it: it tells you how your company’s cash flow is performing, where your money is coming from, and how it’s being spent. You should review this statement carefully. If you don’t understand what’s going on, pose questions to one who knows.
Generally, there are three different types of activities that cash is involved in and tracked: operating activities, investing activities, and financing activities. Reviews of these show an increase or decrease of your cash over a set period of time. Below is a very, very basic outline of what each of these terms refers to:
This is the most important of the three activities, documenting where your money goes in the operations of the business. This is where you can follow what happens to your profits as changes occur in accounts receivable, inventory and accounts payable.
Follow these two rules to find the cash:
- An increase in any asset other than cash has a negative impact on cash and a decrease in any asset other than cash has a positive impact on cash.
- An increase in any liability has a positive impact on cash and a decrease in any liability has a negative impact on cash.
Investment activities is as it sounds, monitoring the purchase and sale of permanent assets in your business. The same two rules above also apply to investing activities.
Financing activities show the changes to cash flow by owner decisions, such as borrowing money, equity capital transactions and dividends paid out to owners. The same two rules above also apply to financing activities.
For more information, check out the SEC’s brochure on A Beginner’s Guide to Financial Statements: http://www.sec.gov/investor/pubs/begfinstmtguide.htm
Understanding these three activities together gives you a strong hold over the running of your business, and in combination with your balance sheets and income statements, begin to give you an advantage in whatever field your business exists by illustrating where you have the opportunities to strengthen, contract, or grow your business to your best advantage. Don’t underestimate the power of your financial statements; understanding them fully will give you the tools to give your business its best shot for success.
How about you? Has your cash flow statement revealed opportunities to you that you might otherwise have missed? Opportunities to grow, or to improve cash flow?
If you are doing well right now, you should be congratulated. One of the best things you can do for your business is prepare for the unexpected by storing away surplus funds.
Week 4 – Invest Extra Cash
Consider the short-term investment
Short term Investments become important when a company has a great deal of cash assets. A company typically plans to sell this type of investment shortly to provide future cash. An example of a short-term investment is a bond that matures in a year or less. This allows the business to earn a slightly higher interest rate than if the cash were deposited in a corporate savings account. These investments aren’t as liquid as money in a checking account, but they provide flexibility if the need for these funds appears in the near future.
Pay Off Debt
One of the most popular questions I receive is, “Should I invest extra money or should I use it to pay off debts?” To answer this question, I explain that you must decide how your money could work best for you and your business. Would the return on your investment be greater than you would pay on your debts? If you would earn less on investments than you would pay on debts, you should pay off debt.
Let’s assume that you have $10,000 in a savings account that earns an annual rate of return of 2 percent. Meanwhile, your credit card balance of $10,000 incurs annual interest at a rate of 22 percent. In a year, your savings account will earn $200, while your credit card costs you $2,200. You’ve essentially lost $2,000 over the course of a year (the difference between what you earned on the savings account and what you paid in interest on the credit card balance). Also, consider how this affects your taxes – the interest on the savings account is taxable, and you have to use after-tax dollars to pay your credit card bill.
Prepare for Your Tax Bill
While we are on the subject of taxes, don’t forget your corporate tax or estimated tax payments each year. Tax season will be here before we know it, so prepare now to avoid late payments and hefty fees.
Create Collateral for Future Loans
If you plan on adding a new initiative to your business, you may as well begin saving for it now. When you add up marketing and promotion costs, it can cost more than you originally expected. Therefore, it is wise to create a separate savings fund for this project to prevent dipping into reserves earmarked for other goals of your company.
Here are some additional suggestions (for some of you) to help reduce overhead and other expenses in your company:
- Acquire one of your suppliers to eliminate a link in your supply chain
- Acquire a distributor to better connect with your valued customers
- Establish a new location to tap into additional markets
If you had an extra $50,000 at the end of this month, how would you invest it for the short term?
The largest expenses for a business are (in no particular order) labor, variable overhead and marketing. We need employees to keep our companies performing and we need marketing to stay relevant in a changing marketplace, but do we need to continue paying exorbitant overhead expenses? Some expenses can’t be helped (such as rent, equipment rentals and utilities), but there are ways to manage the amount your business pays as overhead.
Week 3 – Reduce Variable Overhead
Is your office located in an area that makes sense? Do you need to maintain a downtown address or is it ok to have a smaller office close to home? Is an office space even needed? Determine whether or not you could save by working at home or if you need an office to frequently meet with clients face-to-face.
Ideally, you should also be able to collect all of what you produce within a month. For example, if you sell $30,000 worth of products or services in October, by the end of the month, your earnings should be $30,000. Why is this important? If your overhead averages $15,000 and you only collect $10,000 at the end of the month, you are now facing a deficit.
Did you know that you could preserve the environment while saving money when you move to a paperless and cordless environment? Printing costs in an average office (when you factor ink and toner, paper, envelopes, etc.) may be shocking when it is all added up. Cut the expensive paper trail by storing files and receipts on your computer instead of multiple file cabinets. Many businesses are able to rely on interactive voice communication options to stay in contact with their clients. Solutions such as Google Voice and Skype can be connected to a cell phone or computer and used free of charge.
Here are some additional suggestions to help reduce overhead and other expenses in your company:
- Set a monthly limit on corporate accounts for entertaining clients
- Switch banks if you are paying monthly maintenance fees on your accounts
- Seek out interns for the summer to decrease labor costs
- Renegotiate vendor contracts by asking for better pricing
- Sublease some of your office space or move to a smaller location
What measures will you take to reduce overhead costs in 2012?
In case you missed last week’s post, this month, I am introducing four quick ways for you to increase your company’s cash flow in tough economic times. This week’s suggestion may be easier said than done, but it is the best way to build wealth over time.
Week 2 – Save a Set Amount Each Month
Pay yourself first. Create a budget. Allocate a percentage of your revenue toward marketing. These statements are repeated in various financial advice books and blogs. However, they have glossed over one important tactic to ensure that you always have money – save a set amount each month.
Granted, when you are just starting a business, you may not have much (if any) income to speak of, but getting into the habit of putting away an amount that you will not miss terribly is good practice as your company grows. We’ve spoken about compound interest before, which basically explains that $1 is worth more today than tomorrow. Even if CD rates and money market account interest is low, you are still able to benefit from having additional collateral when you apply for loans and lines of credit.
Speaking of credit, an easy way to begin saving money is by monitoring your credit card use. If you use them responsibly (i.e. completely pay them off every month), you can benefit from them. However, the reason most credit card companies make money is because people end up spending money that they don’t have. Unless you are able to pay off the balance in full every month, you’re better off ignoring the promotions that credit card companies use to lure you in (cash back, introductory APR, airline miles, and so on).
Here are some ideas to help you save a set amount each month
- Arrange for an automatic transfer to come from your business checking to your savings account
- Establish a goal (new building, equipment, more staff members) and save this specific amount
- Trim your discretionary expenses and place this money into savings
How much money do you expect to save within one year?
It’s October 2011; is your business going to make it another year? If you have noticed that your cash flow has turned into a light trickle, it may be time to ask yourself some tough questions. A business without a sufficient amount of operating capital and a steady cash flow could face sudden death. This month, our blog features four possibilities to change the trajectory of your company in slow economic times.
Week 1 – Create Continuity Products & Income
For many service-based businesses, you make money when you sell your time and expertise. If you are not working, you are not making money. Also, if you are a service-based business, you can only accept the number of clients that you and your staff are able to manage at a given time. If you adhere to this style of business, your income will make a major shift downward in a tough economy. Customers who stop calling or coming in the door during this time may seriously affect the profitability of your venture. What is the best solution for these business owners?
Offer a product or service that sells after hours, over the weekend and during the holidays.
By expanding your products and services into other forms of revenue (such as a series of books, e-books, paid downloads/pre-recorded trainings/webinars, etc.), you are able to open your business to a greater number of potential customers and enjoy the reinstatement of your cash flow. This is also known as a passive stream of income.
Other ideas for continuity income are:
- Collect a commission for introducing colleagues who go on to do business with each other
- Host a paid seminar or workshop in your facility
- Franchise your business model to other entrepreneurs
Which methods will you begin incorporating in your company this month? Today may not be the opportune time for you, but hold on to this thought.