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.  

How to know if you need virtual CFO Services

What Your Accounting Dept. Can’t Tell You

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

When your company changes, your internal financial management has to keep pace. Red flags in the accounting department may be signaling a skills gap or they could be indicating a lagging, bloated or overwhelmed financial reporting and tracking system. The expertise to make specific fixes may be outside the wheelhouse of your in-house financial talent. Here are a few ways to know when you need virtual CFO services and why it’s so imperative.

  • Financial Reporting is Not Timely or Accurate – If you are reviewing the numbers one month or more in arrears, your accounting department is lagging, and under such duress, the financial reporting system itself may be faltering. Falling behind on the numbers not only impacts management’s decision-making but adds undue stress and productivity drain, impeding strategic development. A CEO needs timely and accurate information to make timely and accurate decisions.
  • Your Company Needs Experience in Working with Bankers, Lawyers and CPA Firms – Few things are more expensive than inexperience. You don’t know what you don’t know. Navigating the complexities of business and plethora of professional services requires a deep knowledge of the systems and scenarios that are unfolding in and around your company. A skilled CFO is an advocate, analyst and advisor who anticipates and translates the best course of action with your banker, lawyers, accountants and other professional service providers.
  • Your Banker Urges You To Strengthen Internal Financial Talent – If, as a CEO you find yourself complaining to your banker that your accounting department is not delivering, a banker invested in your success will urge you to make some internal changes. He may recommend a stronger accountant, but many accountants don’t have the necessary skills. An interim CFO or in-house CFO may be the precise solution for streamlining and improving the accounting department.
  • You Company is Undershooting Its Potential – When financial reporting is bloated or faulty it requires enormous time and energy from the CEO to review and interpret the numbers. This diverts his or her focus away from growing sales, which is where the energy is needed. A good interim CFO frees the CEO from minutia to focus on creating company growth.
  • Your Growth is Internal and Your Accounting Department Can’t Keep Up – Often a financial reporting system needs a tweak instead of an overhaul. A good interim CFO knows where to streamline the financial management process to keep the accounting department on track.
  • Your company is poised to acquire another company but you don’t have anyone with the requisite background to perform the due diligence. In this scenario knowledge is power, experience is paramount and the success of the acquisition hinges on specific expertise. Acquisitions are both an art and a science founded on the ability to know, use and analyze the numbers.
  • You have a great opportunity to grow the business, but your team lacks the capabilities to manage the numbers. Driving profitability and growth requires swift and accurate financial management. The current team may be unable to define and put in place key productivity ratios and financial ratios, and accurately track and report on the trending, leaving the CEO without a clear view of what is required to navigate the company’s future.
  • A Sounding Board and Strategic Partner- As a CEO it is lonely at the top. Leaders face serious responsibilities when pursuing their company’s next steps. Having a sounding board and strategic partner is not only advantageous, it is optimal. According to Nicholas A. Christakis, MD, PhD and James H. Fowler, PhD, authors of Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives, “Innovation rarely arises without the input of others. Breakthroughs are created in collaborative circles.” A skilled CFO can bring a fresh perspective to the table and strategize with you and your key managers on how to drive the business forward.

If your company is experiencing any of these scenarios, I welcome the opportunity to discuss them with you. Please feel free to call me at: 630-269-7646 or email me at jlafferty@cfo-pro.com

The Best Approach to Performing Realistic Financial Projections

Now is the time to get started on financial projections for the coming year, and these are the fail-safe steps that will help you do just that.

Remember the story I told in my last blog, the one about the CEO who doubled his sales as a result of projections? That CEO was focused on revenue streams. That’s where all projections have to start. You must determine what your revenue streams will be, either by service or product line.

Total revenue or total sales over the course of a year don’t just happen. Three ingredients go into generating those revenues. The first is the number of customers your company has. The second is the transaction frequency, or how often your company is expected to do business over the next year with each of those customers. And the third, of course, is the average transaction value. If you had a hundred customers and did business with each 10 times a year, with the average transaction $1,000, you’d have sales for the year of one million.

The other thing to focus upon is the velocity of these sales transactions. Velocity is likely to move up and down over the year, and you’ll have months or seasons where velocity is comparatively higher than at other times. Your company won’t record the same level of sales each month, so give thought to how that will vary.

The next step in the approach is to establish the gross margins of each revenue stream. The gross margin is a very, very important number in your financial statement, and a topic into which we’ll delve more deeply in a future newsletter.

In order to make informed future financial decisions, you must know the gross margin. That’s a combination of looking at the direct costs to produce each revenue stream, and adjusting your sales prices as needed to hit your targets.

Let’s define direct costs, as opposed to overhead costs. A direct cost is any expense related to generating that sale and delivering it to the customer, while overhead costs are not directly related to that sale.

The final step is studying overhead needed to generate revenue streams. Most businesses, I think, let overhead be where it is, realizing it will cost so much to generate those revenues. Some CEOs will take it a step further, saying, “No, let’s allocate a portion of overhead to each of those revenue streams.”

The result of projections is peace of mind for business owners, because they’ve laid out a plan. If you’d like a plan for the year ahead, get in touch with me.

I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.

Financial Projections Are Crucial to Goal Setting

Projections can help CEOs chart a course from zero sales at the start of the year to the sales objective desired by year’s end

Years ago, I sat down with a new client, and we chatted for hours. The topic: Whether I could help him determine if he would have sufficient inflow of cash to double his company sales from $4 to $8 million in the coming year.

It turned out he had a good command of his product line and product margins. On that basis, I told him we could work together to produce a set of monthly projections designed to determine if he would experience a cash shortfall.

Together, we determined there would be a shortfall. As a result, he approached his bank to increase his credit line. His company ended up doubling its sales. I helped him again the next year. Sales doubled again. I then constructed a model to help his people perform projections, and they took over in year three.

The point of the story is that the client would not have doubled his sales in two consecutive years had he not benefited from financial projections that told him he’d experience a cash shortfall, and would need to extend his credit line.

Therein lies the benefit of projections. If CEOs follow them, the projections force them to focus on the numbers. The ritual of establishing projections helps set a starting point and an end point, or goal. The projections lay out a course for the company to go from zero sales on day one to the desired year-end sales goal.

Projections are also helpful as a scoreboard with which to compare actual results. As you move through the year, you always want to compare how well your company is doing with what you projected it would do. This gives you an opportunity to adjust your actions to achieve your desired results.

Finally, projections enable CEOs to flesh out action plans for marketing and sales teams. Unless you have a methodology or program that says, “This is what we’re going to do to achieve these sales numbers,” it’s not going to happen.

Marketing and salespeople benefit from action plans that flow from the projections. What’s more, those action plans can be broken down by month, week or day to give key employees a blueprint for action. By monitoring those plans, a CEO can determine whether or not employees are getting results.

Next time around, I’ll lay out best practices in developing realistic projections, to help keep companies focused on the numbers.

John Lafferty is the Problem Solver – Week 2

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 a issue that my business is having”?

Week 2 – Food Service and Financials

Place: Chicago, Illinois

Company Type: Food Services

The Situation: A specialty catering and food service company was doing well for themselves. Gradually, however, growth and profit slacked, before coming to a veritable standstill:

Stalled growth. What happens when you wake up one day and realize that your company has hit a plateau?  How do you shift the focus of your operation (and where do you shift it to) in order to stimulate growth to the next level?

The John Lafferty Solution

Enter hands-on professional, interim Chief Financial Officer (more commonly referred to as CFO) John Lafferty. Using his keen insight, he applies his financial prowess in combination with solid business sense to aid the executive team in understanding the key financial indicators, and then how to use those indicators to drive profitable growth.

The CFO-Pro Solution:  Acting in his role as financial mentor, Mr. Lafferty helped to “hone executive management skills and help department heads understand financial statements, determine product line gross margins, break-even sales points and product line contribution margins.” He also illuminated what areas they could afford to take risk, creating customizable immediate action plans, and showing which actions were necessary to meet their year-end objectives.  In the years that followed, sales grew by 250% and profit margins kept pace with sales.

The plateauing of the growth of a business can be a stressful situation. You need to have the right financial guidance to give your business solid direction and replace the stress with confidence in the new path of your company. Contact John Lafferty at 630-269-7646 or JLafferty@CFO-Pro.com today!

Concepts For Personal Financial Security

personal financial securityFar too often, we see news items that state, “money is an entitlement”.  We see this mentality in families where children are paid an allowance for no effort expended. These children act as if they are entitled to toys and video games. Does this sound familiar? If you are looking to change this behavior in your life, here are some suggestions on how to deep-six the entitlement mentality—starting right at home.

Make Money by Earning It

In an honest world, we make money by performing tasks for employers, or as an independent contractor. The family environment can work the same way. Paying an allowance for nothing in return reinforces the sense of entitlement. The solution is to assign tasks so that money can be earned.  Children can do dishes, make beds, mow lawns, shovel snow, vacuum and dust…and they can be paid very nicely for doing these chores.  They will have accomplished something for pay, thereby earning their reward. The next question is, ‘what should they do with this money’?

The Power of Compounding

A portion of the child’s earnings should be saved in order for them to begin to understand the power of compound interest. To illustrate the concept, $100 earning 5% interest annually results in a balance of $105. During the second year, interest is earned on $105, rather than the original $100, bringing the total to $110.25. In the third year, interest is earned on $110.25…and so on.  The numbers can get huge over time because you are earning interest on the interest. Since time is the most important element in compounding, it is a very powerful idea for children to understand. It is the only mathematically proven method to produce a fortune. When a child learns how this concept really works, and assuming they have the discipline to follow through, they will become wealthy. Is there a flip side to compounding?

The Ugliness of Debt

Debt is an expensive proposition. There are two types of people in this world: people who pay interest and people who receive it. When you are thinking about debt, rather than looking at the interest rate, you should look at the total amount of interest you will have to pay over the lifetime of the loan. When you see that, it suddenly dawns on you how expensive borrowing money really is. For example, $100,000 borrowed on a 30-year mortgage at 6%, will result in $116,000 in interest being paid to a bank.  After 30 years, you are out $216,000 for a house that cost less than half that. That is a lousy proposition.

So what do you do? The tough answer is: you rent until you have enough money to buy. And you buy small—not large.  There is a way to become your own banker where you pay yourself the interest rather than a bank. It takes a few years to capitalize your bank; thereafter, you will not be paying interest to a lender other than yourself. This will be a topic for a future posting.

When Should You Borrow Money

Perhaps the only really good reason to use debt is to finance a business or a productive asset. And then, you have to be sure the asset generates a return greater than the cost of the debt. The only way a house is a productive asset is if it produces rent from someone living in it.

Book Recommendation

The Uncle Eric Series by Richard Maybury

Small Business Fears

business fearSmall businesses need to step through the uncertainties. Work on increasing sales. Inflation is already here. We are paying more now for our purchases. So increase prices now. Here’s how to do that, for example: If your health care costs are 5% of sales and you expect (or assume) that these costs will increase 20%, that puts health care costs at 6% of sales; the bottom line result is a 1% decrease in margin; to make that up, increase selling prices by 1% to keep pace. Continue to apply this technique to other cost items. Remember, “a penny makes a difference.” A 1% margin improvement for $10 million in sales is $100,000. That is big-time money! CFO-Pro says, “Walk right through that fear! You’ll feel a lot better. Don’t wait to figure out what the government is doing. They will never get it right! Now–what are you going to do?”