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 Sell Your Business – What Business Buyers Want – Part II
If you’re thinking of selling your business be prepared for an onslaught of questions from potential business buyers. If you know what they want in advance you’ll have an excellent chance of preparing.
Here are some of main areas of inquiry business buyers will scrutinize before you can sell your business.
Due Diligence Process
When the Buyer and Seller execute a Letter of Intent re: a possible transaction and terms, the business is taken off the market and due diligence then begins in earnest.
The buyer or its agents will conduct due diligence of the books, records and operations of the Seller to its complete satisfaction.
Ninety percent (90%) of the business buyer’s emphasis will be on the Profit and Loss Statement (P/L) to help them understand how the P/L provides cash flow.
The business buyer will normalize Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). They are looking for non-recurring items of revenue and expenses such as legal fees, insurance settlements, professional fees, excessive owner compensation, above or below market rate rent expense, personal expenses, etc.
The business buyer will analyze profitability by product, customer and geography. They will look carefully for any operating expenses being charged to depreciation or interest expense which has the effect of fraudulently increasing EBITDA.
On the balance sheet, the business buyer scrutinizes changes in reserves which might reflect out-of-period costs that have an adverse effect on the P/L period under review.
Due diligence also has a perspective for the Seller. Sellers typically rely on a Trusted Advisor to coach them through this process—getting things cleaned up and controlling the process. The Seller must come to understand the true value of the business. This requires diligence. Fix what you can fix in advance of entertaining potential buyers. Set and manage expectations along the way.
The primary objective here is to arrive at an amount the Seller “needs” for the business—not what the Seller “wants”.
Are your books in order? Are your systems in place and above all are they easy to read and understand?
What is the status of your receivables and do you have deadbeat customers and late payers? The confidential nature of your customers dictates that your customers be named A, B, C, etc. until the final stage of due diligence. Then the Buyer will meet the important customers.
Are you under investigation or is there litigation pending?
Do you have signed and current contracts with your customers, employees and vendors?
When does your lease expire and what are the terms?
Are your business license and operating agreements up to date?
Are your ideas, proprietary products and processes protected by patents or trademarks?
What are the terms of your credit agreements?
Potential business buyers are going to want to understand you and your team as well as your company. They are going to dig deep into your vision and understanding of the industry. Don’t be surprised if they ask the following questions:
Why do you want to sell your company?
What do you see is the future of your industry?
What is your vision for the future of this company?
Unasked but most certainly ascertained – Will you be replaceable or is your company too dependent on your involvement?
Do you have an excellent leadership team in place and will they be prepared for the transition?
In addition to the above due diligence a prospective business buyer will delve into, you can expect more questions about:
Your Products or Services
Your Customers & Market Share
Your Operations, Distribution & Back Office
If you need a trusted advisor to help you through the process of selling your business or have questions about the process you are already involved in, please feel free to get in touch.
How to Sell Your Business – Why You Should Build to Sell
Few small business owners think about building a company to sell it. They think about building a company to support their family or hand it down to their children. But building a company to run and grow, and building a company to sell can actually be the same thing with different planning.
Without the guidepost of selling a business, a company closes its doors when the owner tires of running it. Whatever the owner has invested and saved is the extent of his financial security. On the flip side, a company strategically designed to be sold has a value in the marketplace and offers a financial reward to the owner upon the completion of the company sale.
Both companies require the same blood, sweat and tears to build and grow, but only one yields a reward in the end.
I’m going to challenge you to recalibrate your priorities. No matter what goals you’ve set for your company, whether they are profit targets or growth objectives – put ability to sell your company on the top of your list and begin structuring your business with this new strategy in mind.
Becoming the Best CEO You Can Be – take this job and love it
When you build a business to sell it you are consciously structuring your company to operate without you. This by definition is leadership – the ability to lead and inspire others to carry out your plans. As a CEO, this is where your energy is best focused. Your job is to create a dynamic and well run company. Your company’s job is to execute on your vision and perform at their highest levels of efficiency. Done right, your company becomes an operation that can be transferred to the next owner.
To accomplish this you’ll spend your time on big picture planning and strategy while your team handles the daily minutia.
Creating Financial Freedom – your future is up to you
With an exit strategy in mind you are designing your financial future. You will have a specific plan and timeline to calibrate how your financial life and the life of your company will unfold. As you lead your business through its growth and development phases, you’ll make decisions based on your ultimate goal – to sell the company. This creates a new reference point on which to base your thinking. Creating value rises to the top of the priority list and actions and decisions become aligned with this goal.
The Shoemaker’s Children – what’s good enough for you isn’t good enough for a buyer
As in selling a home, it is not uncommon for a homeowner to live with and tolerate imperfections. A loose railing or outdated kitchen may become an invisible annoyance. When it comes to selling the house, just like selling a business, everything has to be fixed to make it desirable to the next purchaser. Ask yourself, “What have I been tolerating in my company that needs improvement?” Is it faulty systems, outdated processes or inefficient accounting? What has been good enough for me but will not be good enough to attract a prospective or future buyer?”
With a plan in place to sell your company you’ll be inspired to take an unvarnished inventory of the people, processes, costs and efficiencies to finally fix what’s faulty. Had you planned to sell your company from the beginning, you may have attended to these things more expediently as they arose.
The good news – it’s not too late to start
Whether you’re considering selling in five years or in the next generation, make it a priority to put the right planning into place for how to sell your business.
Are you using the right metrics to measure your company success?
Key Performance Indicator – Resources & Outputs
A company’s resources include: their people, their plant and equipment and the hours available for production. In a well-financed business, resources also include cash and working capital. Ask yourself, what are your unit outputs or sales from your employed resources?
- Physical units produced/sold
- Purchased units resold
- Machine hours sold
- Project hours sold
- Information reports sold
- Customer Acquisitions
- Other defined unit outputs
Have you defined all of your resources and outputs? Do you understand how to measure the performance of each resource with its related outputs? Are you actually doing this—or just occasionally giving the idea a passing thought?
Think in terms of units for the outputs. What is your client/customer acquisition cost? Have you calculated dollars per unit produced/sold and the unit cost for COGS, overhead and margins? Do you understand how to interpret these results?
If you are doing this kind of analysis and tracking the trends, do you believe the veracity of the results—or is there some doubt?
Many businesses produce some very good financial results, but have not mastered the art of measuring how productive their resources are, and the trend over time.
CFO-Pro specializes in defining and measuring performance indicators, and enhancing your understanding of how these indicators can affect your financial results.
This is not typically a costly exercise since all the information needed is available. It just needs to be surfaced and inter-connected to provide some very valuable trending insights.
Please feel free to call or email me to discuss your situation.
Virtual CFO Services – How to hire a qualified interim CFO
The answers you need before hiring an interim CFO
If you’ve thought about using virtual CFO services, I recommend doing due diligence on your candidate and asking the following questions. The qualified interim CFO you choose should be able to respond positively to 90% of the qualifications listed below.
- Does the virtual CFO have hands-on experience in working with a company of your size and is he or she accustomed to the type of company culture you provide?
- Does the virtual CFO have experience in your specific industry? If not, does he or she have the breadth and equivalence of experience necessary to serve your company?
- Does the virtual CFO have experience in defining and implementing key productivity and financial indicators, and the requisite skills to track the indicators to keep the CEO informed?
- Does the virtual CFO have experience in delivering clean, lean Executive Summary financial information, with commentary regarding tracking and trends, so that the CEO can easily understand where his company stands and what the numbers mean to make informed decisions?
- Is the virtual CFO candidate willing to discuss the two or three most challenging situations he or she has worked on and how those challenges were resolved on behalf of their clients?
- Does the virtual CFO have experience in working with bankers, lawyers, outside accountants and other professional service providers on behalf of the company he serves? If so, what did that experience entail – i.e. experience in mergers and acquisitions?
- Has the interim CFO worked side-by-side in the trenches with CEOs and done the job he was needed to do? Does he have proof of the CEO’s satisfaction through a series of outstanding references given across time and industry?
- Does your interim CFO feel that timely and accurate record keeping is equally as important as forward-looking financial strategies and planning – or does he or she give more emphasis to one over the other? The answer should indicate balance, and not weighting one over the other.
- Does the interim CFO have experience in resolving bottlenecks in company productivity and financial management issues?
- Will the interim CFO candidate readily discuss your situation before coming on-board so you have a clear understanding that he or she has a clear understanding of your challenges?
- Does the interim CFO have repeat clients and long-term professional relationships?
These are some of the main qualifications you should look for when hiring virtual CFO services.
How to know if you need virtual CFO Services
What Your Accounting Dept. Can’t Tell You
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 email@example.com
How To Create Clean, Lean Monthly Financial Reports
Here’s how to turn a lengthy financial report into an executive financial summary
In my last blog I discussed the importance of lean month-to-month financial reporting. Now, I’ll tell you how to generate a lean and clean financial report.
Many CEOs wade through a lot of unnecessary financial detail that clutters their thinking and eats up time.
What the CEO really needs to see are sales figures and gross margins. They tell him or her the amount left over to cover the overhead and produce a profit for the owner.
The first metric a CEO needs to know is the average monthly overhead cost. The second is the percentage of that average monthly overhead compared to sales.
If the average monthly overhead-to-sales percentage is moving up, the company better be generating more sales to cover overhead, or know the reason why it‘s not. In short, if the numbers are moving in ways unfavorable to the company, the CEO can begin to identify the problem and take steps to address that issue.
The worksheet design can be tailored to the company using the spreadsheet’s capabilities. When working with a company, my discussions with its CEO and my analysis of current financial statements will help me shape this monthly financial report into a format easily understood by the CEO.
Moreover, I can walk him through the way I designed the worksheet and how I interpret its numbers. That will allow the company to create the same kind of worksheet, month by month and year by year. That CEO will sleep better at night, because he understands what he’s looking for when reviewing those month-to-month and year-to-year worksheets.
If you would like help replacing one-inch financial reports with easy-to-peruse month-to-month worksheets, please contact 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.
A Time-saving Financial Tool for Better Financial Reporting
How to generate a financial report that provides better financial insights
I was invited to breakfast one morning by a CEO of a food service company. She came to the table armed with an inch-thick sheath of papers, and told me the stack represented her controller’s financial statement.
“This is too much to deal with,” said the successful businesswoman. “I can’t make heads or tails of it. And you know what? I receive a financial report like this every month!”
I told her I’d take the stack back with me, and return with a financial tool presenting the data in an easier-to-absorb format. At our next meeting I handed her the month-to-month worksheet I’d designed and said, “Rather than going through a dozen of those inch-thick stacks every year, let’s take the critical top-side income statements and line them up month-by-month on this one sheet of paper.”
Before delivering it to her, I’d dropped in the April numbers to serve as a guide, with the other columns remaining blank. I told her to give that worksheet to her controller, and have him complete it month by month.
Saving Time for the CEO
I only wanted her looking at the top-side numbers, not all the other detailed figures. I just wanted her to deal with total revenues month-to-month, the gross margin month-to-month, and the total overhead month-to-month. The top-side numbers were what she needed to gain key financial insights.
The worksheet was designed to display the actual numbers reported and the numbers that had been budgeted for the month. She had 25 different operating units, all of them captured in columns on her spreadsheet. She could skim across those 25 columns and quickly see how her company was doing.
As part of this financial tool, I had also calculated a few financial ratios and percentages. She could compare one operating unit versus another, and examine the gross margin percentage. That would tell her how one operation was performing versus the next. The same thing was done with operating costs as a percentage of sales. That told her how each operating unit was managing costs, and whether each one was performing as projected.
Using this important financial tool made the CEO more productive. First, she saved time, because she no longer had to wade through inch-thick monthly reports. Second, she had crisp financial reporting that indicated specific, targeted issues to discuss with management.
Deeply appreciative, she said, “Y’know, after all these years of being in the food service business, I finally understand what my numbers are telling me.”
In my next blog, I’ll explain how this time and labor-saving financial tool can be created for your own company.
Plotting the Trends of Your Company’s Performance
Here’s how to learn whether your company is trending positive or negative in key performance areas.
In my last blog, I told you about a family-owned business I counseled. The firm appeared to be doing well, but had no way of knowing whether its performance was trending positively or negatively. My assignment was to give company officers a means of gaining that insight, through the use of key performance indicators.
The company mentioned is a Web-based business that takes orders through the Web into its system. I first needed to learn how many product lines the company offered. Once I learned that, I identified three different measurements that we would need to help us gauge the cost of producing the revenues that flowed from those lines.
First, we had to determine the direct costs, or in other words, the cost of goods sold. Second, we had to determine the employee cost, split out including payroll tax and temporary help. Finally, we had to determine all other overhead.
Using the revenue from the product lines, we knew the consolidated revenue for the company. From that number we could calculate the average unit selling price. Next, I determined average unit cost for each of those three areas: direct, employee and overhead cost, and came up with total unit cost per period.
When we arrayed all the indicators, we had a lineup of direct costs per unit, summarized for the year. Those costs were clearly coming down. We then looked at the employee cost per unit, and compared that to the average selling price per unit, and that relationship was trending positively. The same was true when we compared overhead per unit with average selling price. We could also determine from those numbers what the unit gross profit was for the company.
Simply put, once we had the unit measurements in each area, we could plot and compare them period to period. Those plot lines revealed trends, and just as quickly, we knew the trends were positive. That knowledge made possible a discussion with management as to why those trends were occurring.
Whether your company is generating reports, offering consulting services, or selling gallons of oil, key performance indicators can determine important trends.
There is a way to measure the company’s performance using two ingredients: the number of employees on staff, and your output.
If you would like assistance in determining and tracking key performance indicators, please contact 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.