A typical company finance function can be divided up into 3 areas, however many businesses believe the finance role is principally to produce accurate accounts.
Ask any bank manager and he or she will tell you the bank’s most problematic customers are those who don’t truly understand what is going on in their business. Some customers ask for finance or expect to maintain an overdraft, yet cannot even produce up to date accounts.
Most SME business owners want to focus on the business and not the numbers. The business is their baby and they want it to be their sole focus – not financials!
The areas which the business owner will seek help in first will be determined by the focus and needs of the business whether in sales, operations, admin or finance. If we look at the finance function, it is traditional to break it down into 3 roles:
1. Finance direction – the CFO
2. Finance control – the Accountant
3. Book-keeping/basic accounting/ AP & AR – the Finance Department Staff
Many business owners think the finance role is transactional in nature and so concentrate just on producing accurate accounting records. This is essential in itself, but not enough to manage and develop a growing business. When focusing on the CFO role specifically then, what are the key tasks of this role and what does the CFO bring that the other finance roles do not? Why would you need a CFO?
I suggest the following four main areas of expertise and input:
Co-ordinating and developing long term business plans; defining the implementation timetables; assessing the risks involved and seeking the funding required to deliver the proposed plans.
Developing internal controls; managing and developing the reports needed to run the business; improving profit levels; managing cash flows. Does the business owner fully understand the profitability of each product / service they offer? Often the answer is no.
Instilling a financial approach and mind-set throughout the organisation to help other parts of the business perform better
The modern CFO provides oversight on tax and compliance issues, develops and maintains key relationships and much more. There are many other considerations that go beyond the pure “job description” above.
What’s the difference between an accountant and a CFO? A CFO looks forward and financial accounting looks backwards; it’s where your business is going that matters as the past cannot be changed – but learnings can be made and changes made so that past mistakes not repeated.
Experience: it is important that a CFO has a wide range of commercial experience, not just financial. Good CFOs do not learn their skills from textbooks alone, in fact they learn very little from textbooks – they learn by doing. Commercial experience means leaving their offices and talking to customers and engaging with the production and operations teams.
Written by Peter O’Sullivan, Regional Director, Victoria
Business control is vital – at both ends of the business spectrum
After the first flush of start-up, many business owners find themselves faced with common problems caused by business control. Those problems tend to polarise into coping with potential failure or run-away success – the ‘zero or hero’ scenario.
The heroes are fast-growing, successful businesses, usually with considerable drive and enthusiasm from business owners. Heroes are clearly going in the right direction, and appear to be getting there rapidly. However, like a fast train, without good control systems, knowing when to slow down or accelerate and understanding all the signals – a hero-business can easily run out of track and suffer a spectacular crash.
The zeros are those businesses that for some reason are finding life difficult. These can often be potentially great businesses, but they find themselves in a situation where their viability may be threatened, again by poor business control.
It is immaterial whether businesses fail with a huge fall or sink slowly and uncontrollably, the result is always the same.
Issues facing the business hero
Hero-business owners are often extremely enthusiastic, have great business ideas, products or services and are consumed with ambitions for growth. Such businesses, led by their highly driven business owners, are usually great to work in, customers and suppliers alike are impressed with the never say die attitudes.
Prime amongst the issues for the fast growing start up is being under-capitalised – the great idea can often die as a result of just not having enough cash. The enthusiastic owner whose vision drives the business can suffer from a lack of vision for coping with growth.
Dealing with the zero scenario
Zero businesses are strugglers. They can be fallen heroes; however they are usually businesses that have striven to survive almost from day one. They often adopt a wait and see policy, hoping that things will get better.
They are usually characterised by a lack of profitability and cash. The constant pressure of trying to juggle cash to make ends meet overshadows the viability of the business and the potential success that lies within.
Driving up the zero and controlling the hero
As with the medical profession, prevention is always better than cure. However, even business cases that may appear terminal can often be rescued.
The solution lies in business-based financial support and advice. The problem facing both heroes and zeros is finding and funding that advice. Frequently, business owners bemoan the difficulty in finding and sourcing affordable advice. However, in some cases they cannot afford to be without that advice.
Finding advisors with the right track record
As with so many other things, the business owner should go for experience. Someone who has “been there seen it and done it”. One immediate response is to hand the problem to the accountant. This can provide a solution, but in reality, most external accountants are not experienced in running a business.
An experienced chief financial officer (CFO) is invaluable in recognising the danger signals and providing solutions, they know how to finance a business, deal with growth, present meaningful monthly numbers and get the best deals from banks. At some point both heroes and zeros need this experience but they probably don’t need it full time – this is where an outsourced CFO provides the best solution. Watch a 3 minute video here to find out how you can take on one of USA’s leading CFOs for a fraction of the cost of a full-time employee.
Access financial management skills at a fraction of the cost of a full-time resource
Owners of hero to zero businesses are prime candidates for an outsourced part time CFO solution. With the outsource option, business owners can access a financial management skill set, that is experienced in dealing with problems and opportunities, able to organise both the in-house and external accounts functions and provide the necessary business advice.
The outsourced CFO has the skill set to plan and implement the controls needed to help the zero business survive and the hero business to grow positively. Additionally, an outsourced or virtual solution does not impact payroll or headcount with the business only charged for the days worked – which may only be a few days per month.
Business owners – zeros or heroes – cannot afford to be without business-based financial advice. The outsourced CFO should be their first priority, before they hit the problems, after all the more time a business has to rectify a situation the more chance of success. Watch our 60 second video on how our outsource model works: www.thecfocenter.com
Jim Collins, the veteran author of Good to Great, believes that “10x companies” – i.e. those which outperform their industry average by 10 times or more – possess 3 fundamental and distinctive traits:
1. Fanatic discipline and monomaniacal focus on achieving goals.
2. Empirical creativity: an obsession with facts over opinion and a readiness to ignore conventional wisdom once armed with these facts.
3. Productive paranoia: constant worry which fuels relentless preparation and precautions against even the most improbably bad events.
To illustrate 10Xers at work, Collins, along with his co-author Marten Hansen goes on to give some wonderful examples.
“Even his contingencies had contingencies”.
Drawing from outside of the business world, he tells the story of Scott and Amundsen’s race to the South Pole. While Scott took a somewhat relaxed and cavalier approach to the expedition, Amundsen’s level of preparation was truly extraordinary.
Even his contingency plans had contingencies. In some cases there were even contingencies to the contingencies within the contingency plans! He was the personification of productive paranoia which gave him the confidence to march forward, with a sense of knowing that when the inevitable challenges arose, his obsessive levels of preparation – the way in which he managed his risk – would be forgiving when mistakes were made or unforeseen circumstances arose.
Amundsen was a relentless ‘tester’ – In preparation for his journey, he ate raw dolphin meat to see if it could provide a decent energy supply. He loaded up with far more supplies than Scott to serve a much smaller team. And, tellingly, for Collins and Hansen, Scott took just one thermometer, which disastrously broke, whereas Amundsen brought four. Amundsen reached the pole more than a month before Scott and made it back alive. ‘Amundsen and Scott achieved dramatically different outcomes,’ Collins and Hansen write, ‘because they displayed very different behaviours.’
By looking ahead and forecasting potential issues and pitfalls Amundsen engendered in himself and his team a reassuring sense of confidence. By doing the hard work up front, they made the journey somehow ‘easier’ for themselves, in the best sense of the word.
Why Microsoft thumped Apple in the mid 1980s to 1990s
The same applies to companies and helps explain why US company Southwest Airlines trounced its discount rivals and why Microsoft thumped Apple in the mid-1980s to 1990s.
Bill Gates used to keep a photograph of Henry Ford in his office to remind himself of how Ford had been overtaken by General Motors in the early days of the car industry. Gates wanted the constant reminder that, however well Microsoft did, there was almost certainly some younger version of himself toiling in obscurity to one day knock him from his perch. The 20 mile march Armed with these behaviours, 10X companies set off on what Collins and Hansen call the ’20 mile march’, a long period of sustained growth, characterized by hitting well-defined performance targets and demonstrating both resolve and control.
Through the discipline of behaving consistently over time and proving resistant to a changing marketplace, an organization discovers self-control. And this, far more than more nebulous ideas such as innovation or creativity, is what determines 10X success. They compare the process of successful innovation to firing bullets in order to zone in on your target, and only then heaving a cannonball at it to do the job properly. Disasters happen when one uncalibrated cannonball after another is fired, each big, reckless bet made in the hope of recovering from the last one, with little or no time taken to test the waters. One of the most important lessons in the book is that innovation is not always the surest route to success. In their comparisons of companies in the same industry, notably the biotech firms Amgen and Genentech, Collins and Hansen found that it was the less innovative firm, Amgen, that generated better returns for investors over 20 years. Sometimes, it serves companies to be ‘one fad behind’. Consistent with this idea is the authors’ assertion that the 10X companies are not the brash risk-takers, but the ones that prepare rigorously for what they cannot predict, the antithesis of many Wall Street banks before the 2008 financial collapse. These companies hoard cash and keep comfortable buffers in every area of their business, just in case. They are hyper-realists, who act according to Collins and Hansen’s ‘SMaC’ methodology, being ‘Specific, Methodical and Consistent’.
Purpose vs Discipline – 10Xing the 10Xers
In 2004, the All Blacks were beaten convincingly by the Springboks.
The incoming All Blacks coach, Graham Henry, found a team that had lost its mojo, its sense of togetherness and most importantly its purpose.
As the number 1 team in the world for so many years, what did they have left to achieve? Henry inspired the team with a new vision that went beyond the individual players themselves.
The vision was to create a values based, purpose driven team, playing for something bigger than themselves.
His watchword was ‘legacy’: for every single player to leave their jersey in a better place.
His philosophy: “when you’re on top of your game, change your game.”
The culture he created, defined by a collective sense of purpose was like none other in All Blacks history.
They reached a totally new level of success. With a staggering 87% win rate they went on to win every possible piece of silverware.
Firms of Endearment
In his seminal book, Firms of Endearment, Raj Sisodia, charts the rise of the purpose driven business.
He shows that organizations aligned around their true purpose exponentially outperform their competition.
In fact, he argues that ‘purpose’ is the magic fuel that can break the bonds of conventional growth and take companies to a whole new space, outperforming Collins’ Good to Great companies.
When times are tough and external circumstances are beyond our control, often the best place to look is inwards.
When we remind ourselves of what our true purpose is, in life and in business, we tap into an energy that gives us the fuel to change the world, or at least some small part of it.
At The CFO Center our mission is to help companies define their true purpose – what they really want from their life/business – and build the plan to actually make it happen.
In fact, we help you bring the discipline described by Collins into your business to give you the space to tap into your true purpose and build a legacy you can be proud of.
One of the toughest challenges for owners of SMEs is to be able to stand back, to look at their business through a wide-angle lens and identify what it is they really have.
Because quite often, the day-to-day distractions and diversions that inevitably surround the running of a successful business – particularly when there’s a global pandemic pulling the rug from under everyone’s feet – get in the way of sensible, objective evaluation and strategic decision-making. Crucially, that can mean that really important opportunities to grow and develop go at best un-exploited and at worst, un-noticed.
This is where the role of Chief Financial Officer becomes so vital. And where the specific advantages of joining forces with a part time (and often virtual) CFO are brought sharply into focus.
Allow yourself to dream…
What does your CFO do for you as the owner of an SME? Hopefully, they’ll make sure that everyone gets paid the right amount at the right time; sort out your internal reporting, compliance and tax planning, and probably run your relationship with your bank.
While that (along with a few other bits and pieces) is probably enough to keep a business ticking over, it’s not a reasonable platform on which to base a sound growth strategy.
Of course, things look even worse if you don’t have a CFO on your team. Whatever your business and whatever your own specific talent, it’s almost certain that you didn’t get into business to spend your life doing cashflow projections or dealing with taxes! No dreaming for you – you’re more likely to be waking up at 3 am in cold sweats.
A CFO Center CFO can help make your dreams come true
When you started your company, you almost certainly allowed yourself to dream – every successful business operator needs ambition. But as we’ve seen, all too often those aspirations become bogged down in the everyday grind of keeping a business afloat.
The CFO Center team provides CFO expertise of a very high caliber – the top 1% of talent in the marketplace. These are people who know their stuff – the operational finance stuff, which keeps the wheels in motion and the strategic finance stuff, which brings the dream to life.
In many cases they’re able to draw on their own business success to guide others.
A CFO Center CFO will help decode the dream and turn it into a plan and be the one to hold you to account to make it happen. He or she will bring forward the target by showing you how to come at it from a different angle. Great CFOs are catalysts and can help you break the pattern of linear growth and get you what you really want on an expedited timetable. And that’s essential if the dream is still to come true.
The CFO Center ‘Entrepreneur Journey’: our ‘secret sauce’
All CFO Center CFOs operate within an environment that provides comprehensive support and expertise. The CFO Center has a global network – a Collective Intelligence Engine – of more than 700 individuals, each of whom has achieved success as a CFO and often as an MD or CEO, themselves. What’s more, they are uniquely able to access and deploy the limitless potential locked up in your business model. And they talk to each other, share expertise, experiences, and contacts.
In brief, a CFO Center CFO will guide the entrepreneur on a three-stage journey to achieve clarity about what it is they really want from their business. To take them from where they are now, to where they want to be.
And to be clear: ‘where they want to be’ is an individual choice for the business owner. It might involve scaling up significantly; it could mean launching new products in new markets around the world; perhaps it means ratcheting up your multiple as you prepare for exit. Whatever form it takes, it’s invariably about making that dream a reality by refashioning the plan and making sure it actually happens.
Stage One on the journey covers the process of achieving operational excellence. In other words enabling an organisation to do what it does best, to the best extent possible.
Stage Two, strategic opportunity, involves preparing the springboard. This is where the strategy to achieve those dreams is forged. Perhaps it’s a question of entering new markets; evaluating risk, raising new funds. Whatever the strategy, it’s based on sound experience and, yes, that ‘secret sauce’ that blends the logic with a little magic and know how.
Stage Three, game-changing performance is, simply, what happens when stages one and two are complete.
The dream is achieved by developing a concise roadmap based on what the business owner wants to achieve. The role of the CFO Center CFO is to identify and unlock that potential – thus freeing the dream and making it a reality.
Fly like a bird
Of course, this is not to suggest that success comes easily. Business challenges are usually complicated and risky. That’s another reason why potential isn’t always realised; why many business owners end up working late nights on mundane tasks.
So, one of the first conversations a CFO Center CFO will have with a client is to understand what it is that motivates them to be in business, and what they want to achieve from it. What really matters to them. There are numbers, many numbers, in the life of a CFO, but it’s identifying and understanding the numbers that really matter in the client’s life that is crucial.
A CFO Center CFO aims to unlock that potential and give wings to the dream.
While much uncertainty still remains after the craziness of 2020, our Chairman Colin Mills talks about his process on how to significantly grow your business.
“The best advice I ever received for ‘doubling’ the size of our business, was to list down the Top 20 things we could do to increase the revenue by 10 times. You can then identify the Top 3 activities to concentrate on for the following year” says Colin.
So let’s say you’re a $4million business. Spend a few hours listing out the 20 things you could do to turn this into a $40million business over the next 12 months. This will force you to think outside the box and away from small incremental changes you can make.
I suggest you then spend another hour or so considering the Top 3 activities. These will be the activities that are most likely to get you towards your goal of $40m.
You then have the top 3 activities to focus on over the next 12 months that may well enable you to double your turnover.
For each of those top 3 activities, develop clear action plans on how you are going to achieve results.
Next, get input from your management team (including your CFO of course) in developing these action plans.
Don’t forget to consider the risk and downsides to each of your priorities. Then develop strategies to mitigate the risks you identify.
Above all, ensure your plans are realistic and find capacity that can support your ideas. Your CFO should be able to support you in developing finance and funding to ensure your growth plan is realistic.
The overall economic climate won’t allow all business to double their size this year. However, this radical approach for business growth will hopefully enable some to change their thinking from doom & gloom towards optimism and growth. As Henry Ford famously said “If you think you can, or think you can’t, either way you’ll be right!”
The CFO Center is the global No.1 provider of part-time CFOs. We are dedicated to making a real difference for our clients and their businesses. Rate your company’s finance function here. You’ll receive a valuable 8 page bespoke report on the 3 main areas for improvement.
The CFO Center will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO. This means you will have:
One of USA’s leading CFOs working with you on a part-time basis
A local support team of the highest caliber CFOs
A national and international collaborative team of the top CFOs sharing best practice
Access to our national and international network of clients and partners
With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision- making. After all, you’ll have access to expert help and advice whenever you need it.
In particular, your part-time CFO will assess your company’s cash flow position and take the following steps:
Identify all the immediate threats to your business
A part-time CFO will look for all those things that could plunge your company into serious financial trouble if they’re not addressed immediately.
These could be factors such as the payment of wages or salaries, the payment of taxes or the payment on a due date for vital goods, etc.
Address those imminent threats
Your CFO will look for ways you can meet your most pressing financial requirements and buy the company more time. This might involve:
Chasing late-paying customers. To encourage those customers to pay, consider offering a discount for immediate payment or asking them to pay immediately by credit card.
With invoice discounting and factoring, you’ll receive up to 85% of the value of the outstanding invoice, sometimes within 24 hours. You’ll receive the remaining 15% minus a fee once your customer has paid the outstanding invoice. An invoice discounting service can be confidential so that your customer will be unaware of the financier’s involvement. Factoring companies, however, undertake a full collection service (including sending out statements, making reminder calls and collecting payment), so your customers will be aware that you’re using their services.
Arranging short-term loans or operating line of credit with your bank.
Considering other funding sources besides banks and other lending institutions such as self-finance, or loans from family and friends, partners, investors and alternative finance like peer–to–peer lending.
Asking for better terms from creditors. You may find they’re open to extending your repayment schedule.
Identifying and addressing the underlying problem.
Assess the business to identify the cause of the cash flow problems. Address those issues to avoid a similar situation occurring again.
Prevent cash flow problems from recurring
As well as identifying and resolving the imminent threats to your business, your CFO will review all inflows and outflows of cash to determine where improvements and savings can be made. This is likely to involve:
Working out your break-even sales figure (the number of sales required to cover total expenses without making a net profit).
This will mean reviewing your sales figures for the past six months to check that you exceeded that breakeven point. It’s then possible to calculate how much you’re likely to make in sales for the next two months. If you’re unlikely to break even, you’ll need to plan how to increase sales and reduce costs.
Looking for ways to increase your profit margins such as raising prices. You can do this without losing valuable customers by offering packages or bundles of goods or services.
Reducing your salary or personal draws from the business until your revenue improves.
Cutting costs. The beauty of cost-cutting is that it can be done in hours or days, unlike revenue-boosting measures which take longer to implement and to take effect. Such cost-cutting measures might include doing any of the following:
Stopping work on non-critical capital projects.
Reviewing your inventory and selling off obsolete, damaged, or discontinued products.
Eliminating slow-moving products or less popular services from your line since selling unprofitable goods or services is likely to send you out of business faster.
Negotiating price discounts for volume purchases from your suppliers.
Consider downsizing. Bigger is not better if your company is always struggling to stay afloat. If your profit margins are consistently small, reassess your business goals. Rather than expansion, focus instead on profit.
Ditching products or services with the lowest profit margins. This change of focus may mean you can also reduce the size of your borrowings, staff, advertising, and marketing campaigns, premises, etc.
Reducing labor costs (without triggering a drop in productivity). Any cost-cutting measure that triggers a drop in staff morale will have negative consequences for productivity. Your CFO may advise you to defer salary increases and bonuses or to cut salaries from the top-down. You might also consider introducing a temporary freeze on overtime. Other measures might include lowering the number of employees through attrition or redundancies.
Speeding up the sales process. Your CFO will encourage you to accelerate the speed with which your customers’ purchase orders are converted into cash. In particular, you’ll be asked to consider what steps in the sales process can be combined or eliminated. For example, asking for payment at the time of the order, accepting credit card payments, or offering automatic account debiting.
Lowering miscellaneous expenses. You’ll be encouraged to find ways to make small savings on things like insurance policies, office rent, bank service charges, utilities, etc. Lots of small savings across the board can have a significant impact.
Refinancing your debt obligations. Your CFO might suggest approaching your lenders to see if you can lower your monthly payments on your term debt obligations by taking the remaining principal amount and spreading it out over a longer period.
Analyzing if you can outsource jobs or services. You’ll be asked to look at your operations to determine if any of your activities, services, or functions could be provided at less cost by an outside company or contractor.
Holding a sale of surplus or slow-moving inventory.
Approaching suppliers to negotiate better deals.
Asking your suppliers to take back excess inventory.
Selling off your underused assets and renting the equipment instead.¹
With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making.
Improving credit control.
Your CFO will help you to get tighter controls over your credit. That will mean:
Getting written agreement to your credit terms before taking on new clients.
Many businesses are not clear about credit terms with their clients and often simply set out conditions on the face of the invoice, but that’s too late in the process. Instead, you should always ensure that an authorized representative of your customer has agreed to your credit terms in writing before you agree to supply products or services.
Carrying out credit checks on all new customers, no matter how large or influential they may appear.
Invoicing at the time of a sale or close to it. Instead of waiting for the month’s end to issue invoices do it daily or weekly.
Making sure your sales invoices are accurate. Unfortunately, some customers will use any excuse for not paying invoices on time and any inaccuracies (such as an incorrect address or date or no purchase order number) could be enough for them to justify delaying payment.
Treating the collection of monies owed as a high priority. If you haven’t already done so, set up a computerized system to provide notification of late payments.
Setting up an invoice dispute resolution process. It’s important that your company records any documentation related to invoice-related disputes. You should also keep a record of those customers who challenge their invoices or raise questions so it’s possible to see if any do this regularly as a way of avoiding settling their accounts.²
Investigate the use of regular cash flow forecasts
Your CFO will encourage you to use regular cash flow forecasts so you know how much cash is going to be needed in the coming months. It means you’ll know in advance if you’re likely to face a cash shortfall and can make arrangements for extra borrowing, or take other appropriate action.
It will also make it easier for you and your senior team to make decisions such as whether or not to:
Hire more staff
Change your prices
Tender for a large contract
Find new suppliers.
You’ll be able to see at a glance the impact such decisions might have on your cash flow.
Cash flow forecasts can also highlight potential problems so that you have time to take action to avoid them.
Your cash flow keeps your business alive. Having control of your company’s cash flow which allows you to operate within your means, and move away from a ‘feast and famine’ situation is usually a huge relief to everyone within the business.
It means that decisions can be made and checked against the cash flow forecast to determine whether they are viable. This increased visibility can be introduced quickly and can have a hugely positive impact on the whole business.
It also means that reserves can be built up gradually to give the business a cushion and alleviate the stress of not knowing what lies around the next corner.
Having the right cash flow management processes in place and being able to spot peaks and troughs in trading to improve cash flow is one of the most critical components of any finance function.
Put an end to your cash flow problems now by calling The CFO Center today.
“Without an understanding of profitability, every business, no matter how successful is a house of cards” – Mike Michalowicz, Entrepreneur and Author.
There are four ways you can improve your profits: sellmore, get customers to buy more frequently, increase margins and reduce costs. If you can do all four at once, your profits will increase dramatically. Even changing one of these four factors will boost your profits.
In this article, we will cover the main reasons for low profits and how a part-time CFO will help you to boost your profits.
Profits are vital for your company’s growth for the following reasons:
They provide a return on yourinvestment capital.
They provide opportunities to reward staff.
They make it easier to attract investors and customers.
They can be reinvested in the business to expand into new markets, products and locations.
They provide a buffer against economic downturns and changes in market conditions.
They make it possible to hire more people.
They allow you to develop and test new products or services.
While many business owners experience a decline in their net profit margin (the percentage of total revenue that’s profit) at one time or another, they are usually able to continue to trade, albeit with the aid of a short-term loan and some heavy duty cost-cutting.
Sadly, unless you identify and address what’s causing your profits to shrink, the problems are likely to get worse. For it often follows that poor profitability leads to reduced cash flow. When profits are low and cash flow is weak, businesses can slip into a downward spiral.
Your profits tell you how well or how poorly your business is performing. For example:
Gross profit (the total amount your business makes minus the cost of goods sold (COGS) indicates how efficiently your business uses resources to produce your products or services.
Operating profit (gross profit minus operating expenses, depreciation,and amortization) indicates how efficiently you produce and sell your product or service.
Net profit (the amount of money left after paying all the business’ expenses including interest, taxation, etc.) indicates how well your business is generating healthy results.
These figures alone won’t give you the whole picture. You’ll need to compare them with previous annual and monthly profit results. That’s where ratios come in: they can be used as a benchmark against which you can measure your business’ performance.
Profitability ratios help you evaluate your company’s ability to generate profits.
They include gross profit margin; operating profit margin; and net profit margin.
Gross profit margin – your gross profit divided by your sales is a useful indicator of your company’s financial health. It shows how efficiently your business is using its materials and labour in the production process and gives an indication of the pricing, cost structure and production efficiency of your business. The higher the grossprofitmargin, the better. That is because the higher the percentage, the more your business retains of each dollar of sales, which means more money for other operating expenses and net profit.
Operating profit margin – calculated by dividing your operating income by your net sales during a period reveals how much revenues are left over after all your company’s variable or operating costs have been paid. It also shows what proportion of revenues is available to cover non-operating costs like tax, interest, and distribution to your company’sowner. It is useful because it shows you whetheryour operating costs are toohigh.
Net profit margin – calculated by dividing your after- tax net income (net profits) by your sales (revenue) shows the amount of each sales dollar left over after all expenses have been paid. The higher your net profit margin, the better because that shows your company is more efficient at converting sales into actual profit. A low net profit margin might mean that your business is not generating enough sales, your gross profit margin is too low or that your operating expenses are too high.
The main reasons for low profits
Your sales or revenue slump could be due to internal and external factors such as:
Inadequate marketing programs. To be effective, your marketing needs to conveythe right message to the right target audience and convince them to take a desired action like call your company to purchase a product or book your service.
An inability to keep up with market changes.
Budget overruns or unexpected costs will chip away at your net profit.
High variable costs
The higher your variable costs, the lower your net profit margin will be. High production costs or purchase costs can result in insufficient funds to cover expenses. When variable costs rise to the point that there are not enough funds left to support all expenses for the period, a net loss will occur.
Follow us in part II of the profit improvement article to learn how a Part-time CFO can help you drive profitable growth! Coming up soon.
Developing a strong relationship with your bank provides tremendous benefits including offering necessary funding, preferential rates, and better terms. Your bank can provide expert financial advice and help you to find solutions to financial challenges. It can also help you to grow your business and reach your financial objectives.
Since your bank works with a wide variety of businesses, it can also be an excellent source of prospective vendors, partners, and customers for your business.
As banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce. Some banks take the initiative and offer their customers business ideas and opportunities. So if you don’t have a strong relationship with your bank, you’re missing out in many ways that could help your business to prosper.
Very few business owners appreciate the value of having a strong relationship with their bank.
Why you should develop a strong relationship with your bank
Having a borrowing history and a solid relationship with your bank will make it easier for you to get credit.
It’s important to educate the bank on your business, your strategy, and your financials so that they are fully aware of your business and the vision you have for it, says banking expert, Peter Black of Snowball Consulting.1
“You need to have a good relationship with your bank,” says Black. “If you treat the bank as a commodity and don’t tell them anything, then when you need them most, they may not be there.”
“Tell the bank the good and the bad news in equal measure, as and when it occurs,” recommends Black. “If you have a new contract or a good story, tell the bank about it. Many don’t do this.”
There’s more to it than regular phone calls, however. You also need to demonstrate that you have a coherent strategy and follow it, says Black. That will help to establish your credibility too.
“Continually changing the strategy or appearing to move from one to another does not give the bank confidence,” says Black. “The worst situation to be in is one where the bank does not even understand your strategy.”
Make sure the forecasts you provide are realistic and credible, recommends Black. “The bank will build up a history of how accurate the forecasts are that a business provides. No forecast can ever be totally accurate, but the banks see no end of forecasts showing a massive increase in profits and cash just to underpin the latest request.”
Let your banker know about regulatory changes that could have an impact on your company’s growth opportunities.
Banks need to know:
Who your customers are
Who your vendors are
What is going on in your industry
For that to happen, you need to establish regular communication with your bank manager.
Share your company’s long-term strategy with the bank. Your bank may be able to provide additional resources to help you achieve your goals.
Schedule regular meetings with your bank throughout the year so that he or she gets an accurate picture of your business. It will also make it more likely the bank will respond faster when needs or opportunities occur.
The stronger your relationship is with your bank, the better they will be able to understand your business when you come to them for advice and solutions to help it grow. Banks know things don’t always go as planned. They want to be comfortable that they understand your ability to deal with these situations and make good decisions to improve, building a track record with them based on trust, sharing information and debate. It’s astonishing how many business owners don’t invest in building a track record and strong relationship with their bank.
At a recent event focusing on how to build a world-class finance function, CFO Centre Group CEO, Sara Daw, found only four out of 50 business owners who attended considered their bank was a strategic partner to their business. This is far too low. At The CFO Center, we make building a strong value-adding relationship with your bank a priority.
If you don’t have a good relationship with your bank manager, you’re missing out on more than a possible future credit facility. You’re missing a valuable free resource for advice and information.
Your bank can provide a regular evaluation of your business and financial strategy, as well as ideas and solutions to overcome many challenges you might face.
Banks also offer a wide array of services including:
Cash management tools
Credit card processing
Online and mobile banking services
Since banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce.
They can walk you through your balance sheet and explain how they perceive your finances and business. They can also learn more about where and when you’re likely to need the money to grow the business.
Giving information and asking for advice helps to build trust between you and your bank manager. Gradually, you learn to trust their advice and they begin to trust in your ability to repay your loans.
Banks hate surprises so if your business is encountering problems, it’s important to let your bank manager know as soon as possible. If you know that you’re likely to miss payments or be late in paying vendors, let your bank manager know in advance so they can assess the situation and provide you with options.
This will also demonstrate to your bank manager that you can manage the business and also be trusted to inform the bank before the problem gets worse. Your bank manager might even be able to extend your line of credit or temporarily waive your fees.
You can increase your chances of getting a loan or credit extension by demonstrating your ability to repay, whether it is a short-term overdraft or alonger-term loan. The bank will expect to see the proof so you’ll need to provide the following documents:
Your track record
Your previous results
A business plan (which needs to cover how the company started, your products/services; the management of the business and its plans for the future; market research undertaken to support assumptions and forecasts; and your financial requirements)
Your last audited accounts
Current and up-to-date management accounts
Accounts Receivable and Accounts Payable lists
A budget for the current/next trading year
A cash flow forecast
How a part-time CFO will strengthen your banking relationship
Many business owners are uncomfortable speaking with their bank manager. Owners and CEOs often do not know how to communicate their business strategy and needs to the bank and do not know what information the bank needs to support their funding requests. This is where an experienced CFO can be an essential part of your team; someone who understands how banks make their decisions and can, therefore, position your application for a greater chance of success.
Your part-time CFO will:
Develop a relationship with key personnel at your bank.
Share information about your business with the bank and keep the bank fully updated. The more trust that can be built the more the bank will be willing to help.
Provide the bank with a credible business plan which takes into account previous track record including debt and cash flow history.
Provide you with independent advice on bank products and their suitability.
Negotiate the best deal on bank facilities.
Provide access to senior contacts in the bank where required.
Introduce new banking options if needed and negotiate terms.
Your part-time CFO will work hard to forge a strong relationship with your bank so that when you need access to any of the bank’s services your request is treated as a priority.
What’s more, your part-time CFO has many years of banking experience so can advise you on the best banking deals.
Your part-time CFO knows where to go for supplementary funding to complement your bank finance (if necessary) and how to benchmark funding deals for your peace of mind.
CFOs can skillfully communicate your needs in a way that appeals to bank managers. That helps to add further credibility to your credit application.
Your bank can play a significant role in your company’s future growth, both in terms of providing necessary funding and strategic advice.
That will only happen if you take the necessary time and energy to foster a relationship with your bank manager. The benefits of doing so, however, make it one of the best investments you’ll make.
1 ‘How to get the most out of your banking relationship’, Black, Peter, Forum of Private Business, www.fpb.org
How a part-time CFO will ensure your business is fully compliant
The CFO Center will provide you with a highly experienced senior CFOwith ‘big business experience’ for a fraction of the cost of a full-time CFO. This means you will have:
One of USA’s leading CFOs, working with you on a part-time basis
A local support team of the highest caliber CFOs
A national and international collaborative team of the top CFOs sharing best practice (the power of hundreds)
Access to our national and international network of clients and partners
With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.
In particular, your part-time CFO will help you to ensure your business is fully compliant.
Compliance is hugely beneficial to any organization but it is by no means a one-off exercise. It takes time, energy and money to ensure it works effectively.
Your part-time CFO can bridge the gap between money and risk and handle both legal and compliance issues for your company to ensure risk is managed and the bottom line is optimized.
That lifts an enormous burden from your shoulders, leaving you free to focus on the core activities of your business.
Our regional teams of part-time CFOs and our national collaborative network have all the latest regulatory knowledge at their fingertips.
There are many aspects of compliance but by way of a summary, your assigned part-time CFO will work with you to:
Ensure that your financial statements and annual returns are completed and filed on time.
Ensure that employment and related payroll taxes are completed and filed on time.
Use our national collaborative network to access information related to specific compliance issues for your industry.
Read and interpret bank/invoice finance covenants and ensure compliance.
Introduce HR checklist and sign off compliance.
Check insurance coverage, relevance and make sure paperwork is complete.
When you allow a part-time CFO to lift the considerable burden of compliance from your shoulders so that you are no longer being sidetracked into time-consuming compliance activities, you are free to focus on the core activities of your business.
You can be confident that your part-time CFO provides an expert level of support in managing compliance functionsand risk.
He or she will help you to cut back on expensive infrastructure so that compliance is managed in a cost-efficient way.
Critically, your CFO will give you peace of mind, leaving you free to concentrate on growing your business.
Protect your company now!
Unless you have an up-to-date compliance programme, your company is at risk. Allow one of The CFO Center’s part-time CFOs to help you to ensure your company is fully compliant. To book a free one-to-one call with one of our part-time CFOs.
To accelerate the growth of your company and organic growth doesn’t appeal, consider merging with or acquiring another company.
Such a move can help business owners like you to grow your top line and profitability, says the FD Centre’s CFO East of England North, Lynda Connon.
A successful merger or acquisition can also give your company access to your target company’s technology, skillsets, markets, and target customers.
If the target company is in a different industry, the merger or acquisition can help to diversify and mitigate risk.
Considering a diversification strategy like this is valuable if there is any doubt about your company’s prospects for long-term profitability.
The standard form of an acquisition is when one company (the acquiring company) buys another company.
It does this by either buying all the shares in the acquired company or by purchasing its assets. The shell company is then liquidated.
Likewise, there are several types of mergers, including:
• Horizontal merger (in which you merge with a company in your industry)
• Vertical merger (in which your target company is at a different production stage or place in the value chain)
• Product-extension merger (in which your target company sells different but related products in the same market)
• Market-extension merger (in which your target company sells the same products as your own but in a separate market)
• Conglomerate merger (in which your target company is in a different industry and has different products or services).
Growing your business via a merger or an acquisition has many benefits, including the following:
• To achieve a lower cost of capital
• To improve your company’s performance and boost growth
• To achieve higher revenues
• To reduce expenses
• To achieve economies of scale
• To diversify your product or service offering in your existing markets or move into new markets
• To increase market share and positioning
• To achieve tax benefits
• To diversify risk
• To make a strategic realignment or change in technology
• To obtain new technology, more efficient production, or patents, and licenses.
Dangers of mergers and acquisitions
As beneficial as mergers and acquisitions (M&As) may be, particularly in terms of achieving fast revenue growth, they are not for the faint-hearted.
The merger or acquisition process can take anywhere from a few months to a few years depending on such factors as whether the target company is a public or private entity, the negotiations, legislation, and the involvement of financial institutions and other stakeholders.
“The actual transaction can be done very quickly if you’ve identified your target and if all parties are keen to go ahead and legals can be put in place,” says Connon.
“But typically, a merger or an acquisition takes several months.”
But you also need to factor in the time that will be involved in the identification of suitable target companies as well as the post-acquisition integration.
The post-acquisition integration can take anywhere from six to 12 months, she explains.
“So the actual transaction itself can be done very, very quickly. It’s the process of identifying the target and making sure it’s something that will work for your organisation as a combined entity and making it happen after you’ve done the deal.”
It’s estimated that of all M&As, 70% to 90% fail for various reasons.
Many failures are due to a lack of strategic planning and incomplete due diligence, according to Connon.
They also fail if there is a poor strategic fit between the two companies, a poorly managed integration or an overly optimistic projection of the target company.
The result is a failed growth strategy and a large amount of lost opportunities.
Successful merger or acquisition strategy
So, how can you be sure of being in the 10% to 30% who achieve successful acquisitions or mergers?
Before even starting your search for target companies, it’s essential that you clarify your acquisition strategy and reason for merging with or acquiring a company, says Connon.
Most successful acquisitions happen when companies have identified and understood their own acquisition strategy, says Connon.
They have clarified the company’s direction over the next two to five years, understand the market challenges for their core business, and know the gaps in their own portfolios and skillsets.
“They also take time to identify potential targets and to subtly review and understand the strengths and weaknesses of each of those target companies,” she adds.
“Post-acquisition, the ones that tend to fail are the ones where acquiring companies haven’t taken the time to really understand their own strategy or market challenges and what they want from an acquisition. Often, it’s been done for emotional reasons rather than good, sound business reasons. Those companies will typically fail.”
To develop your acquisition strategy, you’ll need to be clear about what you hope to achieve. What is your business model? What do you want to do? Do you want to grow income, to improve profitability, to enhance cash flow? Where are the market challenges in your sector and can you address them all? If you can’t, do you need to make an acquisition? Do you need to merge?
If you conclude that a merger or acquisition is desirable and will be beneficial in the long-term, then you need to develop an “identikit” of what that potential company looks like, she says.
Every company you consider should be evaluated against the metrics you’ve decided upon.
“Don’t get distracted by personal judgement. If you stick to the metrics you’re looking for, you’re more likely to make a successful acquisition,” she adds.
You and your team of M&A experts need to carry out due diligence and investigate the target company’s business, people (particularly crucial personnel), records and key documents.
The point of the due diligence process is to uncover any inherent risks in the target business, to question the value placed on the investment or acquisition price and to identify critical issues.
Your M&A team should ask questions and request documentation about the following areas:
• Corporate information, including the company structure, shareholders or option holders and directors
• Business and assets, including your business plan, assets and contracts with both customers and suppliers
• Finance including details of all company borrowings and loan agreements, cash flow statement, business reports, plus all tax liabilities and VAT returns
• Human Resources including details of contracts for directors and employees
• IP and IT, including information about IPs, owned or used by the target company and the software and equipment that are used
• Pension plans that are in place for directors and employees
• Litigation including details of any disputes or legal proceedings the company is involved with now or in the future along with licenses or regulatory agreements it has
• Property including information of real estate that’s owned or leased by the target business
• Insurance policy details along with recent or future claims
• Health and safety policies that are in place
• Data protection, including information about how sensitive data is stored and protected and reassurance the target company is compliant with data protection laws
Post-acquisition or merger, you should use your original strategy to measure its success, whether that’s income growth of 25% or improved profits of 2%.
“That would be the target by which you’d measure your combined entity. You’d go back to those numbers and see what have you’ve achieved compared with what you set out to achieve.”