Wish you could get a loan for your business without providing a personal guarantee? Join the club! Most business owners prefer not to put their personal assets on the line in this way. Banks, on the other hand, only want to lend when they’re 100% comfortable that they will be able to get their money back—and a personal guarantee helps provide that reassurance.
Although it can be next to impossible for new companies to get loans without personal guarantees, established companies sometimes can. From what I’ve seen, here’s what it takes:
• Longevity – Minimum of five years in business, but probably more than 10.
• Profitability – A track record of profitability and a demonstrated commitment to using these profits to grow the financial strength of your company.
• Strong balance sheet – Including:
• Quick Ratio (cash plus accounts receivables, divided by current liabilities) of 2:1 or better
• Debt to Equity Ratio of less than 1.0:1
• Collateral – This must be in excess of what you wish to borrow, with the bulk being liquid, such as cash or receivables. Lenders might also be interested in the real tangible value of inventory, machinery and equipment in a liquidation scenario.
• Ability to repay – Lenders want to see a realistic business forecast for the term of the loan showing that your business can easily meet the loan’s debt service requirements.
• Past loans – A history of satisfying past loan obligations in a timely manner, and remaining in full compliance with the loan covenants until the loans are repaid.
• Prompt accounts payables – Demonstrated history of paying your bills in a timely manner, as supported by consistent accounts payable aging with no past due balances.
• Strong management – A solid and consistent management team that doesn’t change from year to year.
• Long-term relationships – Banks want to see that you cultivate and value long-term business relationships, that you’re not changing banks, insurance brokers, CPAs or other professional service providers every year.
Finally, lenders want to know why you don’t want to provide the personal guarantee. After all, if you’re not comfortable providing this, why should they be comfortable putting their money into your business? A good first step might be to seek a reduced personal guarantee based upon mutually-agreed-upon metrics between you and the bank.
Need help getting your loan package ready?
Give me a call! As your part-time CFO, this is one of the many services I can provide.
If wish I had a dollar for every time someone told me that their business’s financial challenges are unique! Chances are, however, that a given business’ issues are not unique. What I’ve seen is that across all industries and business types, at some point most organizations face the following:
• Eroding margins or pressures on margins – This can be caused by changes in competition, the costs of acquiring or producing the product, or other things. In relatively new industries the pressure often comes when others enter the marketplace. In mature industries, you tend to see consolidation, so that the family-owned businesses are now competing against much larger players
For example, when the big box office supplies stores entered the market, many local players went out of business. Suddenly these small businesses were trying to compete against a company that could set their retail prices below the wholesale prices that were available to the rest of the market.
• Government regulations – There might be a slew of onerous government regulations that affect your business decisions. You may have to spend a considerable amount of money to get into compliance with environmental laws, such as purchasing trucks with cleaner burning engines. Minimum wage laws may be making your company uncompetitive in your market. Record keeping regulations can be taking up many hours of staff time. If you’re struggling with government regulations, you’re certainly not alone.
• Inability to support growth – As I’ve discussed in the past, many companies fail to budget for growth and plan for the resources and infrastructure needed to accomplish their goals. If you’re doing a great job of bidding and obtaining projects but don’t have the work force, production capacity, physical space or working capital to deliver, you’re going to be in a world of hurt.
Across all industries, businesses strive to provide their services at a competitive rate and create ongoing relationships with clients who value what they provide. In my mind, making this happen comes down to service, service, service. You’ve got to get the order right each and every time. Train your staff to understand the products well enough to be able to provide solutions to your customers’ questions. Make sure everyone on the team, from the order taker to the delivery person, takes the time to thank the customer. And so forth. Because lousy customer service can kill your sales…which can make all of the other financial challenges discussed here irrelevant.
Lawsuits…fires…theft…fraud…injuries…cyberattacks…workers comp claims. Without careful planning, one disaster can destroy your business. To ensure that your business is protected, you must have the right types of insurance in place, with policies that offer adequate coverage levels for your needs.
Earlier this year I wrote about how to shop for insurance for your business. This month I’d like to address what it is that you are shopping for.
Insurance policies that most businesses should consider
Be sure to talk to your insurance broker about:
• Property and General Liability Insurance – A must, this protects your property against physical damage and your company against claims of bodily injury or property damage.
• Workers’ Compensation Insurance – Required in California if you have one or more employees. Be sure to see my previous article on “How to Control Your Workers’ Comp Premiums.”
• Vehicle Insurance – Mandatory if your company owns and operates any motor vehicles.
• Health Insurance – As of this writing, this is mandatory for companies of a certain size.
• Directors and Officers Insurance (D&O) – Protects your corporation’s directors and officers from personal liability in the event of a claim against the business.
• Key Person Life Insurance – Can be important if your business depends on the knowledge or expertise of a particular person.
• Employment Practices Liability Insurance – Provides coverage against employment-related claims, such as discrimination, harassment or wrongful termination.
• Business Interruption Insurance – Covers the loss of income that your business suffers after a disaster.
• Cybersecurity Insurance – Helps address the damage after cyberattacks and data breaches.
• Professional services firms – Errors & Omissions Insurance (also known as Professional Liability Insurance) to protect against negligence claims based on mistakes your company made or your company’s failure to perform.
Industry-specific insurance needs
• Petroleum industry – Environmental coverage in case there’s a spill.
• Construction industry – Policies to fulfill bonding requirements.
• Manufacturing industry – Product liability insurance.
Insurance is not a “set it and forget it” item
Because changes in your business often warrant changes in your insurance coverages, annual reviews with your insurance broker are a must. You’ll want to discuss the impact of:
• Purchases or sales of assets (including vehicles and equipment)
• Changes in sales volumes
• New products or services offered
• Leases ended or entered into
• Changes in key personnelOther significant changes
Need help sorting through all of this and working with the insurance broker to get the right coverages in place? Give me a call! As your part-time CFO, this is one of the many services that I provide.
Your Chart of Accounts can be an important tool to help you monitor your business and make intelligent decisions. Or not. It all depends on how things are set up.
The “generic accounts setup” should just be a starting point
Every business’ Chart of Accounts will include some of the same general accounts, such as cash, accounts receivable, assets, equity (hopefully), accounts payable, income, expenses, cost of goods sold (COGS), payroll taxes, etc.
However, I recommend that businesses never operate with just a generic Chart of Accounts, particularly when it comes to income and expenses. To really make your Chart of Accounts work for you, take the time to set up the accounts that are specific to your industry and how you want to monitor and manage your business.
What exactly would you like to be able to track and analyze? What level of granularity will help you determine how different aspects of your business are really doing? You need accounts that track this information
Example: Structural Concrete Contractor
Say you’re running a construction contracting business specializing in structural concrete services. To set up your Chart of Accounts, start with the “generic” recommendations for construction contractors and then customize from there. Some of the things you may want to track include:
• Labor costs by pay category – To give you an understanding of your regular time pay, overtime pay and fringe benefits costs.
• Materials expenses by material type – Ideally your Chart of Accounts will mirror the details in the “Schedule of Values” (i.e. a breakdown of what it will cost to complete the job) that you use to create your bids.
In other words, don’t just lump rebar, concrete, wood and other materials into one “materials” account. If you do, then if you go over on materials, figuring out why will take a lot of work. Tracking materials expenses based on the same line items that are on the Schedule of Values lets you easily make an item-by-item comparison of actual to plan and quickly pinpoint the problem area.
Having this information available is helpful even if you don’t have any overages. When you’re three months into a six-month project, this data will help you determine if you’re ahead of the game or behind.
• Indirect costs – Think about how indirect costs impact how you want to track the performance of the job, and set the accounts up accordingly.
Need help getting your Chart of Accounts set up right? Give me a call and put my broad experience to work for you.
Pity the poor accounting department.
When business is booming and everyone is high-fiving that sales went up 25%, management starts to think about hiring more production staff to handle the extra volume. But the impact of the extra sales volume on the accounting staff is often ignored.
However, when revenue drop off, the staff reductions often hit the accounting department first. With optimism running high that sales will get back on target, no one wants to cut sales, customer service or production staff. So the accounting team takes the hit…even though they still have a great deal of work (such as processing payroll and ensuring the lights stay on) that’s not tied to sales volume at all.
Inadequate accounting staffing levels can hinder your company
Consequently, whether their company is growing or shrinking, many Controllers and Accounting Managers feel like they’re just treading water. With staffing levels inadequate for the volume of work to be done, analysis and other high-level tasks take a back seat to keeping up with the basics, such as creating invoices and paying bills.
In situations like these, there’s a lot that may be falling through the cracks. For example:
• No one is looking at the likely impact of shrinking sales on projected cash flow, and how this will affect operations. Will you run into a problem with your bank on your loan covenants? Will you be able to continue taking advantage of “early pay” discounts from your vendors? Will you make payroll?
• Internal control processes are not being followed. When something doesn’t look quite right, no one is taking the time to investigate why the numbers are what they are. Or even worse, perhaps no one is taking the time to look at the numbers closely enough to even notice that they don’t look right.
• You’re in danger of growing yourself out of business . No one is looking at how increased sales volumes will affect your staffing and working capital needs.
The solution: bring in a part-time CFO
A part-time CFO can help right-size your accounting department, working on an hourly or project basis to get all of those high-level accounting tasks handled. They can create and review the reports, do the analysis, provide oversight, help the Controller prioritize tasks, address projects that are important to senior management, and much more.
Want to learn more about the difference a part-time CFO can make? Give me a call! I’m here for you.
It happens all the time. A person who is viewed as an important part of the team leaves the company, and in their rush to fill the vacancy, management settles for someone who is not a good fit. Then that wrong person causes problems, and the company ends up worse off than if they had left the position vacant.
The reality is, it’s a bad idea to rush the hiring process. To ensure that you hire the right person for the job, here are some of the steps that should not be skipped:
• Update the job description – Talk to the department heads with whom this person will interact. Identify the job duties, the skill sets required to perform those job duties, and the soft skills necessary to succeed in the position.
In addition, be sure your written job description includes the physical abilities that are genuinely necessary to perform the job duties. I recently heard of a company that hired a security guard who managed to hide the fact that he was legally blind. By the time the company found out, it was too late. Since the job description didn’t mention the ability to see, they could not fire him without running afoul of employment laws.
• Have a fair wage scale – Your pay structure needs to be generous enough to attract quality people.
• Ask good questions during the interview – Your questions should enable you to evaluate if the person has both the job skills and the soft skills that you’re looking for.
• Check references – Verify that the statements on the candidate’s application are all true.
• Listen to your gut – If someone looks great on paper but is really rubbing you the wrong way, or if there seems to be a big disconnect between who they are on paper and who they are in person, recognize this as a “red flag.”
• Take advantage of the probationary period – Make sure your company has a clear written policy regarding the 90-day “probationary period.” During this time evaluate the new hire every 30 days. This way you can give them an opportunity to improve, and will build a case for quickly letting them go if they are clearly not working out.
If your company, like most, is running with a lean staff, you just can’t afford to settle for mediocrity. Good hires are productive, bad hires are counterproductive, and it can be difficult to fire someone once they’ve come on board.
It’s a recurring nightmare for many business owners. Something happens, and you suddenly discover that one of your trusted employees has been cheating you. Even worse, the fraudulent activity has been going on for quite some time.
The reality is, fraud can be very hard to detect. Here’s why…
The Fraud: Overpaying for purchases
In this fraud the purchasing agent agrees to noncompetitive pricing, and then gets some type of kickback on every purchase, whether it’s cash, travel, or whatever. Even high-level employees can be on the take, such as a Controller or CFO responsible for professional services contracts.
• Why this is hard to detect: Quite often companies have complete faith in the person doing the purchasing. They do not require that this person gets competitive quotes on major areas of spending, or have somebody review those quotes.
The Fraud: Phantom employees
What typically happens in this type of fraud is that somebody adds fictitious employees to the payroll. For example, a supervisor in the field submits paperwork for someone who doesn’t exist, or for someone who exists but doesn’t actually work for the company. HR has no idea it’s a sham.
• Why this is hard to detect: Most companies will scrutinize time sheets, but will not go out and physically verify that these people were on site during the stated dates and times. This can be especially challenging for companies with labor that fluctuates based on the work load. It can be easy for someone to submit falsified time cards for real people who were not actually employed by the firm at the time.
The Fraud: False overtime claims
This type of fraud generally requires collusion between the employee and the supervisor who approves their time cards. Often the employees are legitimately on the job on the days stated on the time sheet, but are not actually working any overtime. The supervisor agrees to approve bogus overtime in return for a percentage of the extra pay.
• Why this is hard to detect: It is hard to detect a fraud that involves both the employee and the supervisor. To avoid this problem, a good control to put in place is a “labor budget.” Supervisors must keep labor costs within this budget, with additional costs requiring additional approvals.
The Fraud: Embezzlement
What I’ve seen in this area is that someone in accounting opens up a bank account for a fictitious vendor, sets that vendor up in the A/P system, and then cuts checks to them. While banking regulations make this harder than it used to be, it’s still possible. Another common embezzlement scheme is to collude with a vendor who provides bills and receives checks, but does not provide any actual goods or services.
• Why this is hard to detect: First,
many companies do not have the necessary controls in place to prevent
this type of problem, such as requiring the use of purchase orders, or
requiring that multiple people approve new vendors. Second, once checks
start regularly going out to a vendor, everyone becomes familiar with
it. If a person can get away with the fraud for a few months, it’s easy
to keep it going.
Need help getting appropriate checks and balances in place to help you avoid these scenarios? Give me a call. As an experienced CFO, establishing policies, procedures and controls is one of the many services I provide.
Your company’s financial reports provide the basis for a great deal of decision making. You want to be sure that they enlighten rather than confuse! Here are five of the most common things that make financial reports confusing:
1. Poor formatting – Just pushing a button in QuickBooks and spitting out a report often doesn’t cut it. Taking a few minutes to spruce up the formatting can make a big difference in a report’s usability.
Beyond the “look and feel” of the document, though, poor formatting can also be a matter of inconsistencies in the data that’s being formatted, or data presented in an illogical order. For example, I’ve seen Income Statements that listed “labor” in six different places—none of which were at the top of the list, even though labor was the organization’s number one cost.
2. No narrative or context – Chances are slim that everyone who reads the report will be able to instantly discern what the data is communicating. It is helpful to point out the key issues, and possibly provide a conclusion or suggestions for improvement. In many cases it is also a good idea to include historical or industry data, to give context to the data being presented.
3. Undefined acronyms – When sharing financial information it’s important to speak English and not “accountant-ese.” Don’t assume everyone reading the report knows what “Cap Ex” or “EBITA” is.
4. Too much detail – In large companies it is common for the Income Statement to have 50 or more potential line items. Obviously, the report can get confusing if all 50 are included. It’s just too much detail! In cases like this, see if you can consolidate things on the main report, and then provide the ability to drill down into the details as needed.
5. Not tailored to the audience – Think about who the report is for, and customize it accordingly. Your rank and file employees, for instance, will be interested in different data than your investors and bankers, who may have different data needs than your executive team.
The bottom line is, if you’re going to do the work to gather and analyze the data, put in the extra 10% more time to polish the report. Confusing reports do not benefit anyone.
Need help creating financial reports that are a pleasure to use? Give me a call. As your part-time CFO, this is one of the many services I provide.
You’re ready to bring in a part-time CFO. Now what? What should you look at when evaluating candidates for the job?
Start with your specific needs
Chances are the majority of your part-time CFO’s responsibilities will be project-based. A logical starting point is therefore to take a close look at what you expect this person to accomplish. List the three biggest projects for which you need help, and then seek a CFO with experience addressing these types of issues.
Consider some consulting-related factors
Your part-time CFO will most likely be a 1099’d outside consultant. As such, you’ll want to find out:
• How quickly can they get up to speed? You want someone who can come in and hit the ground running. Do they have the background and expertise to pull this off?
• What is their availability? Can they offer you the hours and flexibility you need going forward?
• What resources do they bring? If a project gets too big, or if you need help from professionals in other fields, do they have a network of vetted experts they can tap?
Then look at experience and qualifications in general
Of course, in many ways hiring a part-time CFO is similar to hiring a full-time CFO. You’ll also want to consider all of the usual hiring factors, such as:
• Education, credentials, experience & track record – Be sure to look at the specifics here. Do they have a CPA? Do they appear to have the ability to understand your business? Do they have experience doing the broad array of things that you will ultimately need, or just a subset of this? For example, some CFOs are great with strategic planning but not well-versed in insurance-related issues. If you need both, this person would not be a good match.
• Communication & interpersonal skills – Will they be able to analyze the numbers and then communicate useful, actionable information to you based on what they find?
• Management style – As a part-time CFO, how will they fit in with both your management team and the staff members that they’ll supervise and/or work with?
• Personal chemistry – You’ll be working very closely with this person, and they’ll be working with the intimate details of your business. It’s got to be a good fit!
The right part-time CFO can make a big difference for your company. Before hiring someone, be sure to complete a thorough interview process, check references, and do a background check.
Before your fiscal year began you went through a full planning process, creating a business plan and the detailed budget (including anticipated revenue and expenses) that goes with it. But if you’re not sitting down once a month to compare actual results to projections, that budget is not doing you much good. In fact, you’re missing out on these 5 key benefits that monthly budget monitoring can provide:
1. Gain a clear understanding of where things stand – Ensure management can clearly see both problems and positive trends in real time, rather than being surprised at year end. In comparing actual to budget, look to see if revenue and expenses are in line with your plan and in line with each other. For example, if your revenues dipped by 10% versus budget, did your variable expenses drop as well?
It’s also important to look at sales by product line and anticipated seasonality. If revenues are way ahead of budget due to the unexpected success of one highly seasonal product, what will things look like when the season ends?
2. Hold sales accountable for performance – If they’re exceeding budget, the sales team should be getting public recognition as well as increased commissions. If sales are off, the sales management team will know they need a new game plan to get on track.
3. Avoid cash flow problems – Any variance from budget can impact your cash flow and cash flow forecast. While dips in sales create obvious problems, unanticipated increases can, too. For example, if sales soared to 35% above the projected level, would you have the resources in place to support it. ?
4. See where your staffing levels should be – For manufacturing and operations, be sure to compare actual labor and materials with what was expected, and then compare this with sales to see if things are correlated. Variations may suggest the need to change your investment in raw materials or adjust staffing levels, such as by adding an additional shift.
5. Identify issues with your cost of goods sold (COGS) – Even if you’re on target with your overall revenue figure, if your COGS is higher than expected for this level of sales your gross profit will still be down.
The bottom line is, monitoring your budget on a monthly basis will give management a clear understanding of the current month’s results, how the company is performing year to date, and whether you’re ahead of the game or falling behind.