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Don Welker's Financial Minute

Jun 6, 2017, 9:00 AM

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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.

May 16, 2017, 9:00 AM

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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.



May 2, 2017, 9:00 AM

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I have often heard owners of small businesses say that their firm is too small to need written human resources (HR) policies. After all, their three employees are all “like family,” so the formality of written rules and regulations seems a bit absurd. Until, that is, something that an employee handbook could have enabled them to avoid goes wrong, and they pay the price for their laxness in terms of lawsuits, fines, morale problems and more.

The reality is, every employer should have written HR policies in place. These policies clearly communicate the benefits that the company offers, and clearly communicate rules and expectations to everyone so that they can be enforced evenly and fairly. They help protect the employer from employment-related lawsuits, and help ensure compliance with governmental regulations. In short, they’re a good idea.

How to create written HR policies

Luckily, getting a basic employee handbook in place is easier than you might think. The key is to avoid starting from scratch. There are a wide variety of customizable employee handbook templates and creation tools available online. Your trade association may have one as well. Just be sure to choose a template that is in compliance with the latest labor laws and appropriate for the specifics of your industry and state.

What should your employee handbook include?

While the following is not an exhaustive list, at a minimum your employee handbook should include:

• A brief explanation of what your company does, including your vision and mission.

• Standards of acceptable behavior, such as policies regarding work hours, breaks, overtime, dress code, absences and substance abuse.

• Safety-related rules, especially those needed to comply with OSHA or other regulations.

• Anti-harassment policies (including sexual harassment), the process for lodging a complaint, and your process for responding to complaints.

• Rules regulating the use of company computers, personal cell phones, internet access, and other things related to the use of electronics.

• Consequences for breaking the rules. What warrants immediate firing? What is your discipline process?

• Company-paid benefits, including holidays, vacations, sick pay, family medical leave, medical insurance, etc. For paid time off you should explain how the benefit is calculated and the process for scheduling and taking it.

• Policies regarding performance reviews.

If you need help getting an employee handbook in place, give me a call. As your on-call CFO, this is one of the many services I provide.

Apr 18, 2017, 9:00 AM

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In order to properly manage your company you need accurate and timely information. How are sales? Is your marketing program working? Are there any problems in operations? And so forth.

Underlying all of this, you need to have a firm grasp of your company’s financials. For example…

• Are you on track to meet or exceed your goals, or do you have ground to make up?
• Is your spending proportionate to your sales level?
• Is your staffing level appropriate?
• Is your cash position getting stronger or weaker?
• Are you in compliance with your loan covenants?
• Is the information reported in your dashboard accurate?

Unfortunately, if you’re struggling with your month-end close, chances are you’re flying blind. You’re making decisions based on inaccurate and outdated data, and don’t have the necessary data to spot potentially problematic issues or trends before they get worse.

It’s time to turn the situation around
If your month-end closes are not timely and accurate, you probably do not have the right team in place. To change this you need to be sure that your Accounting Department is staffed with people who have the training, time and skill set to ensure all of the following get done:

• Basic accounting activities – Including accurately completing billing, recording purchases and related accounts payable, processing payroll, and maintaining up-to-date general ledger accounts.

• General ledger analysis – A detailed review of the general ledger to identify and research any unusual or nonsensible entries or account balances. This function should be performed by a senior-level accountant.

• Monthly financial statements – Timely preparation of an accurate Balance Sheet, Income Statement and Statement of Cash Flow, all in a format that properly segregates current assets and liabilities from long-term assets and liabilities. This is usually done by the Controller or CFO.

• Variance analysis – A written narrative prepared by a strong Controller or CFO that clearly explains any significant variances from what was expected in the budget or plan, and what caused them to occur.

Compliance with loan covenants – As explained in a previous article, failing to comply with loan covenants can ruin your banking relationship. Compliance with the reporting aspects of your loan covenants should be done by a strong Controller or the CFO as part of the monthly close process.

Need help putting all of this in place? Give me a call. As your part-time CFO, I’m here for you.


Apr 4, 2017, 9:00 AM

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Your company is in growth mode, and you’re having a hard time keeping up. You’re definitely past the point where as the CEO you can do it all: manage multiple departments, cultivate banking relationships, keep an eye on the vendors, and much more. Things are slipping through the cracks, and you just don’t have time to give sales or operations the attention they need.

Meanwhile, you’re not receiving accurate and timely financial statements. Neither is your bank, which is not making them happy. And your budget…well, what budget? Who has time to create a proper budget?

If you recognize yourself in this scenario, it’s time to bring in an experienced part-time CFO to significantly lighten your load. Some of the many services that a part-time CFO can provide include:

• Developing a strategic plan, goals and budgets – Work with senior management to create a comprehensive strategic plan, as well as goals for this year and the next four years. Then create a detailed budget based on these plans and goals.

• Analyzing all the numbers – Look at the trends, review profitability by service or product line, monitor the budget, and more. Analyze your firm’s overall financial health, and provide expert advice as to where to go from here.

• Supervising the Accounting, HR and IT Departments – Plus work with department heads to identify areas for improvement and implement trackable solutions for these issues.

• Improving your accounting processes – Help your senior accounting personnel expedite the month-end close to ensure you get accurate and timely financial statements. Create easy-to-use dashboards that give you real-time financial data for effectively managing your business. Develop a template to also capture the information that lenders require.

• Identifying and eliminating wasteful spending – See where your money is going, including looking at whether or not you’re getting the best prices from all of your vendors, and right-sizing the Accounting Department.

• Providing valuable introductions – Bring in already-vetted professionals as needed, such as lawyers, CPAs, insurance brokers and marketing experts.

• Maintaining your banking relationships – Help you obtain necessary financing, and then ensure all loan reporting requirements are met.

Having a part-time CFO on board can give you and the rest of your senior management team more time to grow sales, improve operations and strengthen customer relationships. It also enables you to get better information, which leads to better decisions and even more success.

If you’d like to explore this idea further, give me a call. Part-time CFO services are what I provide!


Mar 21, 2017, 8:35 AM

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Whether your company is in growth mode or trying to deal with flat or diminishing sales, there’s a good chance you depend on credit from your bank to help you pay the bills. Which is why I’m always surprised to see how many companies do things that ruin their banking relationship!

Bankers are generally very cautious people. They need to feel completely confident that the money they loan to you will indeed be paid back. Do one of the following actions, and run the risk ruining your banking relationship:

• Provide misinformation or no information. The quickest way to lose your credit is to surprise your bankers. The worst way is to lie to them. If your company is struggling, the best time to tell your banker that there’s a problem is as soon as you become aware of it.

• Add to your debt. In most cases, borrowing money from other sources (outside of trade payables) without your banker’s approval or consent will violate your loan covenants.

• Break the law. Your banker will not be happy if you incur a significant regulatory violation by failing to comply with a law, such as not reporting or properly resolving a hazardous spill, or getting slapped with a class action lawsuit because you didn’t comply with labor laws.

• Miss your previously reported earnings projections. Say your bank has raised a concern about your repeated failure to hit your leverage ratio, and you have assured them that this quarter you’ll hit the numbers. If you don’t, they might get “lender’s fatigue” and give up on you.

• Use corporate assets to buy luxury items. If your banker sees that, while you’re seeking to continue to expand your loan base, you’re using corporate funds to buy luxury boats, planes or cars, they’ll think twice about approving another loan.

• Miss reporting deadlines. It is vitally important that you provide accurate and timely financial statements, and be proactive about telling your banker if something is amiss.Most of the things on this list are typically covenant violations. Always keep in mind that your banker has the right to call your loan—and demand immediate payment—for any covenant violation, regardless of its magnitude. When that happens, I can tell you that it’s really not a pleasant position to be in.

Need help proactively managing your banking relationship? Give me a call. As your part-time CFO, this is one of the things I can do for you.

Feb 21, 2017, 5:13 PM

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Considering selling your business? The time to start building value is long before you put the company on the market. To position your company so it will sell at the highest price, here are some of the things you should do: Create a 3-to 5-year business plan with projected financials. Include a narrative of what you expect to happen and the resources that will be needed to get there. Be sure your projected cash flow statement ties to your projected income statement and balance sheet.

• Assemble a strong management team. What I often see in small businesses is that the owner or CEO is the “face” of the company and, in effect, its only intangible asset. To sell the company you need to have a strong management team in place that customers and vendors are comfortable doing business with.

Give your managers authority to make decisions, and ensure that customers, vendors and other outsiders have a chance to get to know them. Help your managers develop strong reputations within your industry, such as by joining and participating in your trade association.

• Acquire strong vendor contracts. This is especially important if you’re a reseller. Can you get advantageous pricing and/or terms? Would they be willing to grant territorial exclusivity?

• Create 5 years of adjusted historical financial records. Start by identifying any unusual or non-recurring expenses that can be added back in. The goal is to show what the trues results of operation would have been if the company had been run “by the books” and didn’t have these unusual transactions.

For example, if you own both the company and the facility in which it operates, and you have a sweetheart rental agreement that gives you above-market rents, you should adjust the records as though only market rate was paid. Or if you’ve been paying high salaries to family members who aren’t really providing services, adjust the records to remove them from the payroll.

One thing to keep in mind here is that a business’ selling price is often determined by a multiple of expected cash flow. Pay close attention to this, and look at steps you can take now to increase your cash position .

Don’t wait until you have an interested potential buyer to start getting your ducks in a row. And if you need help with any of this, give me a call. As your part-time CFO, I’m here for you.


Jan 24, 2017, 9:00 AM

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Every business needs a variety of insurance policies. Understanding how to shop for insurance will ensure you get a good price on the right coverage for your needs.

Start by Doing Your Homework
Here’s what I recommend:

• Network – Get to know 5 insurance brokers with solid reputations.

• Identify carriers – Determine who the top insurance carriers are in your industry. Find out if your trade association endorses particular carriers.

• Check coverage requirements – Make a list of all the insurance coverage requirements in your agreements with customers, suppliers and lenders.

• Research coverage options – See what is available for the type of policy you need, and then make a list of “must haves” and “can live withouts.” For example, if you’re shopping for health insurance for your employees, is a PPO a must, or will an HMO be fine?

• Improve your metrics – Premiums are often calculated based on a formula. Find out what this formula is and then gather your historical data that relates to it. Determine if there’s anything you can do to improve your metrics before you start getting bids, then develop a projection of these metrics for the upcoming policy year based on your understanding of the formula and any changes you intend to make.

• Qualify for discounts – Learn what best practices and procedures need to be in place in order to take advantage of all available discounts. If you’re not already doing these things, start doing them now.

• Avoid surcharges – With many types of insurance, events that are considered to be outside the norm will result in surcharges. Understand what typically causes surcharges for the type of insurance you’re researching, and look at ways to avoid them.

Then Solicit Bids
By this point you should have a thorough understanding of what’s out there and what you need, and a projection that includes estimates of the metrics that the insurers need to know.

Reach out to two or three of the brokers on your list and ask for quotes. Be specific in your communications to ensure you’ll be able to make “apples to apples” comparisons once the quotes come in – in terms of both the assumptions that the insurer uses to calculate the quote and the specifics of the coverage provided. Evaluate the quotes, and move forward!

Need help shopping for insurance for your business? As your part-time CFO, this is one of the many services I provide.

Dec 13, 2016, 4:02 PM

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I was recently reading a list of famous quotes from Ben Franklin when I was struck by how timeless much of his advice is. While the business world has changed tremendously, these truths about business success have not.

“If you would know the value of money, go and try to borrow some.”

Borrowing money for your business is not easy. For example, according to Biz2Credit’s October 2016 Small Business Lending Index, in October 2016 big banks approved just 23.5% of small business’ loan requests, small banks approved 48.7%, alternative lenders approved 59.5% and institutional lenders approved 63.1%. In other words, 37 to 76% of applicants got turned down.

As I’ve written about before in “Is Your Loan Package Ready for the Spotlight ,” lenders are quite picky about what loans they’ll approve. Managing your cash flow is therefore vital. Making the most of the cash you have minimizes your dependency on lenders.

“Remember that credit is money.”

Maintaining a strong credit rating is like having cash in the bank. Businesses extend credit to those who pay their bills on time. If you can prove your creditworthiness, vendors will be more likely to give you favorable terms, and lenders will be more likely to approve your loan requests.

Of course, you also need to be aware of the flip side of this issue. Do something to wreck your credit worthiness, and you can quickly find yourself unable to access the money you need to run your business.

“Beware of little expenses; A small leak will sink a great ship.”

On one level, this advice gets back to the need to have a budget and financial controls in place. But on another level, this is about managing the mentality and culture.

For example, one area that’s often out of control is office supplies. There’s a storeroom stocked with a nine-month supply of paper and pens. Employees are allowed to “redecorate” their desks with designer in-baskets, and soon everyone wants to personalize their workspace in this way. You get the picture.

While excess spending on office supplies probably won’t sink the ship, this “no limits” attitude will quickly spread to much bigger expenses...and before you know it, your bottom line really is affected.

Conclusion

Want to augment Ben Franklin’s advice with the advice and counsel of an experienced CFO? Give me a call! As a part-time CFO, I’m here for you.


Nov 29, 2016, 9:00 AM

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Fall is in the air. Which means that it’s time for football…falling leaves…and your annual corporate check-up. What exactly is a corporate check-up? It’s a chance to review what took place over the past year, take a hard look at actual versus plan, assess your company’s overall health, and get ready to start planning for the next fiscal year.

How do you conduct a corporate check-up?

Schedule a meeting with senior management, including your company’s CEO, COO, CFO and VP Marketing/Sales. Distribute copies of this year’s strategic business plan (you do have an annual strategic business plan, right?), and have a frank discussion about the following:

• Did you achieve the goals that you laid out in your plan? Why or why not?
•Did your implementation plan turn out to be workable and realistic? If not, what happened that you did not anticipate?
•Did new, unforeseen opportunities arise? If so, did you succeed in taking advantage of them? Why or why not?
•Did you have the right employees to allow your company to succeed?
•Did you have the necessary working capital to grow and thrive? Where do things stand now?
•How strong were your relationships with your major vendors? Where do these relationships stand now?
•How solid were your business processes and IT systems? Did any issues arise?
•Were you able to provide formatted financial reports that everyone from senior management to outside lenders understood and had confidence in?
•Did you make use of weekly dashboards to more effectively manage your business?

The answers to these questions will help you assess the business’ health and inform your strategic business plan for next year. In analyzing the answers, pay close attention to patterns in the things that the company seems to be doing right and areas in which you need to improve. What are the underlying causes of the problems you faced? For example, if you did not have the right employees, what areas did this impact?

Why is an annual corporate check-up so important?

Of course, since conducting an annual corporate check-up takes time and effort, you may be tempted to skip it. Don’t give in to this temptation! This exercise gives the entire team a chance to step back, take a “big picture” look at what’s been going on, and see things that aren’t always obvious when you’re enmeshed in the day-to-day challenge of running a business.

Want to bring in an outside expert to provide a fresh point of view in the corporate check-up process? Give me a call. As a part-time CFO, this is one of the many services that I provide.



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