CFO-Chief Financial Officer

Interview with the CFO of the Boston Red Sox – Steve Fitch

noreply@blogger.com (CFO) — Mon, 25 Feb 2013 14:36:00 +0000

On February 19, 2013 I had the pleasure of interviewing Steve Fitch who is the Chief Financial Officer of the Boston Red Sox. I want to thank Steve for taking the time and giving me the opportunity to interview him.

Steve actually began his baseball executive career as the CFO of the San Diego Padres. The opportunity came about right after the baseball strike in 1994. During the strike there were a lot of layoffs in the various executive offices of Major League Baseball (MLB) and when the strike was over, there were new opportunities. Steve answered a blind ad and interviewed with Larry Lucchino and got the job. When Larry Lucchino came to the Boston Red Sox through the Red Sox ownership change that occurred in 2002-2003, he brought with him many of the executives who worked for him in San Diego and Steve was one of them.

Steve's succinct definition of a CFO is to ensure a company is financially viable to move forward. However he does admit that the motivation of the Boston Red Sox is more about team performance than it is about making a profit, but was quick to point out that making a profit is still very important.

What he loves about his job is the product (baseball) is much more interesting to him than any product of any other company he ever worked for as he is a baseball fan as well as a CFO.

Payroll (player compensation and benefits) is the critical and largest expense for any sports franchise. As a key member of the budget committee Steve points out that his main job on that committee is to provide not only an overall expense number to hit but especially a payroll number to hit and then it is the job of ownership and baseball operations to develop the best team within that budget. Of course if there are any decisions to go over that budget or make any kind of course correction those decisions rest with the ownership. Steve shared a story where this ownership course correction was exemplified most vividly in December of 2006. Steve had just finished the budget process for the 2006 season. The very next day, ownership told him to redo the entire budget because ownership was in the process to pay a $50 million dollar posting fee for the rights to just talk to Daisuke (Dice-k) Matsuzaka. This posting fee only gave the Red Sox the rights to talk to Matsuzaka if they could eventually sign him to a contract that would be additional. The Red Sox ended up paying over $100 million dollars to get Daisuke. Daisuke recently signed a minor league contract with the Cleveland Indians. Steve also had to redo his long term forecasts recently when the Red Sox traded Adrian Gonzalez, Josh Beckett and Carl Crawford where over $200 Million dollars of payroll came off the books last August. By the way, after payroll the next largest expenses are facilities costs and travel costs, but these other costs are dwarfed by payroll.

Besides the Sabermetrics which are calculated by the baseball operations, I asked Steve what are the most important financial metrics in the business of baseball. He said that he asks a lot of CFO's the same question and he always gets back the same answer and in his business it is no different. It is either an EBITDA (Earnings Before Interest, Taxes Depreciation and Amortization) number or a cash flow number. Steve indicated that he actually calculates and reports multiple EBITDA numbers in many different ways because MLB requires it in order for them to make consistent comparisons on a number of parameters from team to team. Steve said there are various nuances to the way the various EBITDA numbers are calculated for MLB. From a cash flow standpoint, you can just imagine how fleet of foot Steve had to be with the Daisuke situation and as he points out there are situations similar to the Daisuke situation that can happen at any moment. It is an ever-changing and always evolving business!

In my business as a Contracted CFO performing CFO services the biggest challenge in forecasting is forecasting revenue. With Steve and the Boston Red Sox the biggest challenge is forecasting expenses. At least in the last 10 years, it is the expenses that are the most volatile and the revenues are the most predictable. The biggest revenue generators in order of size are the team's share of the national television contract, ticket sales, local broadcasting, advertising, concessions and licensing. I originally thought that licensing and advertising were higher in revenue significance but Steve let me know that was not the case. There goes my shot at being a CFO for a professional sports franchise!! Steve did cite that the revenue side could be a little more challenging to forecast as they move forward as in the last10 years you could pretty much bet that they would completely sell out every game, but he admits going into the 2013 season selling out every game with the significant changes made to the team is certainly not as predictable.

As CFO of The Boston Red Sox, Steve's biggest challenge is adhering to the plan that they set. Change in the sports business is the nature of the game. Steve takes on the responsibility of adhering to the plan even though there are a lot of things on the baseball operations and ownership side that he cannot control. But that is the challenge that he takes on passionately. He gets creative and works on other revenue streams as well as new revenue streams and works to eliminate any waste within the operation so that even if baseball operations has to make changes that defy the plan he is creating new revenue streams and eliminating waste to compensate for those changes.

Just like baseball is a team game, Steve gets the most satisfaction from his job in working with the whole team of executives and staff. He says "it is truly a team working environment"! As an example of that teamwork, one thing that Steve gets a lot of satisfaction out of which I am totally envious of is he received championship rings in both 2004 and 2007 when the Red Sox won the World Series.

From an IT standpoint the Red Sox use basic off the shelf software except they do have proprietary baseball information software which was developed internally.

I asked Steve if he would rather be a CFO in a sport with a salary cap as baseball is one of the few major sports that do not have a salary cap. He laughed and said that was a loaded question. I admitted to him that it was and we both shared a laugh.

Overall it was a great experience and once again would like to thank Steve Fitch, CFO of the Boston Red Sox for the opportunity to speak with him.

What is your Biggest Fear?

noreply@blogger.com (CFO) — Sun, 14 Oct 2012 01:29:00 +0000

As a CFO Consultant I have spoken with many business owners from many different industries. My main objective is to really drill down to what the business owner really needs and want. Not what I need and want, not what I think they need and want, but what they think they need and want and to determine their desired outcome. One thing I do that is very effective is to write down their exact words when they are telling me:

What their need and want is,
When they're describing their problem or;
When they're expressing a pain point;

This helps me drill down to the real need and want as I can keep the business owner focused by repeating their exact words.

Through my research and 28 years of business ownership and after drilling down from how they answer the question "What is your biggest fear or frustration in your business", I have discovered that my clients needs and wants 90% of the time fall into one or more of 5 categories to which I can help them.

These are not in a particular order of priority.

For the first need and want that business owners have, the clue I get is:

"I don't know if I am making money or not."

Now I would drill down even further, but it's likely the real need and want here is to have accurate and timely financial statements. Accurate and timely business decisions can only be made with accurate and timely financial statements. Furthermore, accurate and timely financial statements give a frame of reference as to what actually is going on and act as a scoreboard. Imagine going to a basketball game and they don't keep score. Would you really have a frame of reference as to what's going on? Sure you will have a gut feel but that's it. Your balance sheet, your P & L, your Cash Flow Statement, these are the scoreboards of your business. They give you that frame of reference as to what is going on.

The second need and want that business owners have, the clue I get is:

"My financials say I made $150 grand where the hell is it? It's not in my bank account!"

Now I would drill down even further, but it's likely the real need and want here is the business owner needs to know where their cash is going. Cash is the lifeblood of any business. Without cash the business is crippled. Many times cash ends up in hiding places. A couple of weeks ago a client had this exact frustration. Their cash was tied up in Accounts Receivable, excess Inventory, Equipment and paying their bills too quickly without the benefit of purchase discounts. Yes, paying your bills too quickly impacts cash flow. But the important thing is, he now understands where his cash is hiding and we have implemented strategies in each area to free it up and to reduce the chances of it hiding there again.

For the third need and want that business owners have, the clue I get is:

"At times my business is overwhelming!"

Now I would drill down even further, but it's likely the real need and want here is the business owner needs a strategic plan. A strategic plan defines the direction of the business and it defines the proper allocation of company resources to ultimately achieve the business owner's goals and objectives. The strategic plan also identifies the key drivers of the business. Without a strategic plan the business owner is operating their business by the seat of their pants, putting out fires on a day to day basis and running in place instead of moving forward. The most important point is not only developing the plan but the business owner needs to commit to implement it and execute it or it is all for not!

For the fourth need and want that business owners have, the clue I get is:

"I never have time to work on sales!"

Now I would drill down even further, but it's likely the real need and want here is the need for the business owner to start working on their business instead of in their business. The business owner must be the face of the company, the ambassador if you will. Their job is to bring business into the company and to schmooze and communicate with existing customers in order to maintain the existing base. What I find business owners doing is administrative functions and tinkering on the mechanics of their business. I can always tell when the business owner is working in their business because sales are choppy! If business owners can accomplish this one thing, and work on their business instead of in it, they will see more consistent sales, their sales will grow, their profits will grow and their business will be more valuable and more marketable.

For the fifth need and want that business owners have, the clue I get is:

"My employees can't do anything right."

Now I would drill down even further, but it's likely the real need and want here is the business owner needs to have people accountable in the organization. The most successful businesses that I have seen have people throughout the organization accountable for what they do. Why don't business owners make people accountable? Because of everything I have said. Number 1, when they don't have accurate and timely financial statements they cannot develop metrics to evaluate the performance and productivity of their business and make their employees accountable for those metrics. Number 2, when they don't know where their cash is going they don't think they have the resources to put the right people in the right places and to do the proper training to make people accountable. Number 3, when they don't have a strategic plan they don't know what the key drivers of the business are and therefore cannot make people accountable for those key drivers. And Number 4, if they are working in their business and tinkering instead of on their business and be the ambassador, they are not delegating responsibilities to make people accountable.

And when they don't do any one or more of these things the weight of the world falls on the shoulders of the business owner and it gets heavier and heavier. Then the business owner starts to work more hours, then they get burned out, then they fight with their spouse because their never around, then they start to hate their employees and finally they start to hate their business and that's when it starts to fall apart!

Do you Know Where your Cash is?

noreply@blogger.com (CFO) — Sat, 25 Aug 2012 21:39:00 +0000

Not knowing where cash is going is one of the challenges business owners have in their business. As a CFO Consultant many business owners ask me "I am doing all of this business, where is the money"?

Cash is the lifeblood of any business. It is the business's most valuable asset. Without cash the business is crippled. The business cannot operate effectively and trouble ensues. Business owners need to know where their cash is going because if it is going to or being tied up in unproductive places it will cripple the business. Cash, being a company's most valuable asset needs to be effectively utilized in order to produce the maximum amount of earnings and return on assets. The business owner needs to know where cash is going!

Cash can hide and become unproductive in one or more of the following places:

Accounts Receivable - When you don't have a credit policy that you adhere to, cash comes in slowly and gets hidden in accounts receivable
Prepaid Expenses - The psychology of some business owners is that they like to pay for things in advance so they can get the particular expenditure out of their mind. This is a potential hiding place and in most cases an unproductive hiding place for their cash.
Inventory - For retailers, distributors and manufacturers this is a common hiding place. Slow moving inventory must be sold so that the money can be reinvested in the inventory that does move.
Fixed Assets - Sometimes cash is tied up in Equipment, vehicles or machinery and the business owner does not realize the impact or makes the decision to pay cash for a fixed asset when the return on their inventory and services rendered is far greater than the cost of financing
Accounts Payable - Similar to the psychology of business owners with regard to prepaid expenses noted above business owners pay bills too fast and cash gets consumed prematurely and unproductively.
The Cash Conversion Cycle is too slow - The Cash Conversion Cycle is the time period between the outlay of cash to make a product or provide a service and the collection of cash from the sale of that product or service. The objective is to receive payment for the final product before paying for the inventory and/or expenses of production and/or the expenses of selling the inventory. If you understand your Cash Conversion Cycle you can create strategies and work with suppliers to most productively meet your needs.
Lower Profit Margins - Selling prices could be too low. One way to check if selling prices are too low is by the number of customer complaints. If at least 25 to 35% of your customers are not complaining about your prices then your prices are too low! Costs of services can also be too high and impact margins. Always negotiate with suppliers or streamline processes.
High Overhead - A high overhead base can always kill cash flow. Also check for high owner salary. Business owners can abuse their business by taking too much salary. What would an outside board of directors pay you as a business owner given their knowledge of all the factors and contingencies in the business?
Employee Theft - 80% of all theft is employee theft. No one thinks it can happen to them, yet it happens all of the time.

Take a look at this list and see where cash is hiding!

Business Owners, Work on your business not in it!

noreply@blogger.com (CFO) — Sat, 28 Jul 2012 01:46:00 +0000

As a CFO Consultant one of the things I advocate and help my clients achieve is for the business owner to work on their business and not in their business. Business owners who adopt this philosophy not only increase profits, but also make their businesses more valuable to a potential buyer.
The philosophy of working on your business instead of in your business is achieved as follows:

Having the right people in place to assume the administrative and operational responsibilities and if you do not have the right people you must work to get them
The business owner must be the face and the ambassador of the company
The business owner must be responsible for bringing business into the company and working toward that end
The business owner must continuously communicate with existing customers in order to maintain those relationships
The business owner cannot have any administrative or operational responsibilities nor can they allow themselves to get immersed and bogged down in those responsibilities.

I was speaking with a potential client and he kind of snickered when I brought up the concept of working on your business instead of in your business. I asked him why he was snickering and he said because he knew some business owners who did this and when the 2008 recession hit they had to layoff their key people and now they are back to working in their business.

I told this potential client that if I were consulting those business owners there is no way I would have suggested to lay off their key people and abandon the concept of working on their business instead of in their business. First of all, what is needed in a recession are sales and to take the person responsible for bringing business into the company (the business owner) and putting them into the administrative and/or operational trenches is a terrible mistake and will drastically reduce the top line. Secondly, in a recession you do not layoff key top performers you layoff "B","C", "D" and "F" performers.

Part of a good strategic plan is working towards this concept of working on your business instead of in your business. A good Part Time CFO should have a good working knowledge of this concept and its implementation as part of their CFO Services.

Blindsided By a Cash Flow Problem?

noreply@blogger.com (CFO) — Sun, 24 Jun 2012 21:30:00 +0000

The best way not to get blindsided by a cash flow problem is to have either a 13 week rolling cash flow forecast or a 12 month rolling cash flow forecast. I believe that the 12 month rolling cash flow forecast is better as it gives a longer range view with more “what if” analysis capability giving the business owner the ability to not only know a cash flow problem is coming but time to avert it!

When those tools are not in place the business owner can get blindsided by a cash flow problem. Even if those tools are in place sometimes the cash flow problem although the forecast told you it was coming could not be averted or the business owner saw it coming and decided to take on risk because there was a great opportunity to take advantage of, that ultimately did not work out. Whichever scenario occurred you are now faced with a cash flow problem.

As a CFO consultant one of the first things I tell my clients is that in order to successfully get through this cash flow problem you must be in control of each vendor situation. To me that means to be as proactive as possible. Let me explain. Most business owners when they are in a cash flow problem do not communicate with their creditors. They remain silent and in hiding and as a result the creditors are making the phone calls to them and dictating their various demands for payment. What I am proposing is to now prepare a 13 week rolling cash flow forecast because since we are officially having a cash flow problem looking at the short term view is most advantageous. With the 13 week rolling forecast you can determine how much free cash flow is available to pay bills. Then the next step is to determine the absolute "must pays" making top on that list payroll, payroll taxes, sales taxes and any other fiduciary taxes. The next step is to create payment plans for the creditors so that everyone gets not everything but at least something. The next step is do not be silent, but to communicate with the vendors as early as possible letting them know how much and at what time intervals you are going to pay them. You dictate the terms. You are in control!

Usually when you handle the situation in a proactive manner like the aforementioned strategy you get respected for it. However, not always are they going to accept your terms. Sometimes they meet you halfway; sometimes they do not accept them at all and demand payment. You have to expect this to happen. That is why you do not allocate all of your free cash flow to these payment plans up front. Reserve some for the creditors who may be adverse. These situations have to be handled on a case by case basis.

If you find yourself in the midst of a cash flow problem, being proactive puts you in control of a very difficult situation. A Cash Flow Problem is never an easy situation, but I have seen too many situations where the business owner was not proactive and things went spiraling out of control. A Part Time CFO with experience in these situations could be a beneficial resource to guide you through this stressful process.

Never Commit to Just One Source of Supply

noreply@blogger.com (CFO) — Mon, 28 May 2012 02:55:00 +0000

As a Part Time CFO who performs CFO Services and an Entrepreneurial CFO to boot I understand the importance of developing good supplier relationships.
This is not a post about being disloyal to suppliers. Being and developing loyalty to suppliers can be a very profitable strategy in the long run because when the right supplier recognizes that loyalty it usually results in better pricing, better terms and higher profits.
This is a post about taking proactive measures and protecting your business in the long run. Having only one supplier for a particular business segment in your business is risky. When having only one supplier you are at risk for one or more of the following to happen:

You are subject to more drastic changes in price and terms. Although you have general market forces working in your favor having one source of supply still subjects you to drastic changes in price or terms and you are not prepared to go anywhere else.
You are subject to changes in quality of product. If your sole source of supply does not keep up with technology or simply loses their quality due to reducing quality control to save money, you are subject to quality reduction that will hurt your business.
You are subject to being taken advantage of by suppliers who do not recognize loyalty. If I supplier does not really recognize loyalty. If a supplier always talks about "being your partner" without acting like it then you are subject to be taken advantage of and are not getting what you should from that supplier. See this article on Choosing Suppliers.
You do not really know how competitive the sole supplier is with respect to price and terms if there is not a live example to compare them to. Although you may be familiar with the general market pricing, when you are doing business with a supplier there are deals being made in the back room. If you are only using one back room you are for the most part in the dark as to what is really happening in the market.
If your business hits a downturn and the supplier squeezes you with unreasonable terms (like Cash before delivery or requires Letters of Credit) you do not have another source of credible supply. If you do not have at least one alternative supplier where you have established credit terms and there is a downturn in your business, that sole supplier that said they were your business partner will be turning the tables on you as soon as you get behind in your payables and asking for unreasonable payment terms.

Because I am an Entrepreneurial who has owned retail, manufacturing and service companies over the last 28 years I have seen all of these things in my own businesses. Be proactive and establish a credit and business relationship with more than one supplier in all of your business segments!

CFO Services - Executing the Exit Strategy

noreply@blogger.com (CFO) — Fri, 20 Apr 2012 23:23:00 +0000

On previous posts I spoke of Exit strategies and the importance of having a solid exit strategy, but as an extension of that post I wanted to put together a checklist for the business owner to help them understand what they have to think about in order to begin the process of preparing an effective Exit strategy. By the way, these items are going to take some deep and serious thought.

Determine the value of your business through a certified business appraisal
Determine how much money you need to live and be comfortable
Determine when you want to leave your business
Determine how you want to leave, meaning do you want to sell to a 3^rd party? Do you want to sell to a family member? Do you want to sell to a key employee or partner?
Use your advisers – CPA, Lawyer, Part time CFO to help you make these decisions
Build value in your business by keeping and motivating key employees
Do not become an irreplaceable employee in your business.
Work with your advisors to put together your estate plan and prepare a plan as to what will happen to your business should you die suddenly

This is an effective list for the business owner and Contract CFO to lead the team of business owner experts in executing the exit strategy.

CFO Services – The importance of tracking Direct Labor Hours

noreply@blogger.com (CFO) — Sun, 08 Apr 2012 03:31:00 +0000

If you are a company in the trades or manufacturing there is no metric more important to track than direct labor hours. As a Part time CFO performing CFO Services I find that the most important metrics to properly evaluate the performance and productivity of a business in the trades as well as a manufacturing business involve direct labor hours.

Direct Labor Hours are defined as hours worked by those employees who work on the actual production of a product or who work on performing the service. Sometimes this can be tracked from payroll records, however payroll records may include travel time and down time. If possible it is best to exclude travel time and down time and account for that time separately.

Some of the key metrics I like to track are as follows:

Sales per hour – Calculated by taking sales and dividing it by Direct Labor Hours. Through this metric you will be able to identify if your pricing has integrity and you will also be able to tell how efficient your direct laborers are.

Overhead per hour – Calculated by taking your total overhead and dividing it by direct labor hours. Through this metric you will know what your overhead cost per hour is and apply that overhead cost per hour to your selling price to make sure you are covering your overhead. The small business owner is always confused on how to make sure overhead is covered in their selling price.

Material Cost Per hour – Calculated by taking the cost of the materials needed to produce the product or perform the service and dividing it by Direct Labor Hours. When this metric is too high it can mean that you are inefficiently consuming materials or it can mean that you are not buying effectively (prices are too high)

Direct Labor hours are the heart and soul of managing a business in the trades or a manufacturing business. By tracking Direct Labor hours you will identify key metrics so you can evaluate the performance and productivity of your business. Utilization of metrics will help you be able to spend more time finding new business. Your Part time CFO will be able to help you calculate metrics.

Accountability

noreply@blogger.com (CFO) — Fri, 02 Mar 2012 03:52:00 +0000

As a Part Time CFO I find that business owners making people accountable for their performance is lacking more and more and as a result more of the burden of accountability is falling on the business owner. Since the business owner is responsible for everything that happens in their business, the buck stops with the business owner. This additional burden of accountability is not only unproductive to business owners, but it is negatively affecting the bottom line as well. One person simply cannot do it all!!! Therefore people have to be held accountable!!!

What causes a lack of accountability in an organization?

Primarily 3 things (not in any particular order)

Inaccurate and untimely financial statements - The financial statements are the scorecard of any business and are the supreme measure of business performance. If the financial statements are inaccurate or untimely then how can performance be measured properly? If performance cannot be measured properly how can one make anyone accountable?
Fear of Loss of the Employee - If the business owner thinks very highly of the employee and the business owner looks at the employee leaving the company as a detriment to their business they will deflect as much pressure and accountability away from that employee as possible.
Lack of having a strategic plan - Without a strategic plan the business lacks direction. When a business owner has a strategic direction that they can communicate to the rest of the organization it gives employees the reason to be accountable. An employee will not be accountable if they are not given a reason to be accountable. The strategic plan consistently applied gives the employees reason to be accountable. Consistency in the strategic plans application is critical because if the strategic plan is inconsistently applied or changed often accountability is sure to break down.

Having everyone accountable in an organization increases the bottom line, increases the value of the business and allows the business owner to sleep nights!

A CFO Entrepreneurial Lesson Learned

noreply@blogger.com (CFO) — Sun, 29 Jan 2012 18:53:00 +0000

Don't let your small business make you small minded.

This is one of those tough lessons I learned this week. I am an entrepreneurial CFO. This means that I am a Part time CFO that performs CFO Services and my background consists primarily of owning and operating small businesses all through my career. Even now, in addition to my CFO practice I co-own a property casualty insurance agency with my partner.

What I learned this week is that as a small business owner we can become small minded. What I also learned that a large part of what drives that small mindedness is self doubt.

Here is my story:

Back in 2002 I put together a business plan to create Virtual Trade Shows. These virtual trade shows would help small companies who cannot afford to attend or exhibit at important trade shows an opportunity to attend over the internet.

Here is an excerpt of the concept from the Executive Summary:

"Tradeshowsonthenet.com, Inc. ("TSON" or "the Company") was created to streamline commercial trade shows and make them much more cost effective and more productive to the participant. The trade shows would take place on the internet providing both exhibitors and attendees with more capabilities and tools in order for them to accomplish more at a lower cost than they would if they all were actually at an exhibit hall. The Company's purpose is not to eliminate trade shows, but creating them in a virtual environment while maintaining all the advantages that trade shows afford and increasing efficiencies, data and participation."

As I reflect back on why I did not pursue my business plan, I remembered I was fraught with self doubt. Self doubt that I could not raise the money, self doubt that I could not come up with the technical programmers, Self doubt that the idea was before its time and so on.

Last week I received an email from On24 a company among other things creates and builds virtual trade shows. They have 3 Venture firms on their board and look like they are doing extremely well. I saw pieces of their latest virtual trade show and it is exactly what I envisioned. Evidently the founder of On24 had no doubts about raising money, finding programmers and the timing of the project.

I had prepared and executed business plans before but they were on a smaller scale. I let a small business mentality make me small minded and I let self doubt prevent me from executing this plan.

The take away here is:

Wouldn't it be a shame if self doubt prevents you from serving the world!

CFO Services – What Are Rolling Forecasts?

noreply@blogger.com (CFO) — Fri, 30 Dec 2011 20:31:00 +0000

One of the more important CFO Services is Business and Cash Flow Forecasting. This CFO Service gives the business owner the foresight to take action. Many business owners operate their business on a day to day basis without any business and cash flow forecasting and without thinking about what is going to happen next month, next quarter or even next week! As a result they never understand the benefits of business and cash flow forecasting and guess what? Their competition does understand the benefits. Their competition understands that business and cash flow forecasting:

Reveals weaknesses and strengths in your organization.
Finds solutions to solve those weaknesses and improve on those strengths.
Helps you to learn more about your business.
Helps you to be proactive about addressing potential trouble down the road like for example, a cash flow problem.
Makes people in the organization accountable
Gives the business owner piece of mind

One of the problems with business and cash flow forecasting is that once the forecast becomes 30 days old it is stale, outdated and most times forgotten. To address this problem the state of the art CFO performs what are called rolling forecasts. Rolling forecast capability allows one to enter actual results for the most recent month and then the rest of the forecast rolls forward for the next 12 months. This is called a 12 month rolling forecast and should be done every month to keep the forecast current. I usually prepare a 24 month rolling forecast for my clients to get a longer range perspective of where the business is going. With these updates the CFO and business owner can make changes as needed as well as identify any other problems. The rolling forecast makes the forecasting process a monthly occurrence and a monthly planning process that adds tremendous value. With my clients I also combine the results of the rolling forecast with an analysis of the key performance indicators for the month.

With tools like the rolling forecast, the business owner can be on top of their game and gain a competitive advantage against the many business owners who do not do so!

CFO Services - Another Cash Conservation Strategy

noreply@blogger.com (CFO) — Sun, 27 Nov 2011 21:10:00 +0000

As a Part Time CFO performing CFO Services it is my responsibility to identify all the ways a business can conserve cash. This includes providing cash savings guidance for services I do not perform. The best example of this is during this time of year I always advise my clients to have their year end tax planning meeting with their CPA or Income Tax preparer.

These year end meetings many more times than not help the business owner reduce their current year tax liability and conserve cash flow for the business. Certainly most of the strategies evolve around purchasing vehicles, equipment or some type of fixed asset before the end of the year, but there are other year end strategies especially for cash basis taxpayers that are discussed like paying as many expenses as possible before year end and the proper timing of the year end billings.

Virtually every CPA or Income Tax Preparer provides these year end tax planning sessions. They usually last no more than an hour and can even be done over the phone and it can be the most profitable hour in November/December that you will ever spend.

A CFO should have many resources to help the business owner through these challenging times. One of those resources should be good CPA’s and Tax Preparers. If you are in need of a good CPA please feel free to contact me.

yourcfo@nextstepcfo.net

CFO Services - An Option to Consider

noreply@blogger.com (CFO) — Sun, 23 Oct 2011 21:51:00 +0000

As a Part time CFO I run in to situations where business owners are relocating. I always liked the strategy of owning the building you do business in. The way I look at it is you have to pay for facility costs one way or another you may as well build equity through the facility payment.

One mistake I made is with an insurance agency that I have an ownership interest in. I have had this equity interest since 1983. We kept leasing the same office space for years. We paid almost $700,000 in rent in 27 years. If at some point in the process we bought the property we would have probably still paid about the same in facility costs, but we would have enjoyed tax advantages and today we would own an asset that has resalable value. This is the typical falling asleep at the wheel scenario.

Even though the real estate market is down I still believe the right thing for business owners to do is own their building. SBA 504 programs are providing good financing options and believe it or not banks love to do them. The SBA guarantees a large percentage of the loan among other things so the banks are all in on that. However if you cannot finance a purchase today a lease with an option to buy can be a very productive strategy. Through a lease with an option to buy:

You are not committing to a purchase
You are controlling the property and it cannot be sold from you
You can try the property to make sure it fits your business needs before you buy
You have time to work toward a down payment
You can lock in a favorable option purchase price in this current real estate market

Sometimes you have to make a nonrefundable payment for the option but in this real estate environment that can usually be negotiated. Keep in mind any nonrefundable payment you make toward the option should go toward the purchase price should the option be exercised.

With the aforementioned advantages of ownership a lease with an option to buy could give you the opportunity to purchase an asset for your facility dollars instead of accumulating rent receipts.

Exploring different avenues when locating can be one of the many valuable CFO Services.

CFO Services - Excess Cash

noreply@blogger.com (CFO) — Wed, 14 Sep 2011 02:55:00 +0000

As a Part time CFO from time to time I get requests from clients as to what to do with excess cash flow. I know it sounds strange during these challenging economic times, but some companies do produce excess cash. This can occur if business is really good or just from a seasonal fluctuation in a seasonal business. When these situations occur we have a tendency to think only about putting the money in an interest bearing bank account. However, if you have seen money market and CD rates lately you know that if you can get an interest rate of 1% per year you are lucky and this does not seem to be changing anytime soon.

Here are some things that can be done with excess cash:

Call all Trade Vendors to see if they will offer early pay discounts. Some offer them as a matter of policy but I would make a phone call to them anyway to see if they would accept a higher discount. After all you may be inquiring at a time where they need cash.
Call the Landlord and see if he will give you a discount for prepaid rent.
Call your expense vendors and see if you can get a discount if you pre-pay your expenses.
Pay down your line of credit as long as you can dip back into it and the bank doesn’t freeze your line as you pay it down.

If you think about points 1 thru 3 these are operating expenses you have to pay any way in the near future. It is not like paying the credit line which is additional dollars outside of ordinary operating expenses. That is why with respect to the credit line I suggest you make sure you can borrow back into it.

I think it is very likely that the aforementioned four points will yield appreciably better results than an interest bearing bank account.

CFO Services – Accurate Financial Statements

noreply@blogger.com (CFO) — Sat, 06 Aug 2011 01:47:00 +0000

After being a Part time CFO for over 4 years now, I am seeing a trend that is not good and not productive for the business owner. The alarming trend is there are too many business owners who have inaccurate financial statements.

Many business owners want to know two things no matter how interested they are in financial information. That is they want to know what their sales are and they want to know what their net profit is. Even the most uninterested business owners in financial information want to know those two metrics. However, if the financial statements are not accurate you will not know those two metrics or if you do know those two pieces of information they will not be accurate.

Why does the business owner need accurate financial Statements?

To make better business decisions – How can you make business decisions on Collections, pricing, what vendors to pay, capital expenditures, inventory purchases and much more without accurate financial statements?

To get bank financing and to obtain leases – Banks will take you a lot more seriously if your financial statements can back up what you tell them. Furthermore when a banker sees inaccurate financial statements (and many financial types can usually tell inaccurate financial statements merely through looking at them) there is very little chance to get a loan.

To Keep Bank Financing - Many business owners have credit lines that need to be extended or converted to term debt. Without accurate financial statements, at the very best case you are going to make your banker nervous not to mention you may not get the credit line extended which requires you to payoff the credit line immediately.

Allows for better financial analysis – Without accurate financial statements there is no basis for solving problems or for strategic planning. For example without accurate financial statements you cannot solve cash flow problems nor do a business and cash flow forecast. You cannot determine with certainty whether a change in business model is going to work for you.

Estate Planning – If you are going to have an effective estate plan the accuracy of your financial statements are a critical part of the process.

Selling a business – The amount of earnings that a business has is critical to its valuation. Inaccurate financial statements will be discovered by the buyer during the due diligence process and your deal could be in jeopardy.

Shareholder Buyout or Disputes – Just like selling a business accurate financial statements are critical in any shareholder buyout or dispute. Similarly the following events also require accurate financial statements:

Employee Stock Ownership Plans

Litigation or Divorces

Shareholder Buy and Sell Agreements

A Part time CFO can be a very cost effective way to make your financial statements accurate and alleviate any problems you may have with any of the aforementioned events.

CFO Services - Inventory Planning For Profit

noreply@blogger.com (CFO) — Sat, 02 Jul 2011 16:01:00 +0000

As a Part Time CFO where I have multiple clients, there are many clients when I engage with them for the first time that I find do not have an inventory plan/forecast. An inventory plan/forecast is an essential tool and is one of the essential CFO Services in order to manage cash flow and reduce risk to the business owner. Retailers especially need this tool because inventory to a retailer represents one of the retailers’ greatest risks, but the need for this tool also holds true in distribution and manufacturing companies.

An inventory plan or forecast is different from an open to buy plan. Most retailers have an open to buy plan by product classification. The open to buy is calculated by taking projected sales in the product classification (retailers usually use last year’s sales. They should work with a CFO to prepare a more legitimate sales forecast taking other economic, market variables and the retailer’s knowledge of the customer into consideration) and adding the desired ending inventory you want to have at the end of the period you are buying for and then subtracting the beginning inventory for the product classification. The result is how much you should buy or is known as your “open to buy”. You can use cost dollars, retail dollars or units in the aforementioned calculation. You can also include planned markdowns, average markups and other factors. I like to keep it simple and use units.

Example of “open to buy” calculation:

Product class	Calculation Item	Units
Phillips Head Screwdrivers	Projected Sales	500
	Add : Desired Ending Inventory	50
	Less: Beginning Inventory	100

	Open to Buy	450

Now there are other factors that retailers consider (justified or not justified) that increases their “open to buy”, for example:

How hot the buyer thinks the product will be (This will increase projected sales and therefore increase open to buy)
Sizes you may have to fill from beginning inventory to complete size runs or decisions to carry larger or smaller sizes to fit a certain customer segment
Colors you want to add because you think they will have greater consumer appeal
Merchandising plans that have higher stocking requirements to fill rack or shelf space properly
There may be a bad product mix or obsolescence in beginning inventory for the product classification and therefore the beginning inventory needs to be reduced to account for that
Better payment terms offered by supplier
Extra discounts from suppliers at certain quantities
Pressure from a supplier to buy more or they will threaten to open a competitor.
Pressure from a supplier to buy more who is giving you more advertising money
Pressure from a supplier to buy more because they have given you great support or provided you with favors in the past.

Do you see how you can overbuy? Do you see how easy it is to commit the greatest sin in retail? Some of these aforementioned examples are justified, others are not. All of these factors create more risk.

Items 1 through 5 above and are legitimate reasons for taking additional risk and increasing your open to buy if you really did your market/customer study homework. Item 6 above is legitimate only when you are considering the timing of shipments. Items 7 through 10 above are booby traps and are not legitimate reasons to go over your open to buy and take additional risk. In a future article I will explain why the booby traps are booby traps, but the purpose of this article is the absolute need for an inventory plan/forecast.

Let’s say that you have ice water running through your veins and you do not succumb to any pressure. You simply use your experience and knowledge and if you do go over your open to buy in a product classification you legitimately feel a product is going to be hot or you have to complete size runs or there are colors you believe will be in great demand or you have a new merchandising plan that has higher stocking requirements or your beginning inventory could be completely stale and you have to discount a lot of it. Even though you have these legitimate reasons for overbuying you are still assuming greater risk and you need to understand the extent of the risk you are taking and that is where the inventory plan/forecast comes in.

Most retailers just have their open to buy analysis by product classification and call it a day. However they are missing an overall top level inventory receipt plan and inventory forecast. Why does the retailer need an overall top level inventory plan and complete inventory forecast in addition to their open to buy by product classification? Because this plan/forecast gives the retailer a macro view to clearly see how overbought or under bought they are as well as to see what the impact on cash flow will be. This helps the retailer measure their risk and see what is really going to happen at the entire company level.

This plan/forecast starts with beginning inventory and then adds the inventory receipts on order and lists them by the month they will be shipped in and subtracts the costs of the projected sales by month to determine ending inventory by month. You will be able to see how the projected ending inventories by month compare to last year’s monthly ending inventories. However that is not enough. You may have overbought last year. The final test should be entering your inventory plan into a business and cash flow forecast and letting the projected cash flow tell you if you are overbought. In the business and cash flow forecast you must also plug in the proper months when the supplier invoices will be paid. If you find that the business and cash flow forecast tells you that you are going to be out of cash during the year then you are likely overbought and are assuming great risk. Here is an example of a sample inventory plan/forecast for a 3 month period:

Inventory Plan - Numbers in ($000)	Jan	Feb	Mar
Beginning inventory	$ 85.0	$ 90.0	$110.0
Add: Projected Receipts Product on order	40.0	60.0	70.0
Less: Cost of Goods sold on Projected sales	35.0	40.0	50.0
Ending inventory	$ 90.0	$110.0	$130.0

A/P Trade Plan - Numbers in ($000)	Jan	Feb	Mar
Beginning Trade Suppliers Accounts Payable	$50.0	$ 40.0	$ 60.0
Add: Projected Receipts Product on order	40.0	60.0	70.0
Less: Payments to Trade Suppliers (30 Days)	50.0	40.0	60.0
Ending Trade Suppliers Accounts Payable	$40.0	$ 60.0	$ 70.0

In this example the retailer may want to rethink purchases as inventory is rising. Certainly this could be gearing up for a busy period but even if that is true you must still assess if you are bringing inventory in too early especially if your trade terms are 30 days or less.

As mentioned, an inventory plan/forecast works best when it can be plugged into a business and cash flow forecast, but it is still useful to give the retailer the macro view of the impact of inventory ordered. The Trade Accounts Payable Plan should also be prepared as part of this inventory planning/forecasting process.

One of the CFO’s major responsibilities is to reduce risk. To the retailer inventory represents the greatest risk. I have seen many retailers overbuy their way out of business. The Chief Financial Officer (CFO) needs to guide the retailer through the inventory planning/forecasting process.

CFO Services - A Difficult Employee Question

noreply@blogger.com (CFO) — Thu, 02 Jun 2011 02:39:00 +0000

As a Part time CFO I am often in a position to advise clients how to answer the following non financial related question:

What do you do with an inferior employee(s) when the business owner is virtually convinced that the employee market for the particular skill that the inferior employee(s) is in is so thinly populated and thinly skilled the replacement would either be worse or no replacement exists? Assume the inferior employees are not stealing. They just lack the talent, the ambition or they are just plain lazy and incompetent.

Many may say that it is impossible for a skill set in an employee market to be that thin. Many may say this is an easy decision and that you just get rid of the inferior employee(s).

These are all legitimate comments but what happens if the market is really that thin? What happens when the loss of the inferior employee results in a loss of business for an unknown period of time? What happens if the training costs to train the new employee who is being plucked from a thinly populated and talented market is expensive?

I have personally faced these types of situations in businesses that I have owned and they do happen contrary to many who believe that an employee market no matter what the skill set can be thinly populated and thinly talented. In the two specific situations I was personally involved in as the business owner I kept the inferior employees and as a result I believe I paid a higher price versus biting the bullet, letting go the inferior employees and paying whatever price I had to pay including lost business.

What I found was that inferior employees bring down other employees who are more talented, more ambitious and more willing to work. The inferior employees are the proverbial "Bad Apples" that spoil the whole bunch and as a result everyone goes down with them making the whole operation that much more inefficient, ineffective and dis-serving to the most important people in the process, the customer.

Believe me; I understand how tough the decision is to cut the cord. You know that you are going to spend a lot more sleepless nights while you lose business and do not have replacements. You will personally have to work more hours and this can be taxing especially when you already work crazy hours. It tears the very fiber of the business owner, but it is one of those unfortunate situations business owners encounter.

The key is take every precaution you can to prevent this during the hiring process and during the employee's first 90 days on the job.

Even though this is a non-financial challenge a CFO has more value to their clients if they can guide the client through this challenge and provide real life insight. It is the CFO who has prior business ownership experience that is best equipped to handle these situations. At the end of the day these non-financial insights can be one of many valuable CFO Services.

CFO Services - The Power of Control

noreply@blogger.com (CFO) — Wed, 04 May 2011 20:31:00 +0000

I am a Part Time Chief Financial Officer. I was asked recently by a colleague,”when does a client become a client? Is it some particular CFO Service that they are looking for? Is it usually some problem the client is having whether it is solving cash flow problems, getting the business owner to know their numbers, Preparing a business and cash flow forecast or doing some strategic planning?” I responded by saying that certainly the potential client could be looking for specific CFO Services or for solving a specific problem, but the client really doesn’t become a client until they feel some loss of control of a particular problem in their business. For example a potential client may feel they have a cash flow problem, but if rightly or wrongly they can justify in their mind that they can solve the cash flow problem, they feel they have control of the situation and so they say “I can solve this one, why pay someone to solve it?” Of course, the potential client does not understand that a good CFO can identify potential problems, like cash flow problems before they occur. The potential client does not understand that through the use of the right business and cash flow forecasting tools a good CFO can tell the business owner that trouble is brewing and what to do to prevent the trouble. So it is all about the level and sense of control.

As someone who has owned retail, manufacturing and service companies for 25 years I surely can say one of the most uncomfortable feelings for any business owner is the feeling of a loss of control. It only has to be the feeling of a loss of control in one aspect of the business. It doesn’t have to be the feeling of a loss of control of the entire business. The fear and the risk of loss that you feel when you feel a loss of control can be numbing. Conversely, there is no greater feeling for a business owner than the feeling of having control over their business and being able to solve most all problems or issues that come their way.

The potential client underestimates the value of strategic planning. Through the strategic planning process that wonderful sense of control begins to emerge and when the planning process is through and it is then maintained on an ongoing basis that sense of control becomes a more permanent posture of the business owner and confidence ensues. One thing the potential client never underestimates is the power of control.

CFO Services - Reducing Business Risk

noreply@blogger.com (CFO) — Sun, 10 Apr 2011 22:39:00 +0000

What would you dare to dream if you knew you wouldn’t fail?

By asking this question I am attempting to put you in the mindset of my clients. I am attempting to put you in the mindset of a business owner, of an entrepreneur. Many of you are probably already in this mindset, but for those who are not, I believe by understanding this mindset it will help you understand this post, because my clients are of this mindset. My clients are entrepreneurs. They will do what others might only dare to dream. They are risk takers because running a business and doing what others might only dare to dream involves great risk. As a part time Chief Financial Officer it is my job to reduce that risk. This is my primary purpose and the primary purpose of a CFO. All of the things that I do is done to achieve the ultimate goal of reducing the risk of business ownership for my clients. Reducing risk gives the business owner more time and more freedom to find and create opportunity.

I see a lot of business owners and the one thing the most successful business owners have in common is the most successful business owners “Know Their Numbers”. They understand their costs, they understand their cash flow, and they have a basic understanding of their balance sheet. By knowing your numbers you are able to make better business decisions and when you make better business decisions you reduce risk.

Knowing your numbers starts with having accurate financial statements and if you don’t have a bookkeeper to accurately maintaining your books and records I guarantee at some point you will be in a lot of trouble. Strong sales can cover a lot of mistakes, but when the sales slow down the strategies you employ during that difficult time depend on financial analysis and if you have bad numbers, forget it.

Simply put, whether times are good or bad, with accurate financial statements you make good business decisions, with inaccurate financial statements you make bad business decisions. Some people say, Why do I need accurate financial statements, I don’t make any decisions based on my financial statements anyway, and I say, that’s called managing by the seat of your pants and guess what, your competition is managing by knowing their numbers. And that’s why people who manage by the seat of their pants and don’t know their numbers, get crushed when sales slow down or in an economic downturn.

By knowing your numbers you will be in control of your decisions, you will be in control of your business and most importantly you will reduce your risk. I wrote a lot about risk today and that ultimately the main reason people hire me is to reduce risk. The Free spirit of the entrepreneur is inherently prone to risk because remember, it all started with the question “What would you dare to dream!!”

CFO Services – Know Your Numbers

noreply@blogger.com (CFO) — Sun, 20 Mar 2011 00:29:00 +0000

As a Part time CFO I see a lot of Business Owners and the one thing that the most successful business owners have in common, is that the most successful business owners Know Their Numbers.

What does it mean to Know Your Numbers? Here are just a few things that it means:

It means understanding and knowing what your operating costs per hour are.

It means understanding and knowing what your gross margin percentage is on key products.

It means knowing which products you make the most money on and what products you make the least money on.

It means knowing your inventory and what is slow moving.

It means knowing your inventory turns ratio.

It means knowing your average wage rate of direct laborers

It means staying on top of how many days your receivables are outstanding

It means knowing how many days your payables are outstanding and knowing when to time all of your disbursements.

It means being able to answer a question with total confidence when an employee or a vendor needs a decision because your answer is centered on the knowledge you have about the most important numbers/metrics in your business.

It means increasing the overall accuracy of your decisions

It means improving the productivity and performance of your business because you are able to evaluate the productivity and performance of your business.

It means understanding the metrics associated with your advertising campaigns

It means knowing how much cash you have on hand at all times.

It means you know what your monthly debt service is.

It means knowing how productive your capital expenditures are.

When a business owner knows their numbers they are on top of almost all business scenarios that can take place in their business. They have a stronger sense of control over their business. Most importantly, the business owner who Knows Their Numbers reduces the risk of business ownership!

CFO Services – Guidance to the Entrepreneur with an Idea

noreply@blogger.com (CFO) — Sat, 26 Feb 2011 01:55:00 +0000

As a Part Time CFO who performs multiple CFO Services I very often come across entrepreneurs with an idea. It is great to see the enthusiasm and the passion the entrepreneur possesses about their new idea for a product or service. I do not call these situations start-up companies yet because they are just an idea and not something that was put into motion. To me a start-up company is an idea that had been put into motion.

One problem I notice very often is that the entrepreneur thinks that the idea is sellable to an investor as an idea. For example, an entrepreneur has an idea for a new widget that will solve a particular problem in the medical industry. However, it is just an idea. There is nothing tangible. Oh sure, there may be a bunch of doctors that were polled who will say that it will work, but there is no prototype of the widget therefore an investor will question whether the widget can actually be produced. The investor will also question the costs the widget can be produced at because since it has not been produced no one has any idea of what manufacturing challenges exist that may escalate costs. The idea doesn’t even have a contract manufacturer lined up to at least identify someone who can possibly produce this widget. I could go on but the bottom line is that the entrepreneur must take their idea and create as much tangible evidence as possible to support the success of the idea.

The objective of an entrepreneur with an idea is to create as much tangible evidence as is humanly possible in order to convince an investor to make a maximum amount of an investment in exchange for the least amount of equity. The more holes in your idea the lower an investment you will attract if any and ultimately you will give up the most amount of equity. Investors do not invest in ideas. They invest in solid business plans and business models with strong management chock full of tangible evidence that they will get a return equal to 5 to 10 times their investment in five years.

The Part Time CFO can help the entrepreneur develop the business plan, prepare the forecasts and the financial section of the plan, be a strong part of the management team, help develop the strategic plan, find investors, help pitch the deal to investors. These are essential CFO Services.

CFO Services - Financial Numbers Can Play Tricks

noreply@blogger.com (CFO) — Sun, 06 Feb 2011 18:42:00 +0000

If a baseball bat and ball together cost $1.10 and I told you the bat costs one dollar more than the ball. How much does the ball cost?

Most people say the ball costs 10 cents. The right answer is the ball costs 5 cents with bat costing one dollar more than the ball or $1.05 for a total cost of $1.10.

The reason why I bring this example up is because financial numbers can play tricks on you. It is the job of a Part Time CFO to understand all of the tricks numbers can play and help the business owner understand and interpret the financial statements properly so better business decisions can be made.

Reading and understanding the financial numbers on financial statements can play tricks on you. Many times a company is making money so the P & L looks good, but they have poor cash flow. This is the case usually because the cash cycle is too long (The cash cycle is the time frame between the outlay of cash for inventory (and material and labor) and the ultimate receipt of cash from customers). These time frames need to be compressed. Some of these issues to compress the cash cycle involve negotiations with the trade for better terms as well as stricter company credit policies for faster accounts receivable turnover. Sometimes a solution can also be extending payroll from weekly to bi-weekly or even monthly where it is legal to do so. Some clients also need an inventory purchase and receipt plan as they may be overbuying inventory.

To understand better how profit does not equal cash watch the following six minute and 30 second presentation:

Profit Does not Equal Cash Presentation

Another trick that financial statements and financial numbers can play is in understanding the equity section of the balance sheet. This is the section of the balance sheet that values the difference between assets and liabilities. A high equity balance can be deceiving if a high percentage of assets are made up of intangibles like goodwill, non-competes or patents and trademarks. A high equity balance can also be deceiving if a high percentage of assets are made up of machinery, equipment or other fixed assets that depreciate in actual value faster than the accounting depreciation calculation.

Accurate gross profit margins on your P & L can play tricks on you. Understanding what needs to go in cost of goods sold and what is a direct cost of the product or service is very often done incorrectly. For example many business owners in the trades such as construction, electricians, plumbers etc… and who are in manufacturing do not put direct labor in cost of goods sold. This is leaving out a direct cost of the product or service and without it will inaccurately overstate gross profit margins which can lead to poor business decisions.

Helping the business owner read and understand their financial statements in order to make better business decisions is a CFO Service that needs to be done early in the process. Remember, financial numbers can play tricks on you.

noreply@blogger.com (CFO) — Mon, 17 Jan 2011 00:30:00 +0000

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CFO Services - Quick Cash Flow Metrics

noreply@blogger.com (CFO) — Sun, 16 Jan 2011 22:20:00 +0000

As a Part Time CFO I am called upon to do some quick cash flow analysis for clients. This is not often very easy as with cash flow there can be a lot going on. One of my favorite metrics and first places to go to get a good sense of what is happening is Days Sales Outstanding (DSO) and Days Payables Outstanding (DPO). DSO tells you the average number of days it takes a company to collect their accounts receivable. DPO tells you the number of days it takes a company to pay its trade creditors. If you are paying your trade creditors appreciably faster than you are collecting your receivables you probably identified one source of a cash flow problem.

DSO is calculated by taking your accounts receivable as the numerator and Total Credit sales as the denominator. Multiply that quotient times the number of days you are tracking and that is your DSO. Let's get more specific as to the numbers. You can take the accounts receivable off of your balance sheet. Most companies total credit sales are usually their total sales, however if they can specify a certain percentage of sales that they know are COD they can deduct that from sales to determine credit sales. The number of days represents the number of days you are tracking. So for example if you want to determine what your DSO is for the fourth quarter you take the accounts receivable on the December 31 balance sheet and put it in the numerator and then you take your total sales (assuming all your sales are credit sales) for the fourth quarter off of the income statement and put it in the denominator. Then you take that quotient and multiply it times 92 days which are the number of days in the fourth quarter. That will give you DSO.

DPO is calculated by taking your Trade Accounts Payable as the numerator and Cost of Sales as the denominator. Multiply that quotient times the number of days you are tracking and that is your DPO. Let's get more specific as to the numbers. You can take the Trade Accounts Payable off of your balance sheet or Accounts Payable Detail. Keep in mind that your Trade Accounts Payable are the amounts you owe to your inventory vendors versus your expense vendors like the phone bill or Office supplies etc... Take the cost of sales off of your income statement. The number of days represents the number of days you are tracking. So for example if you want to determine what your DPO is for the fourth quarter you take the Trade Accounts Payable on the December 31 balance sheet and put it in the numerator and then you take your cost of sales for the fourth quarter and put it in the denominator. Then you take that quotient and multiply it times 92 days which are the number of days in the fourth quarter. That will give you DPO.

As a CFO these are my "go to metrics" when making a quick assessment of a cash flow problem.

CFO Services - Don't Shoot From The Hip

noreply@blogger.com (CFO) — Sun, 26 Dec 2010 00:52:00 +0000

Whenever former Boston Red Sox Manager Joe Morgan was questioned on why he made certain decisions in a game, his answer very often would be "six-two and even". This was an expression he used which really meant he didn't have a logical reason for making the decision and he was using gut feel and shooting from the hip.

Too many small business owners shoot from the hip. They simply don't have the information or the proper analysis to make quantifiable, sound business decisions. A Part Time Chief Financial Officer provides the tools to avoid shooting from the hip. Through forecasts and financial dashboards the Part Time CFO can provide the small business owner the information and analysis that provides quantifiable guidance to the most commonly asked critical questions like:

Will I have enough cash to get through a dip in my business and what kind of dip can I withstand without needing more cash?

What will happen to my business if I invest in a new product line and what will be the impact on cash flow?

What will happen if I maintain the status quo and keep doing business like I have been?

Should I discontinue a product line and dropping this line make me more profitable?

Should I buy a truck or new piece of equipment?

What will happen to my business if I try a new advertising campaign?

I want to get involved in internet marketing. What investments need to be made in people, time and money and how does this impact the entire business?

Should I add a location and can my business handle the additional investment in adding the location?

What is the liquidation value of my business should I decide to discontinue my business?

Can my business be more productive and are we operating at peak efficiency?

Is there another business model that would be more effective?

Should I add another employee or is that just going to build additional expense with very little benefit?

Should I lay off staff and what impact will that have on the business?

How do I evaluate sales performance?

Is my overhead too high?

Are my selling prices where they should be?

Are my gross profit margins where they should be?

These are critical questions in business. Answers to these questions can make or break your company. An Interim CFO has the tools and the expertise to provide the quantifiable analysis that will make the answers to these questions much clearer. So the next time you have to answer any of the aforementioned questions, make sure your answer isn't "six-two and even".