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Role of the CFO:Oversight of Financial Systems

Role of the CFO:Oversight of Financial Systems

The Chief Financial Officer of a company, defined in general terms, is a person who oversees all the financial functions of a business. While the role of the CFO is much more complex and multi-faceted, financial oversight is one of the CFO’s key roles.

The CFO does not perform the company’s accounting, or other basic functions such as customer billing and accounts receivable, accounts payable, bank reconciliations, administration of employee benefits, internal office and administrative functions, payroll support, and business insurance. The CFO does, however, monitor all these functions and systems to ensure that they are streamlined and accurate. In addition, the CFO will assure the financial results are clear and effectively analyzed and able to be used to understand the financial performance of the business.

Strategy Around Four COAR Systems

At a higher level, the financial oversight role of the CFO is more strategic. At FocusCFO, a balanced approach is used focusing on the Four COARTM Business Systems: Cash Flow, Operations, Accounting and Revenue. By having tools and systems in place in each of these areas, businesses can operate at an optimal level, and maximize internal cash flow.

Examples of the application of COAR include:

• Driving internal cash flow by actively managing working capital and improving product and service line profitability.
• Providing regular operations reporting, focusing on key performance indicators and operating data.
• Ensuring that all internal accounting and management reporting is timely and accurate.
• Developing tools to measure and manage revenue, including the sales pipeline.
• Improving the flow of financial and other information between the business and its banker,
CPA and other key advisors.

Forecasting, Planning and Analysis Tools

In addition to building tools to ensure that the company is operating at an optimal level, the CFO will develop ongoing forecasting, planning and analysis tools in of the all key business areas in order to work collaboratively with the CEO to build a strategic growth plan for the company.

Don Cain of FocusCFO describes the role of the CFO as “overseeing the entire financial structure of the company to manage the financial needs of the business, based on its plans and goals, and to anticipate the future financial needs of the business.“ In other words, the CFO forecasts the future of the business in order to shape its strategic direction.

During Stormy Weather

Especially during these times of instability, the CFO can provide guidance and be a stabilizing force in the business. With a 13-week rolling cashflow forecast, the CFO can provide the business owner with insight to make necessary pivots and decisions to assure the best outcomes. The CFO can lead continuous and proactive conversations with other key advisors (banker, CPA, attorney) to stabilize and provide funding to weather the storm. The CFO can also identify and analyze sources of new revenue like loans and grants, as well as options to minimize expenses, utilize currentinventory efficiently, and workforce and salary reductions.

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The List for Small Business

The List for Small Business

By FocusCFO

Our CFOs have been on the business front lines for weeks, helping small businesses navigate the challenges they face due to the Covid-19 pandemic. While each business is different, and certainly each industry has its own unique concerns, here’s a list of the most pressing tasks that entrepreneurs are facing.

Protecting

the health of your employees and customers

  • Using guidance from the CDC and local authorities, determine business operation and closure policies
  • If operations are essential, execute safe distancing and cleaning programs
  • Prepare a plan for what to do if one of your employees test positive for COVID-19
  • Assess the preparedness of your IT infrastructure and HR department to handle the matters that may present themselves with off-site/remote work 

Assigning subject matter experts

in your company to gather, track, and help employees and the company to be knowledgeable about a specific topic

  • Up-to-date health and wellness information
  • Information about the legislated assistance available to businesses from state and federal governments
  • Information about all the aid available to employees
  • Working from home guidance and policies 
  • Look to trusted advisors for assistance in interpreting new laws

Communicating

regularly with employees and customers

  • Send regular updates via email
  • Schedule “town hall” meetings using video or safe distancing

Assessing the financial picture

 

IMMEDIATE:

  • Prepare a rolling 13-week cash flow projection
  • Prepare updated cash flow-based forecasts by month for the balance of the year
  • Prepare a Stress Test P&L
  • Prepare a plan if urgent cost reduction is needed to conserve cash
  • Prepare cash flow breakeven analysis

Business Issues to Address:

  • Meet with your banker(s) to review these projections and put contingency financing plans in place
  • Prepare necessary paperwork to access government loans, grants and programs 
  • Review inventory levels and liquidate inventory where needed
  • Review supply chain and identify where weaknesses may exist
  • Prepare cash flow breakeven analysis
  • Meet with current customers to see what they need and get a feel for short term orders
  • Identify opportunities to pick-up new customers due to supply chains being impacted

While this is not an exhaustive list, and there are many good checklists available (visit our website at https://focuscfo.com/resources-pandemic for some of our favorites), we hope this short list will provide guidance and direction on what small business priorities should be.

 

If you are a small business and need assistance,
please contact us. We just want to help. 

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Five Pitfalls of the Cashflow Forecast

Five Pitfalls of the Cashflow Forecast

By Bob Palmerton

Weekly cashflow forecasts are a critical financial tool for any company, especially small enterprises with frequently volatile timing issues in working capital. Here are FIVE pitfalls of the cashflow forecast and suggestions to overcome them.

Pitfall 1: Sales (and therefore collections) timing

I’ve spent much of my 30 years in finance dealing with unrealistic sales targets. The more early- stage (or start-up) the company, the worse the problem. And speaking of mature companies, although they may have a good handle on forecasting their legacy products, forecasting new product sales can be daunting. And a changing competitive landscape may thwart their sales forecast accuracy. Once a realistic annual forecast is determined, the next challenge is its timing throughout the year.

Suggestion: Build bottoms up sales plan with defensible metrics (i.e. number of salespeople, sales calls per day, success rates based on experience), and risk-adjust the new stuff. If you have a large collectible item scheduled for a certain date, plan ahead to call early and grease the skids for that payment to arrive on time. And as with any sales forecast, don’t forget to consider contingency planning should the numbers not pan out as expected.

Pitfall 2: Under-estimating what it takes to deliver those sales

It may be labor, materials, internet bandwidth, or any vendor-supplied resources that would need to be carefully assessed not just for their front-loaded costs (i.e. before the cash is collected on those those forecast sales), but for their ability to deliver when they are needed (based on the timing of those sales).

Suggestion: To start, integrating delivery (operations) with sales planning is key. When sales and operations are on the same page, when they communicate effectively, many delivery hiccups can be avoided. Also, know your vendor limitations. Keep key suppliers appraised of your business so that they can plan ahead too, in anticipation of any upside (or downside) sales surprises.

Pitfall 3: Relying on unreliable sources.

Often the person compiling the cashflow forecast will take input from leadership for granted (they should know what they’re talking about, right)? But there may be various reasons why they don’t know what they say they know, or motivations to avoid the cold hard truth.

Suggestion: The best you can do is know what questions to ask, push back where necessary, and risk-adjust any assumptions that might be questionable. Learning as much as you can about the business and its past performance is key, as researching past results can help support your adjusted estimates. Remember what W. Edwards Deming said: “Without data, you’re just another person with an opinion.”

Pitfall 4: Missing contractual timings of outflows

Run rate or one-time costs may change in a material fashion at a certain point in time. For example, commercial loans may include ramp-ups in principal (or higher rates driven by Fed policy). A line of credit may convert to P&I at a certain date (or there may be a 30-day “rest period” during which the line needs to be drawn down to $0). Payroll raises may go into effect at a certain date. How about employer taxes and how they start at their highest level when the New Year begins? Many nuances of timing occur throughout the calendar year and many are driven by anniversary dates (like the annual rent increase).

Suggestion: Review historic financials to see the step-ups and review contracts and bank agreements to pinpoint rate increases and changes in debt servicing.

Pitfall 5: Failing to share the 13-week cashflow forecast with your senior management and/or partners.

Many times, I have come across a senior member of the staff contributing a unique solution to an emerging cashflow problem. It may be a strong business relationship with a key customer or vendor that may shake loose early cash or defer a payment to a vendor to buy some time when cashflow is tight. That revelation would likely not emerge without sharing the cashflow forecast with that person.

Suggestion: Reserve the time to review the forecast with key stakeholders, and solicit their valuable input and perspectives on the business and the market

A well-oiled cashflow forecast process will enable management to focus on items to fix ahead of time so that they can stay on top of their day-to-day business.

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Balance Sheet 101

Balance Sheet 101

By Mark Snyder

Accounting is the language of business, but unfortunately, it’s confusing almost to the point of mystifying to the layperson. A company’s balance sheet is one of the most important financial statements, yet many people don’t understand the “how” and “why” behind its purpose and structure.

The purpose of the balance sheet is simple, it is merely a summary, at a point in time, of what a company owns [assets], owes [liabilities] and net worth [equity]. Why is it organized in such a weird way where the total Assets equals the total of Liabilities plus Equity? Wouldn’t it make more sense to have your Assets less your Liabilities equal your Equity? Accounting is based on the key concept of double entry bookkeeping in which debits have to equal credits. This key principle of balancing debits and credits hews well to the concept of a balance sheet and makes perfect sense to an accounting professional.

Assets and Liability

The asset and liability portions of the balance sheet are organized between current and non- current sections. Anything in the current section is something that will impact cash in 12 months or less. For example, accounts receivable is considered a current asset as it should be collected as cash within 12 months. Conversely accounts payable is considered a current liability as the amount will be paid to the vendor out of the company’s cash balance within the next 12 months.

Working Capital

The essence of the balance sheet is highlighting the working capital of a company. Working capital is merely taking the company’s current assets and subtracting the current liabilities. The concept of working capital is evaluating if an organization has enough liquid assets to cover debts coming due in the next twelve months. If there is significant working capital, this is indicative of a company being able to meet all near-term obligations along with providing funding for investments in their business or possibly returning funds to owners. If working capital is negative it means the company owes more that than they can pay over the next twelve months and the organization will need to seek other financing sources or else the viability of the company may be at risk.

Non-current Assets and Liabilities

Non-current assets and liabilities provides a view of the longer-term resources and debts of a company. A layperson should take note of the amount of property, plant and equipment that a company owns and is this a business with a lot of asset investments that may require significant upkeep in the future. Additionally, pay careful attention to the long-term debt of the company that will be due in future years therefore possibly putting significant pressure on the organization in the future.

Summary

There are a lot of ratios and other indicators that financial professionals use when evaluating a company’s balance sheet, but most of the time its as simple as making sure what a company owns is more than what is owes and ensuring the organization has the liquidity in the short term to pay their debts coming due. It really does not need to be much more complicated than that.

Mark is an Area President for FocusCFO based in Cleveland.

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Designing Effective Incentive Programs

Designing Effective Incentive Programs

By Martin Cobb

Increasingly, organizations seek to utilize some form of variable compensation to motivate employees and align the goals of employees with those of the organization. By making a portion of every employee’s compensation variable, and measuring against clearly defined goals, the impact can be powerful in terms of employee motivation, engagement, retention, and the management of employee costs. When the company does well everyone benefits – but when targets are not met, compensation is limited to the fixed component only. These plans can come in the form of annual incentives, profit sharing, gain sharing, and profit bonuses. Whichever way they are structured they must make economic sense and be clearly understood by all parties to be successful.

Key Benefits

When organizational and individual goals are aligned, through a well-designed incentive program, there is an intrinsic motivation for the employee to achieve success, that benefits all.

It can also lead to a more “open book” culture. When results and information are shared with employees, they develop a better understanding of the business. This can also lead to heightened trust between employees and management as everyone knows – “we are all in this together!”

It trains employees to think and act more like owners. When compensation is tied directly to performance – performance issues are identified and corrected timely, and the sense of urgency and personal ownership increases.

Clear Goals

To develop meaningful and effective incentive programs, there must be a clear organizational strategy with associated multi-term goals. The purpose of incentive-based compensation is to influence behavior and create a mechanism for goal congruence between the organization and employees. Clear and identifiable organizational goals facilitate the development of appropriate divisional, department, and individual goals in support of them. Identifying desired behaviors that lead to desired outcomes, is a key step before the development of the metrics and the mechanics to measure them.

Tracking Metrics

The best measurements of performance can now be selected. These will vary depending on the nature of the goals and associated performance criteria. Some metrics will be expressed in terms of production numbers and efficiencies. Some in terms of sales, margins, profits or expense levels. Some may be financial and others more operational in. They may be team-based or individual. The CEO may be measured by overall company performance while others may be incentivized on the performance of teams, departments or projects, or the achievement of certain goals or milestones. Daily or weekly KPIs and metrics may also be needed. These should be simple, actionable, and in support of prescribed goals.

All measurement metrics must be clear and transparent, and simple enough to provide ongoing reinforcement of performance expectations. Try not to exceed two or three performance criteria and associated measurements – to keep focus.

Setting Targets

Performance targets must be realistic and attainable. There should also be an obvious and easily understood link between individual/team efforts and the achievement of the desired targets.

Start with the end in mind. Target a certain amount of variable compensation for a certain level of performance. With a spreadsheet, it becomes easy to test the assumptions at varying levels of performance, to see what happens at the extremes of the plan parameters.

Will there be minimum or maximum levels of payout? What if goals are missed by a small margin, should any incentive be paid, or none at all?

Roll-Out

Once the measurement criteria and targets have been developed, an illustration and written summary should be produced. This should describe the overall plan, the measurement metrics, and the targets. It should also clearly explain how the incentive compensation will be calculated, paid and ideally should include a few scenarios. The purpose is always to motivate and positively influence behavior. If the plan is perceived to be overly complex, or the bar is set too high in terms of performance, it will have the opposite effect. In organizations where there may be skepticism or resistance, it is important to have open dialogue and communication, to encourage and obtain buy-in.

Other Considerations

Consider who should be involved in the development of incentive plans and the components? Senior management or the whole team? A team approach can certainly promote transparency of process and may provide a lot of useful ideas in terms of what exactly motivates employees and how they might perform better at their jobs.

Information about results and performance affecting the plan should be communicated regularly, to keep folks engaged. Some companies keep a “scoreboard” or multiple scoreboards. These are in full view and track progress, and also may forecast the current incentive payout. Employees know whether they are “in the money” based on current information.

Consider how often the incentive calculations will be made, and the time intervals for payments? The time intervals used for calculation and payout need not be the same. For instance, calculations can be made monthly, with quarterly payouts. However, the advantage of more frequent payouts is the focus and relevance it brings in connecting today’s efforts with a tangible and attainable benefit. This must be weighed against the cash flow impact, and the fact that once made, incentive payments are a sunk cost. If company performance deteriorates substantially – it can wipe out all the prior gains.

Summary

In conclusion, variable incentive programs can be an excellent tool to motivate employees while achieving organizational goals. Sufficient time and attention must be given to the identification and development of the components of each plan and then tailored appropriately. Plans should be reviewed and updated regularly to ensure they are achieving the desired results and remain relevant and effective.

Martin Cobb is an Area President with FocusCFO, based out of Ann Arbor, MI

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