CFOWise

Grow with People or Technology – an Entrepreneur’s Dilemma

Two different companies, each in a different industry, face the same dilemma.  Growth and success have created significant pressure on their business, specifically their people and their technology.  In order to solve the short-term constraints as well as build the most scalable solution for the long-term, how much investment should be made into new technology and how much should be made in people, or human assets?  

Both companies have found a shortage of “off-the-shelf” software to solve their technology needs, so they have built powerful databases and other platforms from which they run their business.  It seems that many entrepreneurs under 40 have the attitude that they should hire a full-time programmer and build their systems from scratch, which often ends up much more affordable in the short-term.  The spirit of bootstrapping is alive and well, even in young entrepreneurs.

The challenge, however, with this scenario is what happens after a year or two.  In both situations, the customized solution has already become antiquated and the company is beholden to the developer who, after some analysis, used non-traditional coding and programming language that is difficult to comprehend and unwind.  These developers often become a little lazy and create shortcuts and work-arounds that begin to rear an ugly head in the most inopportune moments.  What worked in the short-term may not be the viable long-term solution.  At CFO WISE, we have found this to commonly be the case.

Both companies are very conservative in their hiring practices, careful not to over-staff their operations.  Yet failing technology systems put so much pressure on their staff that the entrepreneurs begin to hear things like: “I’m going home at night and on the weekend and working several extra hours each day remotely to try and keep up.  We need to hire more people or I’m going to burn out.”  Often we hire more people to keep our staff happy, but we are actually perpetuating the problem created by insufficient technology.

I tend to operate under the following two premises when it comes to people and technology in a business.  First, use technology to automate as much of the business as possible so that the company can focus on hiring bright, smart, talented employees to help the company grow.  Second, do not buy or implement technology to solve your problems – your employees need to solve the problems first, then you can purchase and implement technology to automate the solutions they develop.  Each of these is worthy of a separate blog of their own, but we’ll let this serve as the basis whereby we approach this dilemma.

Obviously the answer to this dilemma will differ with each situation, but I challenge all entrepreneurs to think hard about the investment they are making into people and technology.  If we are confident that your technology can support the next five to ten years of growth in terms of scalability and relevance, then we are in a fantastic position.  If we are not confident in this and we are just doing the necessary things to “band-aid” our way through each day, month, and year, then ultimately we will probably have to scrap that system and start all over again, anyway.  And we’ll spend a lot of money on people trying to hold it all together in this process.  We should seriously consider getting it right the first time if at all possible.

In addition, we need to strongly consider which operations performed by employees could be automated, and we need to start down the road of automating those functions.  Our competitors are going to do it, and we will need to eventually, as well.  For almost 2 years I put myself through college in a call center for one of the largest investment companies in the world.  At the time, automated telephone systems were becoming popular and many of my co-workers thought they would lose their jobs to automation.  Not only was this not true, but we also found that instead of wasting our time answering questions and resolving concerns that the automated systems could handle we could focus on the more value-added elements of the company’s service mission.  The point – our knowledge worker society will progress only as fast as we automate the simple stuff and add more value to our customers with our human assets.

Staffing Accounting/Finance Department from Start-up to Medium-Sized Company

I have had a lot of conversations recently about staffing the accounting and finance function in the company.  As companies grow and shrink, their needs in this area change.  We certainly do not want to be over-staffed, and we also want the most cost-effective staff doing as much of the work as possible.  For example, we typically do not want our Controller or CFO entering payables – this task can easily be delegated to a much lower cost employee.

This is a simplified organization chart of the different accounting and finance functions in an organization.  The reality is that most start-up and emerging companies cannot afford all of these positions.  My purpose in this post is to explain how to fulfill all of these necessary functions throughout the life-cycle of a start-up company.  I am making the assumption that we all understand the purpose of the accounting/finance function as well as the assumption that the company has or will hire the appropriate outside professional(s), like a tax CPA, to help the company remain compliant.

Even at the earliest stages of a start-up, it is usually best to hire a part-time bookkeeper to fulfill all of the roles listed above.  They usually do not have the expertise of a high-level controller of CFO, and they will be slightly over-paid for doing some of the more clerical tasks.  But the bookkeeper gives an affordable and flexible option to start-ups.

As the company grows and has revenue, the company should begin to look to hire full-time clerical staff to handle most of the AR, AP, and payroll tasks while the bookkeeper remains part-time and delegates everything they possibly can to the in-house staff.  One of the major challenges that usually emerges during this process is that the part-time bookkeeper will begin to struggle to keep up, especially with the monthly financial statement preparation and analysis as well as other management reports on how the business is doing and what improvements should be made to maximize cash flow.

Often the next best step is for the company to consider engaging the services of a part-time CFO.  This individual will be a strategic direction to this department and may only be needed about a half-of-a-day per month.  As the company continues to grow, the part-time bookkeeper will need to be replaced by a full-time Controller or Accounting Manager.  All of the full-time accounting staff will report to this person.  In addition, this position will take direction from the CFO. 

The last full-time hire should be to fill the position of CFO.  Often companies can do very well leaning on the part-time CFO services to exceed $50 or even $75 million in annual sales.

Written by Kenneth Kaufman at CFO wise

One Massive Layoff, or Slowly Let People Go?

I was asked this question today, and I think it deserves a little bit of discussion.  I will share my take on the subject, and then share the opinions I received from several of my friends on Twitter.  Feel free to add your comments.

Let me come straight out with my main opinion – any excuse to not take care of the layoff all at once is covering selfish motives.  Either we don’t want to hurt someone’s feelings, we don’t want to face the music, we don’t want to be the “bad” guy, or we are just scared or a bit cowardice.  If the layoff is what the business needs, then it has to be done – period.  Not doing it all at once will cost the firm money and could put everyone who is left in jeopardy as well.

I recently heard an entrepreneur needing to do a layoff say that he would reduce everyone’s wages (instead of doing a layoff) and wait for certain people to quit.  I have two issues with this – first, this entrepreneur is a coward who is afraid to confront his people with the truth, especially the ones he wants to let go.  Second, if I were a betting man, I would bet that the employees he wants to leave will stay and his star players will leave.

I posed this question on Twitter and here are the replies from folks from all walks of life (just a quick reminder that Twitter only allows responses in 140 total characters or less, so please appreciate the abbreviations and brevity:

@GoodGrapes – Go massive if that’s what it really needs – cut deep, then re-group and move on.

@jeremyhanks – Layoff all at once if u at all can. Get the shock through the system, people hate change, slowly might get u into the death spiral.

@MaritaR – Better putting things to an awful end than to perpetuate an awful time – massive layoff sadly better than a long time uncertainty.

@IFRS exorcist - To avoid uncertainty and negative morale if you know who you are going to lay off it is better done all at once.  Just my opinion.

@LearnSolMary – If must lay off, get it over with & move on so wound can heal. Wd ask client to be absolutely sure layoffs are the only way.

@virtualcfo – One cut and let the remaining employees now that they are ok . If not, moral and productivity will be hurt while waiting for the ax.

@VAinParadise – IMO Massive layoff and get it over with. When done is spurts it puts unnecessary stress on everyone and kills moral/production.

3 Rules every Family Business Should Live By

If you own or operate a family business, you should consider living by the following three rules, in order to have financial help for small business as you carefully try to lead your company:

RULE #1 – NEVER HIRE FAMILY. OK, I know you have to hire family because it is the family business. But if you have to, hire them like you would anyone else. Interview them and make them go through the hiring process just like any other employee. Hire them into a position they deserve because of their background, education, experience, and ability. Failure to follow these simple but very often disregarded guidelines result in overpaid and under-productive family employees and frustrated and sometimes disgruntled non-family employees.

RULE #2 – NEVER PROMOTE FAMILY. Yes, it is actually OK to promote your family, but you better only promote them if they deserve it. Being related to you does not merit their promotion just as not being related to you merits anyone else’s promotion. You will lose your best employees if you do not approach this with great care and concern.

RULE #3 – NEVER FIRE FAMILY – If you would have obeyed rule #1, this never would have been an issue. If times are tough, everybody knows that family will be the last to go, or will they? A well run family business will leave family out of the equation in its evaluation of and overall contribution from each employee. I have seen family businesses lay off their own flesh and blood, and the business was always better off for it.

The underlying theme is this – try and treat everyone, even family members, equally and fairly.

Is your Business Ready for a Part-Time CFO?

Great article on my industry. It’s always nice to be validated by the traditional media.

Please contact me if you have any questions about if your company is ready for a part-time CFO. Thanks.

Winning Sometimes Means Quitting

Successful people quit all the time, they just quit the right things at the right times, according to an article written by Tim Berry.

I have long preached that everyone needs to stick with their core competency and not stray from the things that made them successful. This is not just a nice idea I espouse – I have seen dozens of successful people stray from their core competency and almost lose everything.

If you are good at making widgets, then please be careful if you decide to build a commercial building with the idea that you will use some of the space and then lease the rest. If you can earn a great living as an attorney, you may want to consider resisting the temptation to buy a struggling company thinking you can turn it around. These  often consume huge amounts of time and cash, and they never had the promise of being anything worthwhile anyway.

 Yet for some reason our human nature allows us to risk everything by diverting our attention away from what we do best, for example my CFO Career. The point is this – stick to your core competency, and sustainable success will follow. Surround yourself with people who have different core competencies than you, and you could potentially build something greater than you ever imagined.

In these difficult economic times, many of these side projects are getting out of control. Quitting them is often the best option. So are you a failure if you quit? Go ahead and quit, focus on getting even better at your core competency over the next 10 years, and then let’s see how you answer the questions. My guess is you will long have forgotten about these other things and you will have found more success than you know what to do with. Those who focus will thrive.

Hiring & Use of Independent Contractors Is Up, But Wages Are Down

No surprise here – In 2008, Small to Medium Businesses (SMBs) increased hiring, decreased salaries, and stepped-up their use of independent contractors and business financial consultants according to SurePayroll’s Business Scorecard as reported in this ARTICLE: eweek.com

 All these stats do is validate what we have all expected. The SMBs are and will continue to grow, so they are hiring more. And, since unemployment is so high, SMBs are paying less for the same or better talent.

The most interesting development in the SMB market is the increase in utilization of independent contracts, up 8.3% in 2008 to its highest level since 2004. Not only are SMBs trying to save money and avoid a full-time commitment, but the softening labor market has also encouraged the workforce to be more creative with the structure of their employment relationship. In short, many in the workforce are taking part-time CFO work as contractors to at least have some income.

 The reality is this – SMBs are going to drive us out of this recession, and the smart ones are gobbling up the talent and saving money along the way!

Part-time Work and Unemployment

According to the USA TODAY, 7.3 million people are working part-time but want to be full-time. These people do not count in the unemployment rate, which was up to 6.7% in November, its highest level in 15 years. On expert predicts unemployment will peak at 9% around the end of 2009. This information can offer some unique opportinties to owners and operators of start-up, emerging, and medium-sized companies. All of the large employers around the world cannot avoid the negative impacts of our recession. They are laying off the largest number of employees, by far. Many small and medium-sized companies are not onlu holding their own, but they are GROWING in these difficult economic times. Just like any other business, quality employees are essential to their profitable growth.

We are in an employer’s market when it comes to jobs.  There are and will continue to be quality employees looking for work with a finite amount of jobs to find. As such, these quality employees are taking lower wages and less-accomadting work environments than before – when we were in an employee’s market. Smart businesses recognize this trend and are taking advantage of the employer’s market.

10% Increase in Health Care Costs in 2008

According to the USA TODAY Moneyline on 17 June 2008, employer health care costs will rise about 10% in 2008 and 9.6% in 2009 (study was done by PriceWaterhouseCoopers). The two main reasons for the increase: an increase in the expenses those with insurance are bearing for those without, and a hospital building surge to replace facilities and increase the number of private rooms and outpatient facilities.

The emerging and medium-sized businesses will feel the brunt of this more painfully than most. They are already at a disadvantage because they are trying to attract a talented workforce that has grown to expect Fortune 500 level benefits. But they have little negotiating and buying power in the health insurance markets where the products offered are state regulated and one health issue in their relatively small pool of risk can cause a maximum rating – meaning a family premium cost for a decent medical plan can exceed $2,000.

There are things employers can do to curb these cost increases. They can switch to a high deductible plan that has a health savings account option. They can also pass some of the increased premium cost on to their employees. While this may not be popular, it can sometimes have very little impact on the employee’s net take-home pay, especially if the premiums are deducted from the employees paycheck on a pre-tax and pre-FICA basis – which is allowed through a Section 125-C Premium Only Plan (POP).

A CFO Advisor can assist you in deciding on the proper health care plan you can offer your employees that will also help with your business operations.

These represent just a few suggestions to consider.

How Many Hours do Your Employees Work?

We do not often think how our work week might compare to other areas of the world. Taking a look at just college grads, a much higher percent of them plan on working more than 40 hours per week relative to their peers around the world. A couple of items to consider:

If your employees are working more than 40 hours, are they in an exempt or non-exempt status? I know you may have an opinion on this, but it is important to be objective and try to understand how the Wage and Hour Commission of the Department of Labor would view this. This agency continues to target emerging and medium-sized companies for failing to pay their non-exempt employees over-time. You may want to take a look at this in your business.

Also, how productive are the 40+ hours you are getting from your employees. Whether your employees fall into the knowledge-based worker category or some other, you need to understand and own the productivity of your staff. In every business we have seen, the first or second largest expense is labor. You need to know if you are getting your money’s worth. If you want to know if you are getting your money’s worth out of your labor force please contact a CFO Advisor today.

Do Employers Benefit from Their Tuition Reimbursement Plans?

While the potential benefits of tuition reimbursement plans are widely discussed, the real question is can they prove that they are actually receiving these benefits, and that the benefits are outweighing the costs.

According to an article in CFO in April 2008, a recent study of 180 companies found that almost half of them neither measure the impact of their tuition reimbursement plans on retention and recruitment nor follow-up with employees and managers to learn how the programs affect job performance.

For emerging and medium-sized companies, this can be a powerful benefit to offer. The key is to track the investment you make to make sure you are receiving an adequate return. Deciding whether a tuition reimbursement plan is right for you can easily be decided by an interim CFO Advisor.

CFO Career Opportunity

We are excited to share with you our informational video for CFO Consultants interested in the career opportunities with our firm. Feel free to visit our CFO Career Center.

For more information: http://www.youtube.com/v/7dhdH9GtHdY

Human Capital

An article I recently read in Fortune magazine discussed the global competition for human capital. In essence, economic growth and success will be mostly driven by an economy’s commitment to build and retain its human capital. From the perspective of the 6,000,000 businesses in this country with fewer than 500 employees (which happen to employ the majority of America’s human capital), here is an idea of what this means.

The first or second largest expense category in almost every business is LABOR. Of all of the assets used and things input into a business, studies show that 60-75% of a company’s general and administrative costs, or overhead, are consumed by labor. By adding all of this up, this means that the largest expense in almost every business is people.

Now, imagine if your labor, or human capital, could be just 5% more productive every day. Obviously, this would have an enormously positive impact on your bottom-line. So, the question of the day is: How can you improve your human capital?

On a global level, things like education and opportunity are major parts of how large countries are trying to improve their human capital to improve their economies. These strategies and internal controls take a long time to implement, and even longer to measure the results. I have seen a lot of business owners think that by giving a raise or a bonus or even a stake in the company their human capital would become more productive. Generally, this does not work. Those things become entitlements and do not create sustained productivity, unfortunately. The best long-term strategy to maximize a firm’s human capital is a holistic human resources strategy that has a healthy budget for training.

Just giving a training budget could be a mistake unless specific results are measured. I recently heard an employee say that the company’s training was horribly boring and as soon as they went to a training class they could not wait for it to be over. Just as with any other investment you make in your business, you should measure the return on your training dollars. Sometimes this is a little hard to do, but it can be done. Part of this budget could be used for tuition reimbursement or on other incentives that encourage the staff to improve themselves.

In total, many are concerned with the United States’ human capital strategy because, according to some standards, the US is falling behind relative to other large countries in terms of the education of its people. Without delving into the political realm of this subject, as business owners we can possibly learn something from this. The future of the US and the global economy rests squarely upon our human capital. The future of our businesses rests squarely on your human capital. Your ability to attract it, improve it, and retain it will have everything to do with your long-term growth and success. A knowledgable CFO Advisor can help you achieve this.

Workforce Productivity and Expectations

Entrepreneurs and business owners are easily frustrated with their employees over a number of issues. The most common is that entrepreneurs and business owners expect their employees to care about the business as much as they do. This is an unrealistic expectation, and learning this lesson can often be very costly. The internal controls of your business are crucial in preparing a business for success.

A picture in the USA TODAY on 4 April 2008 stirred the thoughts for this blog post. Although its focus is on the effect chronic illnesses can have on an employee’s absenteeism, it underlines a broader point – employees add a stressful and often frustrating facet to a business. But, when it is managed correctly, employees will be the biggest reason why you can grow and succeed. In some ways, they become one of your most important customers. Every employee has a different set of objectives as well as current and future needs that they will look to the company to meet. Hopefully the company can continue to meet the objectives and needs of its employees, but sometimes this does not happen.

Let me share an example: Several years ago I hired a talented recent college graduate as a staff accountant in a large company. He had a bright future ahead of him, and we felt we could offer him the CFO career track and opportunity he desired. Within months he was asking for a raise and a promotion. I had clearly defined his compensation and career progression when he started with the firm, and his requests were far ahead of the agreed upon schedule. We could not afford to grant his requests because of the overall disruption they would have caused in our long-term plan. We had to part ways, and I believe both parties were better off as a result – he found a quicker career path, and we found a new person that was delighted with what we had to offer.

So, here is the take-away for business owners and entrepreneurs: set expectations up front and resist the temptation to grant concessions that will hurt the long-term plan of your business. As a company, you exist, in some degree, to help your employees accomplish their goals and objectives. When the company and the employee’s goals and objectives fall irreconcilably out of alignment, then it is best for every one to part ways and move on.

Top Workplace Frustrations

Frustration in the workplace reduces productivity. Reduced productivity results in lower profit and less cash to run the business.

Interestingly, the most common frustration has to do with poor communication by senior management.

Why do entrepreneurs and senior managers create so much frustration through poor communication? There are probably many reasons, but let me offer just one thought on this. A business finance consultant once told me that most entrepreneurs grow frustrated with their employees because the employees never care about the business as much as the entrepreneur. Perhaps this frustration felt by the entrepreneur is part of the underlying issue with why they do not communicate well to their employees when it comes to the business. No matter the reason, it seems that a slight shift in attitude and approach can cure this problem and increase productivity.

Office politics is the second most common workplace frustration. If you are interested in how to reduce this, then I recommend a book called Silos, Politics, and Turf Wars by Patrick Lencioni. It is an easy read, but makes a powerful and effective point. In essence, companies that struggle with politics, according to Lencioni, do not have a compelling rallying cry that unites the entire organization in a cause everyone feels urgent in pursuing, individually and collectively. Removing the office politics could sure help improve productivity, and the cost to follow Lencioni’s counsel could pale in comparison to the increased profitability that might come when productivity increases.