CFOWise

Did You Win or Lose?

Sports teams compete against each other and they keep track of the score.  They know who wins and who loses, and each player on the team has more statistics on their performance than they know what to do with.  Individual sports athletes, like golfers and runners, meticulously measure their performance against themselves and others and use their numbers to find ways to improve.

Is running a business any different?  Is there a way to know if you win or lose each day?  Each week?  Each month?  Each year?  The answer to all of these questions is yes, and I write about how to accomplish this in my recent American Express OPEN Forum Article: 4 Reports that will Keep Your Business Thriving.

Are Your Numbers as Deceptive as an Eclipse?

[Author's Note: This post is not about the Twilight Series' release of its third movie.  I do, however, admit that my wife took me to the first two and will likely take me to the third soon.]

At 4:17am on Saturday, June 26th 2010 I saw the beginning of a lunar eclipse.  I was on an early-morning (or more like a middle of the night) hiking trip and we stopped to watch this rare occurrence (this was the first of only two this year).  What we initially saw was unimpressive.  At first, a dark cloud seemed to cover the upper arc of the moon.  The earth’s shadow was barely beginning to interfere with what appeared to otherwise be a full moon.

As the morning carried on, the eclipse continued to black-out a quarter and then an entire half of the moon.  I have never seen anything like this before – it was amazing to watch.  If I was not aware that we were expecting a lunar eclipse, I may not have even noticed this phenomenon.  I wondered how many people, not knowing it was supposed to be a full moon, might have looked at the moon in those early morning hours without realizing what they were seeing.

Then, I couldn’t help but relate this to one of the common business problems I see.  Many businesses will occasionally look at their numbers (in the form of financial statements or some other form of dashboard/KPI data) but the data and information they are looking at is not meaningful and is not helping them improve their business.  Why?  Because they lack context and comparison.  I took several “snapshots” of this event throughout the morning and ultimately I could comprehend what was happening.

Just as I grew to appreciate the eclipse as I saw it progress, others who perhaps only briefly looked at the moon once at any time that morning likely missed out on the eclipse altogether.  So, how do we solve this?  We have to put the numbers of the business into context against where we have been, where we are going, and what our competitors and industry are doing.

We refer to this as comparative analysis, and it works as simply as this.  If we generated $250,000 of sales this month, is that good or bad and what can we do to improve it?  First, we should understand what we have done in the past (last month, last year, same month last year, etc.) to understand if we are growing or shrinking.  Then we should compare it to what we were hoping to accomplish that month and if those sales are helping us to or hindering us from getting where we are headed.  Here’s an example: if we had sales in the same month of the prior year of $200,000, and last month we had sales of $230,000, and we were planning on $240,000 to achieve our goals for the year, then we can call $250,000 in sales a very good month.

While this revenue example may seem very simple and like most businesses do some type of similar analysis, we need to consider if they are doing the same analysis on their lead generation, conversions, operational efficiencies, and other financial metrics.  This will truly put the entire month into perspective in terms of our performance with one exception – industry benchmarks.

How are we doing relative to others in our industry?  As much as we may claim to have an innovative business model, the truth is that business models have been around a long time and there is very little innovation possible (although there is at least a little).  Even if we feel we are better than our competitors, we can still learn from their numbers and we can use them effectively as benchmarks for our own performance.

Are your numbers deceptive like a lunar eclipse?  Avoid the deception with comparative techniques that will make your numbers more meaningful.  Ultimately, the more meaningful your numbers are the better decisions you will be able to make, which will help you improve your cash flow and profitability!

The 2 Problems with Dashboards

There seems to be a lot of buzz around businesses having a dashboard.  Even Intuit has jumped on board and tried to provide this functionality in QuickBooks with its Snapshot Center.  For those unfamiliar with this concept, a dashboard is one place a business owner should be able to look to see all of the key metrics and performance indicators of their business.  To learn more about this concept, please visit my blog post: The Key Business Metrics Every Entrepreneur Must Know.

Feedback is a Gift

About 4 years ago I was approached by a man who wanted to give me some feedback – and none of it was positive. 

20 Indicators Your Financials are Wrong

I have looked at a lot of financial statements over the last five years from at least 250 different companies in almost every industry imaginable.  They all had one thing in common – they were, in some way, wrong.  This is a major challenge of most start-up, emerging, and medium-sized businesses.

5 Ways Entrepreneurs Improve Cash Flow with Benchmarking

Imagine swimming from one end of the pool to another in 30 seconds.  Is that good or bad?  How do we determine how we are doing, what is going well, and what we should try and improve?  It primarily has to do with comparing our performance to ourselves and others.

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

I Cannot Predict the Future…Budgeting is Worthless!

I have heard this statement more often than I care to admit: “I cannot predict the future so a budget would be worthless for my business.”

An article entitled How to Create a Budget in BusinessWeek prompted me to recollect some of my experiences with helping people who have the above attitude towards budgeting gain a new appreciation for the process and, more importantly, the results the process can generate. 

I have and will continue to make this guarantee to any business in any industry anywhere in the world: if you follow the “best practices” steps to creating a financial plan and operating budget for the next twelve months and you track your monthly progress against that plan, you will know more about your business than 80% of your competitors know about theirs.

Why can I make that promise?  Because the things learned in that twelve months are so revealing in terms of the most effective business model and other competitive advantages that the company cannot help but begin to develop and implement the right strategies for making the business more successful. 

Why do most businesses fail to implement this process?  I have found that the two main reasons are lack of discipline and lack of resources.  This process requires a great deal of disciplined time, including the discipline to review your results against your budget EVERY month.  The budget is worthless if we do not do this.  The focus of this monthly analysis should be on the variances in the budget.  We need to know WHY we varied from our budget.  What can we learn from that?  What can we change to improve our performance in that area?

Some companies lack the resources to be able to analyze their historical data and then easily track their progress.  Perhaps they do not have an accounting system in place, or perhaps they do not have anyone that knows how to properly operate their system.  The accuracy of the numbers is certainly a critical element to making the budgeting process a successful experience.  So, having the right staff and a functioning accounting system are critical to this process.  Even QuickBooks allows its users to enter in budget information and then run reports to track the monthly progress and variances.

If anyone reading this post doubts me, I challenge you to try it for 12 months.  In my experience as a part-time CFO for many emerging companies, the value derived from our busgeting process and reports has improved the bottom-line dramatically.  I think you’ll experience similar results.

The Key Business Metrics Every Entrepreneur Must Know

Imagine you own a successful business but become stranded on a deserted island.  The only communication you receive about your business comes once a week on a sheet of paper in a bottle (yes, a message in a bottle).  What information would you need and want on that paper?  When you remove the subjective elements of running a business and try to do it on objective data alone, how does that change your ability to make the right decisions? 

DASHBOARD
For the purpose of this article, we will refer to this piece of paper as a dashboard report, although it may also be called a flash or KPI (Key Performance Indicator) report. The dashboard should be critical in assisting an entrepreneur or business owner predict sales, cash flow and profit and gain clarity on the performance and direction of the company.  In addition, it should be a critical decision-making tool used in the day-to-day operation of the firm that empowers CEOs and business owners to make the best decisions for their respective companies that will drive cash flow and profit.

There are three main steps to consider in building an effective dashboard.  First, we should know the averages and benchmarks for our industry.  Second, we should know what our historical performance on these same averages and benchmarks.  And third, we have to develop what many call a balanced scorecard that comprehensively examines the whole company, not just one or two parts.

SOFTWARE AND TRACKING TOOLS
The answer is not to initially buy a business metric or dashboard software program.  These tools are valuable, but every business needs to initially determine what metrics it should track.  In fact, it is always best to use Excel or even a pen and paper to initially track several different metrics. It is nearly impossible to know which metrics will be the most effective until we get some experience with it.  We can save money on the software for now and focus on finding the best metrics for our business.  Once we know the metrics that are the most effective for our business, then we can consider investing in a dashboard tool.

Marketing, sales, operations, and financial are the four main categories every business needs to include if we want the dashboard to adequately inform us on our deserted island.  We will briefly discuss each of these areas below:

MARKETING AND LEAD GENERATION
This is where it all begins.  We need leads if we ever hope of acquiring customers.  Our dashboard should include the top two to four metrics for measuring our lead generation.  These may include number of visits to our website and percentage of those visitors that become qualified leads.  The key here is to focus on the processes you are currently employing to market and generate leads and measure on your dashboard the efficacy of these efforts.  The cost of acquiring a lead should be included if it is measurable (and it almost always is).

SALES
Obviously a lead is still useless to our business if we cannot convert the lead into a paying customer.  Conversion of leads to customers is a critical element of most dashboards.  In addition, total sales should be included so we know how our volume is doing on at least a weekly basis.  Sales should be communicated in terms of dollars, number of sellable units, and average pricing.

OPERATIONAL EFFECTIVENESS
Since sales is responsible to turn the leads into a paying customers, we desire to satisfy and retain the customer as long possible as effectively and efficiently as possible.   The point here is to structure our business model so that we deliver everything we promise for as little cost as possible.  Let’s review a couple of examples.

If I am a professional service firm that is mainly selling time in exchange for services, then I am concerned about my average cost of paying staff per hour as it relates to my average revenue per hour.  I will also be very concerned with ratios like revenue per employee and sales-to-wages. 

If I manufacture products, then I will want to understand the efficiency of all of my inputs, including materials (and scrap), labor, contractors, and other direct costs.  In essence, we need to look at the major determinants of our gross margin. 

We should consider three additional metrics on our dashboard that deal with operations.  First, an indicator of our current utilization of our total available capacity.  Second, customer satisfaction and retention metrics are a valuable barometer for ongoing sales.  And, third, a measure of product or service quality levels.

FINANCIAL – CASH, PROFIT, & HEALTH
We should know what is happening with all of our major current assets, which usually includes cash, accounts receivable (AR), and inventory.  We should quantify the performance of our AR in terms of total % over 60 days past due as well as the Days Sales Outstanding (DSO).  We should understand if our inventory levels are at efficient levels.

We may want to include some of major current liabilities, like accounts payable and line of credit balances.  This information leads to the tracking of the firm’s current ratio on a weekly basis and other versions of the current ratio that traditionally predict cash flow with some accuracy.

CONCLUSION
If we received a weekly dashboard report with all of the information above (tailored to our industry and business model), how well do we think we could manage our business from a deserted island?  Now, we should imagine having all of that information every week along with being in our business every day.  Not only will we feel empowered to make the right decisions to improve cash, profits, and financial health, but we will see our level of anxiety (which comes from a lack of this information) drop significantly.  Even if the dashboard reports bad news, knowing about it will still reduce our anxiety because we will at least have the opportunity to do something about it before it becomes worse.

As part-time CFOs, we help start-up, emerging, and even medium-sized companies establish and maintain effective dashboard information.  The result is always the same – better information generates better decisions, and better decisions lead to improved performance.

Why Measuring Social Media ROI is so Difficult

If you want to open up a can of worms, ask a group of internet marketers and CMO’s how to measure the ROI on social media investment and participation.  There is and will continue to be a heated debate on this topic until we all realize one thing: Social Media is about branding, not advertising.

Traditional advertising defines a specific spend and generally has measurable results. A return on investment is easy to calculate.  Building a brand requires a significant investment, but does not generate track-able results.  The reason a person at the grocery store chooses Pepsi over Coke is a summation of a lifetime of branding messages (sometimes in overwhelming quantity).  How do you measure that?  It is very difficult, although there are many options for understanding the overall value of branding (referred to as goodwill for the accountant types).

We have the same problem with social media.  Social media is about building a brand, with the cumulative efforts assisting to generate sales.  But branding is less directly involved with the final transaction as traditional, measurable mediums.  How much did the direct mail piece I receive influence my decision to call the home security company in comparison to the branding I have been exposed to for the last five years at sporting events, parades, etc?  Hard to say, and even more difficult to quantify.

In its truest form, social media is a venue to add value to the the market in general in the form of free advice, expertise, networking, and communication.  All of this leads to relationship building with a more targeted market that gravitates towards your content and brand.  I am all for measuring ROI, but I also think there is often a lot more at play than a simple ROI calculation will capture.

Social media is here to stay (just watch this video), and businesses need to get involved.  A great example of this is the professional services industry.  The most effective methods for marketing in professional services have long been referrals and networking, but these survey results indicate that more of the networking efforts in the next 6-18 months will concentrate on social media (LinkedIn, FaceBook, etc.).

So, are you still itching to track the ROI of your social media?  Consider a change of perspective from ROI to the overall value of your brand. Then you’ll be getting closer to overall value generation than transactionally-based (and often incorrect) attempts to attach an ROI to social media, or branding, activities.

Some may take issue with my business finance consultant background and wonder why I am not hard-nosed about tracking ROI on social media efforts.  I believe it is my CFO career that actually gives me credibility to say that ROI on social media is not about ROI, but it is about building a brand.  The brand of a firm should have legitimate and palatable value, and that is what I care about.  Ultimately, the value of the brand becomes a long-term and often sustainable competitive advantage that commands premium pricing, better margins, and maximal cash flow!

CFOwise founder quoted in Utah CEO Magazine

Utah CEO Magazine quotes Ken Kaufman in their article on, “Pricing Goods and Services in a Recession”.

PLEASANT GROVE, Utah, June 6, 2009 - CFOwise is proud to announce that its Founder & CEO, Ken Kaufman, was quoted several times in a recent article published in the Utah CEO Magazine and written by Heather King.

CFOwise founder Ken Kaufman commented on this great exposure by stating the following, “The Utah CEO Magazine is a great resource for CEO’s operating in the Utah area. The information provided in this article and throughout the magazine is valuable and indispensable to CEO’s.”

This article in particular provides Owners and CEO’s the information that they need in order to effectively price their goods and services during the recession we are in. Ken Kaufman was quoted in the article saying, ” If a company is going to change their pricing, they have to recognize that it is a business model change and they have to go through and figure out what the impacts are going to be from a profitability standpoint, a cash flow standpoint and then from a competitive standpoint.”

About CFOwise

With over two centuries of senior-level executive experience, CFOwise is the premier provider of permanent part-time CFO services to start-up, emerging, and medium-sized companies in the United States. For more information, please visit: www.cfowise.com or contact Kim Waldron at 801-380-5615.

About Utah CEO Magazine

The Utah CEO Magazine can be summarized in their Editorial Philosophy, “Robust business is good for everyone, and creating that environment starts with our readers – Utah’s business elite. Our purpose is to provide information to help those business leaders navigate through challenges and seize opportunities. By consistently offering superior content, Utah CEO supports the immediate goals of Utah’s businesses while encouraging forward thinking to sustain the momentum. Outstanding ideas are at the core of a viable business culture, and Utah CEO keeps an ear to the ground for those outstanding ideas.” The content in Utah CEO is designed to serve a business purpose first, not just entertain. For more information please visit: www.UtahCEOmagazine.com .

Part-Time CFO’s Agree on Need for KPI’s

The following results of a survey conducted by Grant Thornton validate what every business needs – a weekly report that highlights the most important ratios and metrics in the company. GRANT THORNTON SURVEY RESULTS

Part-time CFO‘s Agree on Need for KPI‘s