When Should You Hire a CFO? The New York TImes
An article recently ran in The New York Times by Darren Dahl entitled “When Should a Small Business Hire a Financial Chief?” He cites many good reasons to hire a CFO. I’ll summarize and expand a bit:
1. Getting a CEO to do CEO and not do CFO. Many of these successful CEO’s have a lot of financial skills. But the downside is that it often draws them away from the strategic management of the business. I’d also like to add, and I’ve written about this before, (click here), pulling a CEO too many directions can burn them out and render them much less effective.
2. Investor Speak. With all of the business transitions and private equity transactions, it is imperative that a business have someone on board that can communicate with investors. An investment banker once said to me that the accounting and reporting function of a business is a clear reflection of not only the numbers, but also the quality of the business. If a business owner sees accounting as primarily a tool to create a tax return and keep track of the bank account, then the chances of a successful sale at the best price are severely limited. If you as an owner want to look for an exit and are in this mindset, you will have to step up the quality of the process.
3. Due Diligence. Although the article focuses on acquisition, I would expand a bit here. Yes, due diligence carries with it the assumption that a transaction is in the works. However, to me it is part of a larger concept of transparency and disclosure. A buyer isn’t the only one interested in your business. Bankers, insurance companies, governmental agencies, even some key vendors all have a stake in how your business is doing. Responding to their requests for information on a timely, complete and accurate basis is an important credibility building factor.
The last line in the article answers the question the title poses: “…as soon as you can afford one.” The article indicates a revenue level of $10 to $20 million as the “Tipping Point”. But here is where B2B CFO® partner can weigh in. Some of our clients spend only a few hundred dollars a month to have a seasoned CFO involved with their business. Although it doesn’t sound like much, just that small amount of time gets them much closer to the 3 points above at a fraction of the cost of a full time CFO.
Today’s economy is requiring CEO’s and owners to do things differently; to look for better and less expensive options to accomplish the objectives of the business. Check out the testimonials on our website (click here) and see how hundreds of firms have benefited by hiring a B2B CFO® partner.
“As soon as you can afford one” is now.
Read Dahl’s complete article here.
Tax Time!
Q4 2011 has just begun and if you haven’t already made tax planning it a monthly (or at least quarterly) habit, now is the time to start. Here are some things to think about:
• Accrual vs. Cash Basis Taxpayer – I’ve run into this several times in the last few months. Generally speaking, people want to pay the least amount of taxes as late as possible. Cash basis taxpaying is generally the most effective way to accomplish this objective. If you are an accrual basis taxpayer, make sure you understand why and what the benefits are to you. If you are unsure about any of these things, it is best to have a conversation with your tax professional.
• Over paying – If you are one of the few companies that had a great year in 2010, your 2011 quarterly tax payments may be too high. Often times your tax preparer will base the following year quarterly estimated tax payments on the prior year. If he is not aware that you are having a down year you may be paying too much. You won’t be able to get this money back until you get your return filed and if you’re like a lot of companies that automatically file for an extension; you may be waiting for a long time. Although it may be too late to make an adjustment this year if you’ve already made the payments, be aware of the process so it does not happen to you in the future.
• Accelerate expenses – If you’re a cash basis tax payer, encourage all of your vendors to get their bills into you for payment before the end of the year. If you have borrowing capacity, consider paying off your accounts payable and get the deduction.
• Pay State taxes – If you know you are going to have a state income tax liability for 2011, paying your estimate before year end may be beneficial. These are deductible for Federal tax purposes and if you’re going to pay, why not accelerate the deduction into this year rather than waiting to take the benefit next year?
• Wages – You may want to check your payroll cycle for this one. I had a client who had a pay period ending late in December due to be paid early January. By simply getting the payroll done a bit earlier than normal and making sure that the checks were disbursed before the end of the year, they were able to get the tax advantage of an entire payroll run. Let your employees know you’re going to be doing this and also that they may be able to get some additional 401k advantage as a result.
Some of these things may apply, some may not. Each situation is different and we all know how complicated the tax laws can be. The point is now is the time to start the conversation and the process with your tax professional.
Two Truths and a Lie.
How confident are you about your business?
There is an old children’s game called “Two Truths and a Lie.” The idea was to tell three things about themselves, then their friends needed to figure out which one of those three things was not true.
Try playing this game with three statements about your business – then figure out which one is the fabrication, the lie you’ve been telling yourself:
1. “My Financial Statements are Timely, Accurate, Complete and Useful”
Think about the financial statements you get from your accounting department. Do they help you make important decisions? Many times the financial statements are put in a drawer and never reviewed because the information is too old (not timely), the business owner doesn’t believe the information is correct (not accurate), things are missing (not complete) or the financial statements support the preparation of the income tax return, not running the business (not useful).
2. “We Actively Manage Our Cash”
Cash is King! It is the common denominator for all businesses. NO CASH = NO BUSINESS. Some small businesses manage their cash by looking at the current bank balance. We need to remember that there may be checks that have been written but not deposited, as well as cyclical checks that occur periodically (e.g., payroll). Cash management involves understanding your business’s “operating cycle” (i.e., how cash needs vary over time). To improve your “operating cycle” knowledge, it is imperative you understand all the uses and sources of cash, how to calculate the low cash balance points, and what buffer you need. Many times I will ask executives, “What do you expect your cash balance to be in 6 months?” and they won’t have an answer. If they’re fighting cash flow problems today, the future typically only extends to “next week.”
3 . “All Our Systems and Processes Are Documented”
Processes, whether documented or not, exist in all businesses. In many small businesses, the underlying processes to accomplish the work are rarely documented, and even more rarely are they reviewed for opportunities to make them more efficient or less risky. In a business where no one ever resigns, gets fired, or is likely to walk in front of a bus, the lack of documentation is not a problem. But for a business that lives in the real world, documented processes are critical for quickly training new employees and ensuring that organizational knowledge outlasts any single personal. With this documentation, the sales price of a business could potentially increase as it demonstrates to prospective buyers that the accounting, business and administration processes of the business are firmly established.
How did you do? Were you able to find the lie? Were you able to find any truths? You can learn to play this game better. Please let me know if you’d like some help learning how.
B2B CFO® is the nation’s largest firm providing small and mid-market business owners with CFO services on a part-time basis.
The Monotonous Machine – Part 2
In my previous post on this subject I discussed the expectations of the accounting and administration functions of a business and the benefits to the business when these things are being done right; i.e. – boring. First, it keeps the Owner/CEO away from the endless demands of the accounting and administration processes and focused on core business activities. Second, there is an invisible benefit to the company by having a well-oiled machine that can solve current problems and prevent future problems. Since you can’t put a dollar sign on this benefit, it tends to get ignored or forgotten, but it is there and it is very valuable.
What I just said seems pretty simple, unfortunately it doesn’t appear to be the norm. I teach accounting on a part-time basis and usually start out the class talking about this subject. It is a night class of usually 25 students, most of who are working. I ask how many of them work in some sort of accounting department. Most raise their hands. Then I ask if the place seems crazy, out of control, clueless or on fire. Most raise their hands. Ask other people you know that work in accounting departments to see if this is true. Ask bankers and CPA’s. It is a sad state of affairs.
The following items explain why I believe this situation exists and what can be done to remedy the problems:
- Let go of the details – you can’t do it all. This is not to say that an Owner/CEO should walk away from knowing about these business functions, but if you’ve hired good people to take care of it, let them. They want to do a good job so please give them that chance. You picked who you trusted, now trust who you picked. Don’t fear the mistakes they might make, if they’re good, they’ll learn and the department will be stronger for it. Let them take a run at solving the problems; they need to be more than bearers of facts. When this environment doesn’t exist, the good people get frustrated and look for other work and the remaining staff will be tasked with work they are not qualified to do. It will create problems that consume your precious time to solve and make it harder to hire a qualified replacement.
- Spend the money – it is an investment. If you try to use the least expensive people and tools you can find to run the accounting and administrative process, you may think you’re saving money, but you’ll very likely have one of those departments that just doesn’t flow smoothly and is always fraught with problems. Yes it is overhead and yes operations should be efficient, but low costs doesn’t equal efficient. It only takes a couple of bucks an hour to make a big difference in the quality of an accounting person. If you’re running QuickBooks 2001, update. If your department doesn’t know Word or Excel, seek training. I’ve found that having two screens on my computer makes a world of difference. You don’t have to spend a lot more, but if you spend and spend it well, you’ll gain considerable progress in making your machine work the way it should.
- Title creep. When I explain to people the services B2B CFO® provides it often includes a discussion about the concept of title creep. This is a highly prevalent problem with small to medium size businesses. I define title creep as rewarding a person with a title because they are highly trusted and dependable NOT as an indicator of their skill set and level of authority. The title has become a complement. It sounds good and the recipient is probably grateful, but if they don’t have the skill set that goes with the title the CEO/Owner is now hooked. Titles in these cases tend to lock people into an organization. The recipients have been rewarded for their performance and have therefore “arrived”. Since their past performance has been validated as sufficient the forward momentum of the accounting and administrative process development stops. Also, another resulting difficulty is that no one of any greater skill can be brought in to help without offending the title holder. Stakeholders such as employees, owners, bankers, CPA’s and investors who need information and performance from the accounting and administrative functions are often frustrated by the lack of quality and timeliness. Often things stay as they are until the issues get so serious that a CEO/Owner is forced, usually by outside influences, to confront the issue. It does not help to call anyone someone something they are not.*
I was having coffee with a friend the other day who is an MBA student at UC Irvine. Of course we were discussing this. He said one of his professors makes the point quite clearly that accounting is a “social science” with the emphasis on “social”. It’s not just simple math. Even though the basics haven’t changed for over 500 hundred years, it still requires a set of skills and the right environment to make it gracefully boring.
* It’s somewhat unfair to the recipient of the title. They either get demoted or let go, neither of which is good. They are probably used to the status and pay of the title, but will always suffer in the marketplace due to the lack of the proper skills and education. They will not experience a successful career due to lack of proper foundations and will continue to take the same abilities from job to job trying to get back to that trusted role, rather than growing professionally with proper advancement opportunities.
Business Check-up
The following check-up is commonly used by our firm in discussion with business owners to generate thought and discussions about improving business processes and reducing anxiety. Ask yourself the following questions about your business using the following scale to score your response:
5 – I don’t know
4 – Almost never or never
3 – A few times (much less than half the time)
2 – Sometimes (about half the time)
1 – Most of the time (much more than half of the time)
0 – Always or almost always
Questions:
1. Do your bankers and lenders trust your internal financial statements?
2. Are your internal financial statements prepared without errors?
3. Does your internal accounting staff understand your financial statements from an accounting, income tax, business and industry perspective?
4. Are the internal financial statements issued in a timely manner each month?
5. Do you receive monthly reporting on the amount you will owe the IRS on April 15th?
6. Do you receive accurate internal cash flow projections?
7. Are you convinced your company does not have internal or external theft of cash or other assets?
Interpreting your score: 0 to 7; calm / 8 to 13; nervous / 14 to 25; anxious / 26+; panic.
B2B CFO’s work with clients to create financial and goal clarity, which is used to increase cash, sales, profits, company value and to help reduce anxiety. We offer a free financial review to help determine your company’s needs. We will provide you with a confidential written report of our findings, regardless of whether or not you decide to use our services. Please feel free to contact me if you’d like to learn more.
The Monotonous Machine – Part 1
When accounting is done right, it should be boring.
The expectation of most people outside of accounting (and administration) is that things should be done right. Paychecks must be accurate, financial statements must be free of mistakes, vendors must be paid on time, documents must not get lost, procedures must be followed, reports must be ready on time, employees must get correct answers about their benefits, customer invoices must be sent promptly without error, laws or regulations must be complied with. On and on it goes. It’s just the way it is. A mind-numbingly boring machine that runs constantly, always dispensing what is needed without error on demand and without complaint. That is the expectation.
If your machine is running like that, someone deserves a lot of thanks. It takes a lot of work and insight to build and manage a machine that works so well. It does not happen on its own and it is NOT automatic. To paraphrase Buzz Lightyear, “this isn’t boring, it’s accounting with style”.
A couple of things to note if you are a business owner and this is your situation:
1. Don’t take it for granted. You might hear others complain about how much the person supposedly running this boring machine is getting paid. Since all they see is the “boring”, why not save some money and get rid of that person who must not have anything important to do? Don’t buy it. If you do (or if you all ready have), guess who’s now going to tend the machine? You might get some mileage out of the staff, but it is YOU that they are going to be coming to when they run into something they can’t handle, or when they have a tough question, or when something goes wrong, or when a customer or manager calls with a complaint.
2. Keep in mind the “invisible benefit”. When things are working this well, you can bet that some pretty significant problems are being avoided. You MUST put value on this; out of sight should not be out of mind. The people outside your business can help you get a grip on how valuable this is. Just ask your CPA, attorney, banker, insurance brokers, customers, suppliers and vendors. They’ll tell you how much they appreciate your boring machine. They will also tell you how messed up some of their other clients are because they don’t have their machine under control and how much time and money that’s costing them because of it.
All this brings to mind something I saw years ago on TV. Remember that guy who would spin six or eight dinner plates on top of those skinny flexible poles? He’d go through a lot of work to get things up and running and once they were how it didn’t take much effort to keep it going. It looked like things weren’t even moving…sort of…boring! But do you also remember what happened when he walked away?
NEXT TIME – WHAT IF YOU DON’T HAVE THE MACHINE?
Hire a CFO? Are you kidding?
(This article was published in the March 2011 edition of Caypen Magazine – for and by Entrepreneurs)
If we’ve learned anything by this last round of economic pounding it’s that entrepreneurial businesses need to become highly nimble with their business plans, extremely frugal with their money and more resourceful with their decisions. If you are an entrepreneur, you’re probably already feeling the vacuum pull of your business administration. It threatens to tear you away from your passion and from what you do best. The added weight of these new realities only makes the pull that much stronger.
In his book, “The Danger Zone”, Jerry Mills, founder and CEO of B2B CFO describes the unofficial organization chart that exists within any organization which looks like this:
Finders are at the top, they are the future thinkers, the business developers, entrepreneurs, visionaries, etc. They probably started the business, are the driving force behind the products or services delivered and client relations. Right below them, the Minders are primarily the administration types that keep your organization moving along; accountants, receptionists, marketing, human resources, etc. On the base of the pyramid are The Grinders, those that carry out the physical work for the company.
The danger zone looks like this:
Do you see where this is going? If you are the Finder, there is a very good chance that you’re being pulled out of your proper position down into the world of Minders. They have a lot of work to do and will consume every minute of your time if you let them. You’ll be stuck in endless meetings, and pestered constantly to resolve problems. You’ll be dealing with staffing issues, sales issues, product issues, and the list goes on. If your here, you’re probably wondering how it happened and it may be putting a damper on your passion and ambition. This will threaten the health of your operations and can ultimately put you out of business.
My suggestion: hire a CFO.
Many of you are thinking, “What? Are you kidding? Do you know what CFO’s cost?” According to startheregoplaces.com, CFO salaries for small businesses range from $94,000 to $384,000 and beyond, most likely these salaries do not reflect stock or other incentives. Most of these minding issues can be managed by the skills of a CFO. So, if you’ve let yours go due to cost or never had one to begin with, how do you plug that administrative black hole down the hall? Things have changed, , let me suggest something -outsource your CFO.
You may have heard of this before, but have you ever investigated the idea? If you have, it is unlikely that you found anyone who specialized in your business – like finding a needle in a haystack. You may also have concerns that he or she is a part-time CFO because the economy is rough and they’ll be gone as soon as the job market picks back up. How do you know if they are purposely committed to serving their clients and developing a long term results and trust based relationship?
Here’s a solution.
Consider B2B CFO®. Every company can afford a B2B CFO® partner. B2B CFO® is celebrating its 24th anniversary in 2011 and solidifying its position as the leading provider of part-time CFO services to small and mid-market companies in America. B2B CFO® is the nation’s largest CFO services firm of its kind and in an era when executive services firms come and go, the firm has achieved more than two decades of innovation and steady growth. Today there are more than 180 Partners in 39 states and each with more than 20 years of CFO or equivalent experience. The company leverages communication technology so Partners can constantly seek out answers from each other to solve individual client needs. Each Partner establishes his own clientele with the objective of becoming a long term trusted advisor. . This allows Partners to maximize the level of CFO work they are qualified for and maintain satisfying and productive relationships with their clients. Also important to note are the firms core principals: honesty, integrity and objectivity.
As a first step in getting to know the needs of you and your business, a B2B CFO® partner will sit down with you and perform a free financial review of your company. The partner will schedule a day to meet with you to ask about your concerns, interview appropriate staff, look at your company’s accounting systems, and review your internal and external financial statements and key management reports. You will receive a confidential written report of the findings, regardless of whether or not you decide to use their services. You will not be presented with a written contract for services – B2B CFO® Partners engage clients with a handshake.
Why not give them a closer look and schedule a time to meet with a B2B CFO® partner today.
Coming Staffing Changes – the 36% solution
I recently heard an interesting statistic at a lunch meeting a week ago. According to Thomas Trout of Accretive Solutions, 36% of the generation Y adults are currently seeking other employment opportunities. Great I guess if you’re a placement agency, perhaps not so great if you’re a business owner. At a minimum, that stat indicates you probably should be getting ready for significant people decisions once the economy starts to generate jobs. Add this to all of the other management changes you are expecting after the turn, and you’re going to be very busy.
This thought was rolling around in my head at the same time I was reading “Good to Great” by Jim Collins, so I thought I would share his insights.
According to Collins, one of the characteristics of great firms that he identified was that the leaders of these firms spent a great deal of time “getting the right people on the bus, the wrong people off the bus, and the right people in the right seats”. The beauty of this is that hard working conscientious people don’t require bureaucracy and hand holding. They do the right things because it’s right, work hard because they are loyal, and solve problems on their own because they are dedicated.
When it comes to making the people decisions needed to accomplish the above, Collins has identified the following disciplines followed by great companies:
1. When in doubt, don’t hire.
2. When you know you need to make a people change, act.
3. Put your best people on your biggest opportunities, not your biggest problems.
I’ve always found staffing changes challenging. And if the coming wave leaves you with a lot of open slots to fill, it is going to be easy to make hasty decisions. Resist the temptation. If you focus too much on the cost side of the decision, you will miss what I call the “invisible benefit” of good staff – future problems averted because good people do good work.
A final quote by Collins to sum this up, “The old adage “People are your most important asset” turns out to be wrong. People are not your most important asset. The right people are”.
Fraud and Trust
I was having dinner at Houston’s with a friend the other night and the topic of fraud came up. He asked, “You’ve got CFO’s, controllers, all sorts of staff, auditors and regulators…how does this stuff even happen?” I said that fraud in a situation like with all those people is pretty rare. In those cases, you’re apt to have a pretty strong “Control environment”, separation of duties, cross training, dual control, that sort of thing. It would be difficult for someone to steal in a situation like that. Don’t get me wrong, fraud is a serious thing and a well-designed and well-staffed financial accounting function is critical to keeping things in check. But these are publicly traded companies with serious resources and legal requirements that compel them to create these systems.
But it struck me that I should write about the risk as I see it in the small business environment. I’m not going to discuss the statistics or behaviors to watch for; there is plenty of good information on that. Just click this link to see an article by Jan Norman of the Orange County Register on the subject.
But, for the small business owner, unfortunately the risk comes from trust.
The typical scenario is a small business owner who is working his fingers to the bone and finally finds someone who can handle the back office tasks and accounting. The person becomes a fixture in the business and receives almost total reliance from the boss. Usually what you see is a single person in charge of the administration and accounting with almost unlimited access to the company’s cash and assets. Often this situation is accompanied by what I call “Title Blur”, a title given to someone who is clearly unqualified for the role as a reward for being so indispensible. Trust and the shame of violating that trust, are the only controls the owner has to protect against fraud. And once you have this situation, you are now at risk.
You’ve probably heard it said in one way or another that reason doesn’t stand a chance in the face of emotion. Trust falls into the reason category and it can go right out the window for a whole host of emotional reactions. Greed, envy, personal tragedy, mental illness, you name it, can all stack up pretty high and make “trust” seem like a silly little annoying thing. I don’t know how many embezzlers set out to steal from the first day on the job, but life has a curious way of throwing emotional changes and events at us over time. And at some point, the trust will be tested. Maybe the thought occurs to a person, but then is immediately rejected as wrong because of good character and values. Or, maybe not.
One event that I often site in my accounting classes occurred in Orange County in 2009. The trusted employee embezzled $577,000. She’s in jail now, and the owner will never get that money back. Imagine what that does to your sense of trust. If you’re a business owner in this situation, don’t leave this door open. It’s just not a good idea. If it happens to you just one time, it could wipe you out.
Obviously, being a B2B CFO® I believe we can help you if you’re in this situation in the following ways:
• Part of your decision to hire the person was probably cost related. The market rates for accountants with the skill level you really needed was just too high. Since B2B CFO® provides these skills on a part time CFO basis you now have access to the knowledge and resources you need on an affordable basis.
• There are controls that can be put in place in these situations and B2B CFO®’s have the knowledge and experience to do this.
• An on-going consistent relationship with a B2B CFO® adds a level of oversight to the finance and accounting function. We know what to watch for and just the fact that staff is being overseen helps to keep people in check.
Trust in others is something that we naturally desire. It is critical for things to work properly and there is a great sense of satisfaction in a mutually trusting and productive relationship. But it is also a natural desire for humans to be safe. So by putting the proper boundaries and controls in place, we can have the safety we want and need and also be able to enjoy the full value of a trusted relationship.
Jack and the Surfrepreneur’s Budget
A Southern California Guide to Budgeting
(Links provided for translation purposes)
What, budget? Whatever. You cubular hoadads do what you need to do, as for me…grab board, hit beach, shoot e-curls.
Okay you SoCal surfrepreneurs consider this while you’re waiting for your Alchemy Hour; Mark McCormack, in his book, “What they don’t teach you in Harvard business School”, sites an interesting study. A group of Harvard business students were asked about their personal goals. As it turns out, only 3% had written goals, the other 97% had either unwritten or no goals. After 10 years, the group with written goals was earning 10 times more than the other 97%. So, even though this applies to individuals, I think it makes a good, if not compelling case to have goals for your business. In business lingo you can call that a budget.
But I can totally understand why you’d rather be locked in. For the most part, and I’ve been there, budgeting is a colossal waste of time and energy. As soon as you set one in place, you know exactly what is not going to happen. So what’s the point and how do you make this work for your business?
For that, you go to the sage, Jack Welch. In his book (sorry, another one), “Winning”, he recounts his effort to re-tool the budgeting process at GE. Typically, a budget is established, submitted to the powers, then you live in fear of the day at the end of the year when it is dragged out and your bonus is shredded because you couldn’t foretell the future. Or you got lucky, hoodwinked the boss with a low ball budget (aka: UPOD – under promise, over deliver), got your bonus, laughed all the way to the bank with nary a thought of how you really contributed to the success of the business. A culture of game playing, not winning takes hold.
Jack promotes the “stretch budget”. In this case, rather than the zero based budget where you start from scratch, your goal is to improve over the prior year and to beat your competition. Stretch budgeting harnesses your creative energy to find better ways to do what you did before and harnesses your competitive drive to beat the competition. These are the characteristics that a business needs to succeed.
So, for example, say you came up with a budget to grow 12% over last year. You only hit 6%. This would be a clear improvement, but still short of expectation. So management has an excuse to axe your bonus and everyone feels like they’ve failed no matter how much improvement was made or how hard they’ve worked. But if performance against your competition is a factor and your toughest competitor only was able to squeeze out a 3% growth rate in a tough economy, you’ve stomped them. In surf terms, it takes the quality of the swell into account in determining how sweet the ride. Now you’ve made budgeting something that is motivating and relevant, not just an exercise in chance.
So why is a hodad like me writing about something like this? Well, for one thing, B2B CFO®’s are sitting up at night reading these books and studies. We read, you surf, simple as that. We want to say relevant for our clients, not a gory parasite. Additionally, our partnership resources provide us with benchmark numbers so you can compare your business with the competition. Give one of us a call. It runs in our blood, kinda like surfing.
The Wall Street Journal featured B2B CFO® as experts in cash flow management. 
