A few weeks ago, I started another series of our Financial Leadership Workshop, and in Day 1, we discuss that paradigm shift that needs to take place to go from accounting to financial leadership. So, I compiled all the quotes from all of my curriculum that make me think… How can I lead my company differently? What can I do to better serve my clients? Take a look at following quotes every financial leader needs to read. Leave a comment below to suggest any other quotes and/or your take on the quotes I listed.
Quotes Every Financial Leader Needs to Read
While each of the following quotes is focused on a specific need or issue, I believe that every CFO, CEO, and financial leader needs to explore what each of these quotes mean.
Having a Plan
So often, entrepreneurs do not have a plan. We hear horror stories of executives telling their teams that there is no plan. Having no plan is a plan and it usually ends in disaster. Or maybe you have a plan but it is in your head and not documented. You must get your plan down in writing. Do you remember Captain Sullenberger landing the plane in the Hudson River on that chilly winter day? Here’s his take on having a plan.
“During every minute of the flight, I was confident I can solve the next problem. My first officer, Jeff Skiles, and I did what airline pilots do: we followed our training, and our philosophy of life. We never gave up. Having a plan enabled us to keep our hope alive. There’s always a way out of even the toughest spot. You can survive.” – Capt. Chesley B. Sullenberger III
Role of a Leader
Do you know the role of a leader? Condoleezza Rice, former Secretary of State, said the following about a leader’s role.
“The role of a leader is to inspire people to a common goal and enable them to get there.”– Condoleezza Rice
Are you financially leading your company (or trying to)? We are starting a new series of our Financial Leadership Workshop this March 2019. Click the button below to learn more about what this coaching workshop is all about.
“It’s all about sales; the rest is just details!” – Jim Wilkinson, founder of The Strategic CFO
There are several budgeting quotes every financial leader needs to read.
“A well-constructed numerical estimate is worth a thousand words.” – Charles Schultze, former Director of the US Bureau of Budget
“Budgeting is the bane of corporate America.” – Jack Welch, former CEO of GE
“Without a yardstick, there is no measurement And without measurement, there is no control.” – Pravin Shah
The Hedgehog concept – created by Jim Collins – is when companies identify what they do best and focus on that. For example, a hedgehog knows how to defend itself. That’s what it does best! It does not try to expend time or energy hiding or fighting.
“The purpose of budgeting in a good-to-great company is not to decide how much each activity gets, but to decide which areas fit the hedgehog concept and should be full funded and which should not be funded at all.” – Jim Collins
“The only things that saves us from the bureaucracy is its inefficiency.” – Eugene McCarthy, US Senator
Equip yourself with multiple tools, and more specifically, the right tool.
“If the only tool you have is a hammer, then every problem looks like a nail!” – Abraham Maslow
I have written about this in the past, yet it is an ongoing subject that we deal with business owners day after day… A client recently asked me why we (The Strategic CFO) were insisting on generating the clients financial statements on an accrual basis and per GAAP.
He insisted that cash basis was fine and that we were just creating a lot of busy work.
These principles have evolved over time as we get smarter and more advanced.
The main principle behind GAAP financials is to generate a set of financial statements that represent the most accurate picture about your company. They should be comparable, not misleading and clear so a third party can understand.
So the uniform application of GAAP to business transactions would most clearly represent a true picture of your business.
The Importance of Using GAAP Financial Statements
There are several reasons companies should be using GAAP financial statements.
First, public companies and certain loan documents require GAAP financial statements. We recommend that all private businesses also use GAAP financials as a best practice so you can have the best information to run your business.
The invoice gets mailed, taking 1 week to get to you.
Your staff person got the mail and did not enter the invoice in the system for a week.
Then because you did not review your aged payables until the end of the month, you are likely to be 60 days behind your business. You will not have the liability section reflecting the payable for this example until much later.
You need to monitor the trends so that you can make business decisions timely.
Critical for Growth
We see it over and over again… A good business is mismanaged because the CEO or entrepreneur does not want to spend the money or take the time to understand his financials or keep them per GAAP. Eventually, they are upside down on working capital and run out of cash. This is especially true in a high growth environment.
Reasons for Using GAAP Financial Statements
If you have a small business of 3 employees with one legal entity and have sales of $800,000 per year with no plans for growth, no debt, no outside investors, then you can certainly keep your books on cash basis and ignore GAAP.
But if you grew beyond that and have a substantial business that you want to grow, or you have debt, our outside investors, then you seriously need to consider keeping your books and records on an accrual basis and per GAAP.
In short, why should you keep your books and records on an accrual basis and per GAAP?
Working Capital – Not having them per GAAP can lead to operational disaster
So to answer the question we started this blog with why use GAAP financials?
First, using these principles allow your business to be presented correctly to third parties.
Then, you need accrual based financials to properly run your business. Otherwise, you are 60-90 days behind running your business. It may be required by your lender.
Having your books kept per GAAP actually adds value to your business from a valuation perspective. While you are working on adding value, make sure there aren’t “destroyers” taking value from you. Download our Top 10 Destroyers of Value whitepaper and protect your company’s value.
Why use a daily cash report? When facing a cash crunch, CFO/Controllers often manage cash by reviewing the online bank balance. Though easy to do, this number is not accurate. It does not take into consideration outstanding checks. Another symptom of a cash crunch is that accounting falls behind in processing information. By preparing this daily cash flow forecast or projection you force the accounting department to stay current with posting transactions.
NOTE: Want the 25 Ways To Improve Cash Flow? It gives you tips that you can take to manage and improve your company’s cash flow in 24 hours! Get it here!
Update the Daily Cash Report daily; remember, this process should not take more than thirty minutes to prepare. However, there is some element of planning involved insofar as weekly cash commitments are concerned. If the company is in a severe cash crunch, you may need to negotiate with vendors about partial payments.
The Daily Cash Report format should be set up and managed by the CFO/controller. However, it can be outsourced to a staff member in accounting to keep up on a daily basis. There are 3 sections to the Daily Cash Report: Today’s Cash Position, Weekly Cash Position and Payables Detail.
Prepare the daily cash flow report in the morning of each workday. Use the information on the report to help you manage cash for the day that you prepare it.
[box]Note: Today’s Cash Position is really the ending cash position from yesterday. [/box]
Daily Cash Position
This purpose of this section is to give you the cash position at the start of the day as per the G/L balance. The cash position for the start of today is the same as the ending cash balance from the last business day. Hence, the report you update and start off with at the beginning of today will be on the information from the last business day. (Reminder: this report is prepared the following day of the reporting period.)
If the report you are preparing for today is based on information from the last business day, then it is important to capture all the cash flow events that happened during the course of the last business day. To do so, we need to have several anchors. First, you need a starting balance. This starting balance is the beginning cash balance per G/L and any outstanding checks from last business day (usually yesterday). This beginning cash balance is the same as the ending cash balance from two business days ago. Both the cash balance and outstanding check balance should be summed together to a Reconciled Balance. Click here for more information on account reconciliation.
After obtaining the starting balance for the last business day, we need to capture cash inflows. Examples of cash inflows include cash payments, lockbox payments, credit card payments, and any checks received through the mail. Again, these cash inflows and deposits are from the last business day. Add up the total amount of cash inflows together to obtain the Total Deposits.
[box]Managing your cash flow is vital to a business’s health. If you haven’t been paying attention to your cash flow, access the free 25 Ways to Improve Cash Flow whitepaper to learn how to can stay cash flow positive in tight economies. Click here to access your free guide![/box]
The third piece of financial information you need to obtain is information on cash disbursements from the last business day. Cash disbursements include payroll checks, A/P checks. Your firm may prefer to have a separate line item for certain significant cash disbursements. As long as you keep the overall report simple and uncluttered, this is fine. After all cash disbursements have been accounted for, sum up together to obtain Total Disbursements. Enter the cash disbursements as negative numbers. The report is intended for non-accountants who think in terms of expenses being negative.
Sum up all of these elements together to obtain the ending cash balance for the last business day:
Reconciled Balance + Total Deposits – Total Disbursements = Cash Balance.
Incoming monies from yesterday Disbursements (Insert Date from 1 business day ago)- Payroll Fees – AP Checks – Other Disbursements = Total Disbursements
ENDING CASH BALANCE AS OF : This is also the Beginning Cash Balance for TODAY. Reconciled Balance + Total Deposits – Total Disbursements.
Weekly Cash Position
The weekly cash position gives management an estimate of how much incoming cash and cash disbursements the company expects to have for the entire week. Remember, this is an estimate only. Update this estimate periodically so that the company improves on the estimate. Your company may prefer to have a separate line item for certain significant cash disbursements. This is acceptable as long as you keep the overall report as simple as possible.
A template follows as below:
Estimated Deposits for the week ending: Lockbox/Mail + Credit Cards = Total Estimated Deposits
Estimated Disbursements for the week ending: Hourly Payroll + Salary Payroll + A/P Checks Committed + A/P Checks Expenses = Total Estimated Disbursements
The CFO/controller will need to list the different vendor/suppliers that the company intends to pay for the week. During times of extreme cash shortage, it may be helpful to make a note of which vendor/suppliers are of high priority.
Update daily. However at the beginning of the week, plan to give extra attention to prioritize which vendors should be paid. Depending on the cash situation of the company, try to think of paying only a portion of what’s owed.
List of the vendor/suppliers with the amount needed to be paid. Finally, sum up the total amount. Vendor A + Vendor B + Vendor C = TOTAL
Monitor & Review
Monitor and review the Daily Cash Flow Report on a daily basis in situations where cash management is big key part of company survival. A key part to focus on is the estimate of weekly cash deposits. Monitoring and reviewing the cash deposits will improve the accuracy of the estimates. For more ways to improve your cash flow like this one, download the free 25 Ways to Improve Cash Flow whitepaper.
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I say this during every Office Hours I host for our SCFO Lab members… “You need to have a 13-Week Cash Flow Report. If you don’t have one, get one.” As we are quickly coming into the holidays and the new year, let’s look at why you need to have a 13-Week Cash Flow Report.
Or, do you live in a company that is cash rich, and you simply do not see the need to forecast cash because you know you have plenty in the bank? Well, you still need a cash flow forecast.
Whether your cash flow crisis resulted from the fluctuating market or mismanagement, there are a couple of tips in handling a cash flow crisis.
(NOTE: Regardless of whether cash is tight or flush, every company should have a 13-Week Cash Flow Report. In the SCFO Lab, members have access to our 13-Week Cash Flow Report template that we use with all our clients. Click here to view.)
Every company needs cash. That’s why you need to have a 13-Week Cash Flow Report! Learn 25 different ways to improve your cash flow with our free whitepaper.
You cannot make smart and strategic decisions without the most up-to-date facts. Having an updated cash flow forecast for your business that is updated weekly allows you to have a true pulse on the business. Your accounting records should be based on accrual based accounting. But your cash flow forecast ties in nicely as a great tool.
Communication is key to handling a cash flow crisis. This could look like…
Coaching your sales people to collect all outstanding sales
Why You Need to Have a 13-Week Cash Flow Report
The #1 reason why you need to have a 13-Week Cash Flow Report is because it’s active cash management. This report is a big picture tool that tells companies how much cash is required on a forward rolling basis. More specifically, it gives you the freedom to make big decisions.
Cash Rich or Cash Poor – You Need a Cash Flow Forecast
So, we briefly discussed that in a cash flow crisis the cash flow forecast allows you to manage cash and adjust payments to vendors while making payroll and keeping the lights on. What about in a cash rich company?
I recently started on a client, and the company is a cash rich company. The CFO was surprised when I mentioned to him that he should have a cash flow forecast.
Here are a few reasons why a cash rich company would want to know exactly how rich they are:
If you are cash rich, then you may be looking at acquisitions. It would be nice to know who much you pay as cash and how much you finance.
CAPEX acquisitions – you want to know how much actual cash you have to acquire CAPEX.
Distributions/Bonuses, etc. – how much can you pay out?
Plan for the worst – I do not care what industry what you are in; they all eventually have downturns. Plan ahead and save up for those rainy days.
If you are cash rich, then that means you made a large profit. That also means you have to probably pay taxes, or distribute cash to pay taxes. How much cash for taxes do you need?
How to Create a 13-Week Cash Flow Report
Now, let’s look at how to create a 13-Week Cash Flow Report.
There are several pieces of information that you need to gather as you build this report, including the following:
Here are a couple of tips on making your cash flow report successful.
Get C-Level Support
If your C-level is not supportive of creating the 13-Week Cash Flow Report or using it as they run the business, then it’s just going to be another report that never gets used.
Don’t let it become that!
This tool is so valuable AND every company should be using one.
Not using a 13-Week Cash Flow Forecast is like deciding not to drink water for an extended time. You know you need to water/cash, but you do nothing about it. Eventually, you become so illiquid that you are financially distressed, if not bankrupt.
For example, we once put together a 13-Week Cash Flow Forecast for a company that was making a small percentage of what they used to make when the market was better. We predicted that if they did not take any action, then they would be out of cash within 9 months. Unfortunately, the CEO and senior leadership did not make any changes and had to shut their doors. Our long term cash flow forecast was accurate and we warned the CEO.
Use The Report As A Playbook
The report is useless unless you actually use it as a playbook and use it to make strategic decisions. When you use the report as a playbook, you go from being an accounting/finance professional that knows how to build reports to a financial leader that strategically directs the firm.
How to Use a 13-Week Cash Flow Report
Once you have created the 13-Week Cash Flow Forecast, it’s important to maintain it. We suggest to maintain and update it at least weekly. We also suggest that you use this report in conjunction with the Daily Cash Report.
You have probably heard the term, hire for traits, not for talent.
I can tell you ever since I first heard of this term, I have gone back in time and the different experiences I have had, that related to this term over the last 28 years of my career. I am convinced more than ever that we should all apply this to ever hire we make.
Well… There was this “super star” divisional controller that knew it all. He was technically the smartest guy in the room when it came to the latest accounting pronouncements. But when it came to dealing with people, this mad man was impossible to deal with. He was rude, had temper tantrums, and was just a jerk. He got the job because on paper he was a super star. But when it came to working with others, it was impossible.
On the contrary, I recently hired a young man with very little work experience, smart, and was a sponge in learning about the business or how we did things. This young man has turned out to be a real super star. I did not hire him for his talents, but his traits and ability to work well with others.
Conclusion: Hiring for Traits
The stories above are real and I have another dozen like these. All of these individuals had “talent” in there area of expertise, but their personal traits varied. Those that failed had horrible personal traits. Those individuals that I have worked with that had excellent personal traits turned out to be excellent employees. An individual with exceptional personal traits can learn anything.
Personally, I would want to always hire that person that has exceptional personal traits, and maybe average on talent.
Because I know I can train this person and make him or her a super star.
Think about those individuals that you have worked with in your career. Think of their traits versus talent. Someone can have exceptional talent, but if they can not get along with others, work in a team environment or have other horrible traits, then that person will always fail.
A company can fall into financial trouble for many different reasons. Often, the gut reaction of management is to file for Chapter 11 bankruptcy. In our practice, we consider bankruptcy a last resort remedy. We always try to keep our clients out of bankruptcy. Why? Because an out-of-court debt restructuring or liquidation has the potential of achieving higher returns for all of the stakeholders at a lower cost. Furthermore, companies increase the chances for a successful operating turnaround by avoiding the negative publicity often generated by a bankruptcy filing. The purpose of this memo will be to describe the secrets of successful out-of-court debt restructuring for debtors and creditors.
The Usual Scenario That Results in Debt Restructuring
The usual scenario can occur in any type of company – manufacturing, distribution, services, retail, etc. Typically, there is a bank lender with a line on accounts receivable, inventory, equipment, land, and trade creditors. If the business does not own real estate or equipment, then there will be a landlord and some equipment lessors. These are small differences and the principles discussed below will apply regardless. Although the bank loan may be current or just a payment or two behind, there are significant covenant defaults and payments to trade creditors are delinquent.
Restructure or Liquidate
The first thing the business must do is determine whether or not to continue operations/restructure or liquidate. This will depend largely on whether or not there is a sufficient market for the company’s products or services. If there isn’t, it is pointless to continue and the decision will be for liquidation. In the event of a decision to liquidate, the Company must then decide whether selling as a going concern perhaps to a competitor or shutting down immediately will maximize the value of the assets. We often recommend that the client hire a competent turnaround professional. They will assist with this evaluation and the creation of a viable action plan. In addition to assisting in this regard, an independent turnaround professional provides the Company with credibility when approaching creditors for concessions.
One might ask why the Company should care about maximizing the value of the assets. The answer is that often, the principals have personal guarantees that need to be satisfied. These guarantees act as a significant incentive for management to obtain the maximum value. Moreover, our experience is that most principals want to achieve the maximum recovery for all concerned. In many instances, they believe the assets are worth more than their appraised value. If the business can be sold as a going concern, then it must be able to run at close to cash flow break even for at least 90 days. This will give management a chance to market the assets as a going concern. If this is not achievable, then the business must shut down.
First Stage of a Business Plan: Eliminate Cash Flow Crunch
The first stage is when the Company is in crisis and it simply needs to eliminate a cash flow crunch. At this point in time, the plan must provide at a minimum for the collection of enough revenue to cover the payment of ongoing business expenses such as payroll, taxes, rent, utilities, critical supplies, transportation costs, etc. Ordinarily, this means that the Company will likely have to curtail payments on past due loans, leases, and trade credit while the business operations are being turned around. In addition to curtailing payments on past due debts, the Company usually reduces headcount and undertakes other cost-cutting measures to equalize the sources and uses of cash. Competent turnaround professionals are excellent at identifying areas where business can cut costs and become more efficient. The plan should include current and projected balance sheets, income statements, and cash flows.
Second Stage of a Business Plan: Negotiate Out-of-Court Settlements
The second stage of the business plan is developed at a later date. Hopefully, the Company’s efforts to cuts costs and make operations more efficient has turned a negative cash flow situation positive and the long term prospects for the Company are brighter. At this point, the Company has the ability to negotiate out-of-court settlements with its creditors.
The bankruptcy attorney, the Company, and the turnaround professional work together to negotiate with creditors. There are typically two stages to these negotiations, which also mirror the stages of the business plan. The most important negotiation obviously is with the bank; they typically hold a lien on assets, and therefore, the bank has the ability to foreclose. Contemporaneously with this process, the Company should contact its unsecured trade creditors. First, we will discuss how to approach the bank and then the trade creditors.
First Stage Bank Negotiations
Assuming the Company has identified its problems early in the process, the bank is probably not aware that a crisis exists. The worst thing the Company can do under these circumstances is attempt to continue to hide the crisis from the banker. Rather, the Company must go to the banker and disclose the nature of the crisis and provide a plan for resolving it. This is perhaps the hardest principal for most companies experiencing financial difficulty to accept. The Company almost always believes that the bank will take immediate action to liquidate its collateral. This is almost never the case since the bank really does not want to own the collateral. Also, the bank is often impressed with the honesty and integrity of the Company in bringing the problem to its attention.
Banks are not strangers to financial difficulties. Negotiations are even more effective if the Company has already hired a turnaround consultant who has reviewed the business operation and developed a plausible plan to stabilize the situation. Ideally, the meeting with the bank should be with the Company, the turnaround consultant, and the bankruptcy attorney. The Company should let the banker know that an attorney will attend the meeting, so the banker will know to invite his bankruptcy attorney. The knowledge that an attorney will attend the meeting telegraphs and prepares the banker to expect a problem.
Volunteer Complete Access to Company Records
In the wake of Enron and other corporate fraud, bankers are often suspicious and may believe their borrowers are bleeding money out of the company inappropriately. The best way to combat this problem is to volunteer to provide the banker and/or its auditors with complete access to company records.
Circumstances: Liquidation or Continue Operations
The negotiations with the bank are going to depend on the facts and circumstances of each case. They can run the gamut from a simple request to waive a covenant default or a total forbearance. This depends on the cash flow situation and whether or not the Company has decided to liquidate. If the Company has decided to liquidate, then the banker will want to know the nature of the program for selling the assets, the costs of sale, and how the proceeds of the collateral will be transmitted to the bank. If the Company has decided to continue operations, then it will usually request some form of relief on debt service.
The forms of relief can be a total cessation of debt service for a short period of time while operations are being stabilized. Or it can be an agreement to pay interest only for a certain period. Assuming the Company is honest and has a reasonable business plan, it is a virtual certainty that the bank will enter into an agreement.
The negotiations with trade creditors are less involved. This is because they ordinarily do not hold liens and the consequent power to shut down operations. Typically, the Company will create two lists of creditors.
The first list will consist of non-critical vendors. These creditors will be sent a letter requesting a standstill for at least 60 days. Ordinarily, no further credit will be extended by these creditors and the Company will only be able to do additional business with them on a COD basis. In this letter, the Company (or the bankruptcy attorney) will describe the extent of the financial crisis and the steps being taken to rectify the situation. If possible, the letter should include recent financial statements. The concluding sentence should promise to get back to the creditors before the end of the standstill period. Then provide a report and/or an offer to settle the debt. There are several purposes for this letter.
Communication with Creditors & Vendors
First, it is simply good business practice to notify your creditors about the situation. Oftentimes, creditors with past due debts will make collection calls. Then company personnel will do any of the following:
Duck the calls
Promise to make payments the Company really can’t afford
Make phony excuses
These types of responses will only make the creditors mad. Second, the flow of information to the trade creditors will have virtually the same impact as providing information to the bank. That is, most trade creditors will agree to the standstill as an alternative to litigation. Obviously, the purpose of this effort is to avoid the cost and expense of litigation. Moreover, if a creditor obtains a judgment, then it can force the Company to file for bankruptcy, thereby defeating the entire purpose of an out-of-court settlement.
Critical vendors (i.e. those absolutely necessary for the business to survive) must be dealt with separately. In essence, keep these debts current. If the Company cannot keep them current, then it must figure out a way to do business with these vendors on a COD basis.
Equipment lessors are often the most difficult set of creditors to deal with. In the situation where the Company has leased equipment not being used, notify the leasing companies and invite them to repossess. Oftentimes, the equipment lessor will ignore these letters, and they will continue to demand payment. On at least one occasion we have sold equipment and given the proceeds to the equipment lessor who absolutely refused to repossess. If the equipment is being used in the business, then the Company should make the payments if possible or try to reschedule them.
Second Stage Negotiations
Once again, these are going to depend on the circumstances. In a reorganization, the best case scenario is that the business has turned around and is now in a position to propose a restructure or refinance of its bank debt. Here again, turnaround professionals can provide assistance in presenting refinancing requests to asset based lenders, factors or investors. These individuals are typically less risk averse than banks. Furthermore, mail a second letter to trade creditors offering either of the following:
A discounted cash settlement assuming funds are available
A payout of a larger percentage over time
Most trade creditors will accept a deeply discounted cash option rather than litigating or waiting for a larger payout over time. This is usually a good decision. We have negotiated many such settlements in the range of ten to twenty cents on the dollar.
If the business has not turned around sufficiently to proceed in this manner, then the Company should meet with the bank again to discuss the process and request an additional extension of time. Make a similar request to the trade creditors.
In a liquidation, the Company should meet with the bank periodically to report on the status of the sale of assets. Issue similar reports to trade vendors. Sometimes, trade vendors demand to be paid something immediately. The parties must note that once the Company is in default under a secured bank loan, the diversion of collateral proceeds to third parties without bank consent is actually a crime. This crime is Hindering Secured Creditors. It is a felony if the amount involved exceeds $1500. See Texas Penal Code §32.33. It is extremely rare for a bank to consent to such payments. Use this little known fact to dissuade trade creditors from taking collection action.
Assuming a Company is honest and trying to fulfill its fiduciary duty to creditors, then an out-of-court workout will produce a higher return to creditors and a quicker payout than a bankruptcy filing. The parties can tell if a company is honest if it provides information upon request and access to records. When you employ a competent and independent turnaround consultant, you greatly improve the likelihood of a successful outcome. Of course, a single creditor can interrupt the process by filing suit and obtaining a judgment. Such a creditor may think that it is jumping ahead of the crowd and gaining leverage to achieve a higher settlement. In most instances, this is faulty logic for several reasons.
Reasons for Faulty Logic
First, if the Company files for bankruptcy, the creditor will forgo the opportunity to be paid out-of-court. Assuming all circumstances are equal, the return will be reduced by the amount of professional fees paid to exit bankruptcy. Second, if the creditor is paid a higher percentage than other creditors, then the additional amount ordinarily is not enough to cover the legal fees the creditor must pay for the collection work. Third, if the Company ends up filing bankruptcy within 90 days, then the payment is subject to being recovered as preference. In most instances, it makes more sense to work with a Company in financial trouble (debt restructuring) than to file suit.