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You Can’t Afford Not to Spend Money on the Accounting Department

As a former CEO to some CEOs, this Blog is to my counterparts that “don’t know what you don’t know.”  I have seen time and time again closely held businesses that have experienced growth make the same mistakes over and over again. To the CEO that believes bookkeeping is a necessary fixed cost that should be minimized, here is a money making tip. You can’t afford not to spend money on the accounting department if you want to be successful.

The Big Mistake

Your company has grown over the years; you have experienced good times and maybe some bad times. Additionally, you have taken a nice paycheck and sometimes, some nice bonuses.  You got used to a certain life style. And you did all of this with a bookkeeper that does not cost you much.  But your company has grown. Still in the back of your mind, you know something tells you that you are not comfortable with your accounting records. But you elected to keep cost down for the bookkeeper and you do not spend much on accounting.

You Can't Afford Not to Spend Money on the Accounting Department

My Tax CPA Does It All

Maybe until now, some of you have your outside CPA that prepares your tax return also prepare year-end financials. This is not a knock-on tax preparers, but your CPA that prepares your tax return is an expert in one of many fields CPAs work in. For example, I am a CPA, but there is no way I would prepare my own tax return. Tax laws change way too often. I just want to maximize my deductions and pay my fair share of tax, but not more than that. That is why I have my tax CPA prepare the tax return.

But over the course of my career, I have found that most tax CPAs do not have operational expertise. They have not run a manufacturing or service business, nor have they had any P&L responsibility. The Tax CPA is considering accelerated depreciation, maximize expenses, etc. This is quite the opposite from a management set of financial statements. The role of the CPA Tax preparer is totally different from a “operational” CPA, Controller or even CFO.

Minimizing the Back Office For the Wrong Reasons

Most CEOs that I have worked with argue to minimize the cost of the back office. That includes the cost of preparing financial and accounting records. But think about this… The Securities and Exchange Commission (SEC) does not require public companies to prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) because they pulled this out of thin air as another way to regulate.  The SEC requires public companies to prepare their accounting records and financial statements based on GAAP because it is the best way to present fairly the results of your financial operations to third parties reading your financial statements.  In other words, It’s the RIGHT way to keep your books!

In some cases where there is significant debt and exposure, some banks also require that the company present your accounting records based on GAAP – regardless of whether it is a Public or Private company.  Some debt situations even require an audit. The banks simply make it one of the covenants related to your debt. When you present your books and records per GAAP, you have accurate financial statements, everyone is assured your accounting is correct.

The Importance of Using GAAP

So, if a lot of brain power has been put into coming up with GAAP, and the general consensus is that GAAP is the right way to present your financials and accounting records.  Why would you as CEO not require that your financial statements be presented per GAAP?

I have been an “operational” type CPA for over 27 years now. In addition, I have held the office of CEO twice. I have used my expertise in public company environments and private companies both as an employee and as a consultant in the U.S. and in other countries. I have seen many very successful small, medium and large private companies and they were all keeping their financial records per GAAP. Yet, I have NEVER seen a significant company (not a micro or small business) be successful and properly run without keeping their books and records per GAAP.

So why is it that CEO’s of closely held (private) business still permit their accounting records to be kept some other way?   The answer: they do not want to spend money on a fixed cost such as accounting. But they will spend money on the sales team, hunting leases, extravagant meals or parties.

Not getting the basics down – such as GAAP – leaves money on the table when you are exiting the company. Increase value with our Top 10 Destroyers of Value whitepaper.

You Can't Afford Not to Spend Money on the Accounting Department

You Can’t Afford Not to Spend Money on the Accounting Department

These are real life examples and outcomes of minimizing the cost of your accounting department that I have lived…

The service company incorrectly books gains on U.S. dollar receivables. In conclusion, they had to reverse $8 million from earnings.

I have seen this one several times. The company does not have some large assets on the balance sheet, because their tax preparer said they used accelerated depreciation. As a result, the balance sheet assets are severely understated. Hint: your value is understated. IT’S ABOUT THE MONEY DUDE!

The manufacturing facility does not properly accrue costs. As a result, their margins are way off, and the CEO wondered why they were always short on cash.

The company did not properly reconcile accounts including cash. This led to fraud.

The company did not properly recognize revenue. In conclusion, the company was understating revenue by millions of dollars.

I can go on and on with more real-life examples.

If you do not have your financial statements presented per GAAP, how are they prepared and presented? Do you really know your margins in your P&L. Do you really have all your assets, liabilities and equity presented correctly? Is your P&L, Balance Sheet and Cash Flow statement presented correctly? Guess what? Your ratios that your controller or CFO should be analyzing are not correct.

Leadership Needs to Believe in GAAP

Why do you think Exxon, Walmart and all other public company CEO’s believe in GAAP?  I have also seen many small, medium and large closely held private companies keep their accounting records per GAAP.  These are all successful companies. They know their margins, they know where cash is, they know their ratios and guess what, they know how to forecast!

I have also seen time and time again good companies that have been around a while and have experienced growth, and NOT prepare their financials per GAAP.  And every one of these CEO’s and companies has the exact same issues.

  • They really don’t know their margins in their P&L
  • Some companies don’t even really know their actual revenue
  • There is always that doubt in the CEO’s mind as to what is really going on in the business
  • The CEO lives a stressful life
  • Every time there is even the slightest decrease in margins, there is even a bigger disproportionate stress on cash
  • If your books are not per GAAP, then most likely they are not on the accrual basis; if that is the case, then you are 60-90 days behind your business
  • Having your books on an accrual basis is just the first step. There are many other accounting rules, procedures and pronouncements to get your books per GAAP. Just because they are on accrual basis, does not mean they are per GAAP. GAAP “rules” actually change frequently

You Can't Afford Not to Spend Money on the Accounting Department

In Summary

In my consulting business, I have seen CEOs that are “smart” as in they know what they don’t know. They bring us in to get the problem fixed. Although it takes time and money, the CEO is fully supportive and we get it done. These are the companies that grow and ultimately have a successful liquidation event. Or they leave a well-run machine to their family or employees.

But it shocks me to continue to see companies as large as $120 million in revenue, with a couple hundred employees that have not professionalized their accounting department. No one knows the true margins. Everyone stresses out about the “accounting records.” There are no correct historical financials, and most certainly, there are no forecasts. Unfortunately, there is no analysis of the business at all. In some high margin “hot” industries, this works for a while. The sins are buried. But millions of dollars are lost without knowing it. But, since ultimately everything ends up in cash, when that “hot” industry has even a slight downturn, the CEO feels the cash crunch.

Whether you are trying to increase the value of your company or positioning it for sale, this issue of unknowingly leaking cash is a destroyer. Learn how to tighten your belts and increase value with our Top 10 Destroyers of Value whitepaper.

Don’t be Cheap

Don’t be cheap. Spend the money (which is usually less than the hunting lease) to get your books and records based on GAAP basis.  Get your priorities straight.  Continue to have a professional accounting department in your business. YES, you will spend more than you are currently spending. But you can’t afford not to spend money on the accounting department!

Consider this… I had one investment banker with a very large firm tell me the difference in a valuation of an acquisition target from a company that has accounting records per GAAP and solid accounting department versus one that does not have a professional accounting department and accounting records not per GAAP is a difference of 20%-30%.  I had another investment banker tell me the difference in valuation is “one turn of EBITDA”. The use of EBITDA and multipliers is often used in valuation.

So if your company generates $2 million EBITDA and the multiple used is a 5, then your value would be $10 million with a professional accounting department and books per GAAP. In comparison, your value is $8 million with an unsophisticated accounting department and accounting records not per GAAP. I don’t think your professional accounting department will ever cost you $2 million per year! But not having it will.

Not having your financial records per GAAP is one of the destroyers of value. If you want to protect the value of your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

You Can't Afford Not to Spend Money on the Accounting Department

Strategic CFO Lab Member Extra

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Click here to access your Execution Plan. Not a Lab Member?

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You Can't Afford Not to Spend Money on the Accounting Department

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Announcement: Transition of Ownership

transition of ownershipOur Founder and former President, Jim Wilkinson unexpectedly passed away in his sleep on June 15th, 2017. We are grateful for the time we had with him and to work for the incredible organization he built. He is survived by his bride of 34 years and his two beautiful daughters. You can read his full bio here.

Transition of Ownership

Over the past several months, his family and our team have been diligently looking for someone to continue Jim’s legacy at the firm – that is The Strategic CFO. It was important to find someone who had the experience, vision,  talent, and the drive to grow The Strategic CFO.

transition of ownershipMeet Dan Corredor

In 2017, Daniel “Dan” Corredor acquired The Strategic CFO. Dan was a business friend of Jim’s for over 20 years. He saw the vision Jim had for this company from the beginning. Additionally, Dan has a very similar background to Jim’s, making him the perfect fit.

With 28+ years of total experience, Dan’s expertise includes the following:

  • Accounting efficiencies
  • International operations
  • Mergers and acquisitions
  • Operational and financial restructuring
  • Due diligence and post closure business integration
  • Working capital, cash flow management and business improvement

He also deals with business owners and private equity groups during different phases of growth and transition. In addition, Dan has extensive international operational experience, including 10+ years working in Latin America and consulting in Turkmenistan. Dan’s experience also includes working with lenders, bond holders and ratings agencies.

He has held multiple CFO positions and was promoted twice to President & CEO. In addition, Dan has sat on boards as an internal board member and external board member.

Prior to acquiring The Strategic CFO, Dan was consulting for five years. Before that he was President & CEO of a regulated water utility, which was a company that required operational and financial restructuring after experiencing a crisis. Prior to that Dan was promoted from CFO to President & CEO at a Japanese owned Petrochemical company. Dan’s Latin American experience includes both working as CFO in Mexico for a large publicly traded water utility for 4 years and 6 years with two large publicly traded oil and gas service companies in financial executive roles.

transition of ownershipExpectations With New Ownership

With new ownership, there are often many questions. If you are a consulting, coaching, or a retained search client, you may hear from or work with Dan; everything else should remain the same. If you are a coaching participant or SCFO Lab member, all of the information currently available to you will remain the same, with more content available to you soon. Your questions and feedback is most important to us. If you have any suggestions or questions, please email us at info@strategiccfo.com.

If you are not currently a client or SCFO Lab member and have questions/comments, please contact us here. We appreciate your loyalty as we have built The Strategic CFO to this point.

Thank you for your continued support over these past couple of months!

Please welcome Dan in the comments below!

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Budgeting: It’s About Achieving Success

budgeting

Ron Rael, author of 13 ½ Strategic Ways of Winning the Budgeting Wars, once said that, “To achieve success in anything, you need two ingredients: a target to aim for and a way to measure your progress towards it.” Budgeting is all about achieving success in business. When you improve the budget process, you are able to foster both empowerment and accountability. Eventually, it will lead to a better company.  Although initiating change in your budgeting process will be challenging, it will further demonstrate your financial leadership.

The Most Common Budgeting Problems

The reason why you may have not seen much success come from your budget is because of the following common budgeting problems. First, the goals that are established before the budget is created are either too easy to reach or are simply unachievable.

If you know your economics, then you can avoid potential unrealistic goals or assumptions. Click here to download the Know Your Economics Worksheet to shape your economics to result in profit.

Then the budget is built on faulty or unrealistic assumptions. If the assumptions are correct, then maybe not everyone agrees on the assumptions or principles. This disagreement of what to build the budget on results in a dysfunctional team.

After the budget is built, there is often little to no feedback from management about the budget. We have seen this time and time again in companies. Those not involved in the budgeting process simply don’t care about the budget. They think that because they are not the CFO or Controller, it’s not their job. But everyone in an organization should care about the budget.

Additionally, when the budget is completed (usually after weeks of non-stop focus), it is filed away. It is rarely taken out and use in the daily strategy of the company. There is a lack of follow up.

When leadership has to meet with shareholders, stakeholders, etc. regarding the budget, they realize that they haven’t used the budget at all. Then they go to any means to achieve their budget. This manipulation defeats the purpose of having a budget. We suggest to design a budget that cannot be manipulated.

If you are thinking that the most common budgeting problems are more like cultural issues, then you’re correct!

Top 2 Budgeting Problems

Everything we have already said concerns the entire company. But the majority of our audience consist of CFOs and Controllers. The two problems that impact CFOs, Controllers, and budget directors the most include hidden agendas executives may have, the lack of commitment from executives for having a budget, and executives seen budgets as the CFO’s job. The responsibility of the budget is not solely reliant on the accounting department or CFO.

How Businesses Can Prepare for Natural DisastersHow to Budget Successfully

Budgeting successfully requires you to transform how you think about budgeting overall.

Use It As Decision-Making Tool

If you want to budget successfully, then you need to use your budget as a tool for decision making. It is not some disconnected document that has little to do with the company’s actual business. Instead, it should be a living and breathing part of your decision making. Plus, it is more effective when you use it to make decisions. When people ignore it or play games with it, your budget becomes ineffective.

Additionally, understanding the need to improve the quality of decision making and making it happen are two different animals. What you get all depends on the leaders’ commitment and attitude.

Use It As Management Tool

Budgeting is a very important management tool for achieving lasting success. A budget should establish the discipline to set up a plan. But you must also adhere to the plan. Furthermore, this management tool always you to measure your progress, and ultimately, your success.

“Without a yardstick, there is no measurement.  And, without measurement, there is no control”
– Pravin Shah

Issues Are a Result of Culture

We said it earlier, and we’re saying it again because it’s that important. Most budgeting issues are a result of an organization’s culture. Issues that lead to a poor quality budget process mean that these problems  already exist within the organization ALL THE TIME!

Cost Associated

Everything has its cost! The budget is no exception. Budgets take work! They are not easy to implement nor are they easy to manage. Some of these costs include the following:

  • A culture that supports planning
  • Top management’s commitment
  • A reliable and timely reporting system
  • Agreement on principles and assumptions
  • Reliable business information
  • Structure and defined responsibilities

In addition, there are other costs associated with budgeting that could impact the bottom line. If employees are not conserving costs and making the most of opportunities, the bottom line will suffer. If leaders are not investing in their tangible and intangible assets equally while employing them to their fullest potential, the future bottom line will suffer.

Require Specificity

The budget and the plan it drives from is only effective when it leads to specific actionable and measurable activities and generate stakeholder value. Therefore, a budget must require specificity.

Assumptions Drive Everything

Also, your assumptions drive everything. Therefore, it is crucial that everyone be on the same page regarding assumptions in relation to decisions on what is important in your budget.

Governance of Budgeting Process

When your leadership team establishes governance in your organization, they are deciding how to best use all their resources to accomplish the purpose or mission.

Governance Principles

Use the following governance principles in your budgeting process. A reality based budget and planning system that enhances accountability is necessary for the good governance because it increases transparency. Furthermore, the key factor in a realistic and honest budget is people and their accountability. A well conceived and thoughtful budget improves the governance demanded by all stakeholders. In addition, the budget is a reflection of the importance that your executives place on governance and ethical conduct. Every game played with the budget is actually a breach of the organizations Code of Ethics.

CFO’s Role in Making the Bottom Line Commitment

 The CFO is essentially the CEO’s cheerleader! The CFO inspires higher level of performance.  The greatest challenge is to ensure that the strategic objectives and operational plans are adequate and inspirational enough to achieve the leaders’ desired financial objectives. The leader’s three plans, when combined into a cohesive strategy, will generally lead to success; however you define it. Furthermore, the CFO and executive team are the guardians of all assets – physical, financial and human ones. Use these assets to implement the plan and achieve the goals!

 CFO’s Discipline

Having the discipline to build a healthy budget, and having the budget instill discipline across your firm has many benefits. Not only will your budget properly serve as a management tool, but the benefits of discipline will filter over to other areas of your operation which will lead to efficiency and profitability. The next step in achieving success through your budgeting is knowing your financials or economics. If you want to shape your economics to result in profit, then click here to download the Know Your Economics Worksheet.

budgeting

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budgeting

1

Demystifying the 80/20 Rule

Whether you are working with a client, putting together a reporting package, networking with potential investors, or closing the books, there’s a rule you can apply to make your life easier. This rule is probably one that you’re very familiar with – regardless of whether you practice it. When you are completing a job, there always seems to be a few things that push the needle further than anything else. This is the 80/20 rule.

Using the 80/20 rule is a great way to be a more effective financial leader. Click here to read more about how you can be a highly effective CFO.

What is the 80/20 Rule?

Simply put, the 80/20 rule is where 20% of the work results in 80% of the outcome. Likewise, 80% of the work only results in 20% of the outcome. While the numbers may not be spot on, the theory holds true in pretty much everything you do.

In the early 20th century, Vilfredo Pareto, an Italian economist, introduced this concept to explain the distribution of wealth in his home country – Italy. It first came about when roughly 20% of his pea pods made 80% of the total number of peas grown. As he continued to test this theory, he expanded it into other areas of macroeconomics (wealth distribution). Then roughly 30 years later, Joseph Juran applied the 80/20 rule to business production methods. He explained this rule “the vital few and the trivial many.”

Demystifying the 80/20 Rule

Many may argue that it’s not exactly 80/20, and you would be correct. It may even be 99/1 if you look at a particular situation. But as we demystify the 80/20 rule, we need to be thinking from a macro viewpoint. What is the minimal amount of work you can do to result in the most work.

How It Applies to Financial Leadership

As the financial leader of your company, it’s so important to know what pushes the proverbial needle forward the most. Look at your team, your fulfillment, your customers, your vendors. Then look at your role in the company. What work can you do that will result in bigger and better outcomes? Identify the work that takes up the most time without providing much. You may consider having a lower level employee work on those tasks. If that 80% work is too sensitive, then restructure your day to allow for the most time sensitive issues to be front and center.

80/20 Rule

Customer vs Revenue Relationship

Because there is no business without its customers, let’s look at the relationship between customers and revenue.

Who are your best customers? They are the ones who pay their invoices on time, don’t require extra time from your team, and never complain. They are also your most profitable customers. These customers are your 20%ers, and they make up 80% of your revenue!

But then, there are those customers who you dread receiving a call from because you know it’s going to be yet another complaint. These unprofitable customers suck your time, resources, and money. They make up 80% of your customer support/implementation/sales. Yet, because they take advantage of you, they only result in 20% of the company’s revenue (and less in profit). If you are overrun by profitable customers, you may want to think about firing that customer.

An effective financial leader is able to guide their CEO through the numbers and demystifying what may be unclear to them. If you want to more effective, click here to download the 7 Habits of Highly Effective CFOs to become a more valuable leader.

Improve Your Productivity by Applying the 80/20 Rule

If you desire for your team to be more productive, then you need to start with yourself. A fish rots from the head down. Start by analyzing your to do list. Are there a few things that will make a big difference? If so, prioritize those over everything else. Remember, not everything on your to do list will have the same impact or risk. A great way to assess the weight of each task is to use “tags” labeled: non-essential, essential, and critical. Are you chasing administrative tasks or completing the same tasks over and over? Ask yourself whether those can be automated or if a less expensive employee can complete them.

Why You Need to Be More Productive

There are so many squirrels that you could chase! There’s a million ideas that are all million-dollar ideas. But what do you need to do to meet your goals? If you continue to get bogged down by things in the 80% pile, then you risk never reaching your or your company’s goals. You need to be more productive, more streamlined. Although many see automation as a risk, we see it as an opportunity to force ourselves to be more productive.

How It Impacts How Effective You Are

When you apply the 80/20 rule to your leadership and workspace, you become more productive. You are then able to see clearly what is going to push the needle further. In our experience, our client’s experience, and our vendor’s experience, there are just a few indicators that hold much more weight. Think about it this way… If you listed everything you need to improve, you would never get it all done. You simply don’t have enough time to do everything! But you do have enough time to focus on the 20% and reap the 80%.

Lead From the 40,000 Foot Level

An effective financial leader leads from the 40,000 foot level. If you only look at an issue 2 inches away, then you are going to miss what’s causing it, what it’s impacting, etc. A good leader needs the entire picture before they make a decision for the company. This also helps you guide your CEO. Click here to download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

80/20 Rule

Strategic CFO Lab Member Extra

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Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

80/20 Rule

1

Why the CEO Needs to Like Their Financial Leader

When The Strategic CFO was first founded in 1999, there was a lot of disregard for financial leaders and CFOs. If accountants could do their job, there was no need for a CFO. At least, that’s what many CEOs have thought. But we have been writing, consulting, and coaching those in leadership roles to lead the company financially. Companies cannot simply rely on great salesmen or impeccable marketing campaigns. They need a real strategic financial leader. As the relationship between the Chief Executive Officer and the Chief Financial Officer has evolved, we have concluded that the CEO needs to like their financial leader and vice versa.

Why the CEO Needs to Like Their Financial Leader

These two roles have two different responsibilities in the company, but they also need each other desperately. They are the yin and yang to each other.  This is truly a partnership and without the chemistry, this is a dysfunctional relationship. The CEO has the vision and drive; whereas the CFO has the financial data that should back up what the CEO wants to do. Simply said, CEOs and financial leaders need each other.

CEO Needs to Like their Financial Leader

CEO and Financial Leaders Need Each Other

While we’ve been talking about how the CEO needs to like their financial leader, the financial leader also needs to like their CEO. We have seen that when the CEO and their financial leader (CFO, Controller, etc.) have a good relationship, transparency and confidence is increased. This is a critical part of a CEO/CFO partnership.

Russell Reynolds Associates surveyed more than 100 CFOs and found that, “82% of CFOs surveyed gave their CEO high marks for overall effectiveness. Further, the vast majority of CFOs said they trusted their CEOs. But there’s still plenty of room for improvement. Less than half of our respondents gave CEOs a high score when it came to their ability to coach and develop the CFO. And only 49% of CFOs surveyed said they had a “very strong” relationship with their CEOs, the highest relationship ranking in the survey’s 5-point scale.”

It’s a two way relationship. If the financial leader trusts the CEO’s vision, they will be more likely to support their decision. Conversely, if the financial leader does not trust the CEO, then they are less likely going to support them with the financial information they need to make a strategic decision. Likewise, a CEO is going to trust their financial leader if they try to find a solution to implementing a new strategy, campaign, vision. But they will be less likely to trust their financial leader if they are what we call a “CFnO.” In addition, the CFO must have the confidence and relationship to question the CEO and his conclusions without anyone getting their feelings hurt.

CEOs Need Financial & Strategic Direction

Our team has worked with plenty of entrepreneurs and entrepreneurial leaders over the course of our companies life. That being said, we have also seen how much the CEO needs financial and strategic direction. CEOs need to focus on the future of the company – the captain of the ship. They need to steer the ship to success. But they need someone to analyze the data, advise, and help them direct the ship forward. Furthermore, the CEO needs a wingman – a trusted advisor.

CEOs need a trusted advisor or wingman to guide them financially. Click here to access your free How to be a Wingman guide.

What a CEO Needs Most

The CEO needs to like their financial leader because they need someone to make their flight path clear. As a result, they need more of you (the financial leader) and a wingman to guide them.

They Need More of You

What do CEOs want from their CFOs? They need more of them. There is a misconception between what the CEO needs and what the CFO thinks they need. Check out the results of a recent KPMG survey below:

“In a worldwide survey of 549 chief executives by KPMG, 30% said their CFO doesn’t understand or assist them enough with the challenges they face in running the company. “One thing is clear: something has to change if CFOs are going to close the gap between the expectations of their CEOs and the reality on the ground,” KPMG said in its survey report, “The View from the Top.””

They need more of you, not your “no’s.” Start by providing your insight on how to make their ideas come to fruition. As the financial leader your job is not to be a road block, it to understand the operations and the financials and come up with solutions.  In addition, get involved and start collaborating with your CEO. This will both increase the amount of communication and help them with their challenges.

The CFO should be CEO’s wingman, but it’s often difficult to learn what they want and need. Learn how you can be the best wingman with our free guide

The CEO Needs a Wingman

What is a wingman? It’s a trusted advisor that guides the CEO through business challenges. One way to be a wingman is to stay current with the trends. For example, keep your CEO out of trouble.  Look at trends in your financial statements, your industry and the economy.  Know your ratios, working capital and debt covenants so your CEO does not have any ugly surprises.  A good wingman always has his CEO’s back. Click below to learn How to be a Wingman.

CEO Needs to Like their Financial Leader

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

CEO Needs to Like their Financial Leader

1

Turnover in Collections is Destroying Your DSO

One of our clients called us up because his DSO went from 34 days to over 72 days within a couple months. He couldn’t figure out what was causing his daily sales outstanding (DSO) to increase so dramatically in such a short time. When we came in the office to investigate, we found that there was significant turnover in the A/R and A/P staff. As a result, collections were not being consistently collected on. Turnover in collections is destroying your DSO. But how does turnover impact your DSO?

Turnover in Collections is Destroying Your DSO

What happens when there is high turnover in a company? Decreased productivity, bad communication, reduced training, lost processes, and so much more. When we started working with our client mentioned above, they were turning over A/R personnel very quickly. At first, the management didn’t think about their DSO. Sales were going great! But no cash was being collected. What they originally thought was a cash flow problem became more of a management issue.

How are you managing your cash? After 25+ years of working with clients in cash crunches, we designed the A/R Checklist AND you can access for free here. Enjoy!

maintaining accurate records

What Happens When Turnover Is High The Collections Departments

Think about what happens when turnover is high in the collections department. Communication is not clear on who has been contacted, what to charge, if an invoice has been sent out, etc. It can easily get out of hand if communication is not seamless during the transition. There simply is no continuation and follow up.

You also need to address why turnover is high. Are you firing your employees? Are many employees retiring? Is morale down due to an upcoming transition? Are you not compensating them enough to stay? There is typically a reason for high turnover. But it may take some investigating. Do you have a good idea for what is an acceptable turnover rate?

Consider calculating the transaction turnover per A/R employee. If your number is low, you need to start improving the collections process.

      Number of Transactions Processed      
Number of Accounts Receivable Employees

Collections Cannot Be Automated

There’s a lot of things you can automate, but collections are not one of them. You cannot automate human behavior and nothing can replace a live call or meeting between two parties. While we may see some sort of automation built into this process, we don’t foresee it taking the humans out of this role. For example, if a client needs to explain that they need to extend their payment another week, they need a speak to a person, someone authorized to extend payment terms. Furthermore, if their contact person in A/R keeps changing, then those receivables will not be collected timely.  Management often underestimates the importance of having someone in receivables developing a relationship with the customer.

[HINT: Turnover may be high for a myriad of reasons, but your company still needs cash. Consider offering a discount to the client for paying in a certain number of days. Read more about discounting receivables here.]

 

How to Save Your DSO When Turnover is High

Your DSO is a key indicator for management to look at. But like other indicators, you need to know what impacts those variables and why. Employee turnover in A/R can directly impact DSO as those employees are the people responsible for collecting. When turnover is high, communications and processes don’t always get passed down properly or effectively. Let’s learn how to save your DSO when turnover is high.

Know the Cycle

First, you need to know the cycle. Companies (and economies) going through cycles where cash is tight, turnover is high, and credit becomes tight. .  Look at the recent oil & gas crisis. Oil price hit record highs, companies began to spend more, they took on more debt. Then the price of oil drops, companies find themselves paying for debt service based on a bigger size and larger revenue, cash gets tight.  The bank and other creditors tighten up until things get better down the road.

But if you’re experiencing high turnover that doesn’t reflect what the macro economy is doing, then you need to look internally.

Start by tracking your DSO at regular intervals. Make this part of your normal monthly reporting process.  This will give you a basis to predict cash flow and indicates when things are going south. When you create a DSO trend, it is easier to spot irregularity.

Identify Areas With Low Turnover

What areas in your company have low turnover? Is it sales, operations, upper level management, etc.? Identify the areas with low turnover. Regardless of their role in the company, someone needs to collect the cash or the company will be in trouble. For example, you have 5 sales people that have been there for an average of 15 years. Your A/R department has turned over 5 employees in the last 2 years. Choose one of your sales persons to manage the transition between A/R employees. Your sales people often have the relationship with the customer.

Write Down Your DSO Improvement Strategies

This is probably the most important step to saving your DSO when turnover is high. Write it down! A strategy isn’t a good strategy if you don’t write it down. Have written processes for collections as well as notes of what has been done for the entire accounting department will help everyone know where you are at.

Write the collections process down with all your DSO improvement strategies.

Then, write down notes from client conversations, steps in the collections processes. Have frequent internal meetings about collections.  Assign tasks to individuals and write down the progress or lack of progress.  The CFO should be made aware of collections, DSO and trouble accounts.

Improve Your DSO

Whether you are experiencing high turnover in your A/R staff or not, it’s important to continually improve your DSO. For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Turnover in Collections is Destroying Your DSO

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It’s All About Profitable Sales, The Rest Are Just Details

Many times, when we come into a company, we find that there are three buckets: sales, operations, and finance/accounting. Those buckets create silos – no one goes in and no one goes out. But over the years, we have found that the most successful companies do not have these silos at all. While their title may be in one of these three areas, their duties should always include wanting profitable sales. In business, it’s all about profitable sales, this drives everything else.

It's all about profitable salesIt’s All About Profitable Sales

Business is a game… Not life. What does that mean? There are rules and boundaries. Every company has very similar cards to play. Although you can get creative in how to win the game, there are general obstacles that you will face, including:

You have all these people or variables in the game, but driving profitable sales will help win the game. Increased sales with the proper margin increase profitability. As part of management in an enterprise we should all be concerned about sales and margins. Professionals in the finance and accounting department should be equally concerned about sales and margins.

Don’t Get Caught in the “Pitfall”

The Pitfall is that any sales are good sales. Time and time again we have seen enterprises make sales with no margin, or even at a loss. The reasoning for this is that sometimes sales people or management find themselves in a cash crunch and believe that any sale is a good sale. A sale with no margin or a loss actually pressures the bottom part of the cash flow statement. Yes it is true, any sale if collected will drive a cash collection. But if this comes at a no margin or loss of margin this pressures the rest of the cash flow statement and takes away from net cash.

If you have sales and your margins are positive, the rest are just details.

If you struggle with the concept that any sale is a good thing, you are not alone. Under cash flow pressure most managers and owners get caught in the trap that any sale is a good sale because that leads to a collection. A sale without a profitable margin does more harm than good. It eats into your net cash available.

With a sale that contains a positive margin, now you have something to manage. Below the gross margin line you can now manage the details. Are my fixed costs to high? Are my sales and administrative costs under control? Do I have options to bring in cash from debt sources?

If the focus of your company is on profitable sales, then it’s crucial that you forecast or project your sales accurately. Click here to access our Goldilocks Sales Method whitepaper to build your sales pipeline and project accurately.

It's all about profitable salesDouble Your Sales

In April, some of our team went to a large marketing conference in Arizona, called ICON. During one of the breakout sessions, they mentioned that there are four ways to double sales. Since it’s all about profitable sales and the rest are just details, we want to use this week to discuss how to double your sales (and grow your company).

For the purpose of this section, we need to go back to Marketing 101. First, you have your traffic. These are the hits on your website or the company’s in your target market. Then you have your leads. These are the individuals or companies that you have qualified and are already in discussion with. Next, you have your conversions – the clients you convert from leads to sales. Finally, you have your sales price. While this is extremely hard to do when you are established, we’ll go into more detail of how to accomplish that last option to double your sales.

Double Traffic

Traffic is the largest section of your sales pipeline. The more amount of potential clients you have in your funnel, the more likely you are to convert them into sales. For example, if you double your traffic from 1000 to 2000 with a 40% conversion rate to lead and a 10% conversion rate to sales, then you’ve doubled your sales. Let’s work that out though.

Current Sales Pipeline:

1000 in Traffic

40% Conversion Rate

400 Leads

10% Conversion Rate

40 Sales @ $100 per widget equals $4000

Doubled Sales Pipeline:

2000 in Traffic

40% Conversion Rate

800 Leads

10% Conversion Rate

80 Sales @ $100 per widget equals $8000

As technology advances and competition increases, a low-hanging fruit is to optimize your website for search engines, put more Call to Actions on the site, and then improve your sales pipeline. Other options include:

  • Networking events
  • Referral partners
  • Increasing social media presence
  • Guest blogging
  • Pay Per Click
When you double your sales with traffic, it can be difficult to put together your sales projections. Click here to download our Goldilocks Sales Method whitepaper to learn how project accurately.

Double Leads

Get fanatical about doubling your leads! The more leads, the more sales. As we move down the pipeline, it’s going to be more difficult to accomplish (and project). When you double your leads, it qualifies them as a prospective buyer. For example, a candle supply distributor offers a $0-1 wick. That’s a low cost buy-in that qualifies that lead for wanting candle supplies to make candles. Eventually, those leads will be wicks wholesale, along with other candle supplies (wax, aromas, containers, etc.).

Using the same example as above, let’s work out how doubling your leads can double your sales.

Current Sales Pipeline:

1000 in Traffic

40% Conversion Rate

400 Leads

10% Conversion Rate

40 Sales @ $100 per widget equals $4000

Doubled Sales Pipeline:

1000 in Traffic

80% Conversion Rate

800 Leads

10% Conversion Rate

80 Sales @ $100 per widget equals $8000

Double Conversions

Conversion rates should be a financial leader’s best friend! Once you set a conversion rate goal with your sales teams, it’s a great way to hold them accountable and track the likelihood of converting a lead into a sale. You can double your conversions in a variety of ways, including:

  • Offering something for free in exchange for an email address, a phone call, etc.
  • Asking a lead to purchase something for a small amount (i.e. $7)
  • Offering a lot of value for an affordable price (i.e. $50)
  • Giving a lot more value for a higher price (i.e. $200)

When you have multiple steps in your sales funnel, it makes it easier to project your sales pipeline. For example, 50% of leads will buy into the first offer (free). 50% of those buy-ins will get the $7 widget. 30% of those will pay $50. And %20 of those will pay $200. But to actually double your conversions, you need to focus on the top first. Then push boundaries to create a vulnerable connection. We’re learning that customers all over are wanting something authentic.

Let’s see how doubling the conversions will double sales:

Current Sales Pipeline:

1000 in Traffic

40% Conversion Rate

400 Leads

10% Conversion Rate

40 Sales @ $100 per widget equals $4000

Doubled Sales Pipeline:

1000 in Traffic

40% Conversion Rate

400 Leads

20% Conversion Rate

80 Sales @ $100 per widget equals $8000

Double Sales Price

Doubling your sales price is extremely difficult to do, especially if you are already established in an industry. But it’s a way to double your sales! For example, Netflix just increased it’s price 10% for some of its memberships. Even though, that only equates $1-2, many were outraged while others were okay. Mckinsey & Company says that, “Pricing right is the fastest and most effective way for managers to increase profits.” There are many variables, including timing and value, that need to be assessed before you double your sales price.

Goldilocks Sales Method – Building Your Sales Pipeline

Regardless of whether you want to double your traffic, leads, or conversions, it’s essential that you now how to forecast your sales. After all, it’s all about profitable sales. This not only protects the cash, inventory, operations, and sales teams, but it protects the executive team from uncertainty.  Click here to rebuild your sales pipeline and project accurately with our Goldilocks Sales Method whitepaper.

It's all about profitable sales

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Access your Sales Genie Execution Plan in SCFO Lab. The step-by-step plan to produce accurate sales forecasts or projections.

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It's all about profitable sales

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