Tag Archives | financing

Alternative Forms of Financing

Alternative Forms of Financing, Alternative FinancingIt happens all the time. Companies need capital, but they aren’t bankable. Banks or other financial institutions will not touch them because they are either too risky, not able to meet covenants, or it just doesn’t work out for some reason. So, where do those companies go? They need to look at alternative forms of financing. In this week’s blog, we take a look at alternative financing and why there is a need for it.

What is Alternative Finance?

What is alternative finance? The US Small Business Administration defines it as “financing from external sources other than banks or stock and bond markets”. It typically refers to fundraising through online platforms; however there are various sources that could be considered alternative forms of financing. We will look into those a little later in this blog.

Sometimes, the best way to add value in a company is to know where to go for cash. If you want to learn 5 other ways a CFO can add real value, then click here to download our 5 Ways a CFO Adds Value whitepaper.

The Need for Alternative Financing

Why is there a need for alternative financing? Not all entities (banks, stock, bond markets, etc.) are willing to finance certain companies due to a variety of reasons. For example, Company A is a 2 year old company that has a technology that will not be ready for market for another 6 years. A bank most likely will not fund that project because there is no revenue for 8 years and there is no guarantee that the company is ever going to be successful. Alternative forms of financing will help Company A continue to research and develop their product and bring it to market.

In addition, alternative financing often provides benefits like mentorship, customer validation, advice, and buy-in.

Alternative Forms of Financing

There are several alternative forms of financing, but today, we will look at 5 financing options for companies that are not bankable. Those include crowdfunding, grants, mezzanine lending, private equity, and bootstrapping/sweat equity.

Crowdfunding

Crowdfunding is the most public form of alternative financing. It’s simply an online platform where many investors invest small amounts in a company. Popular crowdfunding sites include Kickstarter, Indiegogo, and GoFundMe. This is a great option for companies that have customers who want what they have but the bank does not agree. For example, some indie films have raised capital via crowdfunding platforms as both a marketing effort and capital raising. As a result of investor’s donations, they get perks such as rewards, early access, etc.

Grants

Other alternative forms of financing include grants, competitions, and accelerators. Grants do not have to be paid back, unlike a loan. They are usually disbursed or gifted by one entity. Often, that entity is a government department. It could also be a corporation, trust, or foundation. Most grants require an extensive application process. In addition, most grants are designated for a specific purpose – like research and development.

Grants, competitions, and accelerators often require business plans, financials, projections, etc. A benefit of going this route is to continually improve the business and add value. If you want to learn 5 other ways a CFO can add real value, then click here to download our 5 Ways a CFO Adds Value whitepaper.

Alternative Forms of Financing, Alternative Financing

Mezzanine Lenders

Mezzanine Lenders are organizations that provide loans to businesses; however, they are not required to have all of the guarantees and collateral of a traditional bank. Their loan to you might have some aspects of convertible debt to equity. In addition, it will definitely be more expensive than a traditional commercial loan. It will be about as expensive as using a credit card. But these lenders are great alternative to companies that may not be bankable.

Private Equity

Private Equity firms are funds, and team of individuals manages this fund that provides debt and equity to businesses. Usually, the “hold” period for the investment can be anywhere from 3-7 years. The Private Equity (“P.E”) firms bring best practices and find synergies with other portfolio companies to streamline costs. P.E. firms sometimes specialize in an industry or market to align their interests. Depending on the type of firm, private equity investors may take a managing role in a company.

Bootstrapping/Sweat Equity

While bootstrapping is not necessarily a form of financing, it does free up cash that is needed elsewhere. For example, a company can bootstrap by hiring employees on equity rather than a salary. While this may be a cheap option in the meantime, it can become expensive in the long run (especially if the company takes off).

It’s a CFO’s role to improve profits and cash flow. But to do that, they need to have the financial leadership skills to guide the CEO as they manage the organization. If you are ready to add real value to your company and get the respect you deserve, then click here to download our 5 Ways a CFO Adds Value whitepaper.

Alternative Forms of Financing

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Alternative Forms of Financing

 

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What is Cash Flow?

See also:
Free Cash Flow Definition
How Growth Affects Cash Flow
Why Use a 13-Week Cash Flow Report as a Management Tool?

What is Cash Flow?

Cash flow is a term describing the money into and out of a business. This includes all transactions that transfer cash. Furthermore, the business’s sources of cash are separated into three areas in the company’s cash flow statements. Some of the different categories for money spent or earned to fit into the following:

Cash flow in vital to your business. It is the blood or oxygen for your company. Without it, there is no company.

What is Net Income?

Net income is a measure of revenue after subtracting all expenses. This means you take the total revenue for a period and subtract cost of goods/services as well as overhead. This gives a rough idea of whether a business made ‘money’ during the period. However, net income is not a good way to determine the cash usage in a business.

Key Differences Between Cash Flow & Net Income

Some of the key differences between cash flow and net income include the following:

  1. A business can be profitable and go out of business from lack of cash.
  2. A business can have cash flow but remain unprofitable.
  3. Cash flow is reflected on the cash flow statement and not the income statement or balance sheet.
  4. Analyzing cash flow is a way of planning for future cash needs.
  5. Investors can tell where the cash comes from and where it goes from statement of cash flows.
  6. Loans show up as cash on an income statement; Loans are shown as positive financing activities in the statement of cash flows.
  7. Watching cash flow helps notify a business of cash shortages and shows when to borrow money to keep operations going.

Click here to read more about Cash Flow vs Net Income.

What is Cash Flow?

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Why Valuation Matters

why valuation matters The other day, a client asked why valuation matters. It seems like a lengthy process that is complex and differs in each case. You see, I didn’t respond in an elaborate explanation of the different methods of valuation. Instead, I start off by saying that life is very unpredictable.

Have you ever experienced a life-altering moment (good or bad)? One moment, you are driving; then the next, you are upside down. In another moment, you walk into the office proud of the company you built. Then the next, you are being served with a suit that will put your company out of business. In a less severe example, you may have everything together for the day, only to spill your hot coffee everywhere. Life happens. And unfortunately, there’s nothing that we can do to take the uncertainty out of it.

But there are things you can do to prepare for those unexpected moments. For example, you learned how to punch out a car window in the case of an accident. In another example, you never start a project or venture without completing a full SWOT analysis so that you can minimize any legal risks. Or you simply learned not to carry too many things – especially with hot liquids.

But have you ever thought about the value of your company? You might be thinking why valuation matters. My health is good. My life is good. And the economy is good. We all know that some things in life just happen, beyond our control.

In fact, when our founder, Jim Wilkinson, unexpectedly passed away last June, we found our answer on why valuation matters. You can’t wait for life to just happen to react to it. Preparation will make everyone’s lives less stressful and more productive.

Why Valuation Matters

Before we go into why valuation matters, we need to know what valuation is and why a company needs to be valued. Valuation determines the economic value of a business, asset or company. Although the goal is to determine the fair market value, there is no one way to be certain of the ultimate price paid. Typically, it depends on many factors including industry, sector, valuation method and the economic conditions.  You can also count on a fact, you can have your business valued by two professionals and you will come up with two different answers.

A company needs to be valued if it is being bought, sold, or liquidated. Sometimes a company must provide a value of its assets or company as a whole to raise debt also. A valuation professional typically employs the financial statements, cash flow models, and market analysis. In other words, they are going to look at the discounted cash flow (DCF), market valuation multiples, and comparable transactions. A strategic buyer will also value your company. They may use some of the methods already mentioned, but they will also look at your management team.

Believe it or not the status of your accounting records will also influence the value of your company. Especially when you are looking to sell the business. I have been told twice by Investment Bankers (I.B.) that having clean accounting records based on U.S. GAAP vs. Not having good accounting records based on GAAP can have a difference of a multiple of 1 x turn of EBITDA by one I.B., and the other I.B. stated a difference of 20%-30% of value. That is because if you do not have good clean accounting records based on U.S. GAAP, how are they ever supposed to have confidence in your reported EBITDA or Net Income? The buyer will need to build a cushion for his acquisition, even if they love your company and are a strategic buyer.

why valuation mattersHow To Deal with Valuation

When dealing with the valuation process, it is important to get as many facts as possible with 1-2 clear goals. Why are you valuing? What are you trying to accomplish with this valuation? You need to assess what the purpose of this valuation is.  It could be shareholder disputes, estate planning or gifting of interests, divorce, mergers, acquisitions, sales, buy-sell agreements, financing, and purchase price allocation.

To identify areas of improvement for your company’s value, it would be wise to identify any weaknesses or threats that are destroying your value. Click here to download our Top 10 Destroyers of Value whitepaper. Don’t let the destroyers take money from you!

Valuation for Mergers, Acquisitions & Sales

Interested parties during a merger, acquisition, or sale need to obtain the best fair market price of the business entity.  They need to look at their return on their investment.  (your company is their capital being deployed).  This will ultimately be negotiated between the buyer and the seller.

In buy-sell agreements, you transfer equity or assets between partners and/or shareholders.

Valuation for Estate & Gifting

Death is a fact that everyone is going to face. But the timing of that event varies for different people. If your business is part of your estate, you need to conduct a valuation of your business. This can be done either prior to estate planning, gifting of interests, or after the death of the owner.

The IRS also requires this type of valuation for charitable donations.

Valuation for Disputes (Shareholder or Divorce)

When a couple divorces, they need to divide the assets and business interests from one another.

Occasionally, a breakup of the company is in the shareholder’s best interests. This could also occur when shareholders are withdrawing and need to transfer their shares.

Valuation for Financing

Banks hate risk. As a result, they need to validate their investment in your company before they provide capital. At this point, they request for a business appraisal of your assets.

Valuations are important, but there are “destroyers” that are lurking to limit the value of your company. If you are valuing your company, click here to download our Top 10 Destroyers of Value guide.

why valuation mattersPricing Your Deal Right

There is no one way to value a business and there are multiple valuation approaches, including Income, Assets, and Market. Valuation can be a very complex process. It can also bring up issues that weren’t previously addressed – such as an owner’s differing interest from the other shareholders. In order to price the deal right, you need to figure out which approach will best work for your company and which one really applies.

There are three primary business valuation theories that fall into the following groups:

Income Approach

The income approach determines a company’s value based on the income. This may include:

Asset Approach

In comparison, the asset approach determines business value based on the assets of the company. This is where you might engage an appraiser to discuss value of assets based on market value and possible liquidation.

Market Approach

The market approach decides the value by comparing it to similar companies. A valuation professional will focus on the comparative transaction method. Then, they will appraise competitive sales of comparable businesses to estimate the economic performance of revenue or profits.  This works well with publicly traded companies where earnings information is readily available or when looking at real estate it is easy to find recent comparable transactions.

Valuation Destroyers to Watch Out For

There are a couple valuation destroyers to watch out for. Hopefully, you aren’t in a moment where you have to value immediately and are just preparing for a potential event. Some of the destroyers of value include having:

  • No recurring or consistent revenue
  • No good accounting records
  • A lack of clear direction or a weak management

To discover other potential destroyers of value and to learn about the above three destroyers, click here to access our free Top 10 Destroyers of Value whitepaper.

why valuation matters

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Business Accelerator

See also:
Dilemma of Financing a Start Up Company
Why do most startups fail?
Financing a Startup

Business Accelerator Definition

The business accelerator definition is a program that includes mentorship, education, and typically a “demo day” where companies are able to pitch their business to the business community. This business community is typically comprised of potential vendors, investors, partners, and customers.

Start ups, early stage companies, or subsidiaries of existing companies participate in business accelerators to accelerate their sales, operations, and financials.

Business accelerators are either publicly or privately funded. Publicly funded accelerators are funded by the government. They typically do not take any equity. But they generally focus on a specific industry – including biotech, fin tech, med tech, and clean tech. Whereas privately funded accelerators are funded by private entities. Because there is a higher risk for the investors, they typically take some equity or provide capital as debt.

Regardless of the type of business accelerator, it’s important to note that they are highly competitive. Application processes are usually extensive as each accelerator needs to protect their reputation – the companies they “pump” out.

As an introvert, business accelerators can seem daunting, but it is great networking place! Click here to download our Networking for Introverts Guide.

Purpose of a Business Accelerator

The purpose of a business accelerator or accelerator programs is to grow young companies by nourishing them with the support, connections, and knowledge they need to be successful. Many times universities will have an accelerator program to monetize the intellectual property created. Likewise, governments will host these programs to fill a gap in their initiatives.

Should You be a Part of a Business Accelerator?

Now that you know what an accelerator can do for you, should you be a part of an accelerator? It all depends on the size of your company, whether you need further mentorship and coaching, and if you are preparing for a round of financing.

Need to Mentorship & Coaching

Many of our clients don’t realize how valuable mentorship and coaching until they become coaching participants in our Financial Leadership Workshop. Mentorship and coaching can help further your network, your product, your process, and your brand. They provide a non-filtered, un-biased support that, while may sometimes be harsh, will help further your company.

Preparation for Financing

If you are preparing for your Series A, seed capital, venture capital, or angel investment, it’s important that you see all your options. As more companies are starting up, you will see the investor pool growing. Just because you know only one Angel investor now does not mean that is your only option. Accelerators help connect the right investor for your company to you.

Business Accelerator vs. Business Incubator

One question we get often is, “what’s the difference between a business accelerator and a business incubator?” A business accelerator can often last anywhere from a couple weeks up to a year. Whereas a business incubator holds companies from a year up to several years. An incubator’s goal is to develop a successful company, so until they are ready to fly, they continue to incubate them.

Need guidance in networking and taking advantage of your business accelerator experience? Download your free Networking for Introverts guide and start building your network today.

Business Accelerator

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Business Accelerator

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Key Elements When Seeking Financing

key elements when seeking financing

This past week, one of my clients met with a banker to develop a new banking relationship. He hands the banker the company’s financial statements, expecting the banker to look at the income statement. Instead, the banker flips to the back of the financial statements to look over the balance sheet. As the coach, I asked my client, “See what he just did?” Most financial leaders (and the owners of their businesses) are consumed with their income statement but the banks want to know are more interested in how leveraged their banking client is. Not surprisingly, there are a few key elements when seeking financing for companies to follow.

Key Elements When Seeking Financing

Every company cycles through good and bad times. Depending on what part of the cycle your company is currently in, your banking relationship may be influenced. There are some key elements when seeking financing that will keep you on the good side of your banker.
Identifying your KPIs is a critical piece of the process when seeking financing. Want to find your KPIs and learn how to track them? Access your free KPI Discovery Cheatsheet today!

Leverage

What is leverage? Financial leverage is the use of borrowing from the bank to offset the cost of sales. Many companies hope to borrow just enough to increase their capabilities to sell more. But if banks see that you are too highly-leveraged, it’s bad news!

As a key element when seeking financing, leverage is important to have as it provides credibility to your borrowing experience. A banker will see that you have maximized the potential of previous capital to increase sales. The “kicker” here is if you have failed to optimize the borrowed capital potential, then the bank is going to be more prone to backing out of (or not starting in the first place) a banking relationship with you.

Cash Flow

We say it often and we say it loud… Cash is king. Without cash and/or liquid assets in your company, the bank is going to turn its nose up at you. Be sure to communicate the availability of cash in your company. For example, if a friend asked you for $250,000 but had no way of paying you back, you would be wary and decline the ask. This is because there is no hope that you will get the money back that you loaned. The bank acts in its best interest.

Make it easy for the bank to make a decision. Communicate through the financial statements (especially the balance sheet) the availability of cash.

Not About Price

Oftentimes, business leaders think that the bank cares about the price of your product. They don’t. To the bank, price is the least important factor in their assessment of your company because money is a commodity to them. Price is immaterial.

When meeting with a banker, communicate the bottom line and what’s on the financial statements NOT how you price your product. The bank is not your business consultant. They have to make money off of you.

Creating a Banking Relationship

When seeking financing, it is essential to create a banking relationship. You wouldn’t get married to the person you passed by on the sidewalk, so why would you get into a banking relationship with someone you have zero connection with. There are a few things that you need to look for to have a successful banking relationship.

What to Look For

If you are just starting out in a new city or have no relationships with any bankers, one of the first things that you can do is connect with people that do! For example, as a consultant, I have multiple relationships with various banks. When one of my clients needs a banker, I make the connection. People love feeling like they have it all, so give them the benefit and ask for help.
key elements when seeking financingLook at the bank for their philosophy and how they take care for their customers. In addition to philosophy, look at their morals.
Some questions to ask your banker in the “dating” stage include:
  • How long is a typical relationship with your customers?
  • What are the communication boundaries?
  • What is the bank’s view of breaking debt covenants?

Relationship or Transaction

Another important question you need to ask yourself is: “is this bank looking for a relationship or a transaction?” If you answer the latter, then you are just commission to them. When times are rough, you’re going to get cut. But if the answer is a relationship, then you’re looking at a long healthy marriage.

Relationships are absolutely critical in business. Value these relationships and take care of people. It will reflect in your business.

How does the bank deal in times of crisis?

A few years ago, I had a client that went through a period of stress. In the last quarter of their fiscal year, the business was growing and was doing well. They had 4 quarters of decline, but had tracked their KPIs. Although they had broken a few debt covenants, they were tracking their progress carefully with the bank. This client had a strong relationship with their bank. Without that relationship, the bank would have taken my client to the “workout” group.
Don’t have KPIs to help your banking relationship? Learn how to identify your KPIs and how to track them with our free KPI Discovery Cheatsheet. Click here to download your cheatsheet!
When you stub your toe, how does your bank react? Are they willing to let you slide on debt covenants for a few quarters as long as you have a plan to get out of the downturn? Often, people don’t see the importance of knowing how your bank is going to react in times of crisis. The economy continually ebbs and flows, changing for good or for bad.
Also, how does the bank deal with growth? You need more financing, but you are breaking covenants. Are they willing to provide financing with the knowledge that things won’t pick up immediately?

 The Workout Group

Several years ago, the bank wanted to meet with another of my clients because they had broken their debt covenants. The client calls me after meeting with “great news”! He said that the Bank had offered to work out his problems in the workout group. This “workout” group isn’t to work out your problems and put you back on track. It’s to work you out of the bank. This is not a good thing.
You don’t think your house will ever burn down, but what happens if your house does burn down? You don’t think you need a bank to weather the storm, but what happens when you need the bank to weather the storm with you? Assess whether or not your current banking relationship will be your insurance in the case of a fire or storm.
One way to do this is to look at the bank’s philosophy of business and their internal culture. How tight are they with the rules? Are they willing to stretch a little on their debt covenants and step up to help in times of distress? My client’s bank was unwilling to stretch its debt covenants. Instead the bank just wanted to wipe their hands clean of my client and move on to the next sale.
This willingness to be flexible all boils down to relationships. I have to warn you though, not every bank is similar in their goals.

key elements when seeking financingGet in Line

To prevent being put into the “workout” group, it’s crucial to start out on the same page. Get an alignment of interests, philosophies, culture, and anything else that would impact your company.

Interest and Philosophies

If the bank is only interested in their bottom line, then it may not be a good fit. If the bank is truly invested in your company and is willing to help you out in any reasonable way, then it’s a perfect match.

As I’ve built The Strategic CFO, it’s been a priority of mine to create relationships with bankers as they are going to reap the benefits of my clients doing business with them and I value their expertise. As a result of our mutual interests, the bankers in my network continually push potential clients towards my consulting practice. Those bankers and I have a strong relationship where we understand each others’ needs and desires as well as feed each other.
Of course though, I have had bankers tried to take advantage of my generosity and not return the favor. As a result, those relationships did not last long. It’s all about getting ones’ interests and philosophies in line.

KPIs That Influence Debt Covenants

Banks monitor your debt covenants. To help them (and you) out, identify KPIs that influence debt covenants to help track where you are and where you’re going. Picture this, your significant other or spouse comes home and lets you know that they’ve purchased a house, car, and boat without ever discussing it with you before. If you’re like me, I’d be surprised and would want to control the situation. If your significant other continues to make extravagant purchases or decisions without your prior knowledge, you would have trust issues and may want to cut up their credit card while they’re sleeping.
People see banking relationships as far-off and a different type of relationship. But the truth is, it’s all the same. Relationships are relationships. If you or your company or your significant other continues to create negative surprises, it’s not going to help with the relationship.
First, fix the problem before it becomes an issue. As soon as you see a yellow flag, jump on it!
Then after you fix it, let your bank know what has happened and how it has been resolved. This not only comforts the bank but builds trust. If the yellow flag starts turning red, alert the bank and outline the consequences. This helps you prepare and for the bank to prepare. Procrastinating this step can result in devastating consequences. The bank may be able to help you if you give them enough time.
Start identifying and tracking those KPIs that influence your debt covenants. For help and tips on how we measure KPIs, download our KPI Discovery Cheatsheet today! Know your numbers and where your company is the weakest so that you can start turning around your future.

key elements when seeking financing

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How long can a company lose money without running out of cash?

Only when the tide goes out do you discover who’s been swimming naked.
– Warren Buffet

Is the Houston economy’s metaphorical “tide” going out?  It’s hard to say, but some businesses are definitely feeling a bit “naked” these days.  They may not even realize the peril they’re in because they still have positive cash flow despite the fact they’re losing money.  This begs the question…

How long can a company lose money without running out of cash?

The simple answer to the question “how long can a company lose money without running out of cash?” can be found by using this equation:

Liquidity / Burn Rate = Timeline

… where Liquidity = the amount working capital of the company that can be converted into cash

… and Burn Rate = the amount of cash spent each month

This formula can be very helpful in projecting how much time you have to find a solution to turn things around.

Let’s assume you have $1,000,000 in working capital and are losing $100,000 a month.  According to the formula, you will only have 10 months before you run out of cash. The trouble is, you’ve predicted the downturn to last up to 18 months. 

Now what?

Managing “Crisis”

crisis with wordsThe character for the word crisis in Chinese is actually comprised of two other characters  – danger and opportunity The key to surviving, even thriving, during times of crisis is to find the opportunity amidst the danger.

Your first answer to the crisis was probably to cut costs.  Most likely, you’ve already done as much of that as you can so let’s look at some other ways to weather the storm.

Improving Productivity

One way to stretch your working capital is by improving productivityProductivity can be defined as:

Productivity = Throughput/Resource

 Examples of throughputs are hours worked, widgets produced, etc.  Resources are people, materials, etc.

 In order to improve productivity you must:

  1. Understand the processes – How do we do things around here?
  2. Identify and measure drivers – What’s really driving results?
  3. Identify bottlenecks & inefficiencies – What’s going wrong?
  4. Simplify the process – What can we cut out?
  5. Communicate to everyone – Everyone needs to be on the same page.
  6. Tie rewards to results – What gets rewarded gets repeated.

Improving Cash Flow

If you’re worried that you’ll run out of cash before things turn around, it’s time to focus on reducing your cash conversion cycle

Cash conversion cycle = DSO + DIODPO

Where:

DSO = Days Sales Outstanding

DIO = Days Inventory Outstanding

DPO = Days Payables Oustanding

Some of the ways to reduce your Cash Conversion Cycle are:

  • improving collections
  • invoicing faster
  • obtaining deposits
  • extending vendors
  • reducing inventory

Lastly, you must measure cash flow on a daily, weekly, quarterly and annual basis.

You can’t manage your cash flow if you don’t measure it!

Want a step-by-step guide to improve your cash flow?  Download our free tip sheet 25 Ways to Improve Cash Flow.

In order to measure cash flow effectively, you’ll need to take a look at your cash flow statement. On the cash flow statement, you’ll see three different type of cash flows:

  • operating
  • investing
  • financing

Operating

Your operating cash flows focus on the measurement of cash generated by your operations.  This is the most important cash flow type to look at when experiencing a positive cash flow and a negative net income. Because a positive cash flow is able to maintain current operations and potentially grow the operations, operating cash flow could be the main determinant in why you’re running out of cash in a positive cash flow period. If you’re experiencing this, you either are hiring personnel and can’t avoid it, OR you’re experiencing collections problems and/or have poor debt structure.

The bottom line of your operating cash flow determines whether your company will make a profit or not.

Investing & Financing

This type of cash flow deals with the cash flowing between the firm and its owners. For example, any technology investments or meeting requirements (payroll, etc.) would be considered investment cash flow. This type cannot be controlled like the operating cash flow due to the investment of necessary items.

If you’re experiencing this in your investing cash flows, look at your assets to determine if each asset is absolutely needed. The solution to an investing cash flow problem would be to sell some of these assets. In addition, consider raising capital to get over the hump.

In the end, you need to be mindful of where your working capital is going. Managing your cash flow is just as important as growing your revenue streams. To learn more ways to improve your cash flow, click here to download our free guide.

For more tips on how to manage your cash flow, click here.

The Strategic CFO
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5 Ways a CFO Adds Value

ways a CFO adds valueCheck out the following 5 ways a CFO adds value and how they can take their role to the next level – gaining more respect, increasing salary, etc.

Ways a CFO Adds Value

1.  The CFO Enables the Company to Grow Faster

CFO responsibilities include the following:

  • Formulating and implementing financial strategies
  • Managing the company’s financial departments
  • Ensuring that the company is in compliance with industry and legal standards

An effective CFO analyzes the company’s current financial position and market trends. Furthermore, this enhances financial strategies and improve cash flow and profits, while still keeping a lid on costs. This also enables the company to grow faster and more resourcefully.

2.  The CFO can Improve Company Profitability

Controlling costs, improving productivity, and analyzing and suggesting pricing strategies are three ways the CFO can impact the bottom line. Through oversight and management of the financial departments, the CFO has access to past and current financial reports. Access to this information gives the CFO ability to evaluate how the company can control costs in order to maximize profits. The CFO should also evaluate the productivity of employees in different departments. Then determine if there are any patterns of bottlenecks or slow-downs in operations. The financial reports will then enable the CFO to analyze net income from sales revenues and operational expenses. Then he or she can recommend optimal pricing strategies for the company’s products or services.

3.  The CFO can Improve Cash Flow

By managing the cash conversion cycle, the CFO can help the company improve collections, pricing, and terms resulting in increased liquidity. Cash flow projections prepared by the CFO provide a means for management of the lifeblood of the company – cash.

4.  The CFO has the Ability to Obtain Increased Leverage from Banks

Banks want to see in-house financial expertise. An effective CFO will enhance the financial know-how and of the company when working with banks. In smaller companies, the CEO usually handles bank relationships. In larger companies with different departments and extensive operations, a financial team led by a CFO is necessary to handle company finances and communicate with banks in financial language. An effective CFO knows that maintaining open lines of communication with their banker will enable the company to better access the funds needed for growth.

5.  The CFO Provides Leadership and Direction Throughout the Company

The CEO looks to the CFO to be a sounding board for new ideas, present and sell the financial picture to others and “peek around corners”. An effective CFO can also bring financial insight to sales and operations departments who often distance themselves from company finances or financial strategies. If both sales and operations work together with the CFO to maximize profits by increasing cash flow and minimizing costs, the entire company will become more successful.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

ways a CFO adds value
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ways a CFO adds value

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