Tag Archives | management

Corporate Veil

Corporate Veil Definition

The corporate veil definition is a legal concept that separates the actions of an organization to the actions of the shareholder. In addition, it protects them from being liable for the company’s actions. It does not necessarily mean that the protection is always in place. A court can also determine whether they hold shareholders responsible for a company’s actions or not.

Piercing the Corporate Veil

“Piercing the corporate veil” refers to a circumstance in which courts set aside limited liability and hold a company’s investors or directors personally liable for the organization’s activities or debts. Corporate veil piercing is common in closed corporations. While the laws vary from state to state, courts will generally abstain from piercing the corporate veil unless there have been signs of serious misconduct.

Factors for Courts to Consider

Components that a court may consider when determining whether to pierce the corporate veil incorporate the following:

It is critical to take note that not all of these aspects should be met all together for the court to pierce the corporate veil. In addition, a few courts may find that one factor is so convincing in a specific case that it will find the investors personally liable. For example, numerous large enterprises don’t pay dividends, with no indication of corporate indecency. But for a small or closely held company, the inability to pay dividends may indicate financial indecency.

Protecting the Corporate Veil

There are various ways to ensure you are safe from being liable for a company’s wrongful actions. Read to following ways protect yourself:

  1. Keep your records present and finished. Your documentation should be detailed enough that you can clarify any exchange years after it occurred.
  2. Have a strategy for success or objective that shows how you intend to develop the organization.
  3. If you have stockholders or investors, then keep complete meeting minutes.
  4. Keep your personal finances and your business finances on separate bank accounts. Never purchase something personal with the business funds.
  5. Make sure you have enough money in your business bank account to cover all current exchanges and liabilities. Try not to fund your business from your personal account.

How to Keep the Corporate Veil Closed

The answer to this seems somewhat obvious: keep everything separate. Probably the most important area for separateness is in the financial arena. Document all transfers between the companies. In addition, do not be afraid to have inter-company contracts (i.e. lease agreements, notes, and contribution agreements). Then allocate expenses (including salaries) between the companies so that each pays it’s share. Have policies in place. In addition, practice keeping everything about the businesses separate. You may also consider having separate boards of directors and offices if that is practical.

If you want to take your career to the next level and step up into the trusted advisor role, then download our How to be a Wingman guide.

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Budgeting 101: Creating Successful Budgets

We often discuss budgeting in our firm, and I often write about budgeting because it is such an important topic in any company. As a consulting firm, we deal with this issue at almost every client. Let’s rehash some basics… Why is budgeting important? As properly stated by Ron Real (the author of 13 ½ Strategies for Winning the Budget Wars), “To achieve success in anything, you need two ingredients: a target to aim for, and a way to measure your progress towards it” (more from Ron Real below). Before we go into creating successful budgets, let’s address the common problems with budgets.

Successful budgets, budgeting rules, common problems with budgetsCommon Problems with Budgets

We deal with clients all the time that either do not have a budgeting system in place, or they have the wrong budget system. The following are some of the most common problems we see with budgets at some companies:

  • Lack of accountability
  • Employees ignore the budget, don’t follow it, or find ways around it
  • Only applies to some groups/managers and not to others
  • Results in fights or power plays, or managers play games
  • Budget process takes too long and consumes too much of people’s time
  • Budget is wrong from the beginning
  • Established goals are either easy to reach or unachievable
  • Filed away when completed – lack of follow up
  • Built on faulty or unrealistic assumptions or not everyone agrees on the assumptions or principles
  • Budget performance and financial feedback is slow or nonexistent
Ready to start creating successful budgets? Become a SCFO Lab member and start the Budgeting 101 Execution Plan where we go in depth into common problems with budgeting, budgeting rules, and budgeting principles. Learn more about the SCFO Lab here.

Successful Budgets

Successful budgets are possible, but the TONE STARTS AT THE TOP. If the leadership or Board does not take the budget process seriously and does not hold others accountable, then you will have a problem with the budgeting process. You can build a budget and a budget process that is well conceived, creates a visionary plan, and shares resources. The budget process is very much a team effort, but it often needs to be taught to others in the organization.

The tone starts at the top, and your CEO needs an advisor they can trust. Click here to download our free How to be a Wingman Guide to start setting that tone.

4 Budgeting Rules

Successful budgets are created by following rules and principles developed over my 28-year career. You can find all these rules and principles in the Budgeting 101 Execution Plan inside the SCFO Lab. Let’s look at 4 budgeting rules that help create successful budgets.

Rule #1: Decision Making Tool

The budget is a tool for decision making. It is not a disconnected document that has little to do with the company’s actual business. Start by reframing your and your CEO’s perspective on the purpose of a budget in a business.

RULE #2: Management Tool

Budgeting is a very important management tool for achieving lasting success. Just like the CFO is the wingman to the CEO, the budget is the wingman to all management.

RULE #3: The Plan

A budget is establishing the discipline to set up a plan and then adhering to the plan. In fact, 94% of all ineffective budgets are the direct result of weaknesses in the organization’s corporate structure. Some of these weaknesses include the following:

  • Inadequate leadership
  • Poor communication
  • Conflicting goals
  • LACK OF ACCOUNTABILITY

Hint: Be disciplined and follow the plan!

RULE #4: Problems Exist

Issues that lead to a poor quality budget process mean that these problems already exist within the organization ALL THE TIME! If your company is experiencing budget problems, then it’s time to look at what the problem really is. Issues that are probably already part of the corporate culture, but many times ignored, include the lack of:

  • Vision
  • Accountability
  • Communication

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

There are many other rules to budgeting and basic principles, but we can not cover all of these in this one blog; however, we do cover this topic at length in our Financial Leadership Workshop (Day 4) and our SCFO Lab’s Budgeting 101 Execution Plan.

Understanding how budgets really should work is critical. I recently had an executive tell me that he did NOT believe in budgeting because it just meant that people now had the authority to spend everything allocated to them at the end of the year. Unfortunately, this executive was thinking of budgeting like the government thinks about a budget. You have $1,000 for the year, so you must spend it by year end. That is NOT a corporate business budget or budget process. That is a very flawed interpretation of budgeting.

If I could use just one word that describes why it is important to have a good budget process, it would be “accountability”.  A budget will force your team to be held accountable. But, if that theme of accountability does not start with the Tone at the Top, then you are guaranteed to have a flawed budget process.

If you are ready to take your financial leadership development to the next level, then look no further than the Financial Leadership Workshop. Registration for the Gamma Series of the Financial Leadership Workshop is now open. Learn more about the program and how you can get started in October 2018.

Suggestions to Create a Successful Budget

Other quick suggestions to create a successful budget include the following:

  1. Set goals and objectives that push for growth and efficiency, but keep those goals and objectives realistic. There is nothing more demoralizing than to have a unachievable goal.
  2. Start your budget planning process early. For a calendar with year end at December, start no later than August of the current year.
  3. Measure your actual results every month versus budget, and hold people accountable.

Adhering the these budgeting rules and reframing budgeting to your CEO and leadership team is just one example of how you as the financial leader can act as a wingman. If you want to step up and be the trusted advisor your CEO needs, click here to download the How to be a Wingman Guide.

Successful budgets, budgeting rules, common problems with budgets

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Chain of Command

Chain of CommandThe chain of command in a company refers to the different levels of command within the organization. It starts with the top position such as CEO or the business owner, all the way down to the front-line workers. Companies create a chain of command in order to flow instructions downward and accountability upward by providing each level of workers with a supervisor.

Establishing a Chain of Command

Each company has a different organizational structure, which translates to its chain of command. A company’s hierarchy starts with the CEO at the top. Following the CEO are the vice president and upper management employees who report directly to the CEO. Then, there are department managers and supervisors who report to the higher-level executives. Lastly, come the front-line workers who report to their respective supervisor and department manager. Every employee recognizes the structure of the company when a chain of command is in place.

Levels of Management 

There are three general levels of management: top, middle, and front-line managers.

Chain of Command

Top Managers

Top managers are in charge of the overall performance and health of the company by controlling and overseeing the entire organization. They are the ones who set the goals, objectives, and mission for the company. Top-level executives spend the majority of their time planning and decision-making and consistently scan the business environment for opportunities and threats.

Some of their duties include:

Some examples of a top managers include the following: Board of directors, chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), president, and vice president.

Middle Managers

Middle managers are responsible for achieving the objectives set by the top managers by developing and implementing activities. They oversee the first line managers and make sure they are properly executing the activities they set out.

Some of their duties include:

  • Report to top management
  • Oversee first-Line managers
  • Allocate resources
  • Design, develop and implement activities

Some examples of a middle managers include the following: General managers, department managers, operations manager, division manager, branch manager, and division manager.

First-Line Managers

First line managers are in charge of supervising employees and coordinating their day-to-day activities. They need to make sure that the work done by their employees is consistent with the plans that the upper management set out for the company.

Some of their duties include:

  • Report to middle managers
  • Supervise employees
  • Organize activities
  • Involved in day-to-day business operations

Some examples of a first-line manager include the following: department head, foreman, office manager, section head, shift boss, and supervisor.

Advantages of a Good Chain of Command

There are numerous advantages that can come from having a good Chain of Command, including the following:

Responsibility – Having different areas of the business can improve accountability by giving everyone a different responsibility. Everyone has their own separate duties, and their own supervisor to keep them accountable.

Efficiency – A functional chain of command helps improve efficiency when communicating with workers. As a result, this helps them improve workflow and adjusting their management methods.

Clarity – Having a good company structure makes the chain of command very clear. Furthermore, this lets everyone know which decisions they are allowed to make and which ones to present to their supervisors.

Employee Morale – Companies that have a clear chain of command create an environment without uncertainty and chaos. It improves the morale of workers leading to high productivity and low employee turnover.

Career Path – It makes it easier to create career paths for employees and track their progress toward their goals outlined in their respective areas.

Specialization – Making employees focus on narrow functional areas can create groups of specialists that heavily impact the functions of the company.

Why Chain of Command Matters to a CFO

Even though most top-level executives do not often interact with front-line operations, they still need to be aware of everything that is going on in the company. CFOs especially need to make sure their ideas/objectives are properly being executed and delegated through the chain of command. Even if top-management has the biggest impact on the company, front-line workers are the ones that interact the most with the customer most of the time. For example, ABC Co. is a company that owns office supply stores. The store employees are constantly receiving criticism for being rude and uncourteous to customers – ultimately leading to people choosing to buy office supplies elsewhere. This can directly affect the company’s revenues and therefore, the CFO‘s projections. A good top-manager should occasionally check on its bottom managers to see if they are properly carrying out their tasks to prevent problems like this from happening.

Tip: Walk in the store-front or factory floor at least every week or every other week. Get to know the people that are dealing with your customers or are producing your product. They will also let you in on the secrets that mid to upper management either won’t tell you or simply don’t know.

If you want to take your career as the CFO to the next level, then you need to start acting like your CEO’s wingman. Be the eyes and ears for the company. Click here to access the How to Be a Wingman guide.

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Chain of Command

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The Sacred Cow: Lack of Succession Planning

We have all heard the term, “The Sacred Cow”. Here is how I apply it to the business world… I am in my 28th year of working as a professional after graduating from college. I have been privileged to work in large private companies, small private companies, and large publicly traded companies. In addition, I have made the transition from accounting/finance to operations. I have also consulted for companies in a variety of industries, size, and complexity in the last 6 years. And I run into this one thing constantly – the lack of succession planning.

Sacred Cow

The Sacred Cow

After all these years and great experiences, I still see companies that have “Sacred Cows”. That is that employee who has been in the company 20 years and knows everything and everyone. He has outlived reductions in force, down turns in the economy, is still there after 2 new ownership changes. It’s that guy no one can touch because he is a “Sacred Cow”.

Unfortunately, these Sacred Cows are oftentimes not always that good. They come with some baggage. I have seen many of these Sacred Cows. Oftentimes, they are bullies. They are the ones that are often insubordinate. Although they are the ones that get stuff done, it is done at the cost of moral – always threatening the company that on their next temper tantrum they are “quitting”. Usually, they are overpaid.

Perpetual Life of the Business

A business is created within the confines of a legal entity mostly for continuity of perpetual life. That is one of the main characteristics of a Corporation. Therefore, the business continues no matter who is CEO, CFO, or COO or if there any changes in shareholders. But the business will continue because it “has a life of its own”.  As a matter of fact, that is also how you add value to the business. If that is the case, then how do companies allow Sacred Cows to exist? I see it over and over again. Owners of companies say something like…

“If we terminate him, then how are is going to run the operation?”

“But he is our key sales person and he knows all the clients personally.”

“No one else knows what he knows.”

If your business faces any of these situations, then it is your own fault.  No business should be built around a single or two key people. Some exceptions to this rule are small startups or pre-revenue entrepreneurial companies.

The business relies on the leadership to point out the Sacred Cows and destroy the potential of them holding your company hostage. Know what your CEO wants and needs help with with our How to be a Wingman guide. This whitepaper walks you through the relationship between CEO and CFO.

Examples of a Sacred Cow

I have an example that I lived through in my career. (More stories available upon request).

Petrochemical Company – The Lead Supervisor

There is a petrochemical company that had been around over 20 years and was very successful at different levels. The operators worked on three different shifts with each shift having their own supervisor. But the “Lead Supervisor” – the one that all operators and supervisors reported to – was a gentlemen that had been in that position many years. He had a personal relationship with the President and his wife. He was also the one that made hiring decisions out in the plant and control room. Most subordinates feared him. And management played his game because he “knew where every valve was”.

This guy was the Sacred Cow, but he was nothing more than a prima donna bully. There were many other HR issues, but you get the picture.

Since I am one that believes that no company should depend heavily on one person and the company should never be held hostage, I terminated this Sacred Cow the day I was promoted to President of the organization. I terminated him for being insubordinate and for holding the company hostage with demands of more pay or he would quit. I also terminated him for being a cancer in the organization.

Shock waves throughout the organization, rumors of failure spread, and we are going down in everyone’s mind. In reality, we did not skip a beat. It has been 10 years, and I hear the company is doing great.

As the financial leader, it was my duty to protect the health of my company, support the leadership team, and protect the shareholders. Learn more about how you can become the wingman to your CEO with our How to be a Wingman guide.

Client – Fear of Sacred Cow

I recently saw a large client with a similar issue. Now, we are dealing with a management team that fears the Sacred Cow. It is the fault of prior management for allowing this to happen. As the acting financial leader of the company, I am putting up mechanisms to prevent the development of future Sacred Cows.

Lack of Succession Planning

What the Sacred Cow comes down to is a lack of succession planning. There is no plan in place to continue operations without that person (or the position).

Avoid the sacred cow by guiding your CEO in the direction of the company. Access our How to be a Wingman guide here.

Avoid the Sacred Cow (Lack of Succession Planning)

So how do you avoid these pitfalls? There are three things to focus on as well as steps to avoid the sacred cow.

Sales Person That Has All the Key Customers

One example of a Sacred Cow in your business is the sales person that has all the key customers. First, insist that you attend some key customer meetings. You have every right to ask for detailed documentation of the key customers, relationships, meetings, and the pipeline of business. Finally, develop a relationship with those key customers. Do not let one person hold all the cards.

Key Person in Field Runs the Operation

Another example of a Sacred Cow is the key person in the field that runs the operation. Make sure you have a number 2 person that is just as good; they just don’t have the title… Yet. In addition, every key person in management should drive a succession plan. In order to have that happen, the company should have a succession plan in place for its leaders from the CEO on down. Someone can have direct reports under the Sacred Cow in operations. Furthermore, this does not mean that the Sacred Cow controls everything. Have the subordinates that run key areas document their day-to-day functions. Finally, develop a relationship with those key subordinates. Talk to them about training and potentially moving into bigger roles in the future.

The Sacred CFO Cow

The last example is the Sacred CFO Cow. Have a strong Controller that reports to the CFO. Have the CFO document key functions. In addition, the CEO should know those key contacts – legal, banker, insurance, etc. Develop a strong team underneath the CFO to prevent the CFO from becoming the Sacred CFO Cow.  It never hurts to continue networking and meet professionals that you may want to hire one day.

Do Not Allow Sacred Cows to Form

The objective is to not allow Sacred Cows to be born in the first place. We know that they take control and abuse it. But if you do have Sacred Cows in your organization, then you need to deal with it. Build out the number 2 and number 3 person. Every company should also build a succession plan for key employees. And most importantly, do not allow your company to be held hostage by anyone! Be the trusted advisor your CEO needs and access the How to be a Wingman guide.

Sacred Cow, Lack of Succession Planning

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Problems When Experiencing Business Growth

Problems When Experiencing Business GrowthGrowth is great for companies, right? Not always. There are so many problems when experiencing business growth that can occur if the leadership is not careful. Besides the uncertainty of how long this growth period will last and how big the company will grow, companies loose focus on some basic key factors. This can include not managing working capital, hiring the right employees, not scaling effectively, customer service, and having less efficient operations.

What Happens To Growing Companies

What happens to growing companies? It all revolves around sales. The sales team and CEO are so excited about all the additional new sales and customers. Unfortunately, some of the day-to-day items fall through the cracks. This includes cash management, internal processes, management/leadership, and systems. But growth can be managed if financial leadership is looking far enough ahead and close enough in. Growing companies don’t always land into sticky situations, but there are some issues that need to be addressed.

Problems When Experiencing Business Growth

Cash Poor

Cash is king. Growth usually comes at the price of consuming cash… Buying more inventory to meet the sales, hiring more people and increasing SG&A. I say that in almost every single blog I post because I cannot emphasize it enough. The #1 thing business growth does is make companies cash poor. The management and forecasting of working capital is critical in a high growth situation. Before you know it, vendors are collecting their accounts receivable yet you have not collected your A/RInventory is consuming cash in order to meet sales. It’s a recipe for disaster!

Need help managing your cash? Inside our SCFO Lab contains 13-Week Cash Flow Reports, Dynamic Cash Flow Projections, Cash Flow Tune-Up Tool, Daily Cash Report, and the A/R Optimizer. Click here to learn how you can access all of that and so much more.

Inefficiencies in Operations

Another thing that happens to growing companies is the increase of inefficiencies in operations. The goal is to push out as much product as possible, but oftentimes to do that, corners get cut. Product quality decreases. And customers are not happy. It also may be the inconsistency between products and/or services as there are no standard operating procedures (SOPs) written down.  If you customers get hurt by a decline in quality or service, then you may have some permanent damage. In addition, companies may have an influx of new employees that are not being trained effectively and/or at all.

Management Mistakes

While management mistakes covers a variety of potential issues, let’s look at two. One of the biggest mistakes is not taking care of the employees. Management is scrambling to scale-up to push product out the door and to continue bringing in the sales. But when stress is high and people aren’t being taken care of, you risk increasing employee turnover. This also includes knowing when to bring on new talent. If management is not continually recruiting and looking for new talent to help even the load off of current employees, then you risk further increasing employee turnover. Remember, the cost of employee turnover is on average $65,000 in the U.S.A. according to some studies.

The second biggest mistake is letting inefficiencies run high. At some point, there has to be a stop to letting inefficiencies continue. Financial leadership should be working with other departments to find better solutions that will deliver the same results. Your basic dashboards are very critical in a high growth situation.

If there are no other solutions, then you need to focus on the customers you have now versus continuing to grow.

Not Scaling

Another problem that occurs during a high growth period includes not scaling up. Are you getting the systems you need to run your business effectively? For example, a company is using a customer relationship management (CRM) system like Zoho or Bitrix – designed for small companies. However, this company triples overnight. They have outgrown their current CRM system. Instead of choosing a system that was for where they were at, they should have forecasted where they thought they were going and on-boarded a system that was maybe a little bigger for them to grow into.

Problems When Experiencing Business Growth

Some of the problems when experiencing business growth include the following:

The best way to address problems when experiencing business growth is to first look internally. Access our Internal Analysis whitepaper to analyze your company’s strengths and weaknesses.

Case Study

Let’s look at a case study about a company I worked with recently. They are manufacturer of industrial parts and had experienced growth for $20 million in revenue to nearly $100 mm in revenue in just three years. The company had a basic accounting staff but no financial professional on staff. Why? Because according to the owners, they are too expensive. The company quickly outgrew their accounting system. In addition, they purchased raw materials aggressively. The sales guys were living the dream with non-stop sales orders. They literally could not keep up with all the new sales orders. The manufacturing facility was now on three shifts to cover all orders. The company also did not want to spend the money on a second plant supervisor.

What were the results? It created a high stress environment. Cash became very tight and sales were being generated, but the order to cash cycle increased to almost 100 days. In addition, the quality of the products suffered because there was not proper supervision for the second and third shift. The accounting records were also not correct and reliable. Instead of the records being generated for large accruals and proper costing of products, they were generated by a basic accounting staff who were no equipped. Furthermore, margins were not reliable for management to use. Cash got tight quickly. The line of credit was maximized very quickly. When the lender challenged the compliance certificates and the financial statements, the ownership started to get concerned about the “back office”.

This financial distress and stressed out employees/ownership could have all been avoided with proper planning and forecasting.

Navigating Business Growth

When navigating business growth, it is important to know both your strengths and weaknesses. Ignorance to those two things risk inviting for unoptimized strengths and weaknesses that turn into major threats. Access our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success.

Problems When Experiencing Business Growth, Navigating Business Growth
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The Silo Effect

Silo Effect

We hear about the Silo effect in companies all the time. Silos are formed in the large public companies as well as in small private companies. These organizational Silos can impact the profit potential of an organization because each department or silo is kept separate from one another. In this blog, we’re looking at the Silo Effect and how it impacts your company.

Organizational Silos In Your Company

In business a Silo is a department, service unit, operating unit, business unit that does not have good communication with other units.  Thus leading to a dysfunctional organization.  The Silo operates only for its own benefit and not for the benefit of the entire enterprise. One Silo usually points to other silos when there are problems or issues. Silos have may have their own teams, but they are not part of a broader team – the company as a whole.

Get the financial leadership skills you need to be more effective in breaking down organizational silos. Click here to access our 7 Habits of Highly Effective CFOs and guide your team to a silo-free environment.

How Silos Are Created

Before you can break down the barriers (Silos) between departments, you need to know how Silos are created. I have found that like everything else, the tone starts at the top. If the top brass does not permit his company to have Silos, then you will not. Many CEOs may argue that it is easier said than done. I once operated a fairly good size company and they had two very distinct business units. One was a service company, and the other was a regulated utility. You could not have a more diverse culture in each business unit. As a result, each business unit had deeply entrenched Silos. Once the top brass held management and employees accountable, we saw silos starting to dissipate.

silo effect

Difficulty in Breaking Down Silos

When the CEO or owner allows for different areas in the company to develop Silos, it is very difficult to break those down. But it is doable. Two of the most common areas that are affected by Silos is the operations side of the business and the accounting side of the business. It is easy to allow these to develop. Operations people are the people dealing with customers and the outside world; they directly generate sales. They all understand how to make a widget or draw up complicated engineering plans. While the accountants tend to be “the back office”.  The accountants do not usually interact with the customers and remain in their own department.  Few accounting departments or accountants understand how to make the widget. I bet many have never left the office to understand the field operations or manufacturing facility.  So it is easy for the accountants to develop their own Silos.

So, who is right and who is wrong? They are both wrong. It is up to leadership to ensure that the operating side of the business understand why things are important in the back office. It is also very important for accountants to understand the complexity of any business.

It’s up to you as the financial or business leader to break those silos down. Access our 7 Habits of Highly Effective CFOs to learn about the financial leadership skills you need to do that.

From Operations To P&L Leader

This is precisely why we developed our new workshop From Operations to P&L Leader. I have seen it time and time again… A talented sales person or operations person who gets promoted, and someone hands him a P&L (Profit & Loss Statement). They expect that promoted person to manage the P&L. But has anyone trained the operations person and really explained what a P&L is? Or how to analyze it? Or better yet, has anyone educated the operations person on working capital, the balance sheet, and the cash flow statement? If someone is going to manage the P&L, then that person should probably understand more than just the P&L. Well, we do offer this 4-day workshop to operations leaders. Learn more about the workshop here.

silo effect

What about the accountant? I believe it is up to every CFO to educate the Controller and their accounting department on what the operation does. How do you make the widgets? What do those smart engineers do? What are the challenges and obstacles day to day? Why are the required raw materials constantly changing for that petrochemical plant? If an accountant does not understand what a reactor looks like, then the accountant is missing a big piece of the puzzle. Once the accountants understand the operations, things will work smoother.

The Silo Effect

 Let’s look into the Silo Effect. What is the effect of a Silo or Silos in your company? It increase the number of inefficiencies in your company. You risk duplicating the work, not communicating between departments, wasting time etc. There is a lack of communication between departments in your company. As a result, the company does not work as one. It will cost you in cash. Tension will eventually rise among the different departments. And rumors will begin to spread. There will be delays in the operation – impacting both throughput and/or progress and the bottom line.

Case Study On The Silo Effect

For example, a manufacturer had a somewhat complicated business. They had very talented people in the operating side of the business as well as very talented people in accounting. Their cost accounting is a mess after the implementation of a new system. The system was supposed to solve a lot of issues, but the margins made no sense at all. (Operations blamed accounting, accounting blamed operations). After many interviews and site visits, we concluded in our assessment that the technical cost accounting part of it was relatively not that complicated. What was the problem? The company created Silos.

Accounting never explained to the operations side of the business what accounting needed, and they were sticking to their old ways of doing things. Accounting and operations needed to “talk” to each other and understand what the other needed. The lack of communication led to garbage in and garbage out of the system. They thought they were communicating because they would sit down monthly and have a meeting. But just because they were sitting in front of each other, it did not mean they were “talking” to each other. The meetings included a bunch of finger pointing. Furthermore, both sides not willing to change or listen to the other.

These silos contributed to bad data and unreliable financial statements. It also resulted in issues with lenders and investors. I wish I could say that our firm provided this incredible technical solution for cost accounting. What we did provide was identifying the silos, the lack of communication, and the lack of processes. Then we took corrective action with the ownership and broke down the silos.

Breaking The Silos

By breaking the silos, forcing departments to communicate and having both sides take ownership of the processes established, they can now enjoy reliable financial statements and less pressure from lenders/investors. How do you identify if your company is feeling the silo effect? You need to look from the 40,000 foot level. This is just 1 of the 7 Habits of Highly Effective CFOs. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

Silo Effect

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Why Use a 13-Week Cash Flow Report as a Management Tool?

Why use a 13-Week Cash Flow Report as a management tool? Cash is king! This applies to any and all companies. No matter the size or industry, cash and cash flow are critical to any operation. Yes, some companies have access to lines of credit and other forms of financing, but that is debt that must be repaid at some point.

So if cash is so important, then why do not all companies use a rolling 13-week cash flow forecast?  We have had many clients over the years. And some, but not all, use a 13-week cash flow report as a management tool that is updated every week. Once the process is started, it is actually a fairly easy tool to keep updated.

Cash is critical to a company’s success. Click here to access our 25 Ways to Improve Cash Flow whitepaper and start improving cash flow today.

Establish a 13-Week Cash Flow Report

The first thing we do with every client is to make sure they establish a 13-week cash flow forecast if they do not already have one. And usually, the first thing we are told by someone at the client office is “our business is special, forecasting when we collect cash is almost impossible to predict”. I hear this way to often and you know, we have never failed at implementing a 13 week cash flow forecast.

13-Week Cash Flow Report as a Management ToolThe Purpose of the 13-Week Cash Flow Report as a Management Tool

The 13-week cash flow report is not meant to me an exact measure of what cash balance will be at the end of every week. On the contrary, it is a forecast. That means the actual results will be different from your forecast, especially in the later weeks. But what the cash flow forecast does tell you is your trend for ending cash balances. It actually does give you an estimate of what your cash balances will be. It is true that weeks 1,2 and 3 forecast are more accurate than weeks 11, 12 and 13.  But it does not take away that it provides some visibility as to where cash will end up.

The 13-week cash flow forecast is useful to a company that is financial distress and to a company that is flush with cash. That is because a company that is in financial distress must be able to determine what costs they need to cut in order to achieve a cash neutral position. A company that is cash rich, needs to know how flush they will be with cash to project things like capital expenditures or shareholder distributions. Either way, the company must have an idea of where they will be over the next 13 weeks. Why 13 weeks? Because that captures an entire 3 months, one full quarter. Being able to have an idea of where you want from a cash position in the next 3 months allows time for planning and decision making.

Do you need help putting together your 13-week cash flow report? Access our template and how to use it (and so much more) in our SCFO Lab. Learn more about the SCFO Lab here.

Cash Collections

It is interesting how many times we have implemented a 13 week cash flow forecast, then we look into why the cash actually collected is way off in weeks 1,2 and 3. Then we dig and find out that the actual cash collection process is poor or non-existent.

Case Study

I was part of a Chapter 11 bankruptcy process a couple years ago. The first thing we did was implement a 13 week cash flow forecast. This is something any CRO would do. When asked about cash collections, the CEO told me that the sales team (7 people) handle collections with their respective client relationships. When we were way off on week 1 and 2, I asked the sales people why we are off?  What are they doing to follow up on late accounts receivable (A/R)?  The response from everyone on the sales team was that they do not handle calling to collect invoices and outstanding A/R.  They stated that the accountant makes those calls and follows up with old A/R.  When I asked the accountant, she said the sales guys collect old A/R.

No one was following up with collections of old A/R. I initiated a daily phone call with all the sales people and assigned clients to call on and follow up on old A/R. We started with daily calls. And we saw some progress, then we went to every other day, then weekly calls. Over then next 5 weeks the company collected $2.7 of $3.2 million dollars in old AR.

So How Do You Start Using a 13-Week Cash Flow Report?

Week 1,2,3….13

Create a template that has a direct method cash flow statement.

Cash In –         Cash from accounts receivable

Then list cash from work not invoiced yet (this would be in the outer weeks)

Cash Out–       Major lines of operating expenses

Payroll

Other

On a weekly basis, pull A/R and A/P from your accounting system. Then link the individual items to the line items in the cash flow forecast. Don’t forget payroll totals.

Include a section below operations for CAPEX activities and another section for Financing Activities.

End cash balance by week

Cumulative cash balances by week

Have one person in your accounting department responsible for updating the 13-week cash flow forecast weekly. Make sure you have a dedicated person/people follow up on collections.  Compare the forecast for each week to the actual cash collections and cash payments – note variances. Then adjust how you forecast.

It is that simple! This tool will by you piece of mind and allow you to have insight on your cash trends. You need to know this no matter the size of your company or your industry. Do not get frustrated; your first 3-4 weeks are a learning process. Your forecast WILL be off. Make adjustments and understand your variances. Before you know it, you will have a good feel for what your cash trends are. If you are strapped for cash now, click here to access our 25 Ways to Improve Cash Flow whitepaper. Make a big impact on your company today with this simple checklist.

13-Week Cash Flow Report as a Management Tool
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13-Week Cash Flow Report as a Management Tool

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