Tag Archives | value

Are you destroying your company?

Have you ever been in a position where you were considering selling your company only to find the value of the business falling quite short of your expectations? This is something that can easily happen without you noticing…

Destroying your Company

What do we mean by this? We mean that something, either suddenly or little-by-little, has gone so awry that the value of your company in the eyes of an investor has severely decreased. Out of all the possibilities, the most common reason value drops comes down to the leadership and the key team members that you have assembled.

To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Who You Hire

Your team is one of the most vital assets in your company. Without people, you don’t really have a company. In the process of valuation, investors spend a lengthy amount of time assessing your leadership, key team members, and general staff.

Why though?

Productivity in a company heavily depends on the integration and relationships between the team members. Especially relevant in toxic environments, alliances begin to form, gossip boils, and separation between roles deepens, etc.

Are you the toxic person?

Take a deep breath and assess whether you are the toxic person in your company creating these divides. To do this effectively, you cannot go about it alone. If you are in a position of leadership, bring other fellow leaders in to provide honest feedback of your performance. Give them permission to be brutally honest because in critical times (such as selling your business), there’s no time to work through fluff.

You may be a value destroyer

When considering the value of your business, you need to take yourself out of the equation. Your business should be an asset you own, that generates cash, not an extension of yourself. It should be able to operate without your daily and direct motivation, involvement, or leadership.

If the business cannot function without you, that’s a problem.

When the business cannot function with you on an extended vacation, that’s a problem.

When no one else can fill your position or create the same results, that’s a problem.

If you have a company that is not worth much without you, no one will pay you much for it. If you’re not careful, you could be the destroyer that is impacting your company’s value. Perfectionism, lack of reinvestment, and plain old bad habits could mean you’re in big trouble.

Perfectionism

One of the most frustrating things about entrepreneurs and business owners is that they often forget to take themselves out of the company. What does that mean exactly?

In the “E-Myth,” Michael Gerber states,

“If you cannot separate yourself from the business, then you have a job not a company.” 

Perfectionists are professionals at not separating themselves from the business. By having accountability partners or top managers there to advise you if you begin to slip into perfectionist tendencies, you will be able to continually take a 40,000 foot view.

Don’t Work a Job

The #1 thing to remember is when you create a company, is don’t work a job. Your company should work for you; it should generate revenue and operate independently for the most part.

So, how can you ensure that a business can continue to operate and flourish without your involvement? Hire strong people, create valuable content and procedures, develop a brand that is not synonymous with you. If you do all of these things, it will help you create an asset, not a liability.

Lack of Reinvestment

Sometimes, those at the top can get “greedy”. I always say “greed lowers IQ”. When CFOs, CEOs, COOs or any other person in a financial leadership position finds success, they often reward themselves generously.

While that is not necessarily bad, it is a bad idea when you neglect to financially lead your company by not reinvesting back into the company. Not only is this neglecting your responsibility to the shareholders, it risks a major cash crunch.

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.

Bad Habits

A financial leader can have bad habits that destroy companies. Some of these bad habits include:

1. Wasting time with frivolous tasks

Prioritize using an action plan what tasks will add value to your company. If there is someone who can do a frivolous task at a lower rate, delegate it. It’s not worth your time.

2. Over-rewarding yourself

Consider investing that extra bonus into the company. Check the reasonableness of your bonus.

3. Only acting in the accounting function

As a financial leader, you are more than just the leader of the accounting function. You have a responsibility to provide financial leadership to the sales and operations functions as well.

4. Be only reactive, rather than proactive

Most accounting-types are reactive. Instead, think like the entrepreneur or owner of your company. Proactively make decisions that put your company ahead of competitors.

5. Scorekeeping

This bad habit leads to more than just financial issues. Professional and personal scorekeeping pits people against each other, resulting in workplace animosity. Watch your words and the thoughts that measure and compare one’s performance.

6. Resistance to take any risk

Take calculated risks; measure the downside of the risk in comparison to the upside. Be sure to factor in the  payback period it will take to see if you can afford to take the risk.

As a result of having 1 or more of these bad habits, you could be destroying your company.

Who is actually in control?

Figure out who is in financial control of your company. If it’s you, then start analyzing whether you are the destroyer. Regardless of your conclusion, there is an opportunity to take control of the situation. To truly maximize value, control all value centers in your company. The first order of business is learn the Top 10 Destroyers of Value. Download your free guide to avoid letting the destroyers take value away from you.

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Inconsistent Revenue Streams

When valuing a company, investors look for 3 things: reliable, guaranteed, and steady revenue streams. But what if your business model involves inconsistent revenue streams? Regardless of why your company is experiencing inconsistent revenue streams, it’s important to learn what is happening and how to resolve it.

Entrepreneurs (typically from a sales or operational background) and CFOs/Controllers (financial function) see this issue in completely different lights. But let’s get into the very definition of inconsistent revenue streams.

What is an “inconsistent revenue stream”?

An inconsistent revenue stream occurs when your product and/or service is not able to consistently provide a reliable revenue number to use for projections. One month you may sell 43 widgets while in the next month, you sell 2. This causes some serious problems with putting together sales projections, annual budgets, operational decisions, etc.

The problem with inconsistent revenue streams is that a lot of entrepreneurs survive off the “pops” — those moments of big return, when a calculated investment finally pays off, the moment when you land a big fish that has big business to offer you, the moment when you get a “Win.” But these are conditional occurrences that are inconsistent, sometimes unexpected, and may be dependent on a particular sales person, economic climate, or a referral based on your connections.

Destroyer of Value

Investors look at inconsistent revenue streams the same way they would look at a company that has made no sales in 3 years. It’s worthless to them from a predictive standpoint. Investing in a company with inconsistent revenue streams comes with high risk and questionable return. An investor that looks at a company that only survives off of those “pops” (that get entrepreneur’s blood rushing) will likely run far far away.

This type of inconsistency is what we call a “destroyer of value”.

To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Identification of the Destroyer

It’s often said, if you can’t admit you have a problem, then you can’t solve the problem. The first major task is to identify if you have this particular destroyer in your company. There are a couple of things that you can look for. If you experience any of the following, the value of your company might be less than you would like:

  • Decreases in sales that aren’t reflective of economy
  • Surviving on the cash you made during a large sale
  • Extreme differences with month-over-month sales
  • Dependency on one or two sales persons
  • Reliance on a particular person or company for leads
  • A specific and narrow market that purchases in bulk only every so often

Whatever the signal is, identify it and write it down.

Solutions for the Destroyer

Instead of waiting for the stars to align, smart owners increase business value through the creation of a smaller, consistent revenue streams. This typically means a monthly payment from a wider audience. You might have a monthly membership with access to helpful content or you might have monthly, recurring work where businesses have contracted you for a lengthier amount of time at a discounted rate.

Creating a recurring revenue stream means consistent cash flow and a business that is less affected by change. Instead of relying on one big fish or several “pops,” these owners cast a wider net to obtain many little fish that are constantly putting food on the table.

You’re in a business with customers. These customers have needs. Find a way to consistently meet your customers’ needs. Add value to their lives, at a rate they feel is fair and unobtrusive, and you’ll end up with a higher and more consistent cash flow that a buyer will be willing to pay you top dollar for.

Reliable Revenue Streams

The main way to ensure that your company can consistently have revenue is to modify your revenue stream. Answer the basic questions: 1) how easily can you track and predict future months’ revenues? 2) who are your customers? 3) why are they buying your product more than once?

Recurring Subscription Model

From the customer’s point of view, a subscription for a product or service saves the customer time and hassle. What a lot of companies fail to realize is, subscription models for businesses provide value for the customer and the company.

Because a subscription model has high recurring revenue, a business has the ability to calculate the inventory, lifetime value of a customer, and options for promotional offers. According to John Warrillow, the creator of the Value Builder system, a business with a subscription model’s value “will be up to eight times that of a comparable business with very little recurring revenue.”

As you calculate your net present value, make sure there aren’t any other “destroyers” that could decrease the value of your company. Download your free “Top 10 Destroyers of Value“.

Other revenue streams

Other revenue models such as rentals, usage fees, freemium, and licensing are just a few more examples of reliable revenue streams. What do they all have in common? Convenience and consistency.

Conclusion

Don’t limit your business to the simple commercial and retail business. Choose the one that works well for your business and is predictable. Work smarter, not harder.

(Download the Top 10 Destroyers of Value to maximize the value of your company. Don’t let the destroyers take money from you!)

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Unlock Cash in Your Business

unlock cash in your business

Unlocking cash in your business can make a major impact on valuation, cash flow, profitability, and so much more.  As the saying goes, “Cash is King.” However, there is often money lying around that is essentially “locked up” in the system.

Unlocking Liquidity

Liquidity is key to success. A company could sell all the widgets in the world and have a great net earnings, but still go out of business if it can’t collect paymentsFailure to meet this simple obligation has landed many companies in a cash crunch with Mr. Chapter 11 lurking.

Liquidity =  ability to convert assets to cash

Why is liquidity important? Liquidity is vital to a company. It’s like the blood that runs through your veins. If your blood forms clots within arteries and veins, then you could suffer a heart attack.  Just like the blood coursing through our bodies, freely flowing cash is vital to a healthy company.

unlock cash in your businessReducing DSO

A little improvement goes a long way when unlocking cash in your business.  First things first… Take a look at your DSO, or daily sales outstanding. What is it running?

Oftentimes with our clients, we start by reducing DSO 1-2 days. Depending on the size of the company, this one change could easily create a great deal of free cashFor example, we consulted with a $10 million company that collected every 365 days. If we freed up just 5 days through DSO optimization strategies, it would result in almost $137,000 of free cash!

Small improvements can free up substantial cash within your business.

Here’s an example of how a little goes a long way.  A few years ago, we changed our processes to invoice within 24 hours. This reduced our DSO by 10 days.  Simple things like setting up rules and procedures for invoicing put you in a position to better manage liquidity.

(For more tips on how to optimize your accounts receivable, download your free checklist here.)

What to do in a Cash Crunch

Cash crunches can either be foreseeable or can completely blindside you. Economic downturns, vendors filing for Chapter 11, or a natural disaster, such as a wildfire, can have detrimental impacts on your cash position unless you have the knowledge and skills to cope with cash crunches.

Over several years, I’ve noticed that many companies who find themselves in a cash crunch are investing heavily in technology. While that may not be a bad thing, companies may become over-reliant on the new system and forget that it’s still important to monitor and manage internal processes – namely DSO.

If this is you, there are some options that you can act on to improve DSO:

Slow-moving accounts receivable can hurt a company by tying up cash.  These assets aren’t easy to liquidate in a cash crunch, especially if the crunch is caused by factors that are affecting your customers as well.  It’s important to manage your receivables process to make sure customers are current so the cash keeps coming in.

Example: Sitting on a Desk

CPA firms, law firms, and other professional services are notorious for insisting that all partners review each invoice before they are sent out to the client. The invoices (aka, cash) are essentially sitting on a desk, waiting to be approved. Sometimes, they get lost in the paperwork and are finally sent out 60 days after the service has been completed. Assuming the customer pays within 30 days, the receivable is 90 days old before the cash is in the door.

Let’s look at 2 issues:

#1 Partners are busy.

They simply don’t have time. They should be focused on doing the work, not reviewing invoices. Develop a procedure or invest in systems that circumvent this step.

#2 Each partner has to review the bill.

By having a number of busy partners reviewing invoices, there’s a high chance that it will a) get lost, b) get changed in error or misunderstood, c) get sent out late.

There’s something that most of these firms do not understand: the tradeoff between having a perfect invoice and getting cash quickly.

One firm that I consulted with was in the habit of mailing their invoices 30-60 days after the service was completed. There was no goal on when to mail invoices.  We helped them transition into a position where they mailed invoices within 24 hours of delivering the service. Their DSO was 42, which wasn’t terribly bad.

Then we convinced them to email clients their invoices the day of, reducing their DSO to 38. This was no simple feat. We had to figure out who needed the invoices for processing and we had to train their customers that emailing invoices the day of was the new norm. These are two important factors that you have to acknowledge as you undertake this technological change.  Don’t overlook something as simple as who is receiving the invoiceBusiness owners will likely let your invoice sit in their inbox whereas A/P clerks will make sure it gets put into the accounting system.  While these changes took a little time to adjust to, they saw significant improvement in their cash flow.

Don’t be afraid to ditch old practices.

Value Creation

Are you looking to sell your company in the near future? By reducing your DSO and optimizing your accounts receivable, you’ll be in a better position to add value to your company.

The purpose of business valuation is to assess the capacity a company has to grow. Use this when a company is trying to sell or merge with another firm.

Where To Create Value

It all begins with your revenue growth and profitability. These two metrics can be impacted by cash tied up in accounts receivable. By reducing DSO a certain number of days (depending on what your DSO is currently), you’ll be able to prove to any buyer that your company is able to generate free cash flow.

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.

AR Checklist

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ROE (Return on Equity)

See Also:
Return On Equity Example
Return on Asset
Financial Leverage
Gross Profit Margin Ratio Analysis
Return on Equity Analysis
Fixed Asset Turnover Analysis

Return on Equity (ROE)

The return on equity, or ROE, is defined as the amount of profit or net income a company earns per investment dollar. It reveals how much profit a company earns with the money shareholders have invested. The investment dollars differ in that it only accounts for common shareholders. This is often beneficial because it allows companies and investors alike to see what sort of return the voting shareholders are getting, if preferred, and other types of shares that are not counted.

The term can be confusing as it has various aliases. For example, Return on Equity used to be called Return on Common Equity; however, ROCE now refers to Return on Capital Employed. Return on Equity is also the equivalent to Return on Net Worth (RONW).

Return on Equity Explanation (ROE) 

ROE is a measure of how well a company uses its investment dollars to generate profits; often times, it is more important to a shareholder than return on investment (ROI). It tells common stock investors how effectively their capital is being reinvested. For example, a company with high return on equity (ROE) is more successful in generating cash internally. Thus, investors are always looking for companies with high and growing returns on common equity. However, not all high ROE companies make good investments. Instead, the better benchmark is to compare a company’s return on common equity with its industry average. The higher the ratio, the better the company.

(Are you trying to maximize the value of your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

Return on Equity (ROE) Formula

The return on equity formula is as follows:

ROE = Net Income (NI)/ Average Shareholder’s Equity

The Net Income accounts for the full fiscal year (prior to dividends paid to common stock holders and after dividends paid to preferred stock holders).

Find the average shareholder’s equity by combining the beginning common stock for the year, on the balance sheet, and the ending common stock value. Then divide these two values by two for the average amount in the year and do not include preferred shares.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

ROE

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Fair Market Value

See Also:
Adjusted EBITDA
Asset Market Value vs Asset Book Value
Valuation Methods
Goodwill Impairment

Fair Market Value Definition

The Fair Market Value definition is the price a specific property, asset, or business would be purchased for in a sale. A company’s fair market value should be an accurate appraisal of its worth.

Calculating Fair Market Value is subject to the following conditions:

  1. Prospective buyers and sellers must be knowledgeable about the asset.
  2. Buyers and sellers must not be coerced or strong-armed into selling or purchasing.
  3. All parties must provide a reasonable time frame to complete the transaction.

In other words, an estimate of the amount of money an industry-educated, interested, unpressured buyer would pay to an industry-educated, interested, unpressured seller is the FMV.

How to Determine the Fair Market Value of Your Company

If you are considering selling your business in the future or are just trying to strategically plan for the long-term, then it is crucial that you determine the fair market value of your company. The difference between the fair market value and the purchase price can often be considerable; consequently, many sellers hire professional appraisers for business valuation. This cost can range from a few thousand dollars to $50,000; however, we highly recommend to hire a third party as most owners inaccurately estimate the value of their business, which can lead to disappointed expectations regarding the company’s value or a low sale that leaves hard-earned money on the table.

(Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

What Your Appraiser Will Look For

There are many ways to calculate the Fair Market Value of your business; some of the factors that affect a business’s FMV are the business type, the economic conditions at the desired time of sale, the book value, recent income, dividends, goodwill, and recent prices paid for comparable businesses. During an assessment of your company, an appraiser will look for the following items along with many others:

  1. Future Earnings: An appraiser will forecast future earnings over multiple years, factoring in the discount cash flow and discount residual value by comparing your company to similar ones. The discount rate reflects the diminishing value of money year after year. They will also determine the “capitalization of earnings rate,” which indicates the cost of capital and the company’s risk.
  2. Asset Assessment: They will evaluate the Fair Market Value of all the tangible assets of the company, such as inventory or equipment, as well as the intangible assets, such as brand, reputation, and location.
  3. Comparable Sales Figures: They will analyze recent sales of commensurate companies.
  4. A Partial Purchase Discount: If the buyer is purchasing a minority share of the company, then less than 50%, apply a discount since the other party would still control the business.

Conclusion

Appraisers and valuation experts typically use more than one approach when evaluating the FMV of a company. So start identifying the value of your business today by grabbing your business tax returns and general ledger. Before you start the valuation process, download the Top 10 Destroyers of Value to identify any destroyers of value and maximize the potential value.

Fair Market Value, Fair Market Value Definition, Determine the Fair Market Value

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A Forward-Thinking Driven Business

We are halfway through 2016 and, as technology rapidly progresses, the expectation for financial leaders to be practicing forward-thinking driven business is growing. It’s easy to fall into a habit of valuing historical data over forward-looking information.  So how can you go from being historically-minded to forward thinking?

First things first… Would you drive a car only looking in the rear view mirror?forward-thinking driven businessOf course, you wouldn’t! That’s dangerous.

So why would you drive your company only looking backwards at historical information?

There are two ways financial leaders can use historical information:

  • those that use historical data and put it to work
  • those that use historical data but don’t put it to work

Don’t get me wrong, historical data is important. It’s used to project sales, calculate trends, etc. You can use it for a number of things. But it can’t be the only thing that you use.

Particularly as technology advances seemingly every 6 months, you have to be forward thinking and analytical.

Historically-Minded vs. Forward-Thinking

Let’s look at the difference of being historically-minded versus forward-thinking.

forward-thinking driven business

Historically-Minded

A historically-minded financial leader would look at the financials to the right to learn that this month, they lost $2000. This type of financial leader would go through Weeks 1 through 5 blissfully unaware that trouble was brewing.  They might have a feeling that things aren’t going well, but they aren’t really sure.

However, it isn’t until Week 6 when they receive the financial statements that they realize that the company lost money this month. If only there was a way that they could have known about the losses sooner…

Forward-Thinking

forwardForward thinking starts with forward-looking reports.  A forward-thinking financial leader notices in his or her flash report for Week 1 that they are struggling. Instead of waiting until Week 6 to find out that month end would show a $2000 loss, they could take corrective action to fix the problem before it got any worse.

This thought process allows you to adjust projections for sales and inventory, manage your human capital, and address any cash flow issues.

Forward thinking also adds value to your position as a CFO

Technological Advances = Automation

So why should you care?  You aren’t responsible for the financial results of the company, just reporting the numbers, right?

Not if you want to stay relevant (and employed).  We’ve seen automation take the place of humans in factories for years.  But what you might not realize is that automation is quickly coming (and in some cases, is already here) to the accounting world as well.  In the not-too-distant future, look for smart accounting systems that can capture financial information and produce financial statements with the push of a button.  Not good for you if all you’re doing is cranking out financial reports…

Here’s what we’re seeing about how automation is affecting the workplace.

forward-thinking driven businessCertain roles, such as bookkeeping and accounting, are becoming automated jobs. It’s expected that these services are delivered accurately and on demand, something computers are great at.  The work can either be cognitive or manual.

Non-routine jobs are those that cannot be automated. They either require skills that can’t (at least for now) be accomplished by technology or take a great deal of skill, talent and independent thinking.  Again, the work can be either cognitive or manual in nature.

Example 1 – Routine Jobs

A CEO has to make a decision about whether to continue paying a bookkeeper or to onboard a new accounting system to automate financials. The bookkeeper has made several mistakes over the past couple of months that could have severely impacted projections if not caught early. The new accounting system automates every invoice and payment before a single person can touch the invoice. This position is routine because you can easily replace it with an automated system while still ensuring the accuracy and efficiency for a lower cost.

Example 2 – Non-routine Jobs

A chief of staff in a hospital is facing a decision about whether or not to automate neurosurgery. If the chief of staff decides to automate the role of a neurosurgeon, she risks losing customizability and efficiency as a robot cannot see every cell of a cancerous tumor. Sure, a neurosurgeon is human and will make mistakes. But a neurosurgeon has approximately 8 years of school with 4 more years of training and probably have 5-15 years under their belt. In this case, the neurosurgeon’s skill and ability to adapt to conditions on the ground is what makes them valuable and their job difficult to fully automate.

So what should you do if you find yourself in a routine role?  You should assist in automating those tasks that you can. Then, shift over to non-routine tasks such as analysis and problem-solving.  Adding value in this way will ensure that you stay relevant despite advances in technology.

Pyramid of CFO Value

forward-thinking driven businessThe Pyramid of CFO Value demonstrates how you can move from the routine tasks of accounting and compliance to the non-routine task of being a trusted advisor to your CEO.

People often look at the CFO as an accounting and/or compliance figure in the grand scheme of a company. As we start from the bottom of the pyramid (accounting/compliance), we find that this type of job function is most likely going to be automated.

Particularly as continuous accounting becomes more widely used, this financial function will progress into an automated system. Continuous accounting is just the start of new automation processes that pertain to large sources of data. Accounting technology such as continuous accounting establishes a precedent for timely, cost-effective, and/or high-quality improvements for business.

As you move up the pyramid of value, your role becomes more difficult to automate due to the training and experience necessary to successfully carry out these tasks. Since a good CFO improves profits and cash flow by 1-2%, you can essentially make yourself un-automatable (yes, I made that word up).

Where You’re Going

It’s all about where you’re going, not where you’ve been. A Flash Report is an excellent way to look into the future. It assesses KPIs, or key performance indicators, in order to create a periodic snapshot of key financial and operational data. This weekly assessment gives you the capability to not solely rely on historical financial statements to run your business.

As a management tool, it enables you to monitor and review profitability, productivity, and liquidity on a weekly basis.

forward-thinking driven business

Start driving with your eyes open. Discover why your KPIs are so important to be forward thinking. Download your KPI Discovery Cheatsheet today to start managing your financials as a forward-thinker. 

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How Does a CFO Bring Value to a Company?

See also:
Role of a CFO
5 Ways a CFO Adds Value
EBITDA Definition

How Does a CFO Bring Value to a Company?

Most CEOs don’t understand how a CFO brings value to their company. They see CFOs as overhead rather than income-producers. CEOs typically see the role of a CFO as a CPA or a regular accountant role. So, how does a CFO bring value to a company? In actuality, the CFO is responsible as a financial leader to determine whether the company is successful or unsuccessful. A strong CFO knows how to add value to an organization. There are numerous tactics such as reviewing tax information or analyzing every financial statement involved with the company, but from a strategic standpoint, it’s very simple how a CFO brings value to a company.

According to our 5 Ways a CFO Adds Value article, the CFO of a company should be able to perform in five ways: 1) growing the company faster, 2) improving profitability, 3) improve cash flow, 4) obtain increased leverage from banks, and 5) provide leadership and direction throughout the company. A good way to measure profits and cash flow is to follow your bottom line — your EBITDA.

So why EBITDA? Why not simply check cash flow or sales? Investors prefer to use EBITDA because EBITDA allows bankers to compare and monitor performance over time. EBITDA is the best measurement for the value of a company.

How Much Value Should a CFO Add?

How much should a CFO be able to contribute, and what is the reciprocating value proposition? Having worked with hundreds of companies over the past 25 years, I’ve noticed that there hasn’t been a solid financial leader set in place initially. The ultimate goals for a CFO are to improve profits, manage risk, and free up cash flow.

Let’s assume that EBITDA equals net income. This is so we do not miscalculate interest, taxes, depreciation, and amortization. If a CFO is hired to improve a business, this means that the CFO should configure a way to optimize cash flow and costs to the point of increasing EBITDA by 1-2%.  It is a general expectation that the CFO should improve cash flow and profits by this percentage. Improving business right away by 5-10%, for instance, as a CFO is much more difficult than expecting 1-2%, which is why that is the general rule of thumb.


NOTE: Want to learn the 7 habits of a highly effective CFO for free? This provides a step-by-step guide on how to improve your role as a CFO.

Download the 7 Habits of Highly Effective CFOs


The CFO Value Proposition

The EBITDA improved in a company is equivalent to the salary the CFO is paid. If a company generates $20 million in sales, then that company would typically pay the CFO $200,000-400,000, depending on the size of the company. From this theory, CFOs should be able to pay for themselves the first year by identifying ways to free up profits and cash flow.

Revenue ($20,000,000) x Value of CFO (.02) = CFO Salary ($400,000)

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                                         Value Proposition

The same concept applies for larger companies that generate $100-200 million and pay the CFOs a salary of $1-2 million. CFOs of larger companies are typically paid a higher salary than middle-market or smaller companies. On the other hand, start-ups typically don’t pay their CFOs until they have generated a certain amount of revenue. Most companies under $10 million don’t even have a CFO, because value proposition is nonexistent.

How does the CFO Drive Business?

How do we equate the value of a CFO to the value of a business? The answer is simple: Most companies sell 3-5 times EBITDA. 

If a CFO comes into a $20 million company and increases profits by $200,000, the CFO creates anywhere from $600,000 to $1 million worth of value within the first year.  A CFO driving EBITDA not only frees up that cash flow, but sets a precedent by increasing the value of the company for the future. The investment of $200,000 in a CFO is worth the payback of  a $600,000 to $1 million constant return.

For example, a client I worked with hired a CFO, and within the first year, he generated an increase in business of 72%. The second year, he added another 20% on top of the previous year’s improvement. After 3 or 4 years, the CFO was then in charge of expanding the company and finding new opportunities for growth, such as opening another location for the business.

So how does a CFO add value? It’s a mutual relationship. The CFO of a company separates from title of “overhead,” and evolves into the financial leader for a company.

how does a CFO bring value to a company

how does a CFO bring value to a company

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