When you’ve been acting in some type of CFO capacity for as long as I have, you can’t help it—growth strategies, numbers, maximizing revenue, minimizing expenses, and leadership are a part of your DNA. And that DNA stays with you whether you are in the office, on a Zoom call, or taking care of your personal finances.
I started thinking about the correlation between what we do in our “official” CFO role and what we do in our personal lives. I asked myself what we can learn about what we do in the office to take it home and help us build our own wealth. And the more I thought about it, the more I thought that many of the same principles apply whether we are strategizing for our companies or for our families.
Unless you’re independently wealthy or have been left a huge inheritance, you have to build your own wealth, just like a company has to build its revenue. While inflation and growing debt may make it seem like this is futile, with the right principles, strategies, and habits in place, your financial growth will strengthen. So, I’ve compiled the top five habits to help you grow your wealth … from a CFO perspective.
1. Don’t spend more than you earn
This may seem intuitive, but for many individuals, it’s anything but. It’s critical to be aware of our spending habits and have discipline to live within our means. This does not mean depriving ourselves of full lives, as some may think. Rather, it comes down to making choices.
A few tips to help along the way:
Take advantage of automated savings (i.e., pay yourself first).
Eliminate frivolous spending.
Create a budget and stick with it.
Stop comparing your spending with others (especially from social media posts).
2. It’s never to early (or late) to invest and save
Far too many younger individuals just entering the workforce think they don’t have to worry about saving for retirement or investing. They figure they have years to think about all of that. But I would argue there is no time like the present. Investing is a great tool to help build wealth, but to truly do so takes years. So, the sooner we start, the better.
Additionally, when we start younger and don’t yet have a family or other major expenses to account for, we can invest more and solidify some strong financial habits before incurring additional, often larger expenses. On the opposite side, others think it’s too late, so why bother. It is never too late. You may not have exactly what you had hoped for as you approach retirement, but at least you will have something.
Financial planning should always include both short-term and long-term goals. This includes having an emergency fund, so when those inevitable life experiences come up, our savings accounts do not get exhausted. It also includes taking advantage of matching retirement plans, such as 401(k)s.
3.Use debt strategically
Many financial experts will say to avoid debt at all costs (pun intended). However, I urge my clients to first consider the type of debt they have and also the importance of having some debt. To start, in order to build credit, it must first be established by incurring debt. This does not mean you should max out credit cards and pay insanely high-interest rates (actually an example of the bad debt we want to avoid). But if you are responsible with the debt you have, and make payments in full on time, you will build credit. With regard to the type of debt, consider lower rates on mortgages, home equity loans, and federal student loans. This can help establish credit and free up cash to invest.
4.Diversify income
Just like a company needs more than one product or service to offer, we need more than one source of revenue to truly build wealth. Now, you may be thinking that you already work a full-time job or have a business to run, with no time for anything else. However, there are many passive income opportunities that can help generate additional revenue with little time and effort.
When we diversify our income sources, we minimize the risks associated with losing our jobs or closing our businesses. Other benefits to having additional sources include:
saving more and investing,
paying off bad debt, or
taking a long overdue vacation.
5. Remember knowledge is power
This is a leadership principle that pertains to any industry and organization, and it applies equally here. We must always make a commitment to continuous learning. While expanding financial knowledge can be overwhelming to some, continuously educating yourself is the key to becoming more financially stable—from new tax laws to interest rates to investment opportunities.
Resources can be found almost anywhere—blogs, videos, podcasts, webinars, mentors, and coaches. How you do it is up to you. The important piece is to be prepared, ask questions, and learn something that will help you navigate the path to reaching your financial goals.
Barker Associates provides strategic guidance and outsourced CFO services to companies of all sizes. We can provide the higher level of strategy your company needs to grow. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
It’s January. Your new calendar is in place. There is a renewed sense of energy among the team. A fresh start for your business awaits. Your organization has its yearly goals (or you are in the process of developing them), and it appears to be full speed ahead. Yet, as always, with wide open space in front of us, there’s only one way to effectively move forward – stop and develop a well-thought-out plan. And, in this case, a major part of that plan is the annual budget.
Budget Benefits An annual budget provides benefits that reach far beyond year end. Budgets clarify your goals, provide an accurate picture of what you can afford (and what you can’t), increase creativity (by helping you think outside of the box when it comes to funding sources), help you to avoid surprises, and fulfill some stringent requirements (budgets are needed for funding and become the basis for quarterly financial statements).
Accurate, up-to-date annual budgets not only help organizations maintain control over their finances throughout the year, but also demonstrate to funders exactly how their money is being utilized. They provide an opportunity to view any gaps in funding and what is needed to close those gaps. They also decrease the likelihood of overspending by keeping you and other stakeholders accountable.
Budget Basics While one organization’s budget may be different than another’s, there are common factors included in them all – what we like to call the “budget basics.” Below are some of those basics, along with tips on how to make the best projections:
Projected Income.
Tip 1: Income should be broken down by source. For example, sales of goods or services, subscriptions, grants, contracts, yearly dues or fees (for memberships), rental income (if you have rental property), investment income, and funding from investors.
Tip 2: Start with last year’s figures as a baseline and estimate conservatively. You never want to be overly optimistic when it comes to income. That means staying on the lower end when you make your projections.
Tip 3: Look at who has regularly funded the organization in the past. Have they already promised anything for this year? Is it time to ask?
Tip 4: Analyze whether your funder has restricted the use of funds for a specific activity or item. Build this into the budget to ensure that you adhere to your funder’s restrictions.
Projected Expenses.
Tip 1: Categorize expenses. Look at payroll, rent, consulting service fees, office expenses, transportation, travel, and anything else on which you expect to spend money.
Tip 2: Once again, you should start with last year’s numbers and make conservative projections from there. But instead of staying on the low end, with expenses, you always want to estimate on the high end.
Comparison of Projected Income to Expenses.
If they are approximately equal, your budget is balanced.
Tip: Use the money as you have planned, and do not deviate.
If projected expenses are significantly less than projected income, you have a budget surplus.
Tip: Consider strategies to expand or invest money.
If projected expenses are significantly more than projected income, you have a budget deficit.
Tip: Look for funding sources or find areas to cut expenses.
While your budget will always begin with estimates, it’s imperative to make real-time adjustments as the year progresses. These adjustments should be made monthly to keep the budget as accurate as possible. In fact, by the time you are in the fourth quarter, your adjusted estimates should be very close to your actuals. Additionally, and with particular importance this year, is paying attention to what’s outside of the numbers. With the economy and employment in a state of constant flux, you should anticipate changes in leadership, staffing shortages, product delays, and increasing prices, and their impacts on the budget.
Set yourself up for success in 2022 with an accurate, up-to-date annual budget that you can rely on to get from January to December. After all, it’s difficult to reach any destination without a map.
Barker Associates has extensive experience as an outsourced CFO. If you need assistance with your budget, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
The holidays are upon us. And while we all may enjoy the traditions, family time, gift-giving, and merriment (likely even more so this year), there is still work to be done … particularly for CFOs. It’s time for year-end analyses and processes to end 2021 in an organized, balanced way in order to start 2022 with a clean slate. While it can all be overwhelming at times thinking about reviewing operations, marketing expenses, and all financials, it’s imperative these responsibilities are met accurately.
Unpredictability Doesn’t Change the Basics of Financial Planning
With all its tasks and checklists, end-of-the-year financial analyses and planning comes down to the assumption that when you evaluate where you were, you can better understand where you’re going. However, the past nearly two years has made this assumption somewhat unreliable with unpredictability appearing to be the only thing that’s predictable in business.
Despite this volatility though, CFOs ultimately remain responsible for performing the same duties – analyzing financial reporting, balancing accounts, preparing records and documents to file and pay taxes, and creating budgets. These tasks remain stagnant regardless of outside economic factors. But it has never been more important to dig deeper into some additional, often overlooked, processes.
Top Three Overlooked Year-End Processes
For many, we think CFO and Year-End and we automatically think financial statements, balancing accounts, and preparing for tax returns and payroll reports, but there’s so much more. The end of the year presents a unique time to unwrap real opportunities. Whether its negotiating with vendors, securing investments, or looking for better deals with health insurance, in some instances, you can start over in the new year, advancing your company even further (not to mention faster).
So, before you start the countdown to midnight, readying yourself for all that the new year has to offer, make sure you count the top three overlooked CFO processes so that your company is just as ready for 2022.
1. Accounts Payable. Sure, we remember to look at accounts receivable – our team has worked diligently, and we need to collect the money owed for that work. But what about what we owe?
Analyzing the company’s Accounts Payable is not merely a process to get caught up on payments though (although that is also clearly crucial). Rather, it is also an opportunity to review vendor contracts and negotiate better terms in an attempt to save money in the new year.
Are there any other options?
Are there hidden cost savings?
What does the competition look like?
If the CFO doesn’t look at ways to save the company money, no one else will.
2. Financial Technology. Technology has perhaps never been as important as it has been recently. Technology is what kept businesses running and team members connected when they couldn’t physically be together during a global pandemic. And yes, from an expense perspective, you’re likely spending more on it than ever before. But are you also considering what financial technology you are using? Are you asking yourself –
Is it up to date?
Have we switched over to the cloud, where there are automatic backups?
What does your accountant use and prefer?
If not, you probably should. This is a great time to do an end-of-year financial technology audit.
3. Future Scenario Planning. You may be saying, “Of course, we take time to strategically plan out the year,” and I’m sure you do, but things are different now. Knowing the challenges unpredictability creates in successfully running a company, it’s crucial to expand this planning by using future scenarios. Essentially, you create different scenarios and develop the response or plan of action for that particular set of circumstances. While this type of planning was historically the foundation of crisis management, with crisis permeating every aspect of business, it plays a more prominent role in day-to-day strategy.
With future scenario planning, you define triggers in advance and commit to be flexible and nimble enough to account for them. For example, a common future scenario planning topic this year is PPP forgiveness. For those who do not know yet if their PPP loan has been forgiven, future scenarios include full forgiveness, partial forgiveness, and no forgiveness. Analyzing how each of these scenarios will affect your business next year is key to unlocking future success.
Barker Associates has extensive experience in year-end processes and planning. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
We seem to take one step forward and two steps back lately – with the pandemic, the economy, and life in general. In many instances, things are so close to “normal,” we’re ready to embrace it all again wholeheartedly. We need the familiar, especially during the tradition-filled holidays. We long for some normalcy and comfort. Yet, we’re hesitant in many respects, especially in business. And while this hesitancy is understandable after all that we’ve been through, we can’t run a business this way, especially as it pertains to financial management. In fact, our financials never needed more attention. As 2021 comes to a close and 2022 begins, it’s the perfect time to make a resolution to get back to financial management fundamentals.
Five Steps of Financial Management Fundamentals
Read Monthly Financial Statements
While this may sound entirely too elementary, we’re starting with the basics because there are those who tend to ignore them. By reading (and understanding) financial statements, you will quickly see what looks good and what doesn’t, if there are any red flags, and any trends. Monitor inventory levels against projected sales, receivables, and cash and identify other critical financial indicators and ratios from the balance sheet. If something doesn’t make sense to you, chances are there may be a problem that needs to be solved.
Review Bank Statements
Similar to your review of the financial statements, how will you know if something is off, if you don’t review the company’s bank statements monthly?
What’s coming in?
What’s going out?
Do the amounts look reasonable?
Do the canceled checks (reviewed online) look appropriate?
With this review, you shouldn’t be in the details of every single transaction (or you’ll never get any work done). Rather, your goal should be to get a good sense of the company’s overall activities. In this way, you can track monthly sales-to-expense ratios to better understand when to adjust spending and to identify the top impediments to profitability, so you can deal with them quickly.
Review Payroll Reports
Payroll reports should be reviewed quarterly when Form 941s are filed. During this review, you want to look at year-to-date wages paid for employees and ensure everything looks reasonable. If it doesn’t, find out why immediately.
Assess Expense Reports and Spending
Review credit card usage, expense reports, and overall spending, including meals and travel expenses. Take note of any entries that appear off, whether they are too high, too low, or too frequent. Once again, you don’t need to have all the details, but rather perform a high-level view – often, all that is needed to identify an issue sooner rather than later.
Listen to Feedback
No one has all the answers. The best leaders understand the intrinsic value of listening. In this case, that feedback should be from far more than the accounting department. It should also include feedback from operations and any other impacted department, as well.
What’s working?
What isn’t?
What are the concerns?
Does anything need to be investigated?
These five steps will help ensure you are practicing financial management fundamentals, increasing oversight, and increasing overall engagement. Remember, the most successful CEOs are those who delegate, but also who stay close to the heart of the company’s financial picture. The consistent financial monitoring required of businesses takes attention and it takes work, but without a true long-term plan and careful monitoring, you cannot forecast or grow to the next level. So, in 2022, make a resolution to stay committed to financial management fundamentals. Barker Associates has extensive experience in financial management. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
A Harvard Law School Forum on Corporate Governance study conducted earlier this year identified the global corporate governance trends that would impact businesses in 2021. The study was based on interviews with investors, pension fund managers, advisors, and other corporate governance professionals from around the world. As the new year approaches (I know, I can hardly believe it myself!), we thought it was an ideal time to check back in on these trends, as we navigate what investors may be looking for going forward.
For the United States, the trends have been focused, in part, on the following topics:
Diversity, Equity, & Inclusion (DE&I)
Environmental, Social, and Governance (ESG) Oversight & Disclosure
Corporate Culture & Human Capital Management
Executive Compensation
Technology & Cybersecurity
Virtual Shareholder Meetings
DE&I
Social and racial issues gained unprecedented attention in the United States last year, and companies are responding. They are now incorporating far more aggressive initiatives to address DE&I concerns to increase racial and ethnic diversity, especially on the board and at the C-suite level. But if they plan on bringing on investors, they should maintain or even increase these efforts.
Investors are holding more companies accountable, demanding increased disclosure of key data on diversity, equity, and inclusion. They expect improvements in these areas and full disclosure of the company’s data. Some states and institutions are taking it a step further. The study notes that “California law now requires that by the end of 2021 public companies headquartered in the state have at least one director who is from an underrepresented community. NASDAQ has proposed a similar listing requirement, which is subject to approval by the Securities and Exchange Commission (SEC).”
ESG Oversight & Disclosure
There has been a rise in ESG reporting standards over the past year. Investors are increasing their support of ESG oversight and disclosure, and are holding directors responsible if those standards are not met.
Now, private equity firms and other private companies are also increasing their focus on ESG. All boards should expect to start being held more accountable for ESG disclosures by their stakeholders. Key considerations should include (1) if they have ESG data ready for review, (2) if they have considered shareholder interests when creating ESG initiatives, and (3) whether ESG has been integrated into their business strategies and financial planning.
Human Capital Management
The consequences of the pandemic and social justice movements for businesses have led to an increased demand for Human Capital Management (HCM) data, such as gender pay gap, safety incidents, and employee turnover.
The SEC has adopted new HCM disclosure rules on the premise that employees are key to an organization’s value. Those rules require a description of the company’s human capital resources, including applicant attraction and employee retention and development measures. Investors also have increased expectations and are demanding increased board oversight of HCM and corporate culture issues.
Executive Compensation
While executive compensation has always been a consideration for investors, it is under increased scrutiny now. With the unique considerations brought about by the pandemic – company acceptance of federal aid, mass layoffs, and overall employee treatment during the pandemic, investors are looking more closely at compensation paid to the C-suite. Companies should be carefully scrutinizing the compensation paid to upper management compared to how the pandemic affected their frontline workers and be ready to address disparities.
Technology and Cybersecurity
As a necessary result of conducting business from afar, technology use has exploded over the past year. Unfortunately, with all of the benefits it provides, increased technology use also increases security risks. This year, and going forward, investors want to see that cybersecurity needs to minimize those risks are a part of both the company’s financial planning and overall strategic business decisions. Companies should be prepared with additional board oversight and disclosure on these matters.
Virtual Shareholder Meetings
As shareholders and directors adapted to virtual life last year, many began the process of permanently leveraging the methods used, and their associated efficiencies, post-pandemic. Most of what is emerging is some form of a hybrid model, where at least one annual meeting remains virtual, along with other smaller meetings, while other meetings transition back to face-to-face.
Best practices for virtual shareholder meetings have been codified in the Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings. They include submission of questions, treatment of shareholder proposal proponents, and the use of audio versus video. Boards should ensure that these best practices are taken into account while conducting their virtual shareholder meetings.
Barker Associates has extensive experience in corporate governance issues, especially as they pertain to financial considerations and investor scrutiny. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
As we approach the end of the third quarter, it’s time for more than all things pumpkin spice, falling leaves, and cooler temperatures. For CFOs, it’s also time for quarterly financial reviews and audits. The third quarter is particularly relevant because as we near year-end (for calendar taxpayers), we want to ensure that our financials are in order for any strategic planning and budget planning needs for the new year.
Quarter-End is Also Month-End
Just because it’s time for a quarterly review though does not mean it’s time to put aside our normal month-end review. As a reminder, best practices for month-end financial and accounting tasks include:
Reviewing the general ledger.
Reviewing the balance sheet and profit and loss statement.
Reconciling balance sheet accounts.
Running budget comparisons
Running prior year comparisons.
Reviewing monthly bank reconciliations (particularly for any checks that have not been cleared or any suspicious activity).
Ensuring all bills are current by reviewing Accounts Payable.
Reviewing Accounts Receivable aging.
Reviewing any investment activity.
With regard to specific quarter-end reviews, actual wages paid should be reconciled with any Form 941s that are issued. We always advise our clients to be especially cognizant of any adjustments that need to be made prior to the filing of the annual Form W-2, Wage and Tax Statement. Board and committee minutes required for annual audits should also be approved and filed at this time, and any scheduled quarterly audits conducted. Given our “new normal,” many companies are also taking a closer look at their financial technology at the end of each quarter. With more businesses operating virtually, ensuring your company has the most up-to-date technology and accessible systems is crucial to conducting business efficiently.
Streamlining Closing Processes
While there is no doubt that much needs to be done during a month- and quarter-close, there is always room for improved efficiency in the processes. These closing procedures should not be days upon endless days (or weeks) of analysis of every small detail, particularly when those details have no impact on the company’s big picture or leadership’s decision making. Making this process longer than it has to be costs not only time, but also money.
Leadership needs timely information to effectively run the business. Efficient month-end and quarter-end close processes not only increase timeliness, but also improve controls, and reduce risks. Streamlining these processes gets information to leadership faster for smarter decision-making. Streamlining can include:
Set a goal for a 3-5 day close (yes, it can be done).
Gather a team for the closing process with clear directions and goals. Make sure everyone is in alignment and clearly understands what is expected of them pre-close.
Prepare a detailed close schedule. This should be reviewed at the pre-close meeting.
Conduct a post-close meeting to review what could have been done differently to improve the process.
Continuously implement those improved procedures in future month and quarter closes.
After all, time is money, and no one knows that better than the CFO. Barker Associates has extensive experience in helping companies streamline their month- and quarter-end closes. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Many people incorrectly assumed that the pandemic’s only true effect on a business’s financials was a loss (albeit often significant) of revenue. And while that assumption is not even necessarily true of every business (many did very well), Covid-19 impacted much more—not just financial performance, but also position, cashflow, and balance sheet accounts. There have been impairments to goodwill and other intangibles, effects on inventory, a change in how and when audits are conducted, and impacts to overall company strategy and goals. And these impacts are especially challenging for a company in the growth phase.
If your company is in the growth phase, it’s crucial to think about your options, understand your needs and, more significantly, how they have changed since the pandemic, what numbers are required, and to develop a new strategy. Companies in the growth phase are experiencing positive cash flow. With this increase in cash, they have the ability to repay debt, and are in a better position to seek additional capital from investors to expand their market reach. However, if the CFO hasn’t been carefully monitoring the pandemic’s impact on all aspects of the company’s financials, they likely don’t have their reporting in order to even approach potential investors.
Changing Financial Needs Means Increased Financial Monitoring
We learned fairly quickly in the beginning of the pandemic that liquidity is key to keeping a business from closing its doors in a crisis. The question that plagued many was how to increase liquidity with revenue decreasing? But those CFOs were often only considering pre-pandemic needs and observations, not the changing needs of the company in the midst of the pandemic. Auditors have noted that many accounts, including sales, inventory, and bad debt have been affected, as well as production and distribution.
First, these changing needs require a change in financial monitoring. Cash flow projections and other assumptions used to measure financial instruments pre-pandemic should be adjusted to reflect your company’s new reality. Remember that a majority of businesses have been affected in one way or another, but if that results in their lack of ability to pay you, you’re going to incur additional credit and liquidity risks, increased bad debt, and write-offs.
Cash Flow A careful analysis of your company’s cash flow can help. Some questions to consider about revenue include:
Are accounts receivable being paid?
Are past due accounts being followed up on?
Are late payment fees and interest being charged to customers (your money should not be free)?
Do you need to offer pre-payment discounts?
Should you look at retainers/deposits?
Do you have the capability of setting up auto-payments?
Of course, we can’t consider cash flow without considering expenses. And while there will be a decrease in some, there will be an increase in others. At a minimum, consider the following questions:
How have your office needs changed?
Do you have the ability to downsize?
How much are you saving due to decreased meal and travel expenses?
Where are these savings being utilized?
How much more are you spending on technology expenditures to maintain communications with staff and customers/clients?
Balance Sheet Accounts
Additionally, other balance sheet accounts have also been affected. One issue that warrants attention if you plan to seek outside funding is inventory needs and accessibility. With productivity and supply chains being disrupted, it may be difficult to allocate costs to inventory. There is also the issue of inventory that cannot be delivered because of travel restrictions. This also plays a significant role in the larger economic impact of decreased supply and increased demand, resulting in higher prices going forward.
Goodwill, post-retirement plans, and internal controls are other accounts/issues that require an in depth look at your financials and a pivot in business strategy, as we slowly climb out of this pandemic.
If you’re still waiting for things to get back to “normal,” and analyzing your financials based on pre-pandemic assumptions, you are not doing your business justice. You may think you have enough cash on hand or that expenses are timely being paid, but without meticulous monitoring and a true long-term plan based on our new reality, you cannot forecast or grow to the next level.
This can be overwhelming. But pivoting in your financial planning and forecasting is necessary. Barker Associates has extensive experience in financial statement analysis, plans, and forecasts. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
We have collectively experienced unprecedented times. As CEOs and CFOs, we seem to be writing the playbook as we go. Over the past eighteen months, survival mode has become the norm rather than the exception, as we navigate the turbulent waters of each day. Yet, we all realize we can’t survive in survival mode for extended periods of time. In doing so, we are only looking at our immediate requirements and needs to get by, not our long-term goals and needs to thrive.
When we operate only in the day-to-day, as survival mode requires, we tend to overlook the basics when it comes to our businesses, and specifically, our financials. But truly getting back to basics is the only way to support the long-term strategic growth of the business. And when it comes to basics, you can’t get much more fundamental than a business plan and an annual budget.
Basics #1: The Business Plan
You may be thinking this is Business 101 and you’re beyond it, but you’d probably be surprised (or maybe you wouldn’t be) at the number of businesses that do not have any business plan whatsoever. A business plan is much more than something that has to be checked off your never-ending to-do list. It not only helps you create an effective strategy for growth, but also helps you determine your future financial needs, including the need for investors and/or lenders.
According to the SBA, the importance is clear. “A good business plan guides you through each stage of starting and managing your business. You’ll use your business plan as a roadmap for how to structure, run, and grow your business. It’s a way to think through the key elements of your business.”
Additionally, if you plan on seeking funding, business plans play a crucial role. “Business plans can help you get funding or bring on new business partners. Investors want to feel confident they’ll see a return on their investment. Your business plan is the tool you’ll use to convince people that working with you — or investing in your company — is a smart choice.”
In thinking about the execution of a business plan, too many owners or leaders get stalled on the format itself. However, it’s important to remember there is no right or wrong way to develop a business plan. Regardless of how many pages or the font used, the most important takeaways are that it clearly lays out your product or service, identifies your target market, and details your strategy for reaching that market, including the financial needs and requirements on both a short- and long-term basis. While this past year has shown us that we cannot fathom every possible scenario that could impact our business, developing a robust plan is one way to prepare for as many contingencies as possible and help ensure the company’s success.
Basics #2: Annual Budget
While twelve months from now may feel like it may as well be twelve years from now, it is imperative to have a strong annual budget. The annual budget should also be able to be broken down into months for easier monitoring. At a minimum, your annual budget should include the following:
Income Statement,
Balance Sheet, and
Cash Flow Statement.
Most businesses are familiar enough with income statements – they can clearly see the revenue coming in and the expenses going out. This is undoubtedly important, but it does not prepare you for your working capital needs. Essentially, you need to know how much you actually require to run your business. In order to truly understand those requirements, an accurate balance sheet and cash flow statement are needed. For example, if you have inventory on your balance sheet, you will need to project the use of cash to purchase that inventory. An income statement will not help you with that.
Nearly every decision you make today can impact your cash flow tomorrow. For example, I once worked with an organization that had double-digit growth each year and was very profitable. The company was getting ready to launch a second product and had offered extended payment terms to customers on their entire order if they added the new product to their order. This may have been an impactful customer service move; however, it was quite the opposite for generating the cash flow needed to pay the vendor. No one had projected the impact this decision would have to their balance sheet and cash flow, so they were unaware that the plan they had in place was going to essentially stop incoming cash. We had to react quickly and manage cash just to meet payroll and other immediate obligations. Simply, this stressful time could have been avoided entirely if the company planned appropriately with a balance sheet and cash flow statement.
While the responsibilities and priorities of a CEO or CFO may vary depending on the company, the need to get out of survival mode and back to business basics is the same for everyone. The common denominator of these basics is that they require you to look ahead and make forecasts on the future of your business – the very opposite of survival mode. Barker Associates has extensive experience in developing business plans and annual budgets that are appropriate for the specific business involved. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Typically, when you get into your car, you have a destination. You’re going somewhere and you know how to get there (or you have your smartphone or navigation to help you along the way). You don’t get into the car and sit there wondering absentmindedly about what you should do next (put the key in the ignition, put the car into gear) or where you should go (a quick trip to the store, a commute to work, or a longer road trip to a vacation destination). Rather, you know what your next steps are to take you where you want to go.
We’ve used this analogy before in our financial literacy series, but it holds true here just as much. Running a company is very similar to driving a car. You need to know the steps you need to take to get started, where you are going, and of course, how you will get there. Without them, much like as a driver, you will soon find yourself lost. And, with a company, you not only have to worry about yourself getting lost, but all of those others (staff, clients, vendors, partners) following close behind. It’s important to navigate and lead them along the right path, or, as I like to call it, your corporate development strategy.
What is a Corporate Development Strategy?
A corporate development strategy is best described as an actionable plan for your company. There are different strategies (or routes) you can take—Stability Strategy, Expansion Strategy, or Growth Strategy, to name just a few. And while they all will take you in different directions depending on the goals you have for your company, they all have the exact same foundation—understanding your financials, both current and future projections. Without a clear understanding of your revenue, expenses, and other financial data, it would be difficult to define your strategy based on where you want to drive the company in the future.
As you begin to define your own corporate development strategy, it’s important to put aside some common debates and confusion. Corporate strategy is not corporate finance (although it will always incorporate finance). Corporate strategy is also not business strategy. Like the distinction with finance, they are close, but distinctions abound. Business strategy deals specifically with how you are going to achieve your goals. Corporate strategy is more all-encompassing—it includes not merely your annual goals, but a clear overall strategy on where the company is going with well-researched answers to questions, such as:
Where do you want your business to be in terms of revenue in ten years (not three or five, as most business project)?
Note: This should be realistic, but not conservative.
What will it take each year to get there?
Who is in the competitive landscape?
How will you compete?
What are barriers to where you want to go?
Should you introduce new products/services? Should you remove any products/services?
If so, when?
If so, should you acquire another company with experience in that space?
Are their potential partners or suppliers in which you can outsource some of your operations?
How do you optimize productivity and profitability?
Do you need new technology?
Should you acquire a company with expertise in that technology?
Dig Deeper than a SWOT Analysis
This list in not all-inclusive, but should give you an idea of the scope of the due diligence required. Small companies often will think about some or all of these questions during an annual review (if they have one – let’s hope they do) where they dust off their white board and do a typical SWOT analysis. But a true corporate development strategy will dive much deeper than a four-section chart detailing the somewhat generic strengths, weaknesses, opportunities, and threats of a small business. To grow beyond a small business, there needs to be much more than the contents of four cubes on a whiteboard.
A successful corporate development strategy may include diversification, where a company acquires or establishes a business other than that of its current product. It could also include horizontal integration, where there is a merger or acquisition of a new business, or a vertical integration, which includes the integrating of successive stages of various processes under single management.
Many, but not all, corporate development strategies focused on growth will include a merger or acquisition at some point. It’s often the best way to truly grow your business to the next level. But it always begins with a decision made as you define the right corporate development strategy for your business.
Putting the appropriate strategy together is crucial for the long-term success of your business. If you need assistance defining your business’s future, or corporate development strategy, or have any other questions, Barker Associates can help. Please click here to schedule a 30-minute consultation at a rate of $100.
This week, we continue our month-long discussion on financial literacy, including best practices to increase your financial knowledge. While there are numerous reasons business owners do not have an adequate level of financial knowledge (some people are just not good with numbers, guidance from GAAP has gotten so complicated it makes it even more difficult to understand, and business owners are just “too busy” to get into it), this knowledge is crucial to having effective conversations about your business.
If the right investor came along tomorrow, how confident are you that you are prepared with accurate historical and projected financials? Can you demonstrate thorough knowledge of your company’s financials, cash flow, burn rate, and return on investment? Are you prepared to get drilled on each number you provide and have the ability to accurately explain where it came from? If you are not prepared, it will feel like the longest half hour of your life.
So, how confident are you?
If your answer is, “Not confident,” or “Somewhat confident,” it is time to make an investment in yourself. Here are a few tips to increase your financial knowledge:
Prioritize your financial education. We know how busy you are, but think of it as the investment it truly is.
Develop a financial advisory team. Ask these trusted individuals questions and encourage them to do the same.
Make the cash flow statement your new best friend. This is the lifeblood of business and you should understand everything on it at all times.
Take some basic accounting courses. It’s never been easier to take a class online.
Connect with a CFO firm. Not everyone has all of the required resources at their fingertips. Allow the right CFO firm to become that resource as a trusted partner.
Get a better understanding of key financial terms. We’re including some right here to help get you started.
Terms to Help You Stand Stronger
When an investor begins to ask about gross profit, net profit, or EBITDA, often the business owner’s face says it all – like when you’ve caught a teenager in a lie. Knowing these financial terms helps you not only have a more constructive conversation with potential bankers and investors, but also to truly have a better understanding of your business. Some of the basics (there are many more) include:
Aged Accounts Receivable. This is a report that categorizes a company’s accounts receivable according to how long invoices have been outstanding. This report is used as a benchmark in measuring the financial health (or lack thereof) of a company’s customers.
Burn Rate. Burn Rate refers to how much money it takes to operate your business for a period of time (generally, a month). Knowing your burn rate helps to ensure that you have enough available cash to adequately run your business. Experts advise being able to cover your burn rate for at least six months.
Cost of Goods Sold (COGS). This refers to the total cost of all labor and materials required to provide the products or services that your customers ultimately purchase.
Debt-Service Coverage Ratio (DSCR). A ratio calculated by dividing your business’s net operating income by your debt payments. This compares cash flow to debt obligations. With the information, you can determine if you can cover debts due within one year.
EBITDA. Earnings before interest, taxes, depreciation, and amortization. To calculate EBITA, take the gross margin and subtract total operating expenses, plus depreciation and amortization. Keep in mind the difference between EBITDA and EBIT. EBITDA subtracts all expenses, whereas EBIT subtracts everything except depreciation and amortization.
Gross Profit Percentage or Gross Margin. This refers to the percentage of total revenue that remains after subtracting the direct costs of producing the product or service. For example, if your company’s revenue is $400,000 in one year and your gross margin is 25%, then your gross profit is $100,000.
Profit Margin.Profit margin is the percentage of your total revenue that you retain as profit. This metric is most often analyzed on a per unit basis. To calculate profit margin, subtract overhead expenses (along with direct costs) from your sales and then divide it by your total revenue. While it may take some time for a business to start generating profit, it is ultimately what makes it valuable … and a priority for investors. It is imperative that you are confident that your revenue you are charging for the product will cover the overall cost of the organization. When you are in growth mode, this may not be the case – which is why the Cash Burn rate (referred to earlier) is so important.
Working Capital. Working capital is cash plus other current assets, less current liabilities.
Whether it’s understanding these terms (and the many others), using the tips to increase your financial knowledge, or tightening up financial reporting, successful leaders ensure these characteristics are not contained within the walls of their accounting departments, but instead, are a part of their entire company culture. With financial clarity, you can maintain stability to carry out the company’s mission.
Simply, when you understand the financial terms and their effects on your business, it not only helps your bottom line, but also helps you have a more constructive (and potentially profitable) conversation with potential bankers and investors.
Let Mindy Barker & Associates show you how to raise your knowledge and be prepared for that next big conversation. We can help you improve your financial brilliance and empower you with the tools and financial information you need to improve your company value, cash flow, and profitability. Schedule a 30-minute free consultation here to learn how.
