Category Archives: CFO

Primary Considerations for Equity Allocation Agreements

Part 2 of the Equity series. In Part 1 of the Equity series I laid the groundwork for equity allocation by discussing the impulsive entrepreneur who gives away the business to friend and family just to have them involved in the new venture.

 

Part 2 focuses on equity allocation to key roles in your organization. Unless your entrepreneurial idea is to start a new kind of venture capital firm or become an attorney who specializes in IPOs, discussing employee stock option plan (ESOP) allocations and agreements with potential staff members may seem intimidating.

 

That’s why I am sharing some key considerations for you to be aware of when you are ready to start that conversation. My perspective is that of a former principal and chief financial officer of a private equity firm.

 

Equity allocation to Principal Management. EquityPart2-shutterstock_229730320 The rule of thumb for the allocation of equity to senior management and advisors is 15 – 20%.

 

The allocation to individuals depends on several factors and even timing. For example, if the founder(s) know they need to hire a CEO/President after they get the entity to a certain level, they should reserve some equity for this position.

 

Sales executives typically will earn more through commission than most of the management team, therefore should have the lowest allocation of equity of the C-Suite.

 

Technology and Financial positions are critical in most companies, which means the majority of the allocation should go to these positions.

 

Equity to advisors is another factor when divvying up equity, and discussed in more detail in Part 3 of this series.

 

Finally, there is vesting equity ownership as an employee incentive to perform well and stick with it while the company evolves from start-up to success. My advice is to keep it simple – don’t have one-off vesting arrangements for each person – keep it straightforward, make all terms and conditions with all option arrangements pari passu (on equal footing) with everyone – this makes it easy.

 

Part 3 concludes the Equity series with other key considerations for entrepreneurs considering equity allocation for their startup.

 

Mindy Barker & Associates (cfo@mindybarkerassociates.com) works with entrepreneurial growth companies to help maneuver the many questions of funding, employee compensation and other decisions and is available to discuss your questions on equity.

I Need an Investor!

I am often asked how to find the right investor to invest in an entrepreneurial business. The question often comes from an entrepreneur who is about to run out of money and wants me to introduce them to someone that is going to write them a check by the end of the week.  For the investor/entrepreneur relationship to work effectively, a relationship of trust and understanding has to be cultivated during the pitch and due diligence process.

 

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How prepared are you to ask investors for funding?

Would you ask a friend of yours on Monday to introduce you to a spouse you can marry on Saturday?  I hope not! So why would you think an investor relationship would work that way?  The message you are sending is essentially, “I’m a poor planner and waited until I was in trouble to take action.” Not a good way to start a relationship involving asking for money, is it?

 

Getting ready to find an investor begins long before you think you will need the money.  Preparations include thinking through how to build a business that investors will want to invest in, that they can identify with. You have to maintain credible data on your financials and your potential client base so that each time you meet with an investor you can definitely and consistently communicate your position.

 

How confident are you that if the right investor comes along, you are prepared with accurate historical and projected financials? Can you show the investor you have thorough knowledge of the financials, cash flow, burn rate, use of proceeds and return on investment?  You have to know your product inside and out as well as the financial numbers behind it. You will get drilled on it when you meet with investors and it will feel like the worst spelling bee you ever participated in if you are not prepared. Do you feel confident?

 

If the answer is, “Not confident…” make the investment in your business to prepare.  Let’s schedule some time together to dive in to gain financial clarity and understanding. Let’s talk.  Contact me at cfo@mindybarkerassociates.com to set up a no-obligation 30 minute discovery call to see how we might work together to prepare you to meet with potential investors.

Why Q?


Managed by Q, which I will call “Q,” has helped me maintain my true and deep routed feeling that America is a great country – the best place to start and conduct business. As Clayton Christiansen (who coined the term disruptive innovation) says, “…disruptors displace an existing industry and offer something new.”

 

Q is a disrupter in the most exciting way. Let me count the ways…

 

From their website:

We work hard to provide the best people possible to power your office operations. From cleaners to handymen to software engineers, you can trust our team is covered by competitive pay, health benefits, 401k, and stock options – a happy team at Q makes a happy office for you.

 

Q is a little over two years old and cleans more than 2.1 million square feet of office space in New York City. In addition to cleaning, the company offers a suite of other services to its clients, including maintenance, I.T. support, security, supplies and others. It has expanded its operations to San Francisco, Chicago and Los Angeles, with the eventual goal of conquering every major city in the United States and, eventually, the world.

 

Nothing disruptive about this, right? Here’s where it gets good…

disrupting status quo at Qshutterstock

Traditionally, a high percentage of cleaning companies change their cleaning service each year when the contract renews. Q is changing the game by providing transparent hourly pricing rather than annual contracts, a high standard of service and state-of-the-art communication. The bet is that the client will be serviced in a way that makes them want to stay on forever. By promoting their high standard of service as an investment, Q is optimistic that it will help maintain traction and create sustainable recurring revenue.

 

Q leverages technology to provide precise, real-time communications. They install an iPad in each client’s office so the client can communicate directly with customer service in the modern way. There is no calling a phone number, only to hear an automated robot answering the phone, while in the meantime you are losing your mind and looking at the dirty floor or bathroom. The iPad provides, (again, from their website) …

 

Effortless communication.

It’s 2016, time to say goodbye to the post it notes by the trash and the little white board on the fridge. With Q’s powerful suite of technology, your team can work in sync with our Q Operators to fine tune your office operations, and you conduct the symphony.

 

Q hires “Operators” to clean the offices. Operators are employees who are trained and supervised, being held accountable to high standards of customer service not typically associated with the office cleaning industry. The results show in the customer satisfaction, which in turn leads to high employee satisfaction and pride. Q is betting this will reduce turnover and result in a long-term investment in quality and customer retention. The income statement does not have an expense line item for turnover costs; however, the costs really do exist. Another factor contributing to employee satisfaction could be their ownership in the company. Reported by medium.com, Dan Teran, co-founder of Q, announced in April the Company has committed to give non-management employees 5% of Q’s stock beginning in July 2016.

 

In a post for Medium Corporation, Mr. Teran shares his views that the on-demand economy to hire non-employee workers (aka independent contractors) is setting itself up for two risks: 1) the legal eagles are circling and class action lawsuits by “misclassified workers” are in the process of forming, and 2) the supply of employees willing to work as such is declining. When workers are told what to wear, when to show up and how to do their job, they consider themselves employees and want the compensation package to reflect that status. Q chooses to hire employees outright and invest in them, which makes his model more sustainable.

 

Percy Forrest is a Q Operations Manager. Read his own account, in medium.com, of what his first year has been like with Q, and the up-side to scrubbing toilets.

 

Q is getting a lot of support from the private equity investment community, having recently raised $42.43 million from investors, including David Stern, Google Ventures, RRE Ventures and Kapor Ventures, posts Jordan Crook (@jordancrook) for Techcrunch.com. Mr. Teran and his CFO have calculated the benefits of low turnover of employees and clients and determined the long term investment is worth the upfront investment.

 

Employers have had the luxury of shrugging, then continuing to operate in a world where the employees were happy to have a job and a paycheck in exchange for employer loyalty. It’s safe to say that the economic downturns and layoffs finished breaking the already weakening loyalty bond between employees and their employers. Combine that with the millennial generation insisting they will have fun at work, and the tide is turning, as employees vote with their job selection. High turnover rates and quality products and services with long term sustainability don’t mix over the long haul. The new model continues to evolve as employees, employers and customers figure out what they want, and Managed By Q is helping to lead the way.

Victim, Judge or Warrior – Surviving a Mistake

Mistakes happen to the best of people and organizations. When I was promoted to Chief Financial Officer at the age of 29, I articulated my fear of making a mistake to one of my mentors. It was overwhelming to accept and consider the responsibility of the lead financial role. I would be the last one to review information before it went to the President and Board. The response I got from expressing my concerns was great – You will make mistakes, I guarantee it. What sets great leaders apart is how they deal with the mistakes.

 

What I learned from that experience is that leaders can impede or even stop the ability to develop and execute strategy if they do not take responsibility for their own mistakes. Lack of execution can cause the organization to miss revenue opportunities and quickly burn through cash.

 

When you are a leader of an organization one of the toughest responsibilities you have is leading by example. The Type A leaders who are bold enough to put together a start up or buy a company may not be sufficiently self-aware to take responsibility for their own actions and, as a result, when something goes wrong they can turn into one of three personalities: the Victim, the Judge or the Warrior. What happens next depends on which personality the leader assumes.

 

The Victim says, “I can’t believe the team did this. They are out of control and now this project is ruined.” This is followed by public accusations that humiliate workers.

Leaders, put on your big girl or boy pants and take responsibility as the Warrior.Mindy Barker | Barker Associates

Leaders, put on your big girl or boy pants and take responsibility as the Warrior.

The Judge says, “I can’t believe this happened. I am so stupid for trusting the team and I am never going to do it again. The project is ruined.” This is followed with micromanagement and control freak like activities.

 

Either personality can lead to turnover in the organization, which significantly slows down the organization’s ability to develop and execute strategy. A Star player on your management team will not stay and live in chaos. The star players on the team are all updating their resumes and keeping their ear to the ground to determine what other positions they can pursue. They will resign and say something like: “This opportunity was just too good to give up” or “They approached me, I was not looking.” They were not looking until the leader turned into the Victim and/or Judge and created chaos and an uncomfortable working environment. The culture is such that the star player cannot contribute in a meaningful way and they will leave you. Baby boomers tend to have a deeper sense of loyalty, so they may stay and hope the situation will change. The Millennial generation, in contrast, will bolt quickly once the Victim and/or Judge show up. They are very focused on making certain they can personally contribute immediately.

 

The Warrior says, “I’m responsible for this team and actions. How can we correct and learn from this mistake?”

 

Instead of using blame and shame to work through the dissonance, Warriors use tools like awareness, compassion, integrity, and ownership. Warriors empower their team to fix issues with customers at the earliest point possible. Warriors take responsibility and execute. Execution leads to building enterprise value and higher existing values.

 

Leaders, take an honest assessment of your leadership style and adopt a Warrior attitude!

 

Responsibility can be scary. Leaders put on your big girl or boy pants and take responsibility as the Warrior. Stop the blame and shame, micromanaging and control freak ways that keep the organization from executing. We all have the ability to change once we become self-aware – take an honest assessment of your own actions.

 

Board members, investors, coaches, and mentors – challenge the leaders of the organizations in this area. Although it can feel distressing to challenge a leader without it sounding like a personal attack, it comes with the territory. I have sat in many a meeting when I knew the Board wanted to ask these types of questions and did not because it is uncomfortable. You have a fiduciary responsibility to address the issue if you think it exists. If you suspect it exists – it almost certainly does.

 

Star players – before you update your resume and bolt, try to effectively manage up and have a frank conversation with your leader about the situation. Even if it does not work and the leader does not change, it is good practice for you. To help develop the dialogue, consider reading the book, “Crucial Conversations, Tools for Talking When Stakes Are High,” (Patterson, Grenny, McMillan, and Switzler), before initiating the conversation.

As a Chief Future Officer, I can help you analyze your financial results and determine if the actual results are aligned with your strategy. Contact me at cfo@mindybarkerassociates.com or www.mindybarkerassociates.com.

The CEO’s Guide to Fraud Prevention

In my

The perpetrators of fraud often rationalize their choices by telling themselves, "No one pays attention to what I do anyway."

The perpetrators of fraud often rationalize their choices by telling themselves, “No one pays attention to what I do anyway.”

experience I have found that whether you are a new business owner or an experienced CEO, it’s easy to overlook some basic controls in your organization to detect and prevent fraud. I’ve put together six practices you can…and should…implement if you have not done so already.

 

Read further at The CEO’s Guide to Fraud Prevention.

Four Must-Haves for Strategic Growth

As new entrepreneurs become caught up in day-to-day survival it’s easy to overlook these four practices that support the long-term strategic growth of the new business:

  • Annual budget
  • Business plan with 5-year forecast
  • Planning for leadership evolution
  • Impact of decisions on cash flow

Let’s start with budgeting. The key to survival is measuring and monitoring the results. It is essential to complete an annual budget, break it down in monthly components and monitor each month. The budget should include an income statement, balance sheet and cash flow. Most companies have an income statement; however, I have seen fewer balance sheets and cash flow projections. This can really get you in trouble as you will not have any line of sight to your working capital needs. Working capital is the cash you need to run the business.

 

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Grow in leaps and bounds when you incorporate these 4 strategies.

For example, if you sell goods, chances are you will need to spend money on inventory prior to selling the item and recognizing revenue. If you have projected your sales to increase by 25%, you may have painted a lovely picture of growth with your projected income statement that is not reality if you do not have the cash to purchase the inventory to sell because you have not projected the use of cash to purchase the inventory, which is what the balance sheet and cash flow projection are for. This can really get you into trouble, especially if you have inventory on your balance sheet, but not enough cash coming in from sales to pay for it.

 

In addition to a budget, your company should have a business plan and a five-year forecast. The business plan should articulate the plan for your company’s growth and address anticipated changes in the economy and future trends. It is difficult to predict all of these things, but if you develop a robust business plan, you are thinking through the different scenarios and how these scenarios will impact your business.

 

Think through leadership, including yourself, as your company grows. Clayton Christiansen* of Harvard Business School, says managers who are talented and skilled in the area of productivity and squeezing out the last bit of value from a company’s assets, are usually not the same people who are great at innovation and major change. Often a successful manager replaces the person who is responsible for helping the company become successful when the company becomes mature enough to establish systems and balance checks.

 

It is imperative to think through how decisions you make can impact cash flow – and here is why. I worked with an organization a few years ago that historically had double-digit growth each year and was very profitable. The initial product the business launched was a great success because it was much better than anything on the market. The company was getting ready to launch a second product. At my first management meeting they discussed how the product was on its way to the warehouse, noting they had offered extended payment terms to customers on their entire order if they added the new product to their order. 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 – and they had just signed up for a huge payable to the vendor. We had to react quickly and manage cash to meet payroll and other obligations. Such a decision caused a 5-6 month stressful time, requiring we run cash flow projections daily during that time to ensure obligations would be covered.

 

Unsure how to get started on these four critical processes to help with your growth? Contact Mindy Barker & Associates to find out how we can assist with the process.

 

* Clayton Christiansen is regarded as one of the world’s top experts on innovation and growth. He is the Kim B. Clark Professor of Business Administration at the Harvard Business School, where he teaches one of the most popular elective classes for second year students, Building and Sustaining a Successful Enterprise. – See more at: http://www.claytonchristensen.com/biography/#sthash.jS5zzfLx.dpuf

Instant – Not Always Good

Instant rice and online banking have a lot in common. Instant rice is obviously quick, providing you with an immediate result. It works really well for casserole recipes or for certain dishes where rice and other ingredients are mixed together. But if you are serving dinner guests or in a fine restaurant, you expect the chef to put in the extra effort to serve gourmet rice prepared in an exotic way.

Don't just rely on point-in-time views. Take time to reconcile accounts.

Don’t just rely on point-in-time views. Take time to reconcile accounts.

As with instant rice, online banking provides instant information regarding your bank balance, making it a great tool for certain situations; however, if you want to use it as an effective tool to manage your daily cash flow, it requires the extra effort of being connected to a cash reconciliation process that is properly maintained and reviewed periodically.

 

Before the days of online banking, the standard practice for both personal and business checking accounts was to reconcile a check register to a monthly bank statement. When accounting professionals adopted online banking into their processes, organizations tended to forgo the discipline of maintaining a check register as part of their reconciliation processes.

 

The following is a typical conversation I’ve had when consulting with clients on accounting process improvements:

Accounting professional, with a bundle of unsigned checks, “This is our process for obtaining check signatures.”

 

Me, “How do you know you have enough money in the account to cover these checks? What is your procedure?”

 

Accounting professional, “I checked the balance on line this morning.”

 

Me, “Where is the reconciliation to the check register? How do you know that all of the uncashed checks will not deplete the entire balance?”

 

Accounting professional, “I know there are not that many outstanding checks.”

 

Me, “When is the last time you reconciled the account?”

 

Accounting professional – answers range from a year ago to do not remember (not good) – to yesterday or a month ago (which is good).

 

As with using instant rice, there are times when viewing online balances without going through the reconciliation process are appropriate, but it’s not the final reconciliation tool.

 

Let’s try an experiment: If you are a CEO or President of an entrepreneurial company or a Finance Chair of a non-profit, ask the accounting department for the latest bank/cash reconciliation of the operating account. Ask specifically for these documents:

  • The bank reconciliation
  • A copy of the bank document to which it was reconciled
  • The Balance Sheet balance to which it was reconciled

(Note: Publicly traded companies, financial institutions, insurance companies and other regulated industries have to maintain reconciliation procedures, so if you are in charge of one of those, regulation will take care of this.)

 

If you are bold enough to move forward with this call to action, my experience tells me about 50% of you will get a reconciliation completed in the last 45 days. If you get one and do not know how to review it, contact me for a free, no-obligation checklist that will guide you through a high-level review. If you do not get a reconciliation, and, in fact, get a blank stare from your accounting person, contact a financial professional to complete a review of your cash procedures and process. You may have plenty of cash flow today – however, that can change quickly if you do not appropriately manage it. Don’t risk finding yourself in a position where you cannot meet your basic financial obligations. “Cash is king” is a cliché’ for a reason – it is a requirement to run almost any type of business.

 

Mindy Barker & Associates works with entrepreneurial business owners to empower them with the tools and financial information to improve company value, profitability, and cash flow. To find out more on how you can be empowered, contact them today at cfo@mindybarkerassociates.com, or call 904.728.2920.

 

Test Your Financial IQ – Eight Essential Characteristics of Financial Brilliance for Nonprofit Leaders

Nonprofit leaders often make decisions about adding structure, enhancing staff expertise, or conducting advanced planning in response to a risk situation, or, as an afterthought. financialbrillianceSavvy leaders recognize the need to make periodic adjustments to processes, staff and technology resources if they want to stay on the path to financial brilliance.

 

Donors have many tools to assist with decision-making. GuideStar is a tool most sophisticated donors use. GuideStar is a public charity that collects, organizes, and presents the information in a neutral format. GuideStar publishes your 990, providing potential donors with full access to the information. Do you know what your GuideStar rating is? The process of adding the appropriate information to receive a Gold (the highest level) rating takes less than an hour and the return on that investment is providing transparency and financial clarity for sophisticated donors.

 

Take this quiz to see if you are on the right path to financial brilliance, or if it’s time for one of those adjustments, then tally up your score to see where you stand:

 

  1. Do you have a financial professional on staff? How often do you forego infrastructure development to save money? When you engage the expertise of a CPA on your team, the next six characteristics can become reality.
  2. Do you have an annual budget? Navigating the fiscal year without a budget is like driving down the interstate blindfolded. By reviewing past revenue and expense flows to forecast future income and expenses, you can create a budget to see where you are going.
  3. If yes, do you monitor actual vs. budget? The annual budget is a dynamic document, meant to be part of your monthly financial review process – planned versus actual expenses. It’s OK to make periodic adjustments, a process that helps you know if the company goals are on track.
  4. Is your G/L infrastructure meeting the need? If your monthly financial reporting: (a) is either non-existent, or (b) is not helping you run your business, consider a review and restructuring of your GL. Make it work for you – not the other way around.
  5. Do you have an endowment fund? If yes, ensure accountability with a documented Endowment Fund Management Policy and related procedures.
  6. Do you have restricted funds for operations? With the help of your financial professional, meet the obligations to record, report, and effectively manage restricted funds by understanding the requirements. Document how your company meets these obligations in your fund management policy and follow the practice in day-to-day activities.
  7. Do you have grants and loans with covenants? As with restrictions, part of monthly reporting should be key indicators on how the business is complying with covenants.
  8. Do you know the core financial data contained on your organization’s 990 and its GuideStar rating? Knowing the answers to the questions before potential donors is a must to maintain credibility and be in the best position to make the “ask”!

 

How many “Yes’s” did you score on the Financial Brilliance Meter?
0 – 3 – Financial Dunce
3 – 5 – Financial Aptitude
6 or more – You are on the road to Financial Brilliance!

 

Whether it’s creating your first budget, enhancing your general ledger infrastructure or reviewing and tightening up financial reporting, successful leaders ensure these characteristics are part of their culture. This financial clarity helps ensure stability to carry out your mission.
Raise your Financial Brilliance score, let Mindy Barker & Associates show you how. We can help you gain the financial brilliance that empowers you with the tools and financial information to improve company value, profitability, and cash flow. Contact me here.

The Journey of a Commission Dollar

JourneyOfDollarAs the CEO or CFO of your organization, when was the last time you looked at the commission payout to your lead sales staff? While you were razor-focused on increasing sales, did you also consider the full impact of the commission dollar in developing and executing the company sales plan?

 

The difference between an accountant and the strategic CFO (Chief Future Officer) is the accountant will calculate and pay whatever commission they are given, whereas the strategic CFO will help their CEO understand the entire journey of the commission dollar and its impact on the organization.

 

Before a commission plan is implemented, consider these five impacts:

 

  1. Who will have plan accountability and oversight to avoid fraud, abuse and plan obsolescence?
  2. What metrics will be used to measure/monitor that the plan drives the desired short and long-term results?
  3. How complicated is the plan to administer? Calculate? Pay out?
  4. Should there be a commission clawback provision?
  5. How does the plan fit into the overall compensation structure of the organization

 

If the journey of the commission dollar begins with a few conjectural quantitative analyses, you may avoid implementing a plan that does not achieve the desired outcome or has unintended effects. You can create a system that is full of opportunities to take advantage of the system and in some cases create fraud. If your idea on how to calculate commission is not fully vetted with several “what if” quantitative analyses, you could find yourself in a situation where you are having to revisit and revise the plan continually until you hit on a formula that works.

 

Consider the following “real life” scenarios:

 

The Scenario: The accounting department found they were spending days calculating the commission. The decision-makers who developed the plan were not aware of the mountain of work they created by failing to test the end-to-end process to administer the plan. Get your financial strategist involved to help think through the commission calculation. Test that the calculation will not be unreasonably time-consuming while you are creating the plan and before you communicate it to the sales team.

 

The Scenario: The commission plan may incent the sales personnel to bring on unprofitable or uncollectible revenue dollars. A commission plan that includes a clawback provision builds in responsibility so the commissioned sales person is a participating party to the business. The clawback items should include account receivable write offs, returns and credits and any other reductions of revenue that may occur with the customer. Without this, the sales person is just interested in getting the business on the books. The recent mortgage crisis is a great example of this, as the mortgage brokers selling the mortgages received the initial commission on the mortgage and had no clawback if the mortgagee defaulted on the mortgage.

 

The Scenario: The commission amount is so low, not only does it not incent any increased sales, it also wastes accounting infrastructure to administer. I recently learned of a retail establishment that began an incentive program to provide each employee $20 per month if the store met its monthly goal of thousands of dollars of sales for the month. The manager would ask the employees who had worked a 12-hour shift if they would like to stay later so they could make the extra sales to receive their incentive for the month. The exhausted employees laughed about this behind the managers back – the low bonus and high hours to earn it served as a disincentive to meet the sales goals. The store manager and accounting department were exerting energy to calculate a program that was irritating the customer-facing employees. This is not a good investment.

 

Take the time to evaluate new or changing commission programs by considering the full journey of the commission dollar. Make sure you are actually providing a healthy incentive to your sales professionals without creating an expensive or inadequate process to administer the commission payment.

Streamlined Month-End Reporting is an Investment in Your Business

Each month end, financial reporting packages are prepared in companies across the nation and promptly filed…somewhere. In most cases, the accounting team has prepared these analyses and turned them over to a senior leadership team who really does not understand how to use them to run the business. Reams of paper reports stand in piles, creating more of an environmental concern due to the use of paper, than the financial concern needed to effectively run the business.

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Even though the accounting department has included a tremendous amount of information that may help them prepare for the annual audit, have they contributed information relevant to the management of the business?

 

By implementing accounting best practices, such as streamlined processes and standard, relevant reporting, work effort can shift from processing to high value activities that invest in the business, such as special projects and guidance on improving the bottom line.

 

Time is money, and time spent to prepare irrelevant information is wasted. Month end packages should be concise and provide information about the relevant Key Performance Indicators identified by Management. Contact Mindy Barker & Associates to find out how we can guide your leadership team to discover, report and track monthly Key Performance Indicators that help you make timely and informed decisions in running your business.