The Cost of the Cash Gap

This is an Article I help create that was recently posted on The Business Finance Store Newsletter.

Posted on  by Samantha Hadley

In a recent post about the cash gap, we provided an example of a company with an 80-day cash gap.

Example:

Example: ABC Company LTD
Inventory = 60 Days
Payables = 30 Days
Receivables = 50 days
Cash Gap (60+50) – 30 = 80 Days

Now, look at the financial cost this cash gap has on the company.

Cash Gap = 80 Days

Annual Sales: $1,000,000
Daily Sales: $1 million/365 = $2740 in daily sales
Gross Profit Margin: 35%
Cost Of Sales: 100% – 35% = 65%
Daily Finance Required: $2740 x 65% = $1781 cost for daily sales
Working Capital Required: ($1781 x 80 = $142,480)
Plus interest if borrowed:  (10% x $142,480= $14,248)
Total Capital to fund operations: ($142,480 + $14,248 = 156,728)

This business requires an additional $14,248 annually to cover the interest alone on the $142,480 of working capital they require. However, lets look at the same business, if their cash gap were reduced to 50 days, rather than 80 days.

Annual Sales: $1,000,000
Daily Sales: $1 million/365 = $2740 in daily sales
Gross Profit Margin: 35%
Cost Of Sales: 100% – 35% = 65%
Daily Finance Required:  $2740 x 65% = $1781 cost for daily sales
Working Capital Required: ($1781 x 50 = $89,050)
Plus interest if borrowed: (10% x $89,050 = $8,905)
Total Capital to fund operations: ($89,050 + $8,905 = $97,955)

This company has now saved $5,343 annually in interest and $58,773 in operating costs, simply by reducing the cash gap. So how do you reduce the cash gap in your business?

Increase Payables Period

What does this mean? It means the time you receive from your suppliers before you have to pay them. The most common trade-term offered is 30-days. Do not be afraid to negotiate and ask your suppliers for this time. You are their customer and they need your business as much as you need theirs.

Another way to increase your payables period is to utilize credit or charge cards in your business. Using a credit card to pay for goods from your supplier will provide you with a 25-day interest free period. Research the different options on the market today as some business charge cards offer up to 55 interest free days. Nate Thorne of CFO OnCall LLC also advised that paying credit cards off each month eliminates interest payments as well.

Decrease Receivables Period

What does this mean? The time your customers take to pay you. There are several ways to entice customers to pay earlier. If you have some room in your profit margin you can offer customers a discount such as 1% to pay at the time of purchase. As well, accepting credit cards from your customers allows you to receive your money quicker, while offering payment terms.

Nate Thorn also suggested being proactive in your receivables. If you have customers that usually pay in 30-days, call them ten to 15 days early to remind them of the payment coming up. This will help reduce the amount of customers paying you late.

Increase Inventory Turnover

Out with the old and in with the new. Do you have specialty product that has been sitting on your shelves forever? Sell it at a discounted prize and purchase inventory that sells faster.

These are simply three ways to reduce the cash gap in your business. The cash gap can be costly and a growing business with a growing cash gap is deadly. Factor this gap into your business plans, pay attention to it and ways it can be reduced. Create a cash flow budget, keep it up to date, plan for gaps and be prepared, so the cash gap doesn’t take over your business.

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When Should Business Owners Outsource CFO Services?

August is here and it is time for another blog. Many business owners are very good at what they do and are very busy doing it. Accounting and financial analysis is the last thing they have time to do. When is it time to bring in a CFO that can provide the expertise to give them that financial competitive advantage? I found this great article that answers that question. Give it  read.

When Should Entrepreneurs Outsource CFO Services? by Ravi Patel
 

   

Entrepreneurs start businesses with a new product or service idea and often have skills related to engineering, manufacturing/delivering, or marketing that product or service. Rarely do entrepreneurs commence businesses because of their financial expertise, unless they provide a financial service or product.

As the business idea is crystallized and the company starts growing, entrepreneurs definitely require financial and accounting services that are either developed in-house or outsourced. These functions in the young company are sometimes paid very little attention and are treated as a “bookkeeping” necessity. As the company grows, the operations portion (billing, collections, payables, payroll, etc.) of the accounting function becomes more defined and structured. A Controller is hired to supervise the accounting staff and prepare the monthly financial statements and handle compliance issues. The “CFO” functions are often performed by the CEO (used synonymously with entrepreneur in this article) as a full-time CFO is not deemed necessary or financially justified.      

In fact, CFO services are needed, though not necessarily full time, during the initial stages when a company is started. The need continues to increase with the growth of a company and ultimately a full time CFO is required. Outsourcing CFO Services until a full time CFO is hired is often the prudent course of action.     

As the entrepreneur explores the idea of starting a company, he/she has the product or service expertise but needs guidance on the financial strategy and modeling the business aspects of the potential opportunity. A CFO type advisor can guide the entrepreneur on setting up the proper business and financial structure initially so significant, expensive changes do not have to be made later on. The consultant can also assist the entrepreneur in formulating the appropriate financial organization and internal controls from the beginning. This should provide a template for building the finance function as the company grows.   

Once the entrepreneur starts generating revenues and decent cash flows, he/she starts thinking about raising funds to grow the business. A solid business plan is essential for such efforts, whether for equity or loan sourcing. Utilizing outsourced CFO services is ideal for assistance in preparing business plans and making professional presentations to funding sources. A CFO advisor can also provide useful funding contacts to the entrepreneur and help the CEO in building the finance and accounting organization, including hiring a Controller, to satisfy equity infusers or lenders.       With a stable company and years of acceptable growth, an outsourced CFO can supplement the Controller in an organization by providing the entrepreneur with independent reviews and assessments; special projects in areas of new product/service investments; business/financial analyses; or even help in troubleshooting areas of financial concern, such as business downturns. The entrepreneur benefits from the services of a CFO without having to invest in one and often expediting the performance of necessary tasks, without the need for the CEO or Controller detracting from their day to day responsibilities.     

Until such time that an entrepreneur hires a full-time CFO, an outsource CFO provides an independent, objective advisory relationship and sounding board to the CEO. Such a relationship is valuable to the entrepreneur as it allows him/her to utilize the experience and skills of the consultant for positive change and avoid making significant mistakes made by other growing companies. Even with a full-time CFO position in the organization, the outsourced CFO fulfills a need during transitions or vacancies. 

     The consultant who provides CFO outsource services becomes a useful ally and a stakeholder in improving the profitability, enhancing the value, and financial growth of the entrepreneur’s business■  

New Blog – Outsourced CFO’s are Smart for Business

Happy 4th of July!

I was looking for some ideas to post on my blog and came across this great article

from Mark Ferguson on Ezinearticles.com. It is a great article about why outsourcing

is good for business and the benefit of Outsourcing a Chief Financial Officer.

Give it a read.

Running a business takes many skills sets, and business owners, eager to keep costs in check, try to do it all. From hiring decisions to compiling financial statements, owners spread themselves thin running from task to task. The upside? There’s no large salary tied to people holding specialized positions. The downside? Each task gets but a fraction of the time it deserves – and requires.

According to the Harvard Business Review, outsourcing is one of the most important management ideas and practices of the last 75 years. Companies using outsourcing cite innovation as their number one reason for bringing in a fresh perspective to key company functions. Business owners and executives say they derive these four benefits from outsourcing:

1. Outsourcing allows companies to focus on what they do best – their own core competencies.

2. Companies achieve greater efficiencies without adding people or technological resources.

3. Outside expertise helps companies become more profitable, thereby increasing company or shareholder value.

4. Outsourcing offers increased service levels within company functions.

One of the most critical functions in a company – especially one transitioning through one of the growth phases – is that of the financial officer. A Chief Financial Officer (CFO) typically focuses on how efficiently a business is operating. While some business owners view this function as a reporting function – one where the CFO merely is a score keeper of how well the business already has performed, that’s just where CFO duties begin.

A CFO takes the historical financial data (also known as financial statements and other typical recording reports), combines that information with operating practices, and analyzes areas where the company could – and should – make changes that affect profitability, productivity and efficiency. The CFO with top-notch business sense can dramatically impact a company’s bottom line.

Companies nearing the half million up to the $5 million revenue mark often find they can benefit from the services of a seasoned CFO, but can’t – or don’t want to – afford the $125,000+ these professionals typically demand for a salary. Some business owners, realizing that they do not have the resources to hire a full-time CFO, simply accept this and vow to grow their businesses so they can hire a CFO in the future. Smart business owners recognize that if they want to reap the benefits of an experienced, results-producing CFO, they must look for a more creative way to do it.

These smart entrepreneurs regularly make outsourcing work for them. They understand the importance of leveraging their money while obtaining critical tools for success. Many times, the cost savings accompanying qualified CFOs makes the decision that much easier.

Outsourced CFOs sell their time by the hour or on a monthly basis -four to eight hours a month, for example, at an agreed-upon fee. CFOs can isolate areas of concern that the business’s accountant wouldn’t (and possibly couldn’t) detect until tax time. Even the closest accounting advisor isn’t privy to day-to-day business practices.

CFOs can have a positive affect on the outcome of major business decisions. For instance, companies facing reorganizations or mergers need to have access to real numbers associated with these events. They also need to know how to leverage available resources with company debt. Skilled CFOs handle these issues regularly and can bring much-needed expertise to company owners and executives as they make short- and long-term decisions.

Other areas offer opportunities as well. Purchasing agreements sometimes can hurt the well-intentioned company manager. If a company makes larger purchases because of negotiated lower prices on products and the trade off is a shorter pay schedule, CFOs can isolate this scenario as the key reason why a company could constantly be in a cash crunch.

Finding a qualified CFO may be as far away as a phone call to your CPA or accountant who offers outsourcing as a credible service component for companies like yours. Today, some firms offer the services of experienced CFOs who have retired and now work as temporary workers – much like you would hire a secretary on an as needed basis. Whichever route you take, financial matters aren’t the only areas where an outsourced CFO can lend advice. CFOs can help your business in several critical areas including:

· choosing appropriate accounting software,

· deciding whether leasing or buying equipment is best,

· how to compensate company officers,

· how to handle company collections,

· how to handle cash flow and how to balance company debt with receivables, and

· how systems can be improved to improve productivity.

While hiring a CFO for a short amount of time may get you past a cash flow crunch, help secure a much-needed loan or initiate systems that increase productivity, experts agree that to get the most out of your investment, you should commit to your outsourced CFO arrangement for at least a year. An experienced CFO often can impact your business in less time than an average work day or approximately eight hours.

If you are a business owner currently functioning as CFO, think of all the things you can do with your leveraged time.

· Spend time with valued customers to ensure their continued business.

· Attract and win new business.

· Develop new products or services.

· Work on operational or financial projects to make your business more profitable or accelerate its progress toward your growth goals

Bottom line: the choice to outsource comes down to dollars and sense. When companies add a CFO’s salary to a benefits package complete with annual bonuses, the price tag is high. And, not all CFOs are equal- navigating the maze of available CFOs can leave you dazed and confused. Keep in mind that CFOs possessing business performance management knowledge add an extra dimension that positively affects other areas of your company, including productivity, operating efficiencies and internal systems.

It takes time to make the decision to outsource a critical management position. Aligning company growth goals with the operating budget, and comparing that to the benefits an outsourced CFO can bring to the picture, enables you to determine if outsourcing is right for your company. If you still aren’t sure, call your accounting business advisor to discuss the pros and cons of this type of arrangement.

4 Signs You Need a CFO

I found this articale by Ken Kaufman of CFO Wise.  I couldn’t agree more with what

Ken is saying.  I have reposted it in my blog.

Many business owners and entrepreneurs struggle to find the right time, both financially and operationally, to hire key executives and managers in their organizations. Hiring too early wastes company resources and often either leaves the new hire bored or stuck doing mundane and low-level tasks. Hiring too late usually results in undue pressure on the other members of your team and could cost the company money in terms of hard costs and missed opportunities.

In addition to trying to find the right time to create these new positions in your company, the accounting and finance tasks are sometimes the most confusing and least understood by business owners. Why? Because business owners have never worked in those types of jobs and they are usually focused on making and then keeping promises made to their customers.

Hiring a Chief Financial Officer, or CFO, is one of the most important decisions a CEO or business owner can make. The CFO usually becomes one of their most trusted advisors and plays a critical role in the success of the firm. Knowing when to hire a CFO can be a challenge, but here are a few signs that you need to bring a finance executive on board, even if it is on a part-time or contract basis.

1. You can’t sleep at night.

I know a lot of entrepreneurs and business owners, and I have found one common theme for them losing sleep: the anxiety that comes from not knowing. One of these business owners saw his bank account declining, but he did not understand why. He experienced great anxiety over not knowing what the real problem was so that he could fix it. When he learned that several of his customers were delinquent with payment, he started making phone calls and turned the cash situation around within a few short days.

Even if entrepreneurs have problems, they can usually still sleep. They always lose sleep when they experience anxiety over the unknown in their business. A CFO will become the champion for measuring every critical element of a business, and they will work with the CEO or business owner to solve problems as they arise.

2. You are confused by mixed signals about performance.

Have you ever thought your accountant, who just told you that you lost $20,000 last month, was crazy? After all, you checked your bank account this morning and it had balance of $50,000. If these or other indicators of your business performance conflict, it may be time to hire a finance executive to put all of this information into context, analyze it, and summarize the financial position of the company in terms of the past, present, and future. A CFO will understand all aspects of your business — not just the numbers. The CFO is usually one of the leaders in any company that breaks-down organizational silos and operates from a holistic and results-based perspective.

3. You realize the accounting and finance functions needs to be a competitive advantage, not a necessary evil, of your business.

Accounting and finance are an overhead expense that does not add revenue or profit to the company, right? After all, the only reason you bother to track this information is so that you don’t get in trouble with the IRS, right? Business owners and entrepreneurs frequently feel this way, but nothing could be further from the truth. When structured and functioning correctly this area of the business can be one of the firm’s greatest competitive advantages.

For example, empowered with the right data, an entrepreneur recently made a very wise business move that went against the grain of accepted management practices for his industry. The result — he saved his company a lot of time, resources, and, most importantly, cash flow because he used the information from his accounting and finance department to make the right strategic decision. Many of his competitors, however, did not know their numbers and they have suffered significantly from their poor decisions.

4. You struggle to understand and plan for the future.

In his article, Difference Between CFO and Controller, Ben Paramore explains that CFOs are focused on planning, modeling, forecasting, and preparing for the future. Sure, a good CFO understands the past and the present, but those are only tools to steer the company in the best direction moving forward. If you ever plan to ask a bank or an investor for money, these parties will expect you to project your profit and loss, balance sheet, and statement of cash flows into the future to determine how much cash you will need from them, what it will be used for, and when they might anticipate getting their money (and hopefully a nice return) back. Your CFO should anticipate this and help you guide your business in the best direction possible.

With the option for start-up and emerging businesses to hire a part-time CFO, having a CFO has become more realistic for most businesses. Bringing the right CFO into your business will likely be one of the best decisions you make.

CFO On Call First Blog

Good morning,

Welcome to CFO On Call. This is my first blog.

I am sure they will get better as I do it more.

I am offering a free Industry Analysis as a welcome promotion to the new website.

This is a great report that shows how other companies are performing within your industry.

If you are interested please enter your contact information.

Check back often for updates.

Have a great day.

(CFO On Call UA-38359200-1)