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How Much Cash Reserve Cover Should Your Business Have?

Published: April 7, 2023 by lauramills

How much cash reserve cover should your business have?

Recently in discussions with clients the focus is still on effective reporting, strategy, banking relationships and the 4 levers that drive a business, but in these uncertain times a new question is being asked… how much cash cover should our business have? We currently have ($ x) based on an internal theory and are building with multiple bank accounts for key items etc. Is this the right amount and how will this affect us long term in meeting our core strategic goals?

In past reviews of annual dividend and repatriation polices, the focus is on forecast cashflow (key inflows and outflows), required capital expenditure and potential investment strategies aligning to regulatory requirements. Whilst this still holds true, business owners are now more focussed on what they should be holding as a reserve – and equally maintaining.

A good conversation starter with your financial advisor / CFO / Board advisor is; what is comfortable to the key stakeholders in maintaining? Consideration in the conversation must be given with transparency and thought towards:

Reserve amounts and best use effectively: Focus on building the reserve to comfortable or adequate levels.
Historical Cash flow forecast review: How much do you spend each month and seasonality effect of that spend required. Regular review of what you are spending and timing, especially with key items such as taxes etc.
How much is right for your business? 3 months or 6 months – keeping in mind that a large reserve may also limit potential growth and profits
How to build it? This is where your CFO / Board Strategic advisor will best to help in ways to do this and maintain via Financial scenarios including factoring and additional bank lines of credit.

If you would like any help with determining how much cash reserve cover you should have please feel free to Contact Us

How do I manage my business in an inflationary environment?

Published: April 5, 2023 by lauramills

The last time inflation was over 5% was early 2000’s. For the last 20 years the only business consequence of inflation was annual small CPI adjustments.

Now, the #1 business risk may be our new inflationary world. The most learned bankers and economists admit they don’t know how high or for how long inflation will be around for. Following could be useful guidance.

BUSINESS IMPERATIVES

Forecasting and scenario planning
Cashflows and working capital become even more important
Margin protection
Prioritise high profit customers and products

AREAS TO PAY ATTENTION TO

Loans/financing

Assess the potential impact of rising interest rates and business uncertainty. This includes loan headroom, ability to service the loan, and potential covenant breaches. Use stress tests and sensitivity analysis. Have an open line of communication with your banker and don’t hide any bad news from them. Make sure the amount and duration of financing is sufficient to weather the crisis and rollout any business plans. Ensure facilities can’t be called in. Consider replacing some overdraft with fixed term financing if things look tight.

Credit Control

Your customers may struggle. Ensure you have an on-going open collaborative dialogue with key customers. Review and assess credit limits, payment terms, and credit policies. Ensure you have timely reporting on receivables ageing and potential bad debts. Weekly reporting would be desirable. And ensure someone is reviewing these reports and taking action promptly.

Cash Forecasts

Implement monthly cash forecasting process if you don’t have one in place now. Review forecasts closely. Understand why variances occur, i.e., was it a business issue or inappropriate assumptions, and take appropriate action accordingly. Run regular scenario planning to understand potential problems.

Working capital

Don’t neglect this area. It can be quietly sucking up cash largely un-noticed. Setup processes to ensure invoices are sent out promptly, and customers pay on a timely basis. Review inventory turnover and under-utilised inventory, and setup action plans to improve this. If possible, negotiate better terms with suppliers. Ensure your regular reporting gives visibility of the $ value of receivables, payables and inventory, and also ageing and turnover.

Pricing and margins

THIS IS KEY. Protecting margins is paramount, and a key driver of overall business profitability.

Pricing is a quick and powerful lever to do this. It will need to become more dynamic. Price increases will likely be essential, but they need to be targeted and precise. Understand your customers and where you fit in their value chain. For example, how important and how expensive is your product in their overall costs. This will enable more appropriate and ultimately successful price increases to be made.
Make sure reporting systems give you margin by customers and products. Prioritise high margin products and customers. This is particularly important if the availability of resources, such as labour, is constrained.
Consider hedging mechanisms and contractual T&C allowing you to pass on input prices to customers.

Mix

Understanding, monitoring, and improving, the margin impact of changing customer and product mix is critical. The key is having the mix that maximises margin $. This process needs to be dynamic and correlated to changes in input prices, and internal resource availability.

Input prices

Monitor input prices closely. Understand impact on product margins. As relative prices change, consider input substitution or replacement. Renegotiate major input prices if possible, e.g., using volume discounts.

Overheads. Review, consider what is business critical and what is not. Try to have costs on a variable basis if possible.

Assets. Review all assets. If they don’t generate profit sell them off.

Business model. Run scenarios around inflation rate, interest rates, wage and input increases etc regularly. Is your business model appropriate?, should it be changed?, do you need to have new delivery models?

Risk management. Make sure you regularly monitor risks and take appropriate mitigation. Check insurance coverage is adequate. Don’t forget that uncertainty can create opportunities.

Improve profitability through innovation and efficiency enhancers such as IT. Can business processes be streamlined, removed or changed?

Gary Campbell is an experienced CFO, based in Victoria, working with the CFO Centre Australia. He is particularly successful at profit improvement, financial turnarounds, risk management and corporate governance for SMEs and NFP. If you would like to talk to a CFO like Gary, please contact us.

The Strategic Planning Checklist

Published: April 1, 2023 by lauramills

Our Ultimate Guide to Strategic Planning

Part A: Business Strategy Check List

1. Analysis of Existing Situation – Organisational Philosophy & Mission & Value

Does it reflect what you stand for?
Do your people understand its true meaning?
Does it make it clear as to how you have to compete and against whom?
Is it simply written? Is it clear and unambiguous? Is it believable and realistic?
Does it motivate people? Does it attract pride or cynicism?
Does it give us some indication of what we should be doing and how we should be doing it?
Do all the constituent parts fit and hang together?
“Identity Pyramid” – do you have clarity around all the issues?

2. Internal Appraisal of Company

SWOT analysis – revisit previous analysis & ensure it is complete & current
Distinguish between endowments and core competencies
Assess and audit core capabilities.
Gauge fit between external environment and core capabilities
Identify fit between customer requirements and core capabilities

Having identified what you perceive to be your competences ask yourself the following questions:

Will this give us any source of long term sustainable competitive advantage? Clarify the how? (ie. how relevant is it to the needs of our customers (actual and potential)).
Do customers (broadly) agree with our findings (ie. the market place)?
Can competitors (present/future) emulate or do better? Do they share our perception?
How was this list of core competences arrived at (eg. Training, innovation etc)?
Any weaknesses/shortfall still? If so, what further investments will be required?
Is there any impact on the strategic balance sheet (ie. Intangible and human assets)?
Can it be levered, onto other applications and/or markets?
What happens next?

3. Competitive Analysis

What is the current process for this task?
The Positioning Statement (competitive positioning) – refer below
Scan present competitive position but focus also on future competition.
Do you really know your competitors strategy?
Understand changing face of competition
Who could be a future competitor?
Is your strategy and your competitors becoming more alike or more divergent?
What is the most radical thing that your competitor(s) could do?

4.Value Proposition

Consider or revisit the current Unique Sales Proposition within your Marketing plan & ensure it is complete and up-to-date.
Do you know why your customers buy from you and not you competitor(s)?
Have you asked them?
How can you improve customer experience?

5. Environmental & Industry Analysis

Consider legal, social, political, economic, technological, markets, labour position, society, pressure groups, and any other environmental issue.
Assess potential impact of any change(s) and consider timing implications.
Conduct intensive industry analysis.
What is the long-term viability of the industry as a whole?
What could change the industry dynamics?
What is the nature of current industry changes i.e. radical, creative, intermediate or progressive?
What could be the impact on your strategy and source of competitive advantage of such changes?
Five years or so from now how will the industry leaders look and act?

Part B: Strategy Selection

1. Identify Strategic Alternatives

All options to be examined – growth, acquisitions, alliances, JV’s, innovation.
Upside and downside risks identified

2. Strategy Evaluation & Selection

Clear choice to be made
How will we compete?
Evaluate impact of each option
Will it give unique competitive advantage?
Can it last? Can it be sustained?
Will it differentiate us from our competitors?
Can it be converted easily into a set of business objectives / KPI’s?
How will competitors react?
Easy to implement?
Contingencies in place?
What about the next wave?
Is it consistent with customer requirements and industry changes?
Will it create shareholder value?
Is it financially viable?

Part C: Strategy Implementation

1. Matching Strategy & Organisational Structure

Do we have the necessary resources?
Is there a logical fit?
Is current structure adequate? Assess extent of change. Do not ignore culture effect.
What about the organisation’s values?
Is strategy personalised enough? Assess flexibility and robustness.

2. Allocation of Resources & Responsibilities

Planning, Plans, budgets, controls, appraisals etc….. all to be consistent with strategy
Strategy well translated into clear objectives
Priorities and constraints identified
Time horizons clearly laid out
Management information systems to dovetail strategic choice

Without a comprehensive, up-to-date business plan and an implementation timetable, companies may be missing out on opportunities for growth and not realising their full potential. A formal plan can be an extremely valuable tool for managing and growing a business, as it allows a company to recognise its strengths and weaknesses. Furthermore, research has shown that SMEs that have a business plan in place are consistently more profitable than those who do not have a business plan.

Photo by Andrew Neel on Unsplash

How to Double the Size of Your Business in 2023

Published: March 24, 2023 by lauramills

Whilst much uncertainty still remains after the craziness of last few years, our Chairman Colin Mills talks about his process on how to significantly grow your business.

“The best advice I ever received for ‘doubling’ the size of our business, was to list down the Top 20 things we could do to increase the revenue by 10 times. You can then identify the Top 3 activities to concentrate on for the following year” says Colin.

So let’s say you’re a $4million business. Spend a few hours listing out the 20 things you could do to turn this into a $40million business over the next 12 months. This will force you to think outside the box and away from small incremental changes you can make.

I suggest you then spend another hour or so considering the Top 3 activities. These will be the activities that are most likely to get you towards your goal of $40m.

You then have the top 3 activities to focus on over the next 12 months that may well enable you to double your turnover.

For each of those top 3 activities, develop clear action plans on how you are going to achieve results.

Next, get input from your management team (including your CFO of course) in developing these action plans.

Don’t forget to consider the risk and downsides to each of your priorities. Then develop strategies to mitigate the risks you identify.

Above all, ensure your plans are realistic and find capacity that can support your ideas. Your CFO should be able to support you in developing finance and funding to ensure your growth plan is realistic.

The overall economic climate won’t allow all business to double their size this year. However, this radical approach for business growth will hopefully enable some to change their thinking from doom & gloom towards optimism and growth. As Henry Ford famously said “If you think you can, or think you can’t, either way you’ll be right!”

The CFO Centre is the global No.1 provider of part-time CFOs. We are dedicated to making a real difference for our clients and their businesses.
Rate your company’s finance function here. You’ll receive an instant and confidential PDF report outlining the important, actionable insights to get your business ready for growth.

4 Top Tips for Cash Flow Management

Published: March 17, 2023 by lauramills

Cash Flow Management is pivotal in any business. All too many business owners think that the battle is won once the marketing rolls out and the product is sold. They see that their investment of time and resources has paid off and therefore, assume that their goal has been achieved.

However, the fruit of these hard-won victories can quickly run out. Your working capital (debtors, creditors and inventory) should be carefully maintained with a structured cash-flow management plan.

Here are some key points for businesses to keep in mind when managing cash flow:

Analyse cash flow history and identify patterns

This is particularly useful for businesses that have been in operation three years or more. The past can prove a helpful guide for predicting future ups and downs. Therefore, you can more consistently capitalise on the ‘ups’ while preparing for the ‘downs.’

Review your cash flow management systems and processes

Who have you invoiced? Who has paid? And have you made your payments? Without reliable systems and processes in place, you simply cannot accurately ascertain what your monthly cash flow is, let alone manage it.

Ensure your customers pay before suppliers are paid

With each new business relationship, decide with your debtors a credit plan that will ensure you get paid on time. If a particular arrangement is not working, try something different, such as a payment plan. A partial payment now is better than no payment at all. Make it easy and convenient for the customer, by having all the necessary information on the invoice, and offer various payment options.

As for creditors, try to get as extended an arrangement as possible. As a result, this can help ensure that you’ve been paid by your debtors first. You will reduce the risk of default and help ensure you make payments on time.

Be transparent with your bank

Your bank is your most important creditor. It can also be your best ally if your cash flow projections and business plan inspire confidence. Communicating with your bank about your payment status will also engender greater confidence and lessen the negative impact should a surprise late payment or default arise.

The above key points are all necessary elements in managing your cash-flow well, but they are not sufficient in and of themselves. They is no replacement for tailored advice from an experienced professional. The CFOs at the CFO Centre are all highly experienced in cash-flow management and are dedicated to helping ambitious businesses meet their strategic objectives. For more information, contact the CFO Centre on 1300 447 740.

Photo by Riccardo Annandale on Unsplash

The CFO as a ‘Leader’

Published: February 23, 2023 by lauramills

In the context of the 4 Roles of the CFO, the role of ‘Leader’ is viewed as the catalyst. They bring the other 3 roles of Strategist, Operator & Guardian together to support & deliver the business owner’s expectations of long term growth. They will look to:

Challenge/Shift the thinking of small business owners
Look to drive competitive differentiation
Deliver funding through profit growth to drive long term value

Our CFO’s deliver this role of Leader by providing the following:

STRATEGIC PARTNER TO THE BUSINESS OWNER and ADVISORY BOARD

Performing the role of a trusted sounding board and strategic partner to the business owner and advisory board.
Through their vast experience gained in their various roles in Finance functions, they are able to apply their knowledge and expertise to the whole of business in an “End to End” whole of revenue approach.
This role of the CFO opens up opportunities to constructively challenge the business owner’s mind to improve decision making, by using their influence and persuasion.

STRONG SALES & CUSTOMER FOCUS

In the role of Leader our CFO’s will prioritise spending time building relationships with the organisation’s Head of Sales and other business unit general managers, taking ownership of some of the performance related activities
The CFO will ensure that a Balanced Scorecard measures the human resource effectiveness, innovation, customer satisfaction and loyalty as well as the financials.
Adopting “whole of business” approach enables the CFO to remain focused on prioritisation and time allocation. The CFO uses these activities to protect one scarce resource – cash. As well as using it to protect an equally scarce resource – time.
The discussion with the business owner is then how to derive the best return on those scarce resources.

FIGHT ‘SCOPE CREEP’

In the Leader role the CFO will remain focused on operating at an optimum level of resources. They understand and control the hidden costs of introducing too much organisational complexity. This complexity can be caused by proliferation of products, and or channels to market, or adding layers of management.

SET ASIDE A ‘WAR CHEST’ FOR CRITICAL STRATEGIC ACTIVITIES

The Leader works with the business owner, implementing a plan to set aside a cash reserve in order to fund the most strategic initiative. Or, alternatively, to keep an existing project on track or accelerated to take advantage of a new opportunity.

The success of the Leader role delivering value for the business owner is dependent on developing and maintaining good relationships with the business owner and employees.

In addition, the CFO will also have to ensure the strategic, operational and business support aspect of the business are well attended. They will help SME owners achieve their goals whilst building a more profitable and valuable business.

Written by Greg Yon – CFO and Regional Director at The CFO Centre – Sydney West region

Tell Me Why I Need A Part Time CFO

Published: February 8, 2023 by lauramills

You are the owner or CEO of a medium size business. You already have an in-house accountant and an external public accountant. Why might you need another finance person?

Here are 8 reasons why a part-time CFO will be beneficial to your business:

DIFFERENT (BUT COMPLEMENTARY) AREAS OF EXPERTISE

CFOs will normally have substantial hands-on commercial business experience (see point 3 below). Accountants are more skilled in their areas of expertise, but typically don’t have that depth of hands-on operational commercial experience. The skill sets are different, but complementary. The three finance professionals, working together as a team, can produce substantial benefits.

BETTER INFORMATION

You need good information to make good business decisions. For example:

FORWARD LOOKING reports, such as cash flows and order/sales forecasts
NON FINANCIAL information such as key operational KPIs
Customer, territory, sales channel, service and product profitability
More frequent high-level timely reporting on key business indicators i.e. the weekly dashboard

CFOs can provide business intelligence reporting, specific to that unique business’s characteristics and challenges. They are generally more experienced at “management accounting” i.e. providing the right information which management need to run the business. Management accounting is very different from what the tax accountant uses, or what generic software P&L reports provide.

COMMERCIAL SKILLSET

Most CFOs are professionally trained accountants, who then move to commercial roles. Normally it would take at least another 10 years of commercial experience to become a CFO. In these corporate roles, CFOs often partner with the CEO as their right-hand person, thus acquiring extensive commercial and operational experience. They often have project management, IT, risk management, internal controls/processes and administration experience.

BENEFITS FOR THE OWNER or CEO:

The part-time CFOs:

Can focus on finance, admin, and IT thus freeing up the CEO to focus on the business
Pass on best practices and techniques learnt in corporates
Be a sounding board, mentor and advisor
Be a long-term relationship-based partner who takes the time to really know the business
WORK WITH OWNER/CEO TO ACHIEVE THEIR GOALS AND AMBITIONS

FLEXIBLE CUSTOMISED ENGAGEMENT

You pay for the level of engagement that you need, in contrast to the fixed high costs of a full-time CFO
Both retainer and time spent fee structures are available

HIRE ONE, ……TAP INTO THE NETWORK

The CFO Centre has over 750 CFOs. When you engage with a CFO from The CFO Centre, you can effectively tap into this global network which has in excess of 10,000 years of experience and knowledge.

IMPROVED STAKEHOLDER CONFIDENCE

The CFO Centre are the global number 1 provider of part-time CFOs, Hiring a part-time CFO from The CFO Centre will give banks, suppliers and other partners added confidence to deal with the company.

VALUE FOR MONEY

Take advantage of experienced commercial professional, on a flexible structure determined by the client, at a fraction of the cost of a full time CFO.

SUMMARY

For SMEs who have grown in size and complexity, but not yet reached a size where a full-time CFO is required, the “part-time”, or “on-demand” CFO could be the solution.

Written by Gary Campbell. Gary is a CFO with The CFO Centre in Victoria, Australia. He is particularly successful at profit improvement, financial turnarounds, reporting and risk management within manufacturing and distribution sectors. He can be contacted at [email protected], or you can contact us here

The CFO Operator – Increasing your Profits

Published: February 7, 2023 by lauramills

Cash vs Profit

If cash used to be King, in today’s new landscape it’s now Emperor. The Operator frees up the Business Owner from having to worry about the day to day financial operations. Cash has always been critical to every business, however, now more so than ever. Your CFO will help (re)structure your business to maximise your cash position. This involves balancing supply and demand while cutting back unnecessary costs and improving productivity, efficiencies and ultimately profit.

4 areas of focus are:

Maximisation of Profits and Profitability
Ownership of Cash flow
Reduce Costs
Increase Productivity & Efficiency

The CFO as an Operator

Being thought of as the Operator may not be the first role that a small business owner would think of for their CFO. In his blog, my colleague from The CFO Centre – Dr. Andre Van Zyl set out The Strategist role that a CFO often fills Under The Spotlight – The Strategist. While that role is critical for any organisation’s long-term existence, CFOs also have vast tactical experience in an Operator role. We are obviously not referring to operating a factory floor machine. We mean that the CFO has the ability and experience to oversee and operate a number of critical functions. A calm and reassuring Operator may be key to a company’s future.

In a more benign operating environment, the maximisation of profit may be central to a company’s strategy. In the current environment keeping a tight control of cash and costs will increase organisational efficiency.

Time

Time, or the lack of it, is so often cited by small business owners as one of their biggest frustrations. Our clients often comment that they are spending so much time working IN-the-business that they can’t spend enough time ON-the-business. A Part-time CFO who works closely with a small business owner can free up time for the owner by sharing the load. As a result, this ensures the owner is fully focused on those very roles that were the initial catalyst for creating the business. This can be a significant ‘value add’ aspect of the Operator role of a CFO.

Our CFOs have either worked their way up through, or had executive responsibility for, the Finance functions in various organisations. They deeply understand the importance of running a tightly controlled organisation. This includes specific focus on cash flow management, profitability, and productivity. Andre wrote about developing three-way financial forecasting models which are critical for banks and financiers. It is just as important to deliver against those models.

Making Critical Decisions

Many businesses need to consider whether current business models can survive in the longer term. Critical decisions may need to be made on products or business lines to either scale-up, maintain status quo, scale-down or even shut-down completely. A part-time CFO can help small business owners as they work through that exercise.

A new or refined operating rhythm may therefore need to be designed. This could mean minor tweaking or more major restructuring. Consideration of this may be critical for survival. The Operator who has extensive business experience will greatly assist with a rapid transition to a new business model. Central to this will be the robust and disciplined forecasting exercise.

At The CFO Centre we have the relevant experience required to assist business owners in navigating and operating during the current and future challenges. The objective must be to future proof your business, and The CFO Centre is here to support you.

Written by John Paterson, Principal (NSW) – The CFO Centre.