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30 Ways of Increasing Profits & Managing Costs For Our Clients

by lauramills
30 Ways of Increasing Profits & Managing Costs For Our Clients

Increasing Profits using our unique IP.

At The CFO Centre, when working with our clients, we use a unique framework called the 12 Boxes.  These boxes are made up of the 12 financial building blocks in any company. There are many activities that sit behind each of the 12 boxes and the list below is not exhaustive, but merely gives some examples of how our CFO’s (Chief Financial Officers) can support clients in the area of Profit Improvement:

  1. Help clients identify the ways in which they can sell more, sell more frequently, increase prices (without losing customers) and cut costs;
  2. Help clients identify the profit drivers in the company, both financial and non-financial;
  3. Educate the senior team about the importance of Critical Success Factors (CSFs).
  4. Systematically analyse relevant KPIs and trends to identify potential hazards before they become a problem;
  5. Review arrangements with the company’s main customers to see if there is a more profitable way to supply them;
  6. Review pricing arrangements with existing suppliers;
  7. Research alternative suppliers across all areas of the business;
  8. Research sources of grant funding;
  9. Determine company’s eligibility for government funded incentive schemes that encourage research and development;
  10. Develop effective incentive schemes for staff to encourage productivity and to manage risk;
  11. Prepare customer surveys to understand what the market really wants;
  12. Analyse competitors to find out what is working well and what isn’t and course correct accordingly;
  13. Review significant overheads and isolate opportunities to reduce expenditure;
  14. Investigate exchange rate hedging and planning;
  15. Create a realistic and achievable action plan then communicate it to all employees;
  16. Increase prices;
  17. Explore online selling;
  18. Explore more cost-effective ways of marketing by forming strategic alliances and joint ventures with companies that deal with the business’s prospective clients;
  19. Arrange for business mentors to give advice and share experiences with the client;
  20. Review organisational structure and delegation procedures to maximise efficiency;
  21. Develop customer retention strategies to prevent loss of revenue;
  22. Evaluate business location and determine possible alternatives (to save costs on production, delivery, etc.);
  23. Outsource some functions, employ some people on a part-time rather than full-time basis;
  24. Look at the viability of redundancies;
  25. Introduce an expense control programme;
  26. Review bank charges;
  27. Check invoices from suppliers for overcharging;
  28. Get rid of inefficient systems;
  29. Measure the return on all advertising;
  30. Replace frequent small orders with bulk buy discount orders.

Keys for Cash Flow Management

by lauramills
Keys for Cash Flow Management

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 will quickly run out if the accounts receivable, as well as the accounts payable, is not 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, as the past can prove a helpful guide for predicting future ups and downs. You can more consistently capitalize 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 to keep track, you simply cannot accurately ascertain what your monthly cash flow is, let alone manage it.

Ensure accounts receivable receives before accounts payable pays

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 accounts payable, try to get as extended an arrangement as possible. This will 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

What are the 4 Financial Reporting Ratios?

by lauramills
What are the 4 Financial Reporting Ratios?

The importance of business reporting is twofold:

  • To have retrospective visibility over past performance (that is, to analyse performance data and use it as a tool to course correct for the future).
  • To have visibility into the future (knowing what is likely to happen around the corner)

 

The three key financial statements

At the very least you need to have regular access to three key financial statements. They are:

  1. The Balance Sheet
  2. The Cash Flow Statement
  3. The Profit and Loss Account

Understanding your Numbers

To interpret and understand the numbers contained in your financial statements, you can use financial ratios. The numbers for ratios are taken from the Profit and Loss Account and the Balance Sheet, but not the Cash Flow Statement.

They measure performance in percentage terms rather than raw numbers. This means you can compare your company’s performance with other businesses in your industry, with your previous results and with your projections. They can help you to answer questions such as are your operating expenses too high, is the business carrying excess debt or inventory/stock, and are your customers paying according to terms? Banks and other lenders will want to see your ratios to see how your business performs in comparison with other businesses they’re lending to and with the standards they’ve set for lending.

The four categories of ratios

  1. Liquidity ratios (which reveal your company’s ability to meet its financial obligations including debt, payroll, taxes, payments to vendors/suppliers)
  2. Profitability ratios (which help you evaluate your company’s ability to generate profits)
  3. Leverage ratios (which shows you how – and how extensively—your business is using debt)
  4. Efficiency ratios (which reveal how efficiently your company is managing certain key balance sheet assets and liabilities).

Which financial ratios should you track?

Some ratios will be more applicable to certain industries and businesses than others. If you provide a service rather than sell products, then ratios like return on assets and inventory turnover are unlikely to be relevant to your company whereas the receivables turnover is critical to your business operations. It’s best to choose the five most relevant ratios to your business and track those as part of your monthly management operating plan. It’s crucial to look at your ratios on a monthly basis so that you can spot trends as they develop.

Conclusion

The benefits of having regular access to high-quality financial management reports are far-reaching. Good reports reveal the efficiency (or otherwise) of the constituent parts of the business. They enable you to deal with potential threats and take advantage of opportunities to grow your business. The compound effect of making regular, quick and high-quality decisions based on a strong set of data and reports cannot be overestimated.

Most businesses have some level of reporting in place but in most cases existing procedures are insufficient to allow for rapid growth. The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.

With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.

7 Ways To Increase Profit And Business Value

by lauramills
7 Ways To Increase Profit And Business Value

Have you ever wondered how your business is valued in the eyes of an external party? Then you need to know the seven (7) levers in your business.

With just a little additional focus on one or more of these 7 levers, you can directly improve the cash-flow, profitability and/or value of your business. There’s no smoke and mirrors, nor anything particularly difficult to undertake. However, many business owners do not take the time to appreciate how the financial performance of their business really works.  So, let’s break it down.

Often business owners will primarily focus on sales volume, in other words trying to sell more. However, whilst sales volume is important, it’s only one of the 7 levers available to you.

What are the 7 levers in a business that control your cash, profit and business valuation?

The first four levers are focused on your Profit and Loss and therefore directly impact the profitability (and cash-flow) of your business. As most, businesses are valued at a multiple of cash earnings. These levers also have a huge impact on the value of your business (along with other aspects such as Brand, customer base / income streams, and internal expertise / “keyman” dependence).

  1. Volume

Selling more – although increasing sales can grow your business, don’t forget to focus on the other levers below! How much of every extra $1 in revenue turns into profit and into cash in your bank account, and when?

Tip – formulate a sales & marketing plan, with a budget, which is aligned back to your  overall Strategy. Review and tweak the plan regularly.  This will help keep you focused on the right way to grow your top line.  Any growth needs to be sustainable!

  1. Pricing

can you increase your prices? Even a 1% increase can have a big impact. There can be a fear of losing customers by putting up your prices, which can often be unfounded.

Tip – review your margins by product / service stream / customer to ascertain which sales are making you money and which are not.  You need to know your break-even points!  Your part- time CFO can help – they love this stuff!

Tip – the results of your pricing analysis need to dovetail into the sales & marketing plan. It’s possible to make more profit from less turn-over!

  1. Cost of Goods Sold – reduction in % terms

This lever is most relevant to those businesses with direct costs such as manufacturers, construction, etc and places the focus on your gross margin.

Tip – revisit your direct purchasing arrangements and negotiate better terms and pricing. For example, bulk purchase discounts, early payment discounts, reduced freight.  Maintaining strong supply chain relationships is important but that doesn’t mean you can’t ask the question (or find potential alternatives).

Tip – review your direct labour-force using metrics such as labour utilisation, overtime levels, re-work, customer complaints, and down-time.  You may be able to re-deploy staff or reduce casual labour / overtime once you have this data.  Again, your part-time CFO can make this happen for you.

  1. Reducing Overheads

This may sound like an obvious one, but we always find at least some unnecessary “fat” in our client’s overhead expenditure.

Tip – someone needs to review the overheads line by line. Indirect / office wages, communications, insurance, utilities, freight, and advertising are the common ones where savings can be achieved. Even small reductions in certain areas can all add up over time!

These last three levers are focused on your Balance Sheet and are collectively called Working Capital. They have a significant impact on your cash-flow and therefore also on your funding requirements. Many businesses can avoid additional debt borrowings, or pay their existing debt faster by shortening their cash-conversion cycle.

  1. Reducing debtor days

This means improving the ageing profile of your Accounts Receivable function (i.e. getting your customers to pay you faster).

Tip – review your credit control policy and your payment terms as customers with poor payment histories should be carefully managed.  Review your collections process in terms of who chases the debt and when.  The introduction of direct debit may be an excellent solution for some businesses.

  1. Reducing stock days

This means a faster conversion of your inventory (if you carry it) into sold product, thereby reducing the amount of stock you hold.

Tip – introduce a stock-take process if you don’t have one. This can ensure that your financial records mirror what you actually have on the shop-floor. Then review the results of the stock-take for slow-moving or obsolete stock items – these may need to be discounted in order to convert them into cash.  Your purchasing policies may also need review if you are over-stocked with certain inventory lines.

  1. Increasing creditor days

This means taking longer to pay suppliers (without hurting the relationship or cutting off supply).

Tip – contact your suppliers to re-negotiate your settlement terms. It’s just a matter of asking the question – they may say “no” but then again, they may really value your business.

Now you know the what the 7 levers are, it’s time to do something tangible with them in order to make a real impact on your business. If you don’t have the internal expertise or time to make it happen, we would be happy to talk to you about how a part-time CFO can bring this to life. After all, as CFOs it’s what we do!

 

Photo by Monstera

4 Signs That My Business Might Need CFO Services

by lauramills
4 Signs That My Business Might Need CFO Services

I have recently been talking to business owners and executives who want to build more resilience into their business. They are considering adding a part-time Chief Financial Officer (CFO) to their team.  During these discussions, two questions usually come up.  “How do I know if my business needs a CFO?” and “what does a CFO do that my Accountant can’t?”.  I would like to share some thoughts on these questions.

The primary responsibility of a CFO is to optimize the financial performance of a company. This includes its reporting and accountability, liquidity, return on investment and long-term value creation.

A CFO has a forward-looking perspective. They look at interactions of the business with outsiders, acting as a diplomat and negotiator with third parties.  Often the strategies put in place by a CFO are not short-term fixes. Some may take months or years to be fully realised.

How do I know when my business needs a CFO?

As to the question of when a business needs a CFO, the following indicators may be helpful.

  1. Internal – When information that helps in making important decisions is not timely or reliable.
  2. External – When improved respect must be gained outside the business. eg from investors, customers, suppliers, labour markets, regulators etc.
  3. Rapid Growth – Growth requires an expansion of systems, and usually additional capital to finance the growth.
  4. Exit – When a business is preparing for a merger, acquisition, or business sale.

So, when the business is at the stage of increased external engagement and growth, a CFO can add significant value.

What does a CFO do that my Accountant can’t?

A CFO always works closely with the external Accountant. Having an accounting background, the CFO is well placed to understand the role of the external Accountant.  The external Accountant’s role is mostly concerned with compliance and transactional advice.  They work from their own offices and will normally attend the client’s business premises periodically.  External Accountants often have the skill sets to provide additional services. However, they are usually not involved closely enough in the running of the business to make this a sensible use of their time.

Functions such as the below will either fall to the CFO or some other suitably qualified resource will need to be allocated:

  • Budgeting and forecasting
  • Cash flow management
  • Financial reporting
  • Scenario planning
  • Internal controls
  • Insurance
  • Bench-marking and key performance indicators
  • Incentive schemes
  • Management of key suppliers
  • Accounting policies

If the business doesn’t have a CFO, the CEO or one of the Directors have to take ownership of these functions.  This means they are taken away from other important leadership and governance roles. They also may not have the depth of experience in the technicalities of financial transactions to handle these things well.

Some of the common misconceptions about a CFO

There are some common misconceptions about a CFO that are worth discussing.

The first misconception is that a CFO may have an excessive focus on short-term financial results ie this year’s profit.  Financial success of the business is undoubtedly the objective of any CFO. This, however, does not mean sacrificing long-term value creation for short-term results.  A CFO is interested in the success of all business stakeholders. This includes owners, employees, customers, suppliers, financiers etc. All stakeholders must be rewarded to ensure the long-term health of the business.

CFOs are therefore, likely to be just as interested in the business strategy as they are in the profit and loss statement. In addition, culture, reputation, governance, and risk management will be on their radar. A good CFO recognises that sustainable financial success is only achieved when all aspects of a business are working well.

Another commonly held misconception is that CFOs think in “black and white”. That therefore, they may not be comfortable with the various shades of grey that business and life deal up.  Whilst that may be true for some aspects of a CFO’s decision-making, good CFOs will look closely at the underlying issue.  For example, CFOs are often involved in analysing the performance of a business or even individuals.  In understanding performance, a CFO will often consider a range of underlying factors. This can include; roles and responsibilities, resources, delegated authorities, remuneration and incentive systems, behavioural assessments, management approach, and organisational structure and culture.  CFOs are first and foremost experienced corporate managers. They understand that people are usually the most critical resource in businesses. From experience, most CFOs are skilled at dealing with people issues sensitively.

If you’d like a confidential discussion about whether a part-time CFO could be right for your business, please contact us.

Allan Robb, CFO at the CFO Centre

Why Every Business Benefits From a Part-Time CFO

by lauramills
Why Every Business Benefits From a Part-Time CFO

A typical company finance function can be divided up into 3 areas. However, many businesses believe the finance role is principally to produce accurate accounts.

Ask any bank manager and he or she will tell you the bank’s most problematic customers are those who don’t truly understand what is going on in their business. Some customers ask for finance or expect to maintain an overdraft, yet cannot even produce up to date accounts.

Most SME business owners want to focus on the business and not the numbers. The business is their baby and they want it to be their sole focus – not financials!

The areas which the business owner will seek help in first will be determined by the focus and needs of the business whether in sales, operations, admin or finance. If we look at the finance function, it is traditional to break it down into 3 roles:

3 roles of the finance function

1. Financial direction – the CFO

2. Financial control – the Accountant

3. Book-keeping/basic accounting/ AP & AR – the Finance Department Staff

Many business owners think the finance role is transactional in nature and so concentrate just on producing accurate accounting records. This is essential in itself, but not enough to manage and develop a growing business. When focusing on the CFO role specifically then, what are the key tasks of this role and what does the CFO bring that the other finance roles do not?  Why would you need a CFO?

I suggest the following four main areas of expertise and input:

1.Strategic

Co-ordinating and developing long term business plans; defining the implementation timetables; assessing the risks involved and seeking the funding required to deliver the proposed plans.

2.Operational

Developing internal controls; managing and developing the reports needed to run the business; improving profit levels; managing cash flows. Does the business owner fully understand the profitability of each product / service they offer? Often the answer is no.

3.Leader

Instilling a financial approach and mind-set throughout the organisation to help other ​parts of the business perform better ​

4.Support

Tax planning and legal issues; compliance issues; managing external relationships; outsourcing relationships.

The modern CFO needs to be able to develop all this and more. There are many other considerations that go beyond the pure “job description” above.

What’s the difference between an accountant and a CFO?

A CFO looks forward and financial accounting looks backwards; it’s where your business is going that matters as the past cannot be changed – but learnings can be made and changes made so that past mistakes not repeated.

Experience: it is important that a CFO has a wide range of commercial experience, not just financial. Good CFOs do not learn their skills from textbooks alone, in fact they learn very little from textbooks – they learn by doing. Commercial experience means leaving their offices and talking to customers and engaging with the production and operations teams.

Personality: a CFO must be able to communicate at all levels be it the production teams, sales teams, marketing teams to board level. The CFO must be able to relate to people on all levels of a business.

The CFO Centre provides high calibre CFOs to SMEs on a part time basis, allowing organisations to benefit from the expertise of a highly experienced Chief Financial Officer without incurring the expense of hiring someone full-time. We don’t tie you in with a long term contract.

Whether the business in in fast growth mode and needs control or has hit a brick wall and needs survival solutions to get through a tough patch, our CFO’s can cope with both ends of the spectrum.

For more information about the CFO Centre’s service see How it Works  or call us on 1300 447 740

 

Article written by Peter O’Sullivan – Regional Director – CFO Centre, Victoria

4 Top Tips for Cash Flow Management

by lauramills
4 Top Tips for Cash Flow Management

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

What is the North Star?

by lauramills
What is the North Star?

In the 1950s, strategic planning was around budgetary planning and control, then we jumped to 1970s which focused on corporate planning; 1980s focussed on strategic positioning, 1990s strategic competitive advantage; 2000s strategic and organisational innovation; 2010 complexity and rapid change.

Now, we are talking about North Star Metrics (NSM). The term has been in around since the 2000s and was used primarily in Silicon Valley. It has taken a while to reach Perth.

Here is our view of what the North Star means for SMEs.

If you are not familiar with North Star, it is another form of goal setting. Remember SMART goals (specific; measurable; achievable; realistic; and time-based)? And what about vision boards, or stepping stone goals or even a more recent fad of bullet journaling?

A North Star goal, in its basic form, has also been referred to as the Big Hairy Audacious Goal. It is a goal so big, so far out there and it is not about the destination but more about the journey.

One article recommends to think of them “the way sailors view the North Star: A way to stay on course, no matter where you are. And if you don’t know where to go or what to do, all it takes is a quick glance to get back on track”.

If that is the basic form, let’s have a look at the metric in more detail.

Key steps for creating a North Star Metric

1. Start by Understanding How Customers Get Value

And not just any customers, but instead the “must have” customers who say they would be “very disappointed” if they could no longer use the product. Your goal is to expand this “must have value” across your existing and new customers. Your North Star Metric is how you quantify expansion of this value.

2. Should be Possible to Grow NSM “Up and to the Right” Over Time

A good rule of thumb is to choose a metric that can be “up and to the right” over a long period of time. This is why “Daily Active Users” is an example of a good NSM for consumer products like Facebook or online games.

3. Consider the Downsides of a Metric

Think through some scenarios where growing the metric could lead the team to behave in ways that are against the long-term interest of the business. For example, if you made your NSM “average monthly revenue per customer,” then the fastest way to grow this number would be to eliminate all customers that have a relatively low value — even if they are profitable customers. This would likely reduce your overall customer and revenue growth rate.

4. Keep it Simple

Remember that the point of the NSM is to align everyone on your team to work together to grow it. So, it’s important that it is simple enough for everyone to understand it and recall it.

5. Why Not Just Focus on Revenue Growth?

Revenue growth is very important, so this is a natural question that many people, especially business owners, ask. The challenge is that if revenue growth outpaces growth in the aggregate value that your product delivers to customers, it will not be sustainable. Revenue growth will eventually stall and start to decline. But if we can continue to grow aggregate value delivered to customers over time, then it becomes possible to sustainably grow revenue.

For example, let’s take the CFO Centre (CFOC).

How customers get value: CFOC provides highly experienced CFOs to SMEs on a part-time basis.

Grow NSM: the number of active clients

Downsides: CFOC needs to be able to service active clients and this is directly related to number of CFOs

Keep it simple: CFOC wants every SME to have access to a part-time CFO.

This is a big hairy audacious goal. We understand that the number of clients is limited by the number of CFOs but a North Star Metric isn’t necessarily pragmatic or utilitarian. It does, however, provide a direction for the SME and the business owner.

What is the North Star Framework?

In addition to the metric, the North Star Framework includes a set of key inputs that collectively act as factors that produce the metric. Product teams can directly influence these inputs with their day-to-day work.

This combination of metric and inputs serves three critical purposes in any company:

  1. It helps prioritise and accelerate informed, but decentralised, decision-making.
  2. It helps teams align and communicate.
  3. It enables teams to focus on impact and sustainable, product-led growth.

Personally, I would add to this:

Imagine you have your North Star Metric, next you define sub-metrics (break down big goal to smaller goals), define the outputs (key elements of success) of those goals, define how you will achieve those outputs (needs to be measurable) and finally, what are the inputs to reach the outputs.

The CFOC question

At the CFO Centre, we ask our clients: what do you want your business to do for you?

This is an important question as our goal is to build a relationship with a business owner and the questions starts our journey to better understand what is important to them.

The answer to this question can also be the basis of your North Star.

Is the North Star relevant to SMEs?

Overall, I like the concept of setting a North Star for a business but I much prefer the more basic approach: Big Hairy Audacious Goal.

I was in conversation with one business owner who had his North Star, or rather his Big Hairy Audacious Goal. He wants his business to be valued at $1bn by 2029. I thought this was brilliant and I think this is what North Stars are about.

Set your big goal but remember, it is more about the journey than the destination!

Final words

To qualify as a “North Star,” a metric must do three things: lead to revenue, reflect customer value, and measure progress.

Make it bold, tap into your dream and start the journey.

 

Sources:

Types of Goal Setting – From North Star Goals to SMART to Bullet Journals – Leanne Calderwood; The North Star Approach to Goal Setting | by Patrick Ewers | Better Humans; What is a North Star metric? | Mixpanel; About the North Star Framework – Amplitude; North Star Metric: What Is It and How To Find It For Your Company – Kissmetrics; How To Find Your Company’s North Star Metric (forbes.com); Finding the Right North Star Metric | by Sean Ellis | Growth Hackers; What is the North Star Metric? Theory, benefits and examples | toolshero; What is the North Star for your Strategic Planning? | Insigniam Quarterly; Strategic guardrails for digital transformation | Deloitte Insights