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Tag: cfo

What are the 4 Financial Reporting Ratios?

by lauramills
What are the 4 Financial Reporting Ratios?

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

Get your numbers in track with The CFO Centre

Informed and insightful decision making can only be made if the magic finance numbers are accurate and informative. Reporting should thus be tailored and customised for the type of organisation (large, medium, and small enterprises). This is where a CFO can truly add immense value. A ‘one size fits all’ approach just does not work in today’s challenging, diverse and financially demanding business environment. 

 The CFO Centre can provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.   

With their 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. 

If you’d like to speak with us about how we can help you better understand your numbers to accelerate your growth, please get in touch here.

How do I manage my business in an inflationary environment?

by lauramills
How do I manage my business in an inflationary environment?

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.

4 Top Tips for Cash Flow Management

by lauramills
4 Top Tips for Cash Flow Management

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’

by lauramills
The CFO as a ‘Leader’

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

by lauramills
Tell Me Why I Need A Part Time CFO

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:

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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

 

  1. 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

 

  1. 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.

 

  1. 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.

 

  1. 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

Under the Spotlight – The CFO a A Guardian

by lauramills
Under the Spotlight – The CFO a A Guardian

A CFO can act as a guardian for your business, by forecasting your cashflow and profitability, setting meaningful targets and helping you monitor your progress against them so you achieve your goals.

Looking Ahead – Forecasts

While most accountants are very good at telling you what has happened, not everyone is good at looking ahead. Historical accounting records are vital to any business, but so is a forecast. A forecast acts as a red flag, highlighting where profitability or cashflows are under threat. Forecasts need to be informed by well- thought out assumptions, and be capable of being updated quickly. These days numerous cloud-based forecasting tools are available, that are updated continuously from accounting systems.

ZZZZZ and Improving Your Business – KPIs

We all know the cliché that to improve something you have to measure it. To improve a business, you need clear targets or measure – key performance indicators (KPIs).

But how do you go about setting KPIs?

Here are some tips on setting KPIs. I call them the 5 Zs (I’m using American spelling – apologies to all of us using British spelling).

CustomiZe – KPIs must be relevant to your company. If you trade in inventory in different product categories, you need margin and turnover KPIs for your inventory categories. If you are a professional services company, inventory is irrelevant – you need labour utilization and efficiency measurements.

PrioritiZe – it is tempting to want to choose 100 goals, but don’t. If you or your staff are faced with 100 KPIs, you very quickly become overwhelmed and lose focus. Select 5-10 KPIs. Each manager or department will have their own KPIs.

VisualiZe – KPIs need to be visible and visually appealing. People need to see how they are progressing on a regular basis – every day or every week. Only by monitoring their progress constantly can they make changes to their behaviour to improve their performance. It is no use waiting until budget time at the end of the year to review how well you and your team have done.

OrganiZe – people need to be held accountable for achieving the targets. Each KPI needs a manager who is accountable for achieving that particular goal.

OptimiZe – constantly monitor and improve your performance. This means regular reviews and making the changes needed to stay competitive in your environment. This is particularly important in our current environment, where COVID19 has disrupted many industries and changed the operating environment.

Systems

A key element in monitoring your performance against KPIs is a system that gives accurate and reliable data, quickly. There is no one-size-fits-all system; you need to select a system that relates to your business needs. It’s critical that the setup and implementation of the system takes into account your business needs and your goals.

The Role of a CFO

Of course, you can try and do all of this yourself, but it is much easier to have an experienced person do it for you. A part-time CFO will be able to assess your business and set meaningful KPIs. Your CFO can take thorough look at how you are using your system, and whether changes need to be made. Regular meetings to review your forecasts and how you are performing against your KPIs will ensure you achieve your goals.

 

Written by Andrew de Bruyn, Principal (WA) – The CFO Centre

The Role of a CFO

by lauramills
The Role of a CFO

What does a CFO do?

A CFO’s (Chief Finance Officer’s) role is to get fully engaged in your business. They regularly drill down into your financials to help you plan, forecast and monitor financial performance. A CFO can provide valuable help to you in the follow areas:

  • Help you strategize, plan and operate your business to your maximum financial advantage.
  • Analyse results in the context of the company’s objectives and strategies.
  • Plan and consider how financial transactions will be booked, consistent with the objectives and strategies of the business.
  • Work with your internal Finance function (bookkeeper or Financial Controller) and/or external Accountant.
  • Focus on a clean, quick, and solid closing of the books within days of the end of the period.
  • Establish key indicators that provide early warning for management.
  • Work to maximize the value of the business to the owners.
  • Ensure you (the owner or CEO) understand the financials, the trends and the issues they identify.

Our CFOs are qualified accountants with decades of commercial experience in high level finance roles. They have controlled the finances of companies across a huge variety of industries and sectors – plus with a team of over 750 CFOs globally, you can be sure to get the answers from someone who has been there and done it.

What’s more, you can have a high calibre part-time CFO at a fraction of the cost of a full-time resource. Outsourcing a CFO is tremendously cost effective and most CFOs pay for their own time with the cost savings they identify in your business.

The CFO Centre is offering a 1:1 emergency scenario planning video call with one of our experienced CFOs to review the 7 critical areas in your business. You will come away feeling clearer about your options for increasing cash and mitigating risk.

If you believe our expertise could benefit your business, please click here to get in touch.

Or for more information about the CFO Centre please call us on 1300 447 740.

How to Scale Your Business for Growth

by charlottenoble
How to Scale Your Business for Growth

Scaling your business depends on two factors: your company’s capability and its capacity to deal with growth.

To scale up your business, your company must be capable of dealing with a growing amount of work or sales and of doing it cost-effectively.

You need to know that your company can achieve exponential growth without costs rising as a result. It’s vital too, that performance doesn’t suffer as your company scales up.

You also need to be sure that your business systems, employees, and infrastructure can accommodate growth. For instance, if you get a sudden surge in orders, will your company be able to cope? Will you be still able to manufacture and deliver products or services on time? Do you have enough employees to deal with a surge in work or sales?

Scaling a business requires careful planning and some funding. To be successful, you’ll need to have the right systems, processes, technology, staff, finance, and even partners in place.

Identify process gaps

Audit your business processes (core processes, support processes, and management processes) to find their strengths and weaknesses. Find the process gaps and address them before you start to scale up.

Keep the processes simple and straightforward. Complex processes slow things down and hinder progress.

Boost sales

Decide what your company needs to do to increase sales. How many new customers will you need to meet your scaled-up goals?

Create a sales growth forecast that details the number of new clients you need, the orders, and the revenue you want to generate.

Examine your existing sales structure and decide if it can generate more sales. Can you increase your flow of leads? Do you need to offer different products or services? Is there an untapped market? Do you have a marketing system to track and manage leads? Is your sales team capable of following up and closing more leads?

Make sure you have enough staff to cope with an increase in sales. If you don’t have enough staff, consider hiring new employees, outsourcing tasks, or finding partners that may be able to handle functions more efficiently than your company.

Forecast costs

Once you’ve done the sales growth forecast, create an expense forecast that includes the new technology, employees, infrastructure and systems you’ll need to be able to handle the new sales orders. The more detailed your cost estimates, the more realistic your plan will be.

Get funding

If you need to hire more staff, install new technology, add facilities or equipment, and create new reporting systems, you’ll need funds. Consider how you will fund the company’s growth.

Make delighting customers a priority

To reach your sales forecasts, your company will need loyal customers. You’ll win their loyalty by delivering outstanding products or services and customer service every time you interact with them.

Invest in technology

Invest in technology that will automate tasks. Automation will bring costs down and make production more efficient.

Ensure that your systems are integrated and work smoothly together.

Ask for help

Don’t be afraid to ask for help from experts who have experience in scaling up companies. In an interview, Apple’s co-founder, Steve Jobs, said, “I’ve never found anybody who didn’t want to help me when I’ve asked them for help.

“I’ve never found anyone who’s said no or hung up the phone when I called – I just asked.

“Most people never pick up the phone and call; most people never ask. And that’s what separates, sometimes, the people that do things from the people that just dream about them. You gotta act. And you’ve gotta be willing to fail; you gotta be ready to crash and burn, with people on the phone, with starting a company, with whatever. If you’re afraid of failing, you won’t get very far.”