Ensure you’re tax and legally compliant – Part II

How a part-time CFO will resolve your tax challenges

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.

This means you will have:

One of Canada’s leading CFOs, working with you on a part-time basis
A local support team of the highest calibre CFOs
A national and international collaborative team of the top CFOs sharing best practice (the power of hundreds)
Access to our national and international network of clients and partners.

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.

In particular, since every CFO Centre CFO is a qualified accountant and has experience of the kind of challenges which many business owners may feel are beyond solving, he or she will help you with your tax and legal position.

It is always a great relief to our clients to know that this high-risk area is being looked after for them.

It was a problem with GST that led one family-owned business to contact The CFO Centre.

One of The CFO Centre’s part-time CFOs recalls his first meeting with the business owners well.

“They were in a dark place when I went for my first meeting,” he says. “They had a tax problem and they were paying that off. “ “The company had been operating at a loss, running out of cash and they were constantly cutting costs.“

“I asked them what they thought they needed to do and I replayed it to them at the end of the day and all I did was say ‘You do that, you do this’ etc. “ “They knew what they needed to do, but they just didn’t have the confidence to do it. “

“It took us about nine months to sort it out. We put a strategy together and sold off two showrooms.” “Now, in our second year, we have three showrooms instead of five and yet our revenue is greater than what it was when we had five.”

“The family is in a place where they love going to work. They like what they’re doing and they want me to keep going in because I give them the confidence to make decisions about the business.”

A software development client was another business that benefitted from specialist tax advice from one of our part-time CFOs.

“Our part time CFO sorted out the R and D tax credits, which has also been a big help particularly because it came along at a time where life could have got quite tough if we’d had to pay out a huge tax bill,” recalls the owner. “We hadn’t even considered the R and D tax credits so this was a big win.

“It really helps to know that the finances are being professionally looked after. Our CFO is able to come in and steady my nerves if we are going through a difficult patch.

“I can relax knowing that I’ve got somebody watching over the financial side of things. Because I recognize that I’m not a numbers person and that it could all go completely awry if it were left to me to look at the numbers and understand what was happening.

“Having our part-time CFO has given my confidence in the business an enormous boost. I have no worries at the moment because our CFO lets me know when I need to focus on something. His input has meant that I am free to think about all the other things that I’m trying to do without worrying too much about the financial health of the business. When I do need to look at something urgently he can bring the issue into sharp focus then.”

In certain cases where the structure and complexity of the business dictates, it may be necessary to seek out a tax specialist (or even tax experts) to work alongside your part-time CFO. It’s your CFO’s role to determine the requirements for your business and ensure that the plan is implemented in the most effective and efficient way possible.

A CFO Centre part-time CFO will work with you to:

Determine your requirements and devise a tax planning strategy and remove the fear of the unknown so that you and your senior team can offload the burden.

Work with our wider network of tax specialists to solve complex issues as and when required.
Undertake negotiations with CRA on your behalf.
Implement processes that ensure that tax deadlines are met.
Translate specialist terminology into language you will understand and explain the plan in plain English.
Prepare cash flow forecasts for CRA that support applications to defer payments.
Devise an optimal tax efficient exit strategy for the business.
Ensure the tax advice fits with the overall business strategy
Discuss the most efficient ways for you and your employees to be remunerated.
Ensure that your company is kept fully up to date with new tax legislation.
Establish systems that record data the most effectively for tax purposes.
Deal with day to day legal issues – such as terms and conditions – and make sure your company is compliant.
Work with our wider network of solicitors to solve important/complex legal issues.
Help interpret legal letters and contracts.

Ensure you’re tax and legally compliant – Part I

Managing your tax and legal responsibilities effectively is a critical skill and one that few SME owners possess. This report explains why getting specialist tax and legal advice is crucial for all SMEs and how doing so can be hugely beneficial for businesses and their owners. In these articles, we will see:

The benefits of being tax and legally compliant
How a part-time CFO will resolve your tax and legal compliance challenges

Complying with tax legislation is “an uphill struggle” for many businesses and results in the wastage of precious management time, according to the CBI.¹

It’s estimated that mid-sized businesses spend 110 hours or nine days a year preparing, filing and paying corporation tax, labour taxes and goods and services tax, says PriceWaterhouseCooper.²

Most companies need to comply with at least eight categories of tax. That doesn’t include the industry-specific taxes (such as those in the construction, waste management, and oil & gas industries) that they must also pay.

“Each tax has its own legislation, associated case law that has built up over years of interpretation, varying thresholds for calculations and qualification of reliefs, and a myriad of payment dates, reporting deadlines and filing requirements,” says the CBI. “It is difficult to comprehend, let alone manage. It takes time and effort to ensure that a business is fully compliant in the taxes it needs to collect on behalf of the government and pay in terms of its liabilities – distracting it from commercial priorities and reducing management capacity for strategic decision-making.”

Mid-size businesses don’t have the resources or expertise that large companies possess to navigate tax rules and legislation, nor do they receive the targeted support that the Government directs at small businesses.

John Cridland, the former CBI Director-General, said: “Medium-sized firms are not able to benefit from the incentives that small firms do and, at the same time, most cannot afford to have an army of tax consultants on speed dial to help them wade through the complexities of the system.”³

It’s no doubt why tax worries so many owners of mid-sized companies. As is the case with most finance-related matters, the anxiety usually stems from not having a strategy in place to deal with the issues which arise.

Medium-sized firms are not able to benefit from the incentives that small firms do and, at the same time, most cannot afford to have an army of tax consultants on speed dial to help them wade through the complexities of the system.

As soon as the business owner accepts that they need a tax specialist as part of their team, the faster they can offload the burden knowing that their back is covered.

In other words, because tax is inherently complicated it really doesn’t make sense for CEOs and business owners to spend their own time trying to understand the detail. Accepting that this is the case and delegating out the responsibility to a capable, experienced part-time CFO removes an immense weight from the shoulders.

When we conduct reviews with our clients, we often discover a deep-seated anxiety about the pitfalls of failing to understand tax issues.

The primary concern is usually the idea that the business may be building up significant arrears of tax, which remain unpaid.

There are often worries about whether or not the accounting system used is recording information in the right way and will reveal significant holes in the event of a tax inspection.

Corporation tax, HST, GST, the implications of capital gains tax vs. income tax, failing to claim tax breaks, employment taxes and understanding R&D credits are common areas of discussion with our clients as is the desire to keep up to date with new legislation.

Most business owners simply want to know that their company (and personal) tax affairs and legal issues are being properly looked after; that they are as tax efficient as they can be and that all statutory requirements are being met. Most companies do a poor job of this because tax is inherently complicated and when things get complicated in business the most common reaction is to move onto something else!

Delegating your tax planning and legal responsibilities to a tax specialist is a must.

Knowing that you are not paying tax you don’t need to be paying and having peace of mind that all your tax deadlines will be met without you having to take on the responsibility personally will allow you to focus on growing the business while we take care of the details.

Come back for part II of our tax compliant article to find out how a part-time CFO can help you navigate the tax season!

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¹ « Stuck In The Middle: Addressing The Tax Burden For Medium-Sized Businesses ». CBI/Grant Thornton, www.cbi.org.uk, www.grant-thornton. co.uk. Juin 2014.
² « UK slips two places down league table of effective tax systems » Nicholson, Kevin, PwC (PriceWaterhouseCooper), www.pwc.com. 21 nov. 2014
³ «Medium-sized businesses need more support to stop them from falling over the tax cliff», Prosser, David, The Independent, Jun 23, 2014, www.independent.co.uk

STRATEGIC FUNDING – Where to find the capital your business needs – Part II

In part I of the strategic funding article, we discussed the following sources of funding:

Bank Operating Line of Credit
Loans
Invoice Discounting (Factoring)
Asset Financing

Theres are also another variety of funding available for businesses: the Alternative financing.

Alternative finance is a general term to describe a variety of financing options that sit next to traditional bank facilities and factoring and invoice discounting products.

The alternative finance market includes a wide variety of new financing models including peer to peer lending, crowdfunding and specialist finance providers offering products such as selective invoice finance and invoice trading platforms.

Specialist providers have greater flexibility than the traditional sources and can often offer a faster turnaround on the right deals. Crowdfunding, peer to peer lending and invoice trading platforms greatly depend on online platforms bringing many investors and borrowers together.

The section below looks at the main options for the different and emerging alternative financing options:

Selective Invoice Financing

Unlike traditional factoring companies, invoice financing or invoice discounting, selective invoice finance allows businesses to choose which invoices or debtors should be put forward for funding. The business owner can choose when and how much they wish to draw from the selected invoices. The provider agrees upon an ongoing facility for the business. On presentation of a valid invoice, money can be accessed from the facility as soon as the validity of the invoice has been confirmed. For each invoice, an agreed percentage of the value becomes available to draw – typically 70% to 85%.

Selective invoice finance is a great option if you’re looking for flexibility as the business is not tied to any contract and can dip in and out of the facility as needed. Business owners have direct control over costs and the opportunity to repay early if additional funds become available from elsewhere.

Additional security is often required to support the facility. This could include a charge over business assets and a personal guarantee from the directors or owners.

Invoice Trading Platforms

Invoice trading is a short-term finance option where the borrower signs up to an online platform and submits an invoice for sale.

The invoice trading platform will pre-vet the invoice, looking to ensure the debtor is credit worthy. If satisfied with the quality of the debt, full details of the invoice will be posted on the platform and a bidding process begins.

Potential lenders start a reverse auction so the keener they are, the lower the interest rate for the borrower. If there is insufficient appeal, the trade will fail. It is exclusively web based due to the administration efficiencies involved.

When the invoice becomes due the debtor pays directly to the platform but the business remains responsible for making sure the invoice is paid.

On repayment the platform deducts its own charges and repays the capital and interest to the individual lenders. A shortfall in the repayment will mean the business will be asked to make up the difference.

Some trading platforms have now started to take additional security in the form of a charge on the business and a personal guarantee from the directors and/or shareholders.

Peer To Peer Lending

Peer to peer (P2P) lending enables numerous small investors to loan money directly to a business and could be a good solution for longer term funding.

The length of the loan is agreed by all parties upfront and as per a normal commercial loan, the business will have to pay interest, typically quarterly. In order to attract lenders the proposition needs to demonstrate a strong likelihood of both the interest and capital being repaid on agreed terms.

Failure to meet the repayments may result in penalties such as a demand for immediate repayment or an increased rate of interest if the loan remains in default.

The platform provider acts as middleman between lender and borrower and will ultimately enforce whatever security has been taken on behalf of the individual lenders.

Provided a loan has been properly serviced and there is adequate security available, it is often possible to return to the P2P lender for a second or later round of borrowing but each new loan has to be separately posted to the platform and must justify why the new lending is required.

Security will need to be offered, normally in the form of a charge over company assets (a debenture) and a personal guarantee. Investor money is at risk if the loan is defaulted.

Crowdfunding

Crowdfunding involves a business plan being posted to a specialist website where sufficient small investors offer funding to generate the target amount required by the business.

Crowdfunding is a good option for businesses not wanting ongoing interest costs. However, on completion investors will own shares and have certain rights in the business. For example they may require input such as audited financial statements and will need to be kept informed of how revenue is progressing. No personal security is needed from the current owners.

There are two main types of crowdfunding and the expectations of investors vary according to which they are looking at:

Special Interest Funding: Often used in the entertainment industry, for instance to pay a musician to produce a new album or to cover the production costs of a new show. In this case, the investor doesn’t necessarily expect a commercial return on the investment but will have some special rights, such as pre-release copies of a CD or discounted tickets to see a show.
Trade Finance: Money is advanced to enable goods to be purchased (typically from abroad) before they are sold. The lenders security is the goods purchased so these must either be easily saleable or in response to a confirmed order. Generally available to established businesses with good credit. Minimum transaction values and margin on the contract will apply.

Supply Chain Finance

The funder takes control of the supply chain, generally making payments direct to the supplier. Security is taken over goods purchased. There is usually a high degree of involvement and control over the borrower’s business and other security is invariably required.

Private Equity Firms

Private equity firms provide medium to long-term capital in return for an equity stake in companies with high-growth potential.

The investors’ return is dependent on the growth and profitability of the business. As a result, most private equity investors will seek to work with you as a partner to grow the business.

It is most suitable for firms looking for longer term capital to fund their expansion activities.

disadvantages private equity firms IPO (Public Offering for Shares)

This is where your business is publicly listed and shares can be bought and traded by the public. Typically this is only used for larger businesses.

In Canada, the Toronto Stock Exchange (TSX) is the senior equity market, while the TSX Venture Exchange is a public venture capital marketplace for emerging companies. The Montreal Exchange or Bourse de Montréal (MX) is a derivative exchange that trades futures contracts and options.

CONCLUSION

Funding is often the catalyst for taking your business to the next level.

It’s your choice whether you want to take on an equity partner or raise debt to finance the growth of the business. When raising equity, if the right partner can be found, it can make a profound difference to your business. It may be that the investor provides not only funding but also adds significant value to your business in terms of experience, expertise, infrastructure, and channels to market. However, it does mean you will lose partial or complete control in running your business. Something that for many is not appropriate.

Raising debt can be complex and frustrating, and the increasing array of alternative funding doesn’t make that process any easier, but it does mean you keep control as your business grows. However, if you’re like most business owners, you simply want the funds and are less interested in the detail of how to get hold of them!

That’s fine if your company has a full-time chief financial officer (CFO) with substantial experience in raising funds: however, as an SME, you probably don’t have a full-time CFO, or if you have they probably don’t have a vast range of fund raising experience, whether it be raising debt or equity. So what can you do?

You can hire a very experienced part-time CFO to manage the entire process for you. He or she will manage everything from determining your immediate and long-term objectives to finding the right kind of funding partner for the business.

Discover the funding options now

To discover your funding options, book your free one-to-one call with one of our chief financial officers who are funding experts:

tel: 1-800-918-1906
email: [email protected]
www.thecfocentre.ca

Strategic Funding – Where To Find The Capital Your Business Needs

Funding growing businesses is one of the major challenges any entrepreneur and business owner will face, and while there is an increasingly vast array of options available, figuring out how to access these funds can be a very time consuming, frustrating experience, even for the most seasoned business owner.

Whether you need working capital to support your growth, raise funds for a push into a new market, introduce a new product range or even have a requirement to raise funds for a new business venture, figuring out what you need to do and where to go can be difficult. With the advantage of “doing this for a living”, this report summarizes the process and points you in the right direction in terms of funding providers and where to go to get the independent specialist advice you are likely to need.

Highlights

Which type of funding will suit your needs?
Sources of funding (including advantages and disadvantages of each one).
Where to get independent specialist advice on your funding options and presenting your case for the best chance of success.

Introduction
Whether you need $1,000 or $10 million, there are only two kinds of finance: equity, whereby you are raising money in exchange for for ownership of the company, and debt which is borrowed money. The first step in raising capital is to decide between equity or debt. In the SME world, the choice usually depends on the preference of the business owner and stage of the company.

If you want to maintain total control, you are typically going to prefer a debt driven funding route: however if you are less worried about control, bringing in equity funds can often mean you grow faster. This can be a good route, particularly where you have a very clear exit in mind and this exit lines up with other equity providers.

In most SMEs the entrepreneur or business owner is the person who looks for funding the business needs. When raising debt finance, our experience is that banks are still the most frequent form of funding used, but increasingly owners are hearing about and starting to use new forms of finance outside of traditional banks. This so called alternative funding market is growing rapidly, and has more than doubled in size year on year from £267 million in 2012 to £666 million in 2013 to £1.74 billion in 2014, according to the “UK Alternative Finance Industry Report”.¹

Equity financing can come from individuals, so called angel investors, and traditional venture capital firms. Depending on your ambitions, there is also the option to combine both debt and equity in a funding mix to provide the capital base for long term growth and the working capital to support working capital requirements in the business.

While there is copious advice for those businesses seeking to raise funds for start-ups, this report focuses particularly on the challenges facing mid sized companies who are past start up and need funds to continue to grow (those with annual revenues between £2M and £50M, or employing staff between 10 and 250 employees).

Sources of funding for mid-sized business

Bank Operating Line of Credit

For many businesses the bank operating line of credit remains the traditional form of funding, with relationships formed over many years.

Although lines of credit can be quick to set up, the biggest drawback is that they can be called in by the bank on demand. So when things aren’t going well and you need the facility, that’s just the time when the bank might demand repayment, particularly if you haven’t built a strong relationship with the bank, so they understand what’s going on in your business.

Loans

A bank term loan will have a maturity date and require principal repayments over a fixed period of time (typically 2 – 5 years). As long as you payback the money per the terms of the loan, the advantage is that the bank can’t demand repayment, although typically the business and usually the owner will need to offer strong security for the loan, usually secured on the assets of the business and often the owners personal assets, by way of a personal guarantee.

As with operating lines of credit, the irony is that the more profitable and cash generative your business is, the less likely the bank’s requirements for security.

The principle is straightforward: if your business has performed well over the years and the bank has confidence that performance will be continued, then the easier it is to borrow money against security, or in some cases simply the cash flows of the business.

Invoice Discounting (Factoring)

Invoice discounting, also referred to as factoring, has grown in popularity in recent years. Banks and other specialist invoice discounting firms lend money which is secured by your accounts receivable, so if the company fails, the bank or specialist firm has more security than in the case of a conventional credit line.

With invoice discounting, you effectively sell your outstanding business invoices to a third party. You get the cash flow benefit by receiving a percentage of the money immediately (usually around 80%) and the rest when the money is collected.

Invoice financing can be really beneficial for growing businesses and can help you to bridge the gap between the delivery of goods or services and the payment from your customer.

Asset Financing

An important consideration of financing, is the overall mix of funding a company uses. Asset financing can be used for funding fixed assets such as plant and machinery, equipment, computers and vehicles. All the main banks have asset financing arms and there are also many specialist companies in this space. The bank or finance company takes security of the asset as their protection. This form of financing has the benefit that it is pretty easy to arrange, assuming the assets you are buying are standard.

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1 ‘Understanding Alternative Finance: The UK Alternative Industry Report 2014’, Baeck, Peter; Collins, Liam; Zhang, Bryan, Nesta & The University of Cambridge, November 2014

The importance of a business plan and how to create one – Part II

In our previous article, we have highlighted the importance of creating a business plan. In this article, we will focus on the key elements of a business plan, the sections it should contain and how a part-time CFO can help you to create your business plan and implement it.

The key elements of a business plan

The most important part of your business plan is its financial information. Your financial forecasts should include your cash flow predictions for the next 12 months or more. You’ll also need to provide monthly sales estimates and costs to prove the business has enough working capital or to show that you understand you need to arrange additional financing.

You need to explain all assumptions in the business plan, with best and worst case scenarios. Detail the risks you’re likely to face and how they will be dealt with.

The Business Plan Sections

Executive Summary
The executive summary is usually the first section of any business plan and provides a condensed overview of what the business is and how you intend to reach your goals. If you’re seeking funding, you should detail the terms of the financing and the amount needed. It’s best to leave writing this section until after you’ve completed the rest. It should be less than 1,400 words.

Company description
This is like an extended elevator pitch. You need to explain your company history, business goals and how you satisfy the needs or wants of your market. You will also need to explain your competitive advantage.

Market analysis
You will also need to provide market analysis, size and expected growth as well as, industry participants, distribution patterns, competition and buying patterns, and your main competitors.

Organization and management
In this section, you need to detail your management team (and plans to fill any gaps within that team), your organizational structure, your Board of Directors, as well as a personal plan.

Service or product line
You need to describe your product or service and any associated copyright information or research and development activities.

Marketing and sales
You need to detail your marketing strategy (including pricing, promotion) and your sales strategy (including sales forecasts, programs, and techniques). Your costs, services, and support will also need to be included in this section.

Financial projections
This section outlines what you expect your business to achieve financially over the next three to five years. It needs to include your projected financial statements, expected cash flow and break-even analysis as well as key financial indicators and ratios. Don’t be tempted to overstate your numbers or expectations to obtain financing. It’s likely to harm rather than help you get that funding.

Funding request
If you plan to ask for a loan or capital, you need to include a formal funding request as part of your business plan. You need to include details of how much money you need now and how much you’ll need in the future.

How a part-time CFO can help you to create your business plan and implement it

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. This means you will have:

One of Canada’s leading CFOs, working with you on a part-time basis
A local support team of the highest caliber CFOs
A national and internationally collaborative team of the top CFOs sharing best practice (the power of hundreds) Access to our national and international network of clients and partners

In particular, your part-time CFO will work closely with you to develop your business plan and your timetable for implementation to:

Gain a full understanding of the business and its operating
Work through the existing strategic plan with you and make necessary changes to build a plan which clarifies how the company’s objectives can be realistically achieved.
Agree on milestones and break down the plan into annual and quarterly targets.
Conduct a fresh SWOT (Strengths, Opportunities, Weaknesses, Threats) analysis, bringing the plan up to date.
Conduct a new PEST (Political, Economic, Social and Technological) analysis, bringing the plan up to date.
Carry out a full competitor analysis to understand in detail what is and isn’t working in the market.
Explore opportunities for effective market research to enable innovation and development of new products/ channels to market/operating procedures
Identify key players in the business
Identify skill gaps in the business
Agree financial incentive structures to retain and motivate key members of the team
Identify five key metrics for determining what the future course of the business should look like
Agree on the exit or succession strategy
Develop a clear, coherent message (vision/ mission/purpose) to staff and to customers
Work with the senior team to ensure individual department goals are aligned with the big picture strategy
Agree on a who/what/when set of objectives for all department heads
Implement accountability protocol for every member of staff
Determine methodology which allows the senior team to course correct periodically when a change in strategy is required
Agree on delegation of authority to department heads to spread responsibility across the business and to free up the CEO/business owners time
Create a feedback route so that strategic goals are regularly shared with staff
Develop a set of relevant KPIs (Key Performance Indicators) and a system which allows for regular (daily/ weekly/monthly/annual) monitoring and reporting
Develop a long-term efficient tax structure for the business and for key employees
Identify key outsource suppliers/advisors and, in particular, corporate finance contacts

This process will instill a deep feeling of confidence both within the senior team and throughout the rest of the business.

Conclusion

Installing an up to date business plan or ‘roadmap’ in your business will allow you to experience a sense of control, which may have been absent since the day you started your company.

The business plan (and the methodology for updating the business plan) will remove a significant amount of confusion from your operating procedures. There will always be challenges contained within new projects but you will have a proper framework against which all decision-making can take place.

The plan provides the blueprint for delegating responsibility to your team and allows you to create some space in your own environment to work on growing your business, with your part-time CFO as a constant guide and sounding board.

You will move out of the chaos and into a more serene working environment where each of the gears, which make up the bigger system, is able to move in harmony.

Potential hazards will have been identified in advance and dealt with before they become unmanageable. You will be able to move from a culture of fire-fighting to a culture of fire-prevention and the benefits will be felt by each member of your team and most probably by your customers too.

The business plan is the first key to profitable growth!

Keys to Profitable Growth – Financial Reporting

Have you ever been so far off the grid – on a wilderness expedition, maybe – that your smartphone doesn’t know where you are? If you click on your “maps” app, your phone just shows you a blue dot, figuratively shrugs its shoulders and says, “You’re on the blue dot. But I have no clue what’s around you, where you’ve been or where you’re going.”

That uncomfortable “lost” feeling applies to more than just wilderness trekking. It can apply to your business – when you have no clear idea of which products or services are most profitable, how much you can afford to spend on new equipment, and whether you are on track to your goal (maybe, a comfortable retirement?).

So what’s the “maps app” for your business, so you can see how to get where you want to go? It’s your financial reporting system.

Financial Reporting – One Key to Profitable Growth

To be successful, you and your senior managers need regular access to accurate insights into your business. You need to be able to spot problems when they first emerge; measure and assess what’s working; identify and capitalize on opportunities, and recognize and manage threats.

When you know the reality of how your business is actually performing, you have a platform to confront the reality and can make decisions based on facts rather than speculation, bias and anecdotal evidence.

The importance of business reporting is twofold:

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

A lot of businesses wait too long to introduce a proper business financial reporting structure. But without the right information collected in a timely way, effective analysis and robust planning is impossible.

Well-constructed business reports are the secret weapon for CEOs and business owners of ambitious growth companies. They will reveal how your company is performing and how far you are from reaching your goals.

Three key aspects to your financial GPS

While large companies have sophisticated financial systems tied to human resources metrics, production equipment, and inventory controls, you don’t need to get that elaborate – yet.

Start with mastery of three key financial statements:

The Balance Sheet
The Cash Flow Statement
The Profit and Loss Account

These reports can reveal such information as:

How effective your team is at controlling costs and deploying expenses to generate sales
Which of your products or services are the fastest growing and the most profitable
Your highest growth potential and most profitable customers
Where your break-even point is (how much sales the business needs to produce to cover all its costs)

Having all your business data at your fingertips means that you can spot gaps and weaknesses at a glance, have clear visibility over the future and course correct daily to ensure you are still en route to your destination.

Your company’s balance sheet: shows what your company owes and what it owes at a given time. It reveals:

The net value of your company (which is useful if you plan to raise capital to finance future growth, sell your business, etc.)
Current and long-term debt obligations
Asset management (how effectively you’re managing your assets) and liquidity ratios

Lenders, investors and potential customers can use your balance sheet to assess your company’s creditworthiness, as well as its stability and liquidity – indicating its ability to fund growth without resorting to outside financing.

Profit and loss account: while the balance sheet is like a still image posted to Instagram, the P&L account is more like a video. It is the main way businesses determine how well they’re performing over time.

This is the main tool businesses use to gauge their profitability. It shows how well (or not) your company performed over a particular period of time in terms of revenue, expenses and earnings.

The Profit and Loss Account reveals the steps you can take to increase profitability (for example, whether to focus on more profitable product lines or services or to cut unnecessary expenses).

Investors will use your Profit and Loss Account to assess the ability of a Company to generate cash from operations, service current financing obligations and assess the level of risk involved in extending additional credit or venture capital to your company.

Cash flow statement: reveals how your company spends its cash (cash outflows) and where the money comes from (cash inflows) during a period of time. It is divided into three sections related to your company’s business operations: cash flow from operations, financing, and investing transactions.

Essentially, the Cash Flow Statement reveals whether or not your company has the cash to cover its daily activities, pay bills on time and maintain a positive cash flow. It also helps you to determine whether you’ll need additional working capital to buy inventory or to fund seasonal fluctuations.

Interpret your key financial statements using ratios

To interpret and understand the numbers contained in your financial statements, you should use financial ratios. The ratios are computed from numbers taken from the Profit and Loss Account and the Balance Sheet.

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. _

Typically, owners, managers, and stakeholders look at four categories of ratios to analyze a company’s performance:

Liquidity ratios – show your company’s ability to meet its financial obligations
Profitability ratios – help evaluate your company’s ability to generate a return on its resources
Leverage ratios – show how your business is using debt, relative to capital
Efficiency ratios – reveal how effectively your company is managing assets.

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 revenue 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.

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 and 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.

7 Keys to Profitable Growth

Planning for growth is something every business owner will say they do, but not all business owners will do this effectively and with a focus that will generate profitable growth.

Many businesses plan for growth, but not profitable growth. Some businesses focus on growing sales without a focus on margins while others build infrastructures to support sales and growth that never materialize.

Michael Porter said, “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”

A business must focus on profitable, scalable and sustainable activities if it is to grow. Profit and the generation of cash to re-invest in your business must be made a priority, as it is an essential part of the financial strategy and structure of a successful business. Profit and a clear business plan will create a focus and the alignment of the organization, as well as attract investors and other sources of funds to fuel growth – all of which impacts the underlying business value of the business.

CFO Centre has identified 7 Keys to Profitable Growth:

Define your business goals & objectives
Produce a formal plan from which you can articulate a vision
Critically review your business
Identify competitive advantage, scalability & sustainability
Establish a financial plan
Identify milestones, KPIs & dashboards
Create organizational alignment
Nurture your culture, hire the right people & communicate the vision
Identify the financial resources required
Support the business with systems & processes to optimize performance
Measure, review, evaluate & course correct
Be proactive & prepared to be reactive

If you follow these 7 Keys and plan for profitable growth, you will ultimately:

Improve and grow profits
Maximize the scalability of your business
Enhance management team and organizational structure
Attract investors and other sources of funds
Increase business value

To enhance the value of your business and grow successfully, follow the 7 Keys and Plan for Profitable Growth.

Understanding Business Risk – How to Avoid the Road to Ruin

Entrepreneurship means taking risks, such as launching new products, entering new markets, or using new processes. Because this involves uncertainty, there are always chances that things will go wrong.

Our experience at the CFO Centre has been that the most successful companies take the time to understand the downside of the risks they take, and then find a way to compensate for those downsides.

As the CFO Cente’s book “Scale Up” says, a lot of business owners spend an unhealthy amount of time worrying about what might go wrong, but don’t have a formal risk management framework in place. One of the most dangerous positions to be in is not knowing what might harm you. That’s why “Scale Up” suggests starting with a comprehensive risk analysis, to identify potential risks to your business.

This post talks about how you can understand the risks your company faces, and develop a way to manage those risks.

Why is business risk analysis important to you?

Business risk analysis is an essential part of the planning process. It reveals all the hidden hazards, which occupy the business owner’s mind on a subconscious level but which have not been carefully considered and documented on a conscious level.

Not understanding the risks your company faces can bring your company to its knees, as a 2011 report, ‘The Road to Ruin’ from Cass Business School revealed.

Alan Punter, a visiting Professor of Risk Finance at Cass Business School, said the result of a detailed analysis of 18 business crises during which enterprises failed revealed that directors were often unaware of the risks they faced.[1]

“Seven of the firms collapsed and three had to be rescued by the state while most of the rest suffered large losses and significant damage to their reputations,” he said.

“About 20 Chief Executives and Chairmen subsequently lost their jobs, and many Non-Executive Directors (NEDs) were removed or resigned in the aftermath of the crises. In almost all cases, the companies and/or board members personally were fined, and executives were given prison sentences in four cases.”

“One of our main goals was to identify whether these failures were random or had elements in common.”

“And our conclusion? To quote Paul Hopkin of Airmic, the Risk Management Association that commissioned the research: ‘This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail. In simple terms, directors are too often blind to the risks they face.’”

A lot of business owners spend an unhealthy amount of their time worrying about what might go wrong but don’t have a formal risk management framework in place. It is dangerous not knowing what might go wrong.

What are the risks facing your business?

Business risks can be broken up into the following:

Strategic risks – risks that are associated with operating in a particular industry
Compliance risks – risks that are associated with the need to comply with laws and regulations.
Financial risks – risks that are associated with the financial structure of your business, the transactions your business makes, and the financial systems you have in place
Operational risks – risks that are associated with your business’ operational and administrative procedures.
Market/Environmental risks – external risks that a company has little control over such as major storms or natural disasters, the global financial crisis, changes in government legislation or policies.[2]

The ‘shoot, fire, aim’ approach favored by many entrepreneurs is great for making things happen quickly but often jeopardizes the long-term stability of the business.

What is needed is balance.

Once the business understands the risks, it means that it can move forward decisively and confidently. It’s hard to do this when there is a cloud of confusion hanging over the business.

Where to start?

You need to assess your business and identify potential risks. Once you understand the extent of possible risks, you will be able to develop cost-effective and realistic strategies for dealing with them. Consider your critical business activities, including your staff, key services and resources, and the things that could affect them (for example, illness, natural disaster, power failures, etc.). Doing this assessment will help you to work out which aspects of your business could not operate without.

Identify the risks

Look at your business plan and determine what you cannot do without and what type of incidents could have an adverse impact on those areas. Ask yourself whether the risks are internal or external. When, how, why and where are risks likely to occur in your business? Who might be affected or involved if an accident occurs?

Assess your processes

Evaluate your work processes (use inspections, checklists, and flow charts). Identify each step in your processes and think about the associated risks. What would stop each step from happening? How would that affect the rest of the process?

Analyzing the level of risk

Once you’ve identified risks relating to your business, you’ll need to analyze their likelihood and consequences, and then come up with options for managing them. You need to separate small risks that may be acceptable from significant risks that must be managed immediately.

You need to consider:

How important each activity is to your business
The amount of control you have over the risk
Potential losses to your business
The benefits or opportunities presented by the risk

Conclusion

By managing the company’s risk profile and the risk profiles of the shareholders the whole business can be brought into alignment and can operate as a unit rather than as a set of individual parts.

This is actually one of the most critical roles in any business and your part-time CFO will support and guide you through the process.

At the CFO Centre, our CFOs have an intimate understanding of every conceivable risk that growing businesses face. This means that we can help you build a much stronger business by knowing how to navigate through the growth stages of the business cycle confident that you are equipped to meet the challenges as they present themselves.

It is never possible to eliminate all risks in a business, but it is possible to create a framework and implement systems which lower your exposure to risk. That, in turn, allows you to focus primarily on growing your business.

Knowing that you have a framework in place to mitigate risk means that you can free up time and mental energy.

Lower your risk today

Let one of The CFO Centre’s part-time CFOs help you with business risk analysis. To book your free one-to-one call with one of our part-time CFOs just click here.

[1] ‘The Road to Ruin’, Punter, Alan, Financial Director, www.financialdirector.co.uk, Aug 18, 2011

[2] Source: https://toolkit.smallbiz.nsw.gov.au