Category: Cash Flow

Outsourcing is nearly always cheaper, more efficient, and more flexible than hiring in-house staff. You can use outsourcing to tap into expertise and experience not available in-house (technical or managerial) or to identify and then reduce the costs of support services.

But concerns about the potential pitfalls of outsourcing stop SMEs from seeing the many benefits of outsourcing (which would allow their full-time employees to work on the company’s core competencies).

A part-time CFO can help you to leverage outsourcing, allowing you to operate a leaner, more efficient business and use the savings to drive growth. In these articles, you will see:

• The benefits of outsourcing
• What can be outsourced
• How to use outsourcing in your organization
• The main reasons companies don’t outsource
• How a part-time CFO can help you to leverage outsourcing

A desire to focus on core activities is one of the main reasons companies of any size choose to outsource one or more of their support functions. 

You can use outsourcing to tap into expertise and experience not available in-house (technical or managerial) or to identify and then reduce the costs of support services. But outsourcing is something that worries many SME owners. They fear that outsourcing non-core aspects of the business like finance, HR, IT or managing customer relationships will lessen their overall control of the company. Or that it will be restrictive or expensive.

You might feel that not being able to see and talk to your team will mean that you are less in control and that you lack the visibility to spot potential problems and take decisive action.

You might worry too about the track record of your chosen outsourced provider. Will they maintain the high standards you insist on and deliver quality within the deadlines you prescribe?

Or maybe you worry about costs: will the prices quoted by your provider be set in stone or as the relationship develops, will a number of hidden costs emerge (licence fees, annual renewal fees, maintenance fees, etc.)?

Perhaps the reliability of your outsourced provider concerns you. Will your provider respect your company’s confidentiality? Will your data and other assets be safe in someone else’s hands? Will your ideas be stolen or will your customers’ sensitive data be hijacked by the people you hire?

What will happen if things go wrong with your provider? Are they happy to share a detailed contingency plan with you so that you can feel assured that you will not be hung out to dry if a serious problem arises?

What level of importance does your provider attach to compliance?

How can you be sure that laws and regulations will be adhered to and that you will not be held liable for infringements?

It’s these kinds of concerns that stop business owners from seeing the many benefits of outsourcing (which would allow their full-time employees to work on the company’s core competencies).

One such owner was Simon Wakefield, Managing Director of green bean coffee importers DRWakefield. His bank was asking some pretty tough questions at the time and he knew he needed help.

“Not having enough background information, data and statistics to lay out for the banks to see what we were doing, we soon realized we needed someone who could manage those and help us make those decisions,” he says.

But at first, he was reluctant to hire an CFO on a part-time basis.

“Part-time was something I’d never have considered before because I like to have people in-house that work with us and understand our business. It sounds simple, but when you start drilling into the way we work with multiple currencies, multiple countries, it becomes quite detailed.

“In my previous experiences of part-time employees, they would come, they would be freelance, they would go and it didn’t work with us.”

He eventually overcame his reluctance to outsource and hired a part-time CFO from The CFO Centre.

“The CFO Centre offered us something: if our first CFO didn’t work out, they would quickly put in another one. If the CFO they installed didn’t have the answer to some information that we needed, he was part of a bigger pool that he could get information from and bring to us.”

Not only did his part-time CFO Nick Thompson help improve his relationship with the bank by bringing in a permanent management accountant to take care of the finances but he also helped update the company’s accounting software packages and credit control procedures, so that it had a far better cash flow than it did beforehand.

“In the five years Nick’s been here, we’ve grown about 30% in numbers. He’s helped bring in new software and changed our auditors so that we have a more professional auditor looking after us now. So there have been very clear targets and goals that have been achieved. From the other side, it’s meant that I can sleep better.”

Any functionality that is not core to your business should be outsourced at the best cost and quality, says Kevin D. Johnson, author of The Entrepreneur Mind: 100 Essential Beliefs, Characteristics and Habits of Elite Entrepreneurs.³

“In the majority of cases, trying on your own to produce everything that your business needs is unrealistic and highly inefficient,” he says. “If you have believed the negative hype about outsourcing, quickly disabuse yourself of it and implement the process into your business strategy.

“If you’re subscribing to the propaganda and refusing to even consider outsourcing, your competitors are meanwhile outsourcing and working hard to put you out of business.”

Outsourcing is nearly always cheaper, more efficient, and more flexible than hiring in-house staff. The benefits include:

• Access to expertise that you would otherwise not be able to afford
• Time savings for you and your in-house staff
• Opportunity to focus on revenue-boosting areas of your business
• Lower costs
• More predictability in costs
• Maximizing efficiencies
• Enabling a sharper focus on core competencies
• Increasing business productivity.

What can be outsourced? Outsourced services can be categorized into the following two groups:

Technology services

Companies require advanced IT and communication technologies for their regular operations. Rapid changes in the technology sector bring new capabilities to use for companies that need to select the right kind of vendor to get the best technology at the cheapest cost. The following technology services are generally outsourced:

• Software and applications
• Infrastructure
• Telecommunications
• E-commerce
• Web security and solutions
• Web hosting, website designing, development and maintenance
• Logistics, procurement and supply chain management
• Research and analysis
• Product development
• Legal services
• Intellectual property research and documentation
• Tech support
• Customer help desk functions
• On-site maintenance
• Email management
• Data centre operations
• Disaster recovery
• Security management
• Virus protection
• Data backup and recovery
• Wireless support
• Purchase consulting
• Network architecture

Business Processes Human Resources

• Payroll services (including payroll statements, bonuses, commissions, tax payments, etc.)
• Benefits administration
• Recruitment
• Training
• Expense management
• Management of travel and employee records (personnel forms, policies, procedures, performance management, etc.)

Finance

• Managing accounts payable/receivable
• Bank reconciliation
• Fixed asset management
• Cash management
• Financial reporting
• Risk management

Customer service

• Marketing support
• Technical help
• Advice or disbursing information
• Processing sales order entry, claims, loans,
• applications, credit cards and reconciliation.

How to use outsourcing in your organization You can avoid many of the issues related to hiring and training in-house staff and build a much more agile, flexible and cost efficient business as long as you adopt the right approach.

In fact, enlisting the services of an experienced part-time CFO from The CFO Centre is one example of how outsourcing can add value, increase efficiency and maximize opportunities.

You want your outsource suppliers to possess all the benefits of a high-quality, reliable in-house team but without any of the drawbacks. There are never any firm guarantees of success, but the right approach can prevent major headaches and save you a lot of money.

The key to successful outsourcing is preparation. By understanding what your requirements are and by spending sufficient time during the selection process to ensure that you find suppliers who share your values and will truly add value to your business (rather than becoming an expensive risk) it will usually follow that you will build a highly efficient outsourced team.

The main reasons companies don’t outsource:

• Reluctance to lose control and flexibility
• A given function is too critical to outsource
• Anticipated adverse reaction by customers
• Employee resistance

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¹‘Whitbread renews outsourcing contract with 14% cost cut’, Flinders, Karl, Computer Weekly www.computerweekly.com, Feb 13,2013

²  ’Whitbread signs five-year HR and payroll outsourcing deal with Ceridian’, Berry, Mike, Personnel Today, http://www.personneltoday. com, Dec 11, 2008

³ ’The Entrepreneur Mind: 100 Essential Beliefs, Characteristics and Habits of Elite Entrepreneurs’, Johnson, Kevin D., Johnson Media Inc., Mar 2013, The benefits of outsourcing 

Poor cash flow management can cause huge problems for even the most profitable businesses. Until you find and fix the cause of cash flow problems in your business and put systems in place for managing it, your company can be at risk of failure.

For the stark truth is without cash, your business will be unable to meet its payroll obligations, be more likely to default on payments to suppliers and creditors, and in the worse case, be forced to cease trading.

Without well-defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, many companies will flounder, yours included.

In our 2-part article, we will be covering:

• The main cause of cash flow problems in any business
• How a part-time CFO can help you to avoid or resolve your cash flow problems and prevent them from recurring

Introduction

It doesn’t matter if your product or service is outstanding, your market share is bigger than your competitors’, your team is highly productive or if you have a steady stream of new clients, your company is at risk of going under if you don’t have a firm grip on your cash flow.

Even if your business is experiencing a high level of growth, you can risk issues: expansion can exacerbate the problems caused by poor cash flow management.

Cash really is the oxygen on which every business depends. Without a steady supply of it, your business cannot survive.

That applies even if your company is profitable. Business consultant Bill McGuiness says, “The sad fact is that the majority of failing firms are profitable as they enter bankruptcy.”¹

Without clearly defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, many companies will flounder, yours included.

Cash flow management is not a short-term fix to a problem but should be part of the fabric of the business.

It is like an internal insurance policy for your business. Getting to grips with your income and expenditure and understanding where you stand today as well as in the months and years ahead gives you and the rest of your senior team a great sense of clarity and peace of mind.

It also makes it easier for you and your team to plan and make decisions.

For that to happen, you need to analyze and then manage the flow of cash in and out of your company on a weekly, monthly, and annual basis. You also need to create a cash flow forecast for at least three months ahead so you and your senior team are aware of when cash shortfalls are likely to occur. This will allow you to cover your working capital requirements.

The main reasons for cash flow problems

Essentially, your cash flow problems are likely to be the result of one or more of the following:

Slow-paying customers

According to a 2015 report by Taulia Inc. in the US, “for the majority of respondents, Days Sales Outstanding (DSO) averaged 30 to 40 days, with more than 25% of suppliers waiting more than 40 days to receive payment.

Small business suppliers are waiting longer and longer to be paid after delivering goods. This trend greatly impacts their operation as cash flow is one of the biggest concerns facing today’s small and mid-sized businesses. According to Forbes Magazine, a lack of readily available working capital is the main reason many small and mid-sized businesses fail to succeed.

To fill this cash flow gap, suppliers often have to borrow at costly rates between payments – and that only works if they can qualify for a loan.

From a broader perspective, paying later negatively affects the financial health of the supply chain.“²

Similarly in the UK, according to a report by Bacs Payment Schemes Ltd (Bacs),³ more than three-quarters of respondents (76%) are being forced to wait at least a month beyond their agreed contract terms before getting paid.

The knock-on effect of this is that business owners have to make tough decisions to make it through the month. Some 20% of directors in companies that experience late payments say they have taken a cut in salary in order to keep cash inside their businesses.

Over a quarter (26%) use their operating lines to make ends meet and one in ten are experiencing one or more of the following challenges every month:

• Difficulties in paying staff on time
• Factoring invoices
• Difficulties paying regular bills

Some 23% claim the late payment situation is forcing them to pay their own suppliers late.

Poor collection from customers

Many companies don’t issue invoices quickly enough. They’re even worse when it comes to chasing up invoices.

If this is the case in your company, it’s important to realize that every sale has already cost your business something in terms of labor, purchase of raw material, warehousing, advertising, etc. If you don’t collect what you’re owed, you’ll be worse off than if you never made the sale.

American entrepreneur Nolan Bushnell is fond of saying that a sale is a gift to the customer until the money is in the bank. ⁴

Your fixed costs are too high

If it is to survive, your business needs to bring in more cash than it spends. If it doesn’t, its long-term survival is unlikely.

Three of your biggest fixed costs (expenses) are likely to be payroll, capital expenditure (equipment, hardware, and plant) and office costs.

Your prices are too low

It’s quite common for businesses to set their pricing levels at the low end of the market in a bid to win customers.

If their expenses rise, their profit margins get smaller. Unfortunately, if they raise their prices, they risk alienating customers who have become accustomed to the low prices.

Your sales are too low

The way many business owners tackle the problem of low sales is to look for new clients. That inevitably incurs more costs since it involves spending more on advertising and marketing to attract those new clients.

There are other more cost-effective ways of boosting sales. They involve encouraging your existing or dormant customers to spend more and to do so more often.

You’re giving customers too generous payment terms

If your payment terms are overly generous (say, 60 or 90 days rather than 30), you could find that your business is constantly having to make up the cash shortfall.

Allowing customers to pay in arrears for goods or services received is similar to offering those companies short-term unsecured loans, says financial advisor John Toppin, MA FCA.⁵

“This form of financing is a fabulous deal for the customer as it is commonly unsecured, interest-free and the customer can pay its debt well beyond the agreed credit terms if it likes,” he says.

“What is more, unlike bank lending, the customer rarely has to pass any form of credit check to obtain these generous and virtually unlimited credit facilities.”

You’re overtrading

This happens when your business experiences rapid growth (which forces you to invest in more inventory, equipment, buildings, staff, etc.) but you don’t have the working capital to match that growth.

You have too many bad debts

Even a couple of bad debts may be enough to put your own business in jeopardy. That’s why it’s best not to rely too heavily on one or two big clients.

You’re holding too much old inventory

Accumulation of old inventory can tie up your cash reserves and prevent you from buying more up-to-date inventory. If this is the case, you should look for ways to sell off as much of that inventor as quickly as possible.

Joins us in part II of this article to find out How a part-time CFO can help you to resolve your cash flow problems.

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1 ‘Cash Rules: Learn and Manage the 7 Cash flow Drivers for Your Company Success’, McGuiness, Bill, The Kiplinger Washington Editors, Inc., 2000

2 “Empowering Suppliers, Insight into What Suppliers Use, Want and Expect from early Payment Programs” Taulia White Paper Q1 2015

3 ‘Late payments are forcing businesses to make tough decisions’, Bacs, www.bacsservices.co.uk, Feb 16, 2015

4 ‘Finance for the Non-Finance Manager’, Siciliano, Gene, McGraw-Hill Companies, Inc., 2003

5 ‘Cash Flow: Advice For Business Owners And Finance Managers’ Toppin MA FCA, John, Nomizon Business Publishing, Kindle edition, Sep 30, 2014-09-30