If you are looking to grow faster, your current way of doing your budgeting may well be restricting your growth plans way more than you think.

What if there was a much more organic way to think about budgeting? A way that doesn’t restrict and limit your business but enables the creative process and encourages innovation?

The following interview with leading FD, Phil Drury, explains through real-world examples why the concept of Beyond Budgeting is such a powerful innovation for the modern-day finance function.

Using sound management reporting and project by project accounting would make it easier for construction companies to get funding from banks and other financial institutions to grow and scale their businesses, says Simon Parkins, a construction industry accounting specialist.

Many construction businesses don’t invest in good management information, says Simon, who has over 20 years of experience in the construction sector and who is now a part-time FD with the FD Centre, the UK’s leading provider of part-time FDs.

Instead of making informed decisions about how to run the business based on facts, Managing Directors and their boards tend to rely too much on gut instinct, he says. That makes banks and other financial institutions wary.

Why banks and financial institutions don’t like construction companies

Getting access to external finance has always been challenging for construction companies because it’s perceived to be a very high-risk sector, says Simon.

The collapse of construction giant Carillion with £7bn debts just over two years ago has made lenders even more cautious about providing funds to companies within the sector.

“Carillion going bust made it even more difficult than it already was,” he says. “There were already banks who would not touch construction clients, but now even the ones who were open to construction companies have put a lot more hoops in place for them to jump through.”

SME construction companies are not particularly good at investing in management information or the accounting software that’s suitable for the industry, so they are often the first things Simon recommends they do.

Having access to the banks and financial institutions that will lend to construction companies and knowing what assurance and MI they want to keep that lending position in place is really crucial.

“I’ve got connections with some really good lenders who are not put off by construction, and they’ll improve their rates and fees on that the basis the FD Centre is involved,” Simon says. “They know that we will ensure the management information they need is there.”

“A lot of construction companies simply do not understand what the banks need to get finance, which is where we can help.”

Another reason why lenders find construction companies less appealing than other businesses is that the profit margins are often quite low.

Many of the top construction companies work with tiny margins of 4% to 5% while SME construction companies are more likely to have margins of between 10% and 25%.

Using project by project accounting practices

Many SME construction companies fail to put project by project reporting into place. This results in poor MI for the business, but also in an erratically performing profit and loss position, which scares lenders.

“A bookkeeper or accountant will put together management accounts for the business, but they often report on the whole business and not on individual and distinct projects.”

“The key to success in construction is really understanding project by project performance, so you can see which ones are performing, which ones are not, and which ones contain the risk. Doing that brings the performance of the business into clear focus,” he says.

“I worked with one client with a Commercial Director who the Managing Director regarded as performing quite well. He was delivering reasonable but not great numbers, but there was no transparency to what he was saying at the monthly board meetings. When we put project by project reporting into place, he had nowhere to hide. He was found to be deficient and covering up lots of problems and issues from the Managing Director.”

“Within four months of me coming on board as a part-time FD, the Commercial Director went from a position of nearly being assigned share options and some ownership of the company to the point where it was revealed he was fundamentally underperforming and probably losing that business something in the region of £100k to £150k a month.”

Construction accounting is very different from standard accounting and many good accountants get it wrong when tackling construction accounts for the first time, says Simon.

“As accountants, traditionally, we take the ledgers, we adjust for income not recorded (bringing in work in progress) and then we adjust for missing cost (accruals). Do this for a construction company without looking at individual project performance at your peril.”

“Traditional accounting in this way is problematic, and the following issues were common to the majority of construction SME clients I have worked with:

• Making income and cost adjustments without looking at individual project performance means there is no sense to check/validate the adjustments being made.
• The majority of risk tends to materialise or manifest itself at the end of a construction project, and so you need a system of reporting that reflects this risk and adjusts accordingly.
• The ability of the business to forecast the expected margin at the end of each project is often poor to moderate.

Clients believe that when they bring the income and cost adjustments together the accounts will be accurate. What you tend to find is that income is optimistic and overstated and that not all outstanding costs are identified. Coupled with poor visibility of the likely financial outcome of the project, and no consideration for risk, the accounting profit tends to be overstated.”

Too few construction companies allow for the problems that inevitably occur during a project.

“Nine times out of 10 profit-related things go wrong at the end of the construction project. There might be:

• Liquidated damages where you’re actually on penalty clauses to finish the project on time,
• Remedial works, an ongoing obligation to fix any subsequent problems which materialise with the work you’ve carried out,
• Snagging at the end of a job is when the client will point out problems with the work,
• Many companies underestimate the amount of work required to fulfill the snagging list for the client to be 100% happy.”

“It’s also just an industry in which people haggle at the end of the job.”

It’s for all these reasons that Simon tries to persuade clients to hold back some of the profit.

“I tell them to beware of ever taking the full margin until the client has signed the project off and physically paid the bill.”

While big construction companies have the systems and processes to put that all into place, many SMEs don’t have the knowledge or resources to do these things properly.

They might have accountants or bookkeepers, but they often do not understand well enough how to allow for how the construction industry works.

“It’s quite hard for an accountant without construction experience to know what to do or to understand the risks involved in construction,” he says.

“I have worked with many of the blue-chip companies in the construction sector for the past 20 years, and there are lots that I’ve learned along the way. A finance director in construction cannot sit in an ivory tower playing with spreadsheets. You’ve really got to understand project performance and how things are going on operationally.”

One client has a Commercial Director who was advising the monthly unbilled income figure and working with the accountant on the missing cost figure. They were adamant that the adjustments they were making were correct. But they had no mechanism for sense checking whether the adjustments were logical when bought together in the accounts. By introducing project by project reporting Simon showed them that their adjustments were very often incorrect. On one project they were reporting a 75% margin, on a project they were forecasting would make 35%. Moreover, the forecast proved to be inaccurate, and by the time the job was complete the actual margin achieved was 23%. With the job not even halfway completed they were already taking £250K profit on a job that ultimately only made £130K, and yet they were 100% convinced that what they were reporting was accurate.

Why construction companies need external funding

Much of the work construction companies do initially is self-financed with extended payment terms and that can put pressure on cash flow.

Projects can also go into a dispute which means cash flow can stop altogether.

“I had a client with a modest annual turnover of £6M who got into a dispute with a customer who then withheld a massive £1.2M. The work was delivered, but the £1.2m was withheld because a single piece of paperwork wasn’t delivered by a deadline.”

Many of Simons’ clients are SMEs who are working on four to eight live projects at any one time and are therefore highly exposed to each client.

“Their clients can quite often just withhold money on a pure technicality. The amount of cash they need for business operations hasn’t changed but their expected cash inflows can suddenly dry up. It is a difficult sector from that point of view.”

It’s therefore often a good idea for the construction company to have lending facilities on standby as a contingency to cope with any issues that may materialize. Approaching the bank, at short notice and with an urgent need for funds is rarely easy of a successful conversation.

If your a construction business needing some help/advice on getting external funding, reach out to us today at [email protected] and one of the team will be able to book a call with one of our dedicated Regional Directors to discuss more.

In the light of events over the past weeks, we are very conscious of the heightened levels of concern facing businesses at the moment. The CFO Centre is also an SME and it’s very much a time where we are all in this together.

The purpose in writing was to let you know that we are here to help and have set aside some time to talk to companies in need of urgent advice, on a pro bono basis. We are very well positioned to help and would like to give something back.

As it stands today, the greatest concern for SMEs is cash/liquidity. As Chief Financial Officers, navigating these issues is what we do. Admittedly this is a particularly unusual situation, but there are measures you can take to put yourself into the strongest possible position for the weeks and months ahead – and fast action will of course pay dividends.

Even if it’s just to have a 3^rd party perspective and potentially put forward some options you may not have known were available, we’d love to help if we can.

If you know someone who would value a conversation to review their current situation and look at their options to increase liquidity and mitigate risk, please contact us on 1-800-918-1906 or at [email protected] so that we can set up a video conference call to review with one of our virtual CFOs.

 

 

In this day and age, we rely on the Internet for its convenience, such as online shopping or banking. Although the Internet solves various pain points in our lives, it also comes with its dangers, such as cybercriminals who try to exploit users online. One of these cyber attacks is known as “phishing” – below is more information about this issue and how you can identify and protect yourself from phishing:

 

What is Phishing?

Phishing is a general term used to describe emails, text messages or websites that try to obtain personal information from recipients by posing as trustworthy organizations or individuals. They may impersonate a trusted individual in a professional organization or use the company’s logos and graphics as an attempt to pass off as legitimate content.

The purpose of this form of content is to get a quick reaction from users. For example, they may threaten to close down your bank account unless immediate action is taken, such as asking to verify your account by entering your personal information in a web form. Please note that phishing can come in various forms, from an alleged professional asking for gift cards to an alleged financial institution asking to transfer hundreds of thousands of dollars.

According to the Government of Canada’s website, around 156 million email scams/phishing emails are sent out everyday and 80,000 individuals become victims to this form of cyber attack on a daily basis. Falling victim to these phishing scams can have serious implications, especially  when cybercriminals ask for personal information, such as one’s social insurance number, driver’s license number or banking information. This information can be used to transfer funds, open new bank accounts or apply for loans. As of today, approximately 1 million Canadians have entered their bank details on a website they are unfamiliar with.

 

How to Identify and Protect Yourself From Phishing

In order to avoid falling victim to this form of cyber attack, the RCMP has provided information on the ways to identify phishing scams and prevent future attacks:

• Phishing messages are normally not personalized and the content may include serious consequences if immediate action is not taken. Here is an example of a catchphrase they may use: Dear Online Account Holder, Access To Your Account Is Currently Unavailable…
• Be wary of email or text message senders who ask for personal information – when in doubt, it is always best to call and double-check with the alleged organization asking for personal information.
• Check your bank, debit and credit card statements regularly in order to ensure you are aware of all of the transactions. If a certain transaction does not look legitimate, contact your financial institution and report it.
• If an email link looks suspicious from an unknown sender, do not click on it.
• Before opening emails from unknown senders, it is recommended to run them through your computer’s anti-virus software.

Phishing Emails Targeted at Financial Institutions

There is an increase in activity where cybercriminals impersonate the CEO, C-Level Executive, Board Member or owner and make unusual requests, such as requesting wire transfers, gift cards or other cash transfers from the recipient. The email addresses of the alleged financial leaders are often very similar to the original and may only differ by a single letter. If you receive unusual requests from an alleged financial leader, it is recommended to call the individual to confirm whether this request is legitimate and double-check with another senior executive within the organization.

Need help with protecting and managing your finances beyond cyber attacks? Our team of part-time CFOs is ready to assist your business.

 

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

Introduction

Planning is the key to the success of any business, no matter its size or age, but nearly 30% of the UK’s small to medium-sized businesses don’t have a plan of any kind1

The majority of those without such a plan which sets out the company’s strategic direction, its main operating and financial targets, the actions it will take to achieve those objectives, the new initiatives and investments planned, and their impact on the company’s performance say they don’t believe it’s necessary. Nearly a fifth say they prefer to keep plans in their head, according to research by Close Brothers Asset Finance.

Mike Randall, CEO of Close Brothers Asset Finance, says, “It’s concerning that so many small and medium-sized firms do not have a business plan. Without clear direction, they may be missing out on opportunities for growth and not realizing their full potential.”2

He suggested that those who weren’t prioritizing it or “didn’t feel it was necessary” should rethink their approach.

“Planning is key to any business throughout its lifecycle. A formal plan can be an extremely valuable tool for managing and growing a business, as it allows a company to recognize its strengths and weaknesses.”

The study also asked those who did have a plan, how often they reviewed it. Almost two-fifths said they considered it at least once a year while a fifth said they looked over their plan every two years. Some 14% reassessed it once every two to five years. Randall said this was an area SMEs should be focusing on as “a plan is only useful if it is reviewed regularly to ensure it meets the current and future needs of the business.”

He added: “It’s vital business owners regularly review their financial strategy to ensure they have the right funding in place to meet the needs of their business, at its current stage of the business lifecycle.”

Rebecca McNeil, MD for Business Lending and Enterprise at Barclays, says, “A lack of a succession plan can put the future success of a business at risk, so this needs to be considered far earlier and more formally than the results show.

Having a business plan is fundamental, she says. “It defines exactly what you want to achieve, how you plan to achieve it across a set time period and is a sure-fire way to ensure that growth targets and plans are being met.

“Business plans are dynamic documents – meaning they should be revisited and adjusted as the business develops. In addition, a strong plan can help applications for finance from a business loan to alternative forms of finance and investment.”

She continued; “Importantly, when a business is in trouble, having a solid plan can help to steer it back to good health.”

SMEs that had a business plan in place last year was consistently more profitable (70%) than those that did not (52%), according to yet another survey, this one commissioned by business and finance software provider Exact.3

It showed that those who had a business plan in place were more than twice as successful in achieving these goals than those who did not (achieving a 69% success rate versus 31%).

Creating a well thought-through, comprehensive business plan is an arduous task. Thinking through objectives and likely outcomes which may occur many years down the line is, by nature, challenging. But it is the hard work up front which makes for lighter work down the road as all of our team of part-time CFOs will attest to.

Most CEOs and business owners simply don’t have the time to spend on quality strategic thinking or to document and communicate that thinking in a way which allows the whole business to buy into the vision.

Harder still is managing and implementing the business plan. Significant strategic course corrections are commonplace in fast-growing companies. These should be embraced. The tricky part though is in managing regular change. That requires a combination of time and specialist knowledge.

There is an art and science to effective business planning and getting it right brings a real sense of clarity and direction to business – this is where an experienced part-time CFO can make a significant contribution

Not spending quality time on strategic planning usually leads to a chaotic working environment. Our clients often talk about ‘not feeling in control’ and ‘not really knowing what is coming around the next corner’.

When the plan is weak, business owners tend to operate without the same sense of conviction as those who allocate time and expertise to the planning process.

Our part-time CFOs often find their clients have done some good planning and strategic thinking but need a devil’s advocate to ask the right questions and help to steer the ship in the right direction.

Being a CEO or business owner without a high level ‘finance person’ to bounce ideas off can be tough. CFOs often possess a different, albeit complementary, set of skills to CEOs/business owners.

It is natural for business owners to bring people into the company who see the world in the same way they do. It is often more valuable to have key members of your team who possess very different skills to your own. Constantly doing the same things in the same way as the same people will usually lead to achieving the same results.

If you are worried about whether you have the right team in place to fulfill the vision you have for your business, or whether you have the funds you require, or whether your business plan is sufficient to reach your objectives, then we would recommend you take the time out to work through the detail. It is rare to see a company succeed if it doesn’t have a robust plan.

Our part-time CFOs often work with clients who started off with intentions to run a business and have ended up working in a job. However, with the right business plan in place and a robust implementation approach, the business owner is able to run the business without getting drawn too far into the day-to-day details.

The benefits of creating a business plan and implementation timetable

Proper business planning is very liberating for the business owner, whatever their objective might be. A well-constructed and regularly reviewed business plan will instill real confidence that the goal is indeed achievable.

Writing a business plan has many benefits for businesses of any size and in any industry. It can help owners and senior managers to:

1. Clarify objectives and develop suitable strategies. They can create a clear path for management to follow in the early stages and identify targets for performance measurement (or ‘milestones’), says David Cromwell, former head of JP Morgan & Co’s Private Equity and Venture Capital Division and co-director of Yale School of Management’s Entrepreneurial Business Planning Course. “Research forces companies to learn what they can expect to make and what the industry trends are. Where has the industry been the last five years, and where is it going? If the research indicates your idea is viable, the actual construction of your plan depends on the goods or services you offer, how much funding you need and your goals.”
2. Understand the market. You have to research your market to understand it and that will always be beneficial. “Research is one of the big value-adds of writing a business plan,” says Joseph Ferriolo, Director of Wise Business Plans.5
3. Identify and overcome internal and external threats Organize the company
4. Organize the company
5. Access external funding (banks, venture capitalists, and angel investors are unlikely to look at any funding request that isn’t accompanied by a very solid business plan.)

“A professional investor’s decision to pursue a proposed new opportunity will turn on the quality of the business plan and the accompanying materials,” says Cromwell.

“There is no chance whatsoever of raising the needed financing without a business plan. Even with a plan, the content and packaging must be excellent.

“The business plan is management’s first, best, and probably only chance to capture the attention of investors,” he adds. Investors need assurance that management has thought of its corporate goals, management team, products, strategies, competition, and the necessity of capital.

They also want to know that the management team has considered weaknesses as well as strengths, problems as well as opportunities.

“At JP Morgan & Co., we received over 4,000 business plans every year,” recalls Cromwell. “We invested only in about 1% of the incoming situations.” That ‘deal flow’ versus the rate of investment is typical for venture capital investors, he says.

“Venture investors think they are busy people. Instead of trying to find a reason to pursue a new investment opportunity, most VCs try to find a reason to kill it ASAP.”

There is no chance whatsoever of raising the needed financing without a business plan. Even with a plan, the content and packaging must be excellent.

Read our next article on the key elements of a business plan and to learn how part-time CFO can help you to create your business plan and implement it.

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1 ‘Worrying number of SMEs don’t have a business plan’, Business Matters magazine, www.bmmagazine.co.uk, May 1, 2015

2‘ Are business plans redundant? Nearly a third of British SMEs don’t use them’, Smith, Rebecca, Real Business, www.realbusiness.co.uk, May 1, 2015

3 ‘UK SMEs losing out on nearly 20% extra profit by not having business plan’, Exact, www.exact.com, Apr 10, 2014

4 ‘The Business Plan: Lecture 3:1’, Cromwell, David, David Cromwell’s and Maureen Burke’s Entrepreneurial Business Planning course, Yale School of Management

5 ‘How to Write a Business Plan: Outline, Format & Sections’, Arline, Katherine, Business News Daily www.businessnewsdaily.com, Feb 5, 2015