Get more bang for your CFO buck – tips for business owners

by Michael Royal, BIR Solutions

Many owners of SMEs do not believe they can afford a top quality Chief Financial Officer (CFO).

At a full time annual cost of between $150K to $250K pa, many business owners would suffer heart burn if they thought they would have to pay this sort of salary for their CFO!

But can a business owner who is focusing on growth afford not to have a top flight CFO as part of their team?

Are they getting enough bang for their buck with their $65K to $100K pa CFO (probably called Chief Accountant of Financial Controller) or is there a performance gap?

From our experience, many SMEs are not getting enough bang from their CFO buck to make their business a high achiever in their industry. These SMEs are generating over $5M in turnover yet they are still structured in their management ranks as if they were a sub-$2M business. The difference in requirements can be significant for many SMEs once they reach that $5M turnover level and start reaching for a turnover of $10M plus.

The days of a CFO being a number cruncher for the purposes of lodging tax returns, BAS Statements and Annual Accounts have long since gone.

CFOs should be a growth-orientated business owner s first source for ensuring:

  • What is being managed is being measured.
  • Proper planning processes are in place with appropriate follow up.
  • The business strategy is based on a proper assessment of profitable customers and profitable products.
  • The business growth strategy makes commercial sense as well as strategic sense.
  • Funding is adequate to handle the current business model as well as future expectations.

TABLE OF CONTENTS

  1. What analysis of the business is the CFO currently preparing for the management team each day, week, month and year? Read more >>>
  2. How easy is it for the non accountants in the business to correctly interpret and understand the analyses prepared by the CFO? Read more >>>
  3. What future projections has the CFO prepared both short term cash needs and longer term outcomes based on the current direction of the business? Read more >>>
  4. Has the CFO analysed the cash lock up in unproductive or unprofitable assets? Read more >>>
  5. Has the CFO analysed untapped customer and product quadrants as part of the profitable sales drive for the business? Read more >>>
  6. Has the CFO analysed the alignment of the stated business strategies with the actual business decision making? You would be surprised how many business decisions are not aligned to the stated strategic direction of the business. Read more >>>

Let’s now explore each of these questions in a bit more detail.

  1. What analysis of the business is the CFO currently preparing for the management team each day, week, month and year?

    Most businesses produce management reports on business performance – sales reports, profit reports, balance sheet analyses, cashflow projections etc.

    The key to useful management reports is optimising the balance between detail, readability and ‘actionability’. Trends and comparisons (eg to ‘last period this year’, ‘same period last year’ and ‘budgeted projections this period this year’) can be as important if not more important than the raw data.

    As an example, let’s drill down and look at Sales Reports for three common reporting time periods: Daily, Weekly and Monthly.

    Daily: Some businesses like to track sales daily – and in this case, a headline sales figure is probably as much detail as can be actioned when the information is available the next day (perhaps with a comparison to an expected sales level for the day).

    Weekly: Each week it may be useful to have snapshot details for the top 10 customers and top 10 products or product groups as well as a comparison to the monthly target to see whether the target is going to be achieved and if not, to determine whether the missed target relates to a specific customer or product grouping.

    Monthly: On a monthly basis there will be time for a more considered and reflective view of the customers and products, both on a sales and gross margin contribution basis; together with analyses of Credits & Returns statistics, Delivery statistics (retailers focus on Delivery in Full on Time – ‘DIFOT’), Stock Optimisation statistics (Stock Outs & Over Stocks), Quality statistics (Customer Complaints, Audits).

    Supplementary questions to consider asking:

    (i) Is the level of detail too much / too little for each time period?

    (ii) Who uses the data and what level of accountability is enforced by the business owner and CFO for the performance being measured?

    (iii) Does the analysis reflect the Key Performance Indicators (KPIs) for the business and its management team?

    (iv) Is there a good mix of financial and non-financial measurements?

    Back to Table of Contents

  2. How easy is it for the non accountants in the business to correctly interpret and understand the analyses prepared by the CFO?

    Accountants can prepare reports until the cows come home – and then some!

    What is really important is whether their reports are able to be correctly interpreted and whether they are being used by the non accountants in the business on a timely and regular basis.

    First, find out who uses which reports and whether they understand what the data is supposed to be telling them.

    Supplementary questions to consider asking:

    (i) Does the explanation by the non-accounting staff for what is included in a particular figure reflect what the accountant s have included in that figure?

    (ii) Can the key users of the analysis explain it to their staff?

    (iii) Is there a reluctance by non-accounting staff to interact and question the analyses prepared by the accountants?

    Back to Table of Contents

  3. What future projections has the CFO prepared – both short term cash needs and longer term outcomes based on the current direction of the business?

    Cash is king in every business and it is critical for every business to be aware of potential cashflow hiccups. Many business owners do not know about an impending cashflow problem and rely upon the goodwill of their suppliers and customers to get them out of the trouble they should have anticipated – if they had access to the right information from their CFO.

    Having access to the right information is a sign that a business has ‘grown up’ and is starting to be able to take responsbility for its own financial affairs and direction.

    Supplementary questions to consider asking:

    (i) Has the CFO prepared a workable short term cash model that ensures cash will not run out and surplus cash will be best placed to generate additional income?

    (ii) Is there a timetable to discuss future financing needs with current financiers (and at least one other financier to make sure the best terms are being obtained)?

    (iii) Is there a key man ‘insurance’ plan in the event a key member of staff decides to leave?

    (iv) Is there an exit strategy for the business which makes commercial sense and which is achievable?

    Back to Table of Contents

  4. Has the CFO analysed the cash lock up’ in unproductive or unprofitable assets?

    It is not always possible to optimise your asset levels on a permanent and ongoing basis. In our experience, even well run businesses will have cash locked up in unproductive and unprofitable assets.

    However, having a process to systematically review asset holdings on a regular basis is achievable. Such a process is a bit like spring cleaning – it ‘cleans out’ locked up cash rather than waiting for a crisis to require an emergency clean out (which is often stressful for those involved and less productive in terms of cash generated).

    Supplementary questions to consider asking:

    (i) Has an assessment been made from a business perspective as to what is the optimal level of debtors, stock and creditors?

    (ii) When conducting this assessment, there are two points to remember:

    (a) Low asset balances and high liability balances are not always the ‘optimal balance’ from an external stakeholder’s perspective as your customers and suppliers might not be able or willing to support your tight asset holdings or slow payment terms.

    (b) Less than optimal balances, particularly in stock can be more harmful to a business than excess balances. Why? You can always put in place a plan to reduce stock balances but you might upset your customers if you do not hold enough stock to service their needs. If you cannot supply them, they might look elsewhere for a supplier for good…..

    (iv) Is there a regular review process to review under/over balances of your key assets and liabilities?

    (v) Has there been an assessment of all the fixed assets (including leased and hire purchase assets) as to their current contribution to generating income?

    Back to Table of Contents

  5. Has the CFO analysed untapped customer and product quadrants as part of the profitable sales drive for the business?

    Most businesses can generate more sales from both existing customers and potential customers, existing and new distribution channels and also current and additional products.

    However, unless there is a focus on a rigorous program of untapping these potential opportunities, they may lie dormant as the status quo is accepted as being ok. An ‘on the ball’ CFO can keep a ‘status quo’ Sales Manager on their toes!

    Supplementary questions to consider asking:

    (i) Has an analysis of customers and products been conducted in the last year?

    (ii) Who/what is contributing 80% of the revenues and 80% of the profits? (‘80%’ is based on the Pareto Principle of 80:20. The relevant percentage for a particular business may vary from this percentage. The relevant percentage is normally determined by analysing sales and profits by customer and by product).

    (iii) Is there a discrepancy between these two analyses? What does this mean?

    (iv) Would more be sold to existing customers (i.e. does a competitor also supply them or could other products be sold to them which they do not currently purchase)?

    (v) Are there potential customers in the current distribution channels who should be targeted?

    (vi) Are there distribution channels not included in the company s sales mix (including online, overseas markets)?

    (vii) Are there new distribution channels opening up which could be included in the company s sales mix?

    (viii) Could products be sold for other uses in new markets?

    (ix) Could product lines be extended?

    Back to Table of Contents

  6. Has the CFO analysed the alignment of the stated business strategies with the actual business decision making? You would be surprised how many business decisions are not aligned to the stated strategic direction of the business.

    You would be surprised how many business decisions are not aligned to the stated strategic direction of the business. When you ask ‘why was that done?’, the answer is often ‘that is the way we have always done it.’ Not a good answer from a CFO!!!

    Looking at key strategic decisions and ensuring they are consistent with the stated direction of the business ensures two things: first, this analysis ensures there is a stated direction for the business to be heading in; and second, key decisions can be assessed against whether they are assisting, detracting or are neutral in their impact on achieving the stated strategic direction.

    Supplementary questions to consider asking:

    (i) What are the stated business strategies?

    (ii) Are the stated business strategies communicated to management and staff?

    (iii) Do these stated business strategies make up the Key Performance Indicators (“KPIs”)?

    (iv) What customers/products do not fit within the profile required by the stated business strategy?

    Back to Table of Contents

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact