Financial Planning – 2023

If you have been following my posts for a few years, you’ve seen this diagram at least once before. It’s the master plan for planning that the best-in-class companies use to drive strategic direction and goal setting. Each year I urge more of our CEO readers to adopt the model for their own planning, to give them the tools to truly manage strategically instead of tactically. My pitch is late this year, because there were so many other topics I couldn’t wait to write about, so my apologies for that.

But there is still time if you want to reap the benefits of improved planning and you’re open to a more aggressive timetable for getting it done. The ultimate goal is to lay the groundwork for long-range thinking – typically 3 to 5 years – and then produce the goals and budget for the next twelve months that will put your company on track to reach your strategic long-term goals and ultimately fulfill the mission you set out for your company.

But let’s suppose for the moment that you already have a clear sense of your long-term goals, but just haven’t developed the tools to manage the day-to-day activities that will move you measurably in the right direction. That in my mind is what the Operating Plan and Budget are designed to provide – specific short-term targets that can be established, put on a timeline, and then budgeted for. Now budget accountability provides a monthly reminder of what you wanted to get done and what it should cost to get there.

I’m not going to tell you in this post how to develop that budget, but I will tell you where it is laid out in clear language, with illustrations, thanks to an on-demand online course called Budgeting Best Practices that I developed a few years ago for Illumeo, the top-rated national financial education website, with over 1,700 courses available, including several of mine. Just this year alone this program has earned a 4.7 rating (out of 5) from Illumeo customers, which include some of the largest companies in the country.  The cost for this course is nominal, and you can get access to their entire library for less than $300. So the real cost is not the money or even the time to take the course. The real cost is not taking the course and not using the methods outlined there – your company’s impaired ability to define and manage its investment in goal achievement. How do I know this works? We’ve been using it for over 30 years. When clients use it, it works. When they don’t, we get more consulting work. Because…

We are Your CFO for Rent.


Commercial Real Estate Investing – Things are Changing

You don’t need a professional advisor to tell you that the value of office space has declined in the past couple of years as companies reduce their space need and adapt to the concept of remote work. On the flip side, it doesn’t take much research to be aware that residential multifamily properties continue to be valuable assets when properly managed, a condition only strengthened by climbing interest rates that are preventing first time home buyers from making that purchase, adding to the rental demand.

But what’s in between? We’re looking to acquire a McDonald’s location that we’ve held under a land lease for over 30 years. The landowners want to sell the land and McDonald’s wants to stay on it. An opportunity. And for major names of food service companies across the country, they are mostly opportunities for solid long-term investments, but usually with minimal returns that work only if the landlord doesn’t have a mortgage attached to the deal.

Our focus isn’t typically restaurant chains, it’s healthcare. And our portfolio of healthcare properties is still performing really well. But adding more? Not yet. We’re waiting for the cost of debt to come down a bit, or the prices of these properties – dialysis, urgent care, medical office, etc. – to reverse their climb of the past few years. Still a strong sector and one with decades of staying power in our view, but not yet the value they were 5 years ago. So we’re waiting patiently. But looking carefully at the same time.

Oh, and don’t be fooled by the NNN designation that brokers often put on properties to draw attention to them. The term technically means the tenant – not the landlord – pays all expenses of maintaining the property, but in recent years it’s been misused a lot. An ad that touts NNN almost always actually does have some landlord responsibilities beyond just collecting rent, usually related to the roof and structure of the building. An old roof can put a big dent in your investment returns if you suddenly have to replace one. Only those ads that say “Absolute NNN” or similar wording are truly without landlord obligations – a key consideration in estimating your ROI.

If you have similar thoughts, I’d love to hear from you. I think next year will be the time to get actively back in the market, and we will look anywhere in the US for good investments with dependable returns. How do we know how to find them and make the numbers work? That’s what we do.

We are Your CFO for Rent.

Guidelines for Independent Directorship

Privately owned companies are increasingly recognizing the value of having a formal Board of Directors to help owners/managers navigate the dynamic business world we live in today, to get truly independent thinking and the benefit of a trusted outsider’s perspective and experience. Consultants abound with the mission to help owners build or enhance their boards, and the 2014 formation of the Private Directors Association represented the first real effort to organize and bring together those who need directors for non-public companies, those who want to become directors, and the resources to qualify and connect the two. Its vision is short and sweet: We connect, educate, and advocate! Among its resources are several magazines that are available to members, including the one from which this topic was lifted.

The current issue of Private Company Director magazine published a really excellent article written by Jim McHugh, a member of their editorial advisory board and a seasoned private company director. His list of guidelines – yes, all 25 of them – pretty much covers the waterfront and could be the course outline for a college degree on the subject, if one existed. So, naturally, it has a number of no-brainers on the list: Participate. Attend meetings. Be independent. And so on…But the power of his article is the subtle insight created by the not-so-obvious guidelines, and the clever way he demonstrates each guideline from his experience. How do you “take it easy” or “be a good shipmate” so that you are making the genuine contribution that everyone expected when you accepted the appointment?

His 2,500 word article won’t fit into my blog post, but his list will, and if you’re curious enough to ask me, I’ll send you the entire article. Please ask me – it’s really good stuff. Here’s Jim’s list:

  1. Be independent – and stay independent.
  2. Remember your role as a fiduciary.
  3. Wear the correct “cover” to meetings.
  4. Don’t be a rubber stamp.
  5. Don’t be the majority shareholder’s attack dog.
  6. Understand shareholder expectations and their personal and financial goals.
  7. Understand the owners’ personalities.
  8. Don’t be timid about coaching or mentoring the shareholders.
  9. Understand the business model and the industry
  10. Get to know the management team.
  11. Be a resource/coach to the CEO.
  12. Trust your gut. 
  13. Understand the culture of the company.
  14. Know your boundaries.
  15. Be consequential.
  16. Be a colleague, not a bore.
  17. Prepare for and attend the meetings.
  18. Participate
  19. Embrace, understand and use technology.
  20. Stay fresh and understand time and place.
  21. Learn the new alphabet.
  22. Be curious.
  23. Don’t be a dog with a bone.
  24. Take it easy.
  25. Be a good shipmate.

Yeah, I know, 25 is a very long list. Want to be a really good director or find really good candidates for your company board? Take this list to heart – and to your recruiter. We will.

We are Your CFO for Rent.

Gross Profit vs. Contribution Profit – Which is Best?

A question was raised in a client review meeting recently that reminded me that some financial terms – these two in particular – are often not as clear to non-financial managers as they should be, so this post seemed like a good opportunity to provide some clarity.

Gross Profit? Contribution Profit? What’s the difference? Why and when to report one or the other, or both? For better or worse, that’s the goal of this post.

First, the definitions in non-accounting speak…

Gross Profit – the amount of money remaining during a reporting period that is the sum of all the recognized revenue earned during the period (whether paid by the customer or to be paid later), less all the costs of actually producing and delivering to the customer everything they bought that was reported as revenue – normally referred to as Cost of Goods Sold. That includes materials that went into the product, the labor to make it, production overhead costs – fixed and variable, and delivery and installation costs, whether actually disbursed during the period or accrued for disbursement in a later period. The electricity to run the plant and the janitor who sweeps the factory floor are both part of production overhead (generally considered fixed costs) because the plant wouldn’t run if it weren’t electrified and swept up regularly. This metric is most useful when it is presented as a percent of revenues (“Gross Profit Margin”), either in total or for an individual sale.

Contribution Profit – the amount of money that goes to the company’s bottom line as a result of a sale, less all related variable costs – that is, all costs incurred specifically because that sale occurred, but not including the company’s fixed costs (such as that electric bill). This is a different approach to profit management because it omits from the calculation all the fixed costs of running the business, costs that must be paid for before the business earns a profit. Another way of looking at this is the business makes a sale, incurs the variable costs of capturing and consummating that sale, and then must have enough left over to pay the company’s fixed costs before it actually earns a profit. That makes this metric often the foundation of breakeven analysis. This calculation when reduced to a percent of sales (“Contribution Profit Margin” or just “Contribution Margin”) and applied an individual product or product line or customer is very useful in determining the benefit of launching a new product or service, the sales commission that the company should pay for selling it, and whether or not to continue to sell an existing product or service or keep selling to a demanding customer.

So when should you use one vs. the other?

Where variable costs are high – think of a restaurant with part-time, as needed labor – the value of tracking Contribution Margin and working to improve it is high. If you can lower the labor content while still bringing in the customers, your profit goes up. Contribution Margin is an easy way to measure and monitor that relationship.

By contrast, when fixed costs are high – think of a private school that must have a teacher for every class regardless of how many students actually enroll in that class, variable costs are much lower by comparison and the school must cover its fixed costs to stay in business. That will drive its need to cover all its costs, fixed and variable, in order to stay solvent. Its best bet: raising revenue, i.e. enrollment.

How about your business? In the middle? Should you report and track gross profit, contribution profit or both? Not sure? Maybe you should ask. Us.

We are Your CFO for Rent.

Everyone Wants to Lend You Money – Big Surprise!

I have a “side hustle” when I’m not occupied with running the CFO for Rent business; it’s investing in commercial real estate, along with some of my clients and close friends. It’s the business I’ll pursue more fully when I’m no longer offering consulting services, and the brokers and money lenders know that. Our office gets offers to buy real estate, or money to help us pay for, it every day. And since so many of them don’t even mention real estate, I’ve concluded that they’ll lend money to anyone for any purpose if they’re remotely close to qualifying. And I’m guessing you are seeing that same kind of traffic in your inbox as well, which gave me the idea for this post.

But why should you read it? Because you or someone you know is considering taking out a loan at a really bad time.

In our real estate business the choice of how much to borrow gets down to some relatively simple numbers (unless you’re a value-add investor when it gets more complicated). We compare the income from the property, and its predictability, with the interest rate on the loan, and its term (primarily) and we profit from the spread between those two metrics. If you earn a 6% gross return from an investment but you pay 5½% on your mortgage, there’s not much left to make the deal work out. Especially if you have contingencies related to operating or repairing the property. Not surprisingly we’re not shopping for anything today that would involve a mortgage.

Enough about me. What’s the point of this post?

Financing an ongoing business, let alone a startup, is much more complicated because that first number is so hard to come by with any real accuracy, mostly because the future isn’t so predictable. But even when there’s a credible plan in place CEOs don’t often look at it as a calculation of Return on Investment (ROI). More often they focus mostly on:

  • Dreams of massive growth that some additional capital will enable them to somehow capture, or
  • Getting more money into the company to compensate for being undercapitalized from the start, or
  • Compensating for the fact that they’ve pulled too much money out of the company for their personal benefit.

That’s not to say those aren’t understandable reasons for getting more money if it’s needed – even though some better thinking earlier might have precluded the need or at least reduced its size.

The point is that timing is a key element in the decision, and this is not a good time to borrow money. The Federal Reserve is trying to stifle demand by making it much more expensive to do most anything involving borrowed money. Rates at all credible lenders are going up to match the Fed’s inflation-fighting actions, and marginal lenders who serve those that banks won’t are raising rates even faster, with risk protections that are not your friend. Meantime the price of things you will buy with that money is going up also, a double squeeze on your ROI. So if you’re considering taking out a loan to boost your working capital, consider these planning steps:

  • First, if you can postpone the need for a year, when we think you’ll be in a much better borrower position.
  • Base your calculations on an objectively developed financial plan, complete with reasonable contingencies based on today’s world.
  • Make an ROI calculation based on your financial projection as part of your decision making process, and decide if the projected return is worth the risk.
  • If you’re eligible, SBA financing can give you some space in interest rate and terms.

How do we know this is the right way to go? That’s how we do it, and…

We are Your CFO for Rent.

Is it Time to Upgrade?

We have a client that has been coming out of a revenue decline induced in part by COVID 19, and they’re now in the black and growing nicely. But their accounting team has consistently been below an acceptable standard for performance. So when we started working together we connected them with an outsourced accounting firm that takes our client’s data entry information and produces financial statements, tax returns, etc. The client also moved an additional employee from Operations into Accounting to help fix the holes. Much improvement resulted for the client and for our ability to help them understand their financial condition and prospects.

But some things didn’t improve enough. The data entry has consistently had flaws that required back and forth Q&A, delaying reporting and related analysis and decision making. Despite developing a checklist of all the things that should be reviewed before sending data off to the accounting firm, the quality of the data entry didn’t improve enough to enable us to review financials in a reasonable timeframe. (Note: a reasonable timeframe can be defined as: soon enough to avoid making the same mistakes this month that we made last month.) As the company grows and does more business, accounting accuracy and timeliness become more important, and the CEO recognized that and wanted to make changes to fix Accounting, get the loaner employee back into Operations, and be able to capitalize on their renewed energy. Here are the steps we recommended to make the transition:

  1. Upgrade the company organization chart to ensure the overall company structure supports the growth expectations, so that a restructure covers all the bases. The alternative is a rolling restructure that disrupts everyone’s concentration on doing the business of the company.
  2. Develop job descriptions for the restructured jobs to ensure that all needs are identified in Operations and Accounting, both to inform the new people about their responsibilities and enable ongoing performance reviews.
  3. For Accounting, hire a strong accountant to lead the effort to remove bookkeeping flaws, starting with a job description that will serve both to define the search criteria for the new employee and inform candidates what will be expected of them once hired. This does not need to be a controller level person at this point, but ideally the new hire could potentially grow into that role as the company’s needs grow – a win-win for both.
  4. Finally, actively use the information they’ve created: Hold employees to the job descriptions in performance evaluations, rewarding good performance and guiding correction of not-so-good performance. Let everyone know what the organization structure looks like, and when reporting responsibilities have changed, and keep everyone on track and in tune with the new relationships.

For most companies their people are their most valuable resource – where have you heard that before? Treat them fairly and they will treat you with strong loyalty. Our client is on the Inc. 500 list of best companies in America to work for. There’s a reason for that. How do we know?

We are Your CFO for Rent.

Don’t Let Your Accounts Receivable Escape!

You’ve got a solid business that sells on credit and makes a nice profit doing it. That assumes, of course, that you get paid substantially   all of your accounts receivable, even though some of your customers may want to use that money elsewhere, and others would prefer not to pay you at all. How do you keep everything on track? Here’s how.

First, there are four key KPIs to watch – not just one – so you can quickly see if your AR collection effort is flagging. They are:

  1. Total Past Due AR as a percent of the Total AR. While the AR aging report is the tool most companies look at first to monitor their collections, they don’t always pay attention to what it tells them. If your past due AR is more than 25% of the total, as an example, you’re probably not paying close enough attention to it. This is your interest-free lending to your customers, and you should employ it wisely. What that number should be is, of course, a function of your industry and normal collection patterns. But regardless, don’t stop there.
  2. Aged Trial Balance of AR by Period – what percent of your AR dollars are 30 days past due, what percent is 60 days past due, 90 days, etc. Historically, and logically, the older a balance remains uncollected, the lower the likelihood that it will be paid in full, for whatever reason. You should expect that the dollars that are 60 days past due are less than the dollars that are only 30 days past due. The smallest total dollars, if there are any, should be in the 90+ range.
  3. Days Sales Outstanding (“DSO”) – meaning the number of average days sales you have sitting in AR, calculated simply as your average daily sales divided into your total AR. What that should be also depends very much on your industry. Tech companies who sell subscription services and get paid by credit cards will likely have a DSO in the 15-20 day range, while a toy manufacturer whose big season comes once a year might have a DSO in the 90-100 day range or more. But in general, you should consider a reading under 45 days as a traditional measure of good results.
  4. KPI Trends – are those metrics moving in a positive or negative direction? That means tracking them over time, with each monthly financial report, and noticing if:
    1. Total past due balances have been increasing as a percent of the total, or
    2. DSO was at 40 days and then went to 42 days and now just hit 44 days, or
    3. Unpaid balances over 60 days were 20% of the total, and then moved to 24%, and now just came in at 26%.

Those small changes in trends are a warning not to be ignored.

So how do you fix it?

We’ve seen this problem so often in new client engagements, and the #1 reason is because collection follow up is not the key responsibility of anyone, or it’s everyone’s responsibility when they have free time. Hint: NO ONE will have much free time if that means trying to collect money from past due customers, getting in the middle of their reasons for not paying, having to push back against the worst slow payers, etc. No one wants to do that job, so unless it’s a key responsibility of someone, whose job performance is directly related to effective collection success, good luck. Ultimately you may have to make a decision to pursue collection or not sell to that customer, and then you and the customer both lose. Bad outcome all around.

How do we know this? Because we’ve seen it and fixed it a hundred times. Because, after all…

We are Your CFO for Rent.

Checklist for hiring a top notch CFO

Sometimes a company needs a full time CFO, not a fractional one. I can live with that. We are really good at helping mid-sized privately owned companies that need a good slice of a CFO, but we can’t ever be there every day, a requirement for many larger companies and virtually all publicly traded ones. And while we have assisted clients over the years in finding that full time person to replace us when the time was right, we always tailored our search to the specific, highest priority requirements of that company. Good job, guys! But – we rarely stepped back to craft a job description for the perfect CFO, because that’s not what our clients wanted and we probably couldn’t find a perfect one anyway.

But times have changed. Today’s CFO is a leader in the company, often second only to the CEO in influencing the company’s strategic thinking, growth execution and ultimate success. In today’s world that requires a fresh look at what kind of qualities a CFO should bring to the job. Well, we found a great list – actually written by someone else, but powerful enough to share and give credit where credit is due.

In this case the credit goes to the author, Jack McCullough, who wrote a short book a couple years ago called Secrets of Rockstar CFOs. Based on his own experience observing the best of the best, it’s a short but impactful read that should be required reading for every search professional and every CEO who wishes he/she had one. Even at only 40-some pages it’s too long to effectively summarize here, but I’ll go this far. I’ll share his traits list and send a digital copy of his entire book to anyone of my readers who asks for it. So first, here’s his excellent list:

  • Think Strategically
  • Provide Ethical Leadership
  • Master Deal-Making
  • Build Elite Teams
  • Learn Continuously
  • Develop Board Relationships
  • Perform Cross-Functionally
  • Maintain Financial Expertise
  • Achieve Work/Life Balance

That’s the teaser. If you want the details in the author’s own words, you have two options: Buy it on Amazon for about $13 or ask me for a copy of the edition provided to me by Oracle during a promotional mailing. I’m sure they won’t mind. We think we bring a bit of each of these traits to every assignment we take on. But only for a few weeks, a few months, or a few years. Want it every day? Start by getting this great primer. Want it only when you absolutely need it? Call us.

We are Your CFO for Rent.

Exit Challenges When There’s a “Special Sauce”

I had dinner with a group of friends this week, one of whom is a CEO looking to plan an exit from the consulting firm he built over the last 25 years. Since this group occasionally discusses business issues, we talked about the options and issues our friend will face going forward. The discussion brought out some points that are worth sharing with other CEO/entrepreneurs looking to exit their businesses in the next few years. I’ve already written frequently about starting earlier than CEOs think necessary, a common misstep perhaps because they don’t think about it until they decide it’s time to do it, virtually always too late to optimize the outcome. In this case the “when to start” issue was front and center.

But that aside, this conversation had two unique assets that added value and created different challenges.

  • First, proprietary software tools that were developed over the years, their intellectual property (IP) and that made this firm’s services more effective and more valuable than many of their peers. An asset that is often as difficult to value as it was to create, the effective application of this special sauce is overseen by its founder, our would-be selling CEO.
  • Second, the industry image of this firm – the driver behind its growth, the leader of its sales and marketing effort, the recognized voice when its results are delivered, and the face every client thinks of when this firm comes to mind – is the guy who is looking to exit.

So, what could go wrong? Several otherwise viable exit options become almost unworkable. For example:

  • Selling to the in-house team who know the business – the skilled team of technicians who use those proprietary tools – won’t work. They are good at using them but none of the team has the skill set to step into the CEO’s shoes, so internal buyout alone is off the table.
  • Selling the firm to an outsider or hiring an outsider to become the new CEO leaves the leader’s quarter century of relationship building in limbo, a very critical asset to the firm’s marketing and closing success. Transferring those relationships can take years to make happen, during which the departing CEO could be tied in, as in “not departing.”
  • Selling the firm to a larger competitor in the same field could happen, but they may not value the IP as highly as if the firm were kept intact, with its image and reputation unchanged in the minds of its clients. Possible result: potentially much smaller selling price, or locking in the selling CEO for a few years to oversee the realization of the anticipated value.

So now what? The group had a variety of ideas and suggestions for how to proceed, but virtually all recognized the need to start now and accept the likelihood that the selling CEO will be around a bit longer than he wanted to. If that’s only a preference, it’s probably acceptable. Were it a necessity, the result could be very painful. We know, because we’ve been helping private company CEOs for over 30 years.

We are Your CFO for Rent.

The Board’s Role in Strategic Planning

To my Board director friends: How do you guide long range thinking without overstepping your job description?

I am a longstanding board member of a mid-sized nonprofit organization that is about to develop their next strategic plan – a 3-year look into the future of special needs services in a period of dramatic change. We have recently hired the organization’s 3rd CEO in its 76-year history; they have engaged a planning facilitator who has in depth planning experience but none of it with this organization. They met with the Strategic Planning Committee of the Board, made up almost entirely of former Board chairs.

What could go wrong?

The old adage of Board service came to mind during the meeting: “Noses in, fingers out,” meaning the Board’s role is to ask questions, listen to and reflect on the answers, and offer guidance. By contrast, the Board’s role not to take charge, give orders to anyone in management having to do with how they do their jobs, or make decisions for the CEO. A delicate balancing act for many Board members, especially those with long years of tenure and strong views, which many in our group had.

The good news: nothing went wrong. A spirited discussion ensued about the process, the timeline, the options for doing a thorough SWOT analysis in advance (essential for informing any effective strategic plan), how best to get the Board’s input and keep members advised of progress, and when the Board will be able to vote on a final document. I was actually proud of the way we handled something that often trips up Boards in organizations of all sizes.

Admittedly, there are big differences between a nonprofit Board and a for-profit Board, whether advisory or fiduciary. But some things should be firmly in place in all of them. Here’s my short list of the principles they should all adhere to:

  1. The Board has one employee that they oversee, direct or advise – the CEO. All information flow to other members of the management team should come from the CEO, not the Board. While this is sometimes violated with no painful repercussions, the risk of undercutting the CEO is huge, to the detriment of the team and the organization.
  2. The CEO has a responsibility to keep the Board informed of any major activities, whether in process or planned, that run counter to the existing strategic direction of the organization. A recent example in the press of a CEO pursuing a merger without advising his Board was a good reason the Board should have immediately begun shopping for a new CEO.
  3. No matter how close a Board member feels about his/her relationship with the organization, Board decisions must always put the company ahead of personal feelings and priorities. This rule is most often violated in family-owned and run companies and nonprofit organizations where Board members have family members receiving services from the organization.
  4. Every Board should have fixed length terms and firm term limits that enable the Board to remove a member who is unwilling to play by the rules. With these tools in place the Board can then decide whether to invite an exiting member to be re-elected or not – an effective Board will use these rules to keep the Board collaborative, authentic and committed to the success of the organization.

How do I know? Been there, done that.

We are Your CFO for Rent.

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