To CFO or not to CFO – That is the Question

I’ve been reading headlines recently about newly hired CFOs at several large companies. Some eye openers to be sure: PayPal delivered a package worth $6 million to their new financial guy. Walmart threw in a $5 million signing bonus, Pfizer paid their new CFO $5 million up front, and Moderna delivered a package worth over $5 million.

What are they thinking? Why do these huge companies think having a strong CFO on board is that important? By contrast, why do the CEOs of so many smaller middle market companies – especially the privately owned ones – think having a CFO at all is unneeded expense when they can do it themselves? The short answer, not surprisingly, is the bigger the numbers the bigger the impact a skilled financial leader can make.

But the longer answer, often unspoken, is that middle market CEOs are often shortsighted by underrating the impact a seasoned CFO can bring to their companies. And yes, it’s true that today’s competitive compensation environment means the good ones are asking premium compensation to come aboard and devote their full-time efforts to a single company. So too many CEOs believe their choice is to either pay the outsized compensation or go without.

Unfortunately, that’s both a bad decision and an unnecessary one.

The fractional CFO business that we created over 30 years ago is thriving today across the country, and while many draw the conclusion that that option is primarily for small, mostly local companies, that just isn’t true. Our client list over the years has ranged from $200 million companies down to $5 million (plus more than a few early stage). Our coaching services have aided CEOs in companies up to a billion in top line, and our current client base stretches from coast to coast. In these days of more frequent remote management, all a company needs to engage a fractional CFO from anywhere in the country is a competent accounting department, or the willingness to enable their CFO to transform a less-than-competent accounting department. We’ve had success both ways.

The call to action: If you are, or know of, a CEO of a middle market, privately owned company that is acting as their own CFO – and doing it poorly while neglecting the real job of being the top level leader their company really needs, consider this: Half a CFO will cost substantially less than a full-time one, even at consulting billing rates, and usually a company will need much less than half to make their critical financial decision making monumentally better. No signing bonuses, no stock options (usually), no company car or paid vacation. Just solid financial guidance from someone in the prime of their career who has been there and done that for companies with issues similar to yours. With great success. Sound worth exploring? Call us.

We are Your CFO for Rent.

ESG – Not What It’s Cracked Up to Be

If you sit on a Board or invest in equities (and read about how they’re doing) you have seen those powerful initials many times. Environment, Social, Governance – the phrase intended to fix everything that is self-serving about corporate America. Just one small problem: it’s not working.

The Economist wrote last week that there is such a “dizzying array of objectives” implicit in the phrase that no one has any ability to determine what strategy will develop acceptable ESG results and which won’t. Tesla is a “corporate-governance nightmare” but is helping tackle climate change. Closing down a coal mine sounds good, except for the workers and suppliers who lose their jobs. It doesn’t take a researcher to find lot of other examples in the corporate world.

In a special feature edition of the Los Angeles Times, a Deloitte survey of CFOs found that 2/3 of companies surveyed do not tie their compensation to performance against ESG objectives, even if those are set forth in their purpose statements to the world.

And yet investors and other stakeholders are looking for more emphasis on such things, leading many companies to stretch the reality a bit in their publicity – called “greenwashing” by the whistleblowers who see the realities. If profits are the real goal, it’s often more profitable to pass those costs through to customers and society as a whole rather than bear the cost of making a real difference.

So what to do? Well, that’s not our expertise, for sure, so I don’t have the answers. But I know the challenges of pursuing multiple objectives at once – the usual result is all get done poorly. So when The Economist’s writer suggests “the more targets there are to hit, the less chance of bullseye-ing any of them,” that makes sense to a management consultant, and perhaps to you too.

So how about this idea: Have your company choose one element of ESG that you can truly influence: emissions control, natural resource stewardship, waste management, better human capital management, homelessness prevention, honest labelling of products sold, solid governance practices in the Boardroom, etc. Then develop and implement an effective way to measure, monitor and report progress. Pay your executives meaningful incentives to pursue and make progress in the area you’ve chosen to invest in. And tell your stakeholders how you’re doing and how you’re doing it. Wouldn’t that make a great lead-in for your annual report?

We don’t know the answers – but we have some pretty good questions.

We are Your CFO for Rent.

Family Business Succession – How to Make it Work

Family-run businesses are in many respects the backbone of American business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family-owned and operated businesses. Yet 70% of family­ run businesses don’t make it to the second generation, and a full 90% never make it to the 3rd generation. Not new statistics, to be sure, but appalling just the same.

So why the embarrassingly high failure rate?

Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. While we are strong advocates of planning, we know that no plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. So in this article we take a slightly different approach to defining what is needed. We’re going to go out on a limb and be specific about some of the problems we’ve seen that prevent many family-owned businesses from realizing (very much of) their real potential.

Please understand, we are not saying that all family-run businesses are fundamentally flawed, because they’re not. What we’ve observed, however, is that those that do have problems are often emotionally unwilling to acknowledge them or, having acknowledged them, are unwilling to make the hard decisions necessary to fix them. While far better than the 90+ percent average failure rate of small businesses as a whole, this is still a pretty dismal record given the advantages such businesses typically have: loyalty, strong family support systems, management continuity, long training periods for the next wave of managers, love and affection, etc.

How can you ensure your transition is a success?

  1. Treat your children in the business like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees), and help them work out action plans to correct deficiencies before they become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life “on the outside.” Incidentally, if you don’t evaluate performance for any of your employees, no need to read further, and we wish you the best.
  2. Make a detailed list of the skills that are needed to succeed in your Not just the ones you used to start the company, but the ones that will help the business grow in the environment in which it now does business. You may need help from impartial but knowledgeable outsiders to complete this one, but it’s worth it. Then build your would-be successor’s grooming program around that list, filling in the holes as needed.
  3. Outside advisors can be priceless (no reflection on their fees intended) in this They bring a broad range of expertise and a high level of objectivity. They don’t sit around the dinner table and glare at you in the evening and they don’t own part of the company. They are the experts from across town, whose advice will have the greatest chance of being accepted as unbiased
  4. Finally, consider forming an Advisory Board for your company, and populate it with advisors who can help you groom your sibling for that next step. Outside advisors can bring relevant skills that you and your existing management team may not have, and they bring the added benefit of being outsiders who are not already labeled by your son or daughter with preconceived ideas about how it should go. They can help you avoid making decisions that may not be in the best interests of the company – “Aw, let’s not push him so hard,” and they will likely be a good balance with the family members on the Board. Since you and the management team retain the decision-making power, you have nothing to lose and can only gain new benefits for you, your upcoming successor, and the company.
  5. Treat your children in the business like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees) and help them work out action plans to correct deficiencies before those deficiencies become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life “on the “

Want some help thinking through all this? Call us. We know our way around this stuff.

We are Your CFO for Rent.

How Do Vacations Save Employers Money?

We often find ways to save clients money once we begin working with them: renegotiating bank loans, switching insurance brokers or providers, identifying hidden costs in underpowered accounting systems, etc. We also look for ways to improve internal accounting controls to ensure the business is run in accordance with its approved policies. Those two important elements in any CFO’s job description, whether fractional or full time, rarely intersect in a meaningful way because they have different objectives, unless you include the occasional sales person’s padding of expense reports.

But sometimes the stakes are much higher. Take the often overlooked policy that requires certain employees in sensitive positions to take periodic vacations, during which time their duties are performed by others. Staffing challenges being what they are today, that seems like an easy one to overlook. But two examples from our client files say “Not so fast” when it comes to the accounting department.

Example 1: Consider the payroll department in a small or midsized company, which may be only a single employee. That person keeps track of employee records, submits payroll data to the accounting department – or more often these days to an outside payroll service that doesn’t actually know the employees. We took on one client that had a sizeable chain of retail stores and a couple thousand employees across the country. And one payroll person in accounting who never took a vacation, supposedly because no one was trained to cover for her. We discovered that there were about a hundred “employees” on the payroll, and getting paid regularly for years, that didn’t exist. Paychecks were cashed and no one was the wiser until the arrival of Your CFO for Rent. Cost to the company was in the hundreds of thousands of dollars.

Example 2: This bookkeeper at a mid-sized manufacturing company had gotten approval to borrow money from the company, as an employee loan, as long as the loan was repaid. Apparently a series of personal issues led to repeated loans from the company to the same bookkeeper, all of which were repaid in due course. Or were they? Our fractional CFO was there when the employee, who also never took vacations, was off for a genuine medical reason. A question came up that caused the CFO to look through the employee’s desk for the answer to the question. Surprise! In the back of a desk drawer were a stack of checks made out to the company and signed by the employee, loan repayments that were never deposited into the company’s bank account. The bookkeeper was able to credit the loans and bury the actual cost elsewhere in the books, with no one the wiser if he hadn’t kept the actual checks in his desk.

Internal control is often seen as a nuisance by mid-sized and smaller companies with lean staffs in specialized areas like accounting, especially given today’s short-staffed employment environment. But it’s the little things that will get you, and sensible internal control policies is one of them. Firing an employee, or even prosecuting them, will not recover the money. Well thought out policies are intended to prevent the need for remedies by avoiding the disease in the first place.

Need a good internal control doctor? Give us a call.

We are Your CFO for Rent.

Be Careful Who You Ask For Help

Few decisions in life will be more important to a business owner than the ones they make while planning the exit from their business, especially if they spent 5, 10 or 20 years building it. And no matter the size of the business, or its niche, its degree of success or its position in its industry, the owner/CEO will need help from outsiders getting a deal done. And that’s where the sky gets cloudy. Who do you need? Who do you call to satisfy that need? How do you know they can really help? All questions you’d like to feel you have the answers to before you engage an advisor for this life-altering next step.

So you ask friends, business associates, your banker, your CPA, your fractional CFO/CMO/CTO if you have one, to tap into their network and recommend the right person for the assignment. And you hope for the best. So let’s devote this post to a very brief outline of the kind of help you will need and the questions you should ask of anyone who is referred to you as the “right person.”

Here are the kinds of expertise you will want to have around you:

  1. An M&A attorney. This is not the lawyer you’ve trusted for years with your personal or business matters, unless one of his/her specialties is buying and selling companies. Explain to your long-time family attorney, that this requires special experience in dealing with the pitfalls that a deal like this can create for you. A good friend will get it.
  2. A CPA who has also been actively involved in helping clients buy and sell businesses. They will be required to support you as a prospective buyer questions your tax status and tries to justify a prospective deal that would be unfavorable on your tax return. NOTE: Same caveat about prior experience as with your attorney. And this is especially true if you don’t have a well-qualified CFO on your team. See comments below about the term “Q of E” and “due diligence”.
  3. A really good investment banker or business broker who does deals in your industry and for companies in your size range. Those who do have contacts who are interested in that segment of the business, and without those contacts their work is fraught with obstacles to developing and pursuing the right contacts – kind of like cold calling for new customers – never fun and usually mostly wasted effort, except that your banker/broker will likely be charging you for that time. Don’t let them learn on your dime.
  4. A strong internal financial professional on your team, either at the CFO or controller level. This is not your CPA, but someone who knows the internal workings of your company and how the numbers were put together, and who can effectively defend those number during due diligence, when the buyer wants to pay less than your business is worth by finding fault with your history that you can’t explain in financial terms. If you don’t have one on staff, you might consider this a modest pitch for having a fractional CFO on board. I’m just sayin’.

Depending on your industry, your internal team might also need to have strong expertise in R&D, sales & marketing, technology, etc., but if you have the team above in place, they will all likely tell you if that’s a soft spot on your team or not. I met a deal advisor recently who asked me what a “Q of E” was. Since that term (translation: Quality of Earnings, a key analysis process that typically enhances reported earnings by removing from your history one-time events and personal expenses that will not occur after the sale) refers to a key element of every due diligence process, you might not want to have that person advising you. If an attorney or CPA tells you they’ve done a couple of deals recently, and your inquiry reveals two deals in the past 20 years where they were part of a group of advisors and not the key advisor, head for the door.

As you can tell, I could go on about the challenges of not having the right team in place, but this post is already too long. More strategies to consider are discussed in my book, or you could just call us.

We are Your CFO for Rent.

Set your targets and get your team involved

Last week I asked if your strategic plan was for real. It was noted that one of the ways to bring it to life is an operating plan that spells out what gets done each year in support of the long-range plan. This week I want to take that idea a step further, based on a tool used effectively by one of our favorite clients, a Georgia-based company that sells and services industrial equipment. Their workers are mostly field workers and their managers, so a nice 20-page description of their key operating goals is unlikely to get much attention. So they chose a scoreboard approach to get their annual message across. Here’s how it works:

The scoreboard is broken down into sections for key departments – Sales & Marketing, Customer Service, Finance & Accounting. They developed a spreadsheet (a chart for you non-techies) showing the operating goal area, and metrics being measured, including the target and the current status, for example:

  • Sales & Marketing: prospect leads developed, leads converted into sales, units sold, sales dollars, number of customers under service contracts, etc.
  • Customer Service: Service hours billed weekly and year to date, service revenue billed, etc.
  • Finance & Accounting (my personal favorite): Total revenues, gross and net profit margin percentages, cash collections, past due receivables, and more.

Further, each metric has a champion, identified on the chart, that member of the team most responsible for managing the company’s effort to hit that goal. Each week the chart is updated and shared with the entire team. Everyone sees how they, and everyone else, are doing against their operating goals. They can see month-to-month progress toward the annual goal; and whether they’re getting better or falling off is easy for all to see.

What’s the point I’m trying to make? You need to meet your annual goals if you’re going to meet your long-term strategic goals. Then you need to communicate those annual goals to the people in your company who are the boots on the ground for getting things done; and communicating means effectively sending and receiving. If your team won’t read the 20-page plan and keep it in mind every day, every week, then find another way to remind them – a way that resonates with them.

And find a way to reward them for the results they deliver. Our client made the Inc. Magazine list of Best Workplaces in 2022. The relationship between

  • their method of communicating their goals,
  • their success in hitting those goals, and
  • their employees voting them a best place to work

is not an accident. It’s the owner/operators of that business recognizing that contented workers produce better results for their employers. Is our client perfect at this? Not yet, or they wouldn’t need us, but they’re actively working on it in ways that make sense, and they’re getting better each month.

How’s that for a feel good story? Want to write one for your company? Call us.

We are Your CFO for Rent.

Is Your Strategic Plan For Real?

Every well-run company has a strategic plan in writing, ideally also in the hands of every key executive in the company. Not just hopes, dreams and aspirations, but solid goals and targets and timelines they hope to achieve for the benefit of owners/shareholders, employees and customers.  Unfortunately many CEOs who believe they have created a strategic plan for their companies really have only created hopes, dreams and aspirations, because their plans have no teeth. And by teeth I mean the means and methods to bring those plans into reality.

We’ve met a fair number of these executives over the years – usually owner/operators in most cases –who often paid outside advisors to guide them through a strategic plan development project, with the result that they got a very well written document outlining, often in considerable detail, what they hoped to achieve. When asked about their plan our prospective clients proudly produced that document, carefully preserved in a file cabinet, for us to review. When asked about the planning tools that support their plan, the discussion got fuzzier. When asked if their operating plan or their financial plan/budget was tied to the plan goals, we often got either a long pause or simply a blank look. For those who have faced that question before, the amount of effort to implement and manage those operational planning tools was considered an unproductive use of precious time, because “everyone here knows where we want to go.”

With all due respect to all the CEOs out there who have built successful businesses and hit their goals without a planning system in place, congratulations on your accidental success.

To those CEOs who truly want to build a company that is more than a lifestyle business, that is more than good enough to get by, that truly is all it can be, you’re not going to get there without a planning system that is integrated from top to bottom, meaning:

  • A strategic plan, stating in clear terms the goals you intend to achieve in specific, measurable terms with a realistic, even if optimistic, timeline,
  • An operating plan, defining in detail the milestones you will achieve in the next 12 months that are directly in support of one or more of your strategic plan goals, and
  • An operating budget that allocates the resources – human and capital – needed to achieve the milestones set out in your operating plan.

That’s the easy part. The hard part, and by far the most important part, is managing your resources to keep them on target as outlined in your operating plan and budget. Set the milestones that move you toward the timeline defined in your operating plan, spend the money directly in support of those milestones, and don’t let anything let you take your eye off the ball.

Unless, of course, your plans change as a result of renewed thinking, newly discovered opportunities or insurmountable challenges. If that happens, and it often does, then go back to your strategic plan and see if the original goal needs to change, or perhaps the milestones need to be adjusted without losing sight of the goal, or perhaps the budget needs to be reallocated in support of approaching those milestones from a different direction. Just keep in mind that goals get met by defining the process to get there and then managing the process and staying focused. Anything else is accidental.

We help you avoid accidents. We know how this works, or how it doesn’t.

We are your CFO for Rent.

Timing is Everything – in CRE too

When Michael Dell started assembling computers in his dorm room in 1984, his timing couldn’t have been better. When Jeff Bezos founded Amazon in his garage in 1994, his timing couldn’t have been better too– although it took some time for that to play out. When I started CFO for Rent in 1986, my timing was pretty good too, although that also too took some time to play out, creating today a “fractional” industry that has services in most of the C-suite positions. Well, that’s the case with commercial real estate (CRE) investing, my latest endeavor, and today demonstrates that pretty clearly. Let me explain:

Yesterday. When we started building a portfolio of net leased properties nearly a decade ago, there wasn’t much interest from the small investor who were my target partners. The stock market was producing what turned out to be a 10-year tear (with a couple notable dips along the way, like now) and alternative places to put money weren’t plentiful. If the opportunity was big enough, the big money players could jump in, bringing venture capital or private equity funds to the deal. But for the small investor who wanted to invest a few hundred thousand or a million, not a lot of good choices. We started with apartment buildings before they caught fire and sold them off as the fire started to spread. We then moved into medical services, recognizing that our aging population was going to need a lot more care, and our well-chosen portfolio of dialysis and urgent care centers is doing very well today.

Today. But something else is happening today that makes that strategy a challenge. Others have discovered that it was a good idea. Demand outstripped supply and prices went up, up, up. Then fast forward to today, and inflation and the Fed are raising interest rates, raising the cost of financing those higher purchase prices. Suddenly the higher prices and higher borrowing costs are making CRE a much trickier deal.

Tomorrow. So, we are taking a pause in our previous strategy, which was to add a property a year to the portfolio. We’ve concluded that it’s better to wait for a good deal than to try to accept a not-so-good deal. And our healthcare target is now recognized as a great place to be, so much so that properties are being purchased at prices that don’t make sense to us. So we’re holding what we have and waiting for things to settle out. If an attractive deal comes our way, we’ll look at it, even if it’s not in the healthcare space. We just don’t look at high risk businesses like retail or office, nor do we go for high management intensive properties like multifamily residential (although those are still very good if you have strong on-site management).

We’ll bide our time. We’re in for the long haul:

  • low risk to invested capital,
  • solid ongoing returns with good capital gain potential,
  • minimal care & feeding along the way.

We are (still) Your CFO for Rent

Profit vs. Cash Flow – Why is this so hard?

As we experience a strong year in our business, new clients always have a list of questions to guide our client-tailored task list, and one question that appears on more than half of those lists is this one:

“We’re making a profit, why isn’t our cash flow reflecting that profit?”

It’s truly not rocket science, folks. It just requires some out-of-the-box thinking that is reflected in a standard report that virtually every accounting software package produces automatically, if only people would learn how to read it. In trying to develop a short post for this week I scanned the text in Chapter 6 of my book Finance for Nonfinancial Managers, for ideas. The chapter is 5,000 words long, so simply inserting it here was not an option, despite the fact that it’s really well written (in as much modesty as I could muster). So if you don’t have the book, at least here is a 300 word teaser that might help.

If the net profit on your income statement isn’t the same as the net increase in your bank account – hint: it never is – the reasons are clearly laid out in the Statement of Cash Flow. Think of net cash flow as an “adjusted net income.” Some examples:

  • If you sell something but don’t get paid for it in the same month, you loaned money to your customer and that takes cash out of your adjusted net income, because your accrual basis income statement assumes you got paid for whatever you sold.
  • Similarly, if you get paid for something you sold two months ago, that means a customer repaid your earlier loan to them, putting cash into your adjusted net income, since your current month income statement shows no record of that sale.
  • On the flip side, if you bought something this month from a supplier, and consumed it this month, but won’t pay the supplier until next month, you just borrowed money from your supplier. Your normal income statement shows money out (but you didn’t actually pay for it). The loan from your supplier is cash not disbursed that will be reflected in your adjusted net income for this month.
  • And one step further, if you sold something that you’ve had on the shelf awhile, and paid the supplier for it last month, your current month income statement shows an expense – cost of goods sold – that didn’t consume any cash this month. Your adjusted net income will put that cash back into the bank, so to speak, because you already paid for it earlier (and that payout would have shown up your prior month’s adjusted net income). Of course, if your customer didn’t pay for it at the time of sale, the selling price will come back out of adjusted net income until you get paid.

See, it’s not rocket science after all. Need help getting your adjusted net income closer to your accrual basis net income? Call us. We can help. Or you could just read the book.

We are Your CFO for Rent.

What Should Your Board Meeting Look Like?

This post is for privately owned companies and nonprofit organizations that have Boards that they want to make more effective, or those that don’t have Boards but realize they should have. This applies equally to advisory boards as well as fiduciary boards, except that the former just listens and offers advice; while the latter listens, offers advice, and evaluates management performance by how well they take the advice. The guidance in this post is appropriate for both types of Boards, with the goal of making the best use of that meeting time and getting the greatest value from Board members’ time and experience.

Before the Board meets – the preparation packet: Every Board member should be able to review this information in advance of the meeting and be prepared to participate meaningfully in any relevant discussion. As a minimum this should include:

  • The agenda – what topics will be discussed, and who will lead that discussion. Any new documents related to agenda items should be included as well.
  • Minutes from the last meeting – for review and approval by the Board
  • The financial reports – key summarized financials for the period since last reported, including budget performance, if budget management is in place
  • Strategic plan updates – key progress (or lack of) against the goals for the year, assuming a strategic planning process is in place (you might want to do this no more often than quarterly).

Meeting discussion – Facilitation points for the Board Chair to keep in mind:

  • Allow a few minutes at the start of the meeting for Board members to socialize, re-acquaint with those they’ve not seen since a prior meeting, etc., without letting this eat into the committed meeting time. If the meeting includes lunch or dinner, that is even better, as the socializing will be out of the way when the meeting starts.
  • Manage the time for each topic on the agenda. If there is a significant issue that comes up, allow time to fully explore it. At the same time don’t let a minor issue from a talkative Board member sidetrack the discussion.
  • Ensure action items from the prior meeting are dealt with to Board members’ satisfaction, or at least advise them of progress and keep everyone informed about what you expect going forward.
  • Executive Sessions are sometimes needed to discuss sensitive issues without the presence of company executives or staff, e.g., CEO performance and/or compensation. Be careful not to let the Board get into management issues in these sessions. Always remember the key mantra for Board performance: Noses In, Fingers Out.
  • Ensure someone takes effective notes around the discussion, so key points raised at the meeting will be effectively summarized in the minutes. This is especially important for new action items and updates on continuing action items, so no one loses track of them. I’ve found having the Board secretary digitally record the meeting as well as taking manual notes is very effective in developing complete minutes.

After the meeting – any loose ends?

  • The CEO and/or Board Chair should determine if offline discussions with individual Board members are needed as a result of the meeting discussions. This may arise in connection with the work of Board committees, if any, or the need for some in-depth advice from a Board member with particular expertise in a challenging area, or even inappropriate comments at the meeting by an individual Board member.
  • It’s always best to have the Board secretary complete the minutes sooner rather than later, just so memory can add context to discussions and avoid inadvertent mischaracterization in the minutes. In any event the Board Chair should review the final version before distribution.

We strongly believe that every company should make best use of outside advisors in areas beyond the expertise of existing management, whether in the form of a Board of Advisors, a Board of Directors, or a fractional CFO as a start. We do all the above, when needed.

We are Your CFO for Rent.

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