There’s Always a Good Reason to Spend Money

Remember the last time a member of your management team, or a valued worker, come to you with a “great new idea” to help the company get better at something – a new machine that will shorten processing time, a new software service that will help you sell more products or services, or cut the cost of whatever? Of course the idea is always presented with enthusiasm and enticing reasons why it’s a great idea. And now the hard question: How many times has that great idea delivered the promised results and been the best use of your money?

“Almost always” would be a phenomenal answer – and hard to believe. “Most of the time” would be a tribute to your team’s expertise and your leadership. “Almost never” would be a problem, and “I really don’t know” is a BIG problem, and the subject of this post.

Leaders can often see if a change delivers on its promise of doing something better. Processing time indeed shortened, sales indeed went up, etc. The second part is the tough one – was it the best use of the money? Very often ideas get implemented in the excitement of seeing improvements without taking stock of the total cost across the organization and comparing that with the net income improvement produced by the new shiny thing.

  • How much did it really contribute to the company’s bottom line?
  • How did its net profit improvement compare with a different idea that would have required a similar amount of capital as what you committed to carry out the idea you adopted?

The part of the decision making process that typically gets overlooked is the analysis that answers those questions. Of course if there is something that’s critically broken that has to be fixed now, there’s no real opportunity for that hard look. You’ve got to fix it now. Understood. But let’s be honest: most of the time that’s not the case.

You see, there’s always a good reason to spend money. The question that’s harder to answer, given that we all have limited resources, is the one that asks: Is this the BEST use of our money at this time, and down the road? Taking the time to do the analysis and answer that question, before giving the go-ahead, can be frustrating to the avid proponent of the “great idea,” but essential in doing what is best for the company.

Tools that are available to answer that question – besides reining in the boundless enthusiasm that you don’t want to discourage – include:

  • having your finance team calculate the Internal Rate of Return, based on the real Contribution Profit expected,
  • comparing it with what can’t be done elsewhere if the money is spent here and now,
  • determining if this supports the long term direction of the company (as outlined in your strategic plan, of course), and
  • assessing the likelihood that your management team can utilize the full effectiveness of the new idea, an assumption likely adopted without challenge by the presenter of the idea.

Your job as the leader of the team is to resist the urge to jump on the bandwagon until the idea has been vetted as fully as possible, using the tools list above. That’s how you build a great company.

How do I know this? Because we’ve helped build some great companies by “thinking financially.”

We are Your CFO for Rent.

So, time to sell?

The last few years have been wonderful for business owners who wanted to sell privately owned companies that they had built up over time. A sound business has been able to attract multiple bidders and often get a premium price for its owners, never mind the pause caused by the COVID epidemic. That’s behind us now. So, you might ask, now that you think you’re ready to sell yours, is the game still open?

Well, yes and no. Or as economists, politicians, and sometimes consultants are prone to answer: It all depends.

A number of factors will determine the value of any business, including yours. Although the wild ride in the equity markets for technology companies might lead you to think otherwise, these factors aren’t dramatically different from the past.

So, to guide you in your decision to sell or not, here is our list of those factors that in our opinion influence your chances of getting a great price for your company:

1. Is your business producing positive cash flow? This is another way to ask if it’s really profitable. Unprofitable businesses have declined substantially in appeal, except in the minds of turnaround experts and those shopping for bargain purchases. Unless your business has some special attraction, e.g. a technology segment that is in favor, or it’s in an industry ripe for a roll-up and added volume would enrich its bottom line, this could be a deal killer.
2. Does the business have growth potential? If you’ve had trouble making it grow, how will newcomers fare any better? If it’s not likely to grow, but can be maintained, the ideal buyer will be someone who is mostly interested in buying income stability. They will need to be convinced that there is no serious pending competitive threat to that stability. For the owner/operator buyer or most any private equity group, growth potential is essential.
3. Is the business “clean?” Are your accounting books, tax returns and financial statements current and credible, and the legal structure of the company uncomplicated? The absence of any of these can scare buyers because they can be costly to correct and/or may be hiding greater sins just below the surface. The cost of day-to-day “cleanliness” is almost always less than the cost of scrubbing your company in order to close a deal.
4. Is the timing right? Have you decided to sell because sales are in a gradual slide or your 25-year employees are approaching retirement – or worse, zero productivity – and you’re tired of dealing with it? This won’t be appealing to a buyer who wants to buy future prospects, not past glory. Better to sell when you’re on a high, you’ve just launched a new and exciting product line, morale is high, sales are growing beyond your capacity to fill the orders, etc. You get the picture.
5. Are your expectations reasonable? Have you put a fair price on the business that is based on its value rather than the cost to finance your retirement plans in the South Seas? An independent valuation of your company is a good investment at this time, if only to give you plausible support for your asking price.

This is still a great time to sell a good company. It is no longer such a good time to sell a troubled company. It can be done, but you need to be better prepared to demonstrate why it’s worth what you ask. A presentation memorandum (“the Book”) prepared by a good investment banking firm that knows what they’re doing can be helpful in this instance, because it will help you highlight your company’s strong points and give you the time to prepare plausible answers to questions about its weak points. We know some good firms that deliver strong results and work well with sellers.

This could be your biggest sale ever, so do your homework, and let us know if we can help. PS: we can, because…

We are Your CFO for Rent.

Beware These Real Estate Financing Potholes

I have been buying commercial real estate for nearly 20 years, and each investment has involved the use of leverage, taking out a bank loan for as much of the purchase price as possible to increase the investors’ cash-on-cash returns. These days it’s harder than it’s ever been because of the close relationship between high interest rates and stubbornly high prices for the best properties.

But that’s just the numbers, and it’s pretty easy to tell if a deal will make sense based on the numbers. What we’ve recently discovered is that as lenders get more restrictive on what they will charge for such a purchase, other marginal lenders often step in to pick up the transactions that investors pass on because the numbers don’t work out. Enter the opportunity for less sophisticated lenders, like credit unions. As it turns out, these lenders that are traditionally used to lending for the purchase of cars and personal residences can get in over their heads in commercial real estate. And guess who bears the pain of their inexperience – the borrower.

How do I know this? Because I’m the borrower who is engaged with such a lender on a current deal that has been extended twice due to the underwriting team’s inability to efficiently accumulate and evaluate the information needed to make a reasonable credit decision. They have made nearly a dozen separate requests for information, each one only coming after the last batch was received, with no indication of when the entire wish list will end. And on top of that, their most recent request was for the never-before-requested credit reports of my co-trustee, which were frozen for security purposes (as are yours we hope). As requested, we lifted the freeze and so advised them. Nearly a week later we were told they couldn’t access the credit reports because they were still frozen. So, my co-trustee went into their credit bureau files yet again, determined that the files were still unfrozen and available, and that the lender’s staff apparently just didn’t know how to access them. This from an organization that is typically regarded as a respected financial institution, as are most credit unions.

I don’t yet know how the story will end, but my message to you – should you be seeking a reasonably priced loan in today’s market – is this: Qualifying for a loan is more than your satisfying a lender that you’re a good borrower. You need to satisfy yourself that the lender is a good lender. Questions you should ask before you start working with any real estate lender:

  1. How much of their business is lending for the kind of property you want to buy?
  2. How long have they been lending on this kind of property?
  3. How does their credit committee/underwriting process work?
  4. How does their rate lock process work?
  5. How long would you expect the entire process to take, based on past experience?

If any of their answers are troubling, or equivocal, I urge you to actively consider finding another lender. You could save yourself a great deal of aggravation (I say to myself now) and at the same time send the message to the would-be lender that you are not willing to tolerate their lack of experience by letting them learn at your expense. Be assured there are other options that will work better for you. How do I know this? I’ve been learning for a couple decades, and I just learned something new. And now you did too.

When all is said and done, we are still Your CFO for Rent.

Our Take on Financial Metrics

The literature typically calls them KPIs, or Key Performance Indicators. I used to call them Critical Performance Factors, or CPFs, before the idea became popular and in every consultant’s toolkit. Whatever you call them, the financial KPIs should be collected and reported in a dashboard format, an essential addition to your monthly financial reporting package (if not needed even more frequently). Ideally, they’ll be presented in graph or chart form for easy absorption by the nonfinancial readers.

I’ve listed below the 10 KPIs we think are most important for nearly every business. That qualifier means, for example, you don’t calculate Inventory Turnover if you run a services business that doesn’t maintain a material amount of inventory, and you don’t need a Debt Coverage Ratio if you have no debt. Just a little common sense will weed those out.  As for those that apply to your company, you will be amazed at the insights you’ll get if you capture, report, and look at these regularly. OK, enough generalization, here’s my list:

  1. Gross Profit Margin – Knowing the dollars of gross profit is good, but knowing the percentage of every sales dollar that drops to gross profit is even better, because it helps you see if direct costs are eating away at your profits in not-so-obvious ways.
  2. Net Profit Margin – This is a no-brainer, for sure. What percent of every sales dollar are you keeping as bottom-line profit? Again, remember that operating expenses can eat up a lot of profit if we’re not watchful, and percentages keep us alert when the numbers don’t.
  3. Current Ratio – Easily gleaned from your monthly balance sheet, this is a quick way of seeing if your current assets are enough to cover your current obligations. Any ratio close to 1:1 is a problem. If you don’t have inventories the equivalent metric is called the Quick Ratio. If you’re spending time pleading with creditors or bugging customers, this is likely why.
  4. Operating Cash Flow Ratio – This ratio of cash flow to current liabilities helps you keep aware of your ability to pay bills as they come due without strain, a refinement of the Current Ratio and Quick Ratio that gets down to actual cash in the bank, without having to figure out how your receivables and inventory will turn into cash when the bills come due.
  5. Days Sales Outstanding – How much of your sales is still tied up in receivables? If your terms are 30 days and your DSO is 60, 75 or more, you have a collection problem.
  6. Accounts Receivable Aging – Knowing your DSO is important, but receivables past due 90 days and those past due 45 days figure into your DSO equally. So to have the complete picture, what percentage of your total AR is actually 40, 60, or 90 days past due? That can be an eye opener, and should always accompany the DSO calculation for a complete picture.
  7. Cash Conversion Cycle – How many days does it take for a dollar paid for inventory to come back to you as a collected sale? Remember there is buy it, pay for it, sell it, and collect the money. This will tell you something about the adequate capitalization of your business. Elements of the calculation include your AP cycle, the average days you hold inventory, and your DSO.
  8. Debt Service Coverage Ratio – If you have a bank loan, your bank almost certainly follows this, and requires it to be at a certain minimum. You should follow it too, especially if you’re in a low margin business. Don’t let your bank surprise you.
  9. Firm Order Backlog – How much business is on your books for future delivery? If you have to make what you sell, or buy it from overseas, there are lead times to consider. Not to mention the anticipated trend in sales in the upcoming months. If this is dropping, look out!
  10. Return on Equity – If you’ve considered retiring or just selling the business, this is your first step in seeing what an outsider will want to see. How much are you earning, as a percentage of what you’ve invested over the years, will tell you something about your ability to get out of the business what you put into it. It also tells an outsider what they should expect if the business were theirs. Far from the whole picture, but it’s a good start.

And now the kicker – your dashboard should chart each of these KPIs over time – for 6, 9, or 12 months, so you can see the trends developing before a leak turns into a gusher. Lots more details in Ch. 7 of my book if you want to read further.

Sorry for the length of this post, but I wanted you to get the tools we think best to measure your company’s financial performance, and after all, we know this stuff because…

We are Your CFO for Rent.

The Value of a Management Retreat

I joined a southeastern US based client of ours last week for their quarterly offsite management retreat, a regular exercise they have pursued in the interest of keeping their goals current and relevant and their managers focused on working as a team to meet the goals. The process and the outcomes were invigorating for everyone, and my observations are the subject of this post, perhaps with the thought that our readers might find the motivation to try a similar approach to team building.

The client is a small but growing company with strong goals and a financial plan that is on track to grow revenue by about 50% this year. They are opening branches in several cities where the demand is strong and their high customer service record is expected to enable them to take market share from less responsive competitors. But all of that growth requires a strong team effort, and as successful entrepreneurs know, lots of working capital to finance growth – especially true when the growth includes building and guiding remote management teams.

The meeting facilitator, a seasoned leader of such events, created a series of group-think exercises that challenged the team to develop function-based action plans around the company’s goals, working in teams on areas like marketing initiatives to develop a flow of leads, building a sales force to close those leads, the needed closing rate, and the internal resources that would be needed to support all that outreach. All in two days. The walls were covered with charts of action items developed around the assigned goals, while the facilitator gently nudged each group to keep focused and aware of the direction the other groups were taking.

Our group was focused on finance – how to make sure we had the team and financial resources to support the company-wide activity. One of the issues that came up was the difference between what we could afford to spend money on and what we needed to spend money on to support the goals. The point had to be made that the two are not the same. If spending money we don’t currently have would further the growth in very profitable ways, the challenge has to be how to attract the needed capital, not how to restrain our activity to the amount of cash on hand. Easy to say, not so easy to accept, especially if you think your CFO should be committed to restrained spending regardless of the cost. In the end, we identified ways to attract the needed capital – bank borrowing, SBA-backed loans, outside investors – that might be viable options to finance profitable growth. The message from our finance group was clear: when projected profits are rich enough to pay for the cost of additional capital, the company should establish an action plan to bring in the capital.

And when all the groups presented the results of their group-think efforts, the synergy of their efforts was truly impressive. While our firm doesn’t organize or facilitate such events, we know people who do. My advice to company CEOs: If you have an understanding of:

  • The strength and ambition to go after more than you already have,
  • The opportunities to grow rapidly in profitable ways,
  • The internal changes that may be needed optimize your chances of success, and
  • The understanding of the risks involved and how to deal with them,

Then do it! Those of our readers who have worked with us will recognize those bullets as the paraphrased elements of a SWOT analysis that every company should undertake before developing a strategic plan. Our client’s preparation for last week’s event showed they understood that and were prepared. And we were too, because…

We are Your CFO for Rent

Who needs a board of advisors?

A question asked by private company owner/operators – perhaps when they’re asking advice from someone they trust, their banker, lawyer, CPA, or their sister-in-law. It’s not that they don’t think they need advice – OK, for some of them that’s true – it’s just that having a structured group of advisors sounds like (a) a lot more effort than it’s worth, and (b) a lot more sharing of private information with outsiders than feels comfortable.

Well, the second part is certainly true, because you can’t expect good advice if you don’t share the whole picture around the advice you’re seeking. But I want to challenge the first part, not because it doesn’t require some effort, but because the company that has an advisory board invariably gets value far in excess of the effort to organize and maintain one.  Think about this for a moment.

Let’s say you run a company that manufactures and distributes consumer products. You spend a full day managing all the activities in your company, hopefully through a band of trusted employees, who deal with the day-to-day tasks in marketing, sales, plant operations, shipping, accounting, human resources, etc. And they’re working a full day too, in their respective areas of responsibility. How do you get the benefit of solid guidance on questions like:

  1. Will interest rates continue to climb? Do other banks have lower rates than your bank? Should your next equipment purchase be a cash purchase or a financed one? Would your banker tell you and risk losing your business?
  2. How are labor regulations trending in your city/state? Aside from the cost of hiring and keeping staff, insurance premium trends, etc., will new rules or rates make it wise to consider a PEO rather than doing it all in-house? Would your insurance agent tell you and risk having someone else provide the relevant insurance?
  3. What competing products are coming to market that could take away market share? How are they doing in places where they’ve been introduced? What is the best way to compete? Will your marketing manager know the answer because they researched it on weekends?
  4. Are there new software products out there that will efficiently produce a financial dashboard that would make your spending decisions smarter, your accounting reports easier to understand, or your performance metrics easier to track? Would your accounting manager have time or interest in researching that on top of their already packed daily routine? Is this really an area you should rely on your CPA to keep you updated?
  5. What are the potential benefits and pitfalls of a new idea you had, beyond those you had already thought of, from the perspective of an actual outsider?

These questions come up all the time in today’s fast-moving world. They don’t announce themselves in the newspaper or on TV, they just happen somewhere just about every day. When you have the time to think about an issue, a risk, an exposure, you can certainly pick up the phone and call your banker, your insurance agent, your attorney, etc. and ask them about it. When you have time to think about it, that is. But what if you had a small group of people who came to your office (or zoom link) on a regular schedule, and you could count on them collectively to:

  1. have broader market awareness about things that touch your industry than you have time for,
  2. have genuine concern for your company without regard for what’s in it for them, and
  3. are smart enough to understand how trends and new developments might impact your company.
  4. offer advice without any requirement that you take it, as long as you hear them?

Wouldn’t that be an asset worth having around? We think so, and clients who engage one of our team to sit on their advisory board think so too. And hey, would we lead you astray? Remember…

We are Your CFO for Rent.

The risks of aerospace manufacturing

An area of manufacturing that has seen dramatic ups and downs over the past few years is aerospace. Commercial aircraft orders fell during the pandemic as people stopped traveling. Then everything opened up again and people started traveling even more than before the pandemic. Airlines started ordering more planes with more fuel efficiency and lower operating cost. All that pent up demand after several years of depressed demand resulted in – surprise – inflation in everything from raw materials to labor. Especially labor, since all those workers now have to spend more for things like eggs, rent and cars. And then Russia had the poor judgment to invade Ukraine, resulting in western countries shipping weapons of all kinds to Ukraine, and then trying to rebuild their supplies. To top it off, China scared everyone that was relying on their low cost sources for almost everything, and we’re now trying to make more stuff here instead.

Supply chains have been stressed to the breaking point and a recent study of the industry by Deloitte predicts this isn’t going to end anytime soon. Their take on potential solutions and rising challenges include:

  • A&D companies getting stronger control over their supply chains to better manage risk,
  • Increased adopting of digital “smart factory” solutions to streamline design and development,
  • Rebuilding a workforce despite still high turnover, and with greater digital skills besides,
  • Dealing with decarbonization pressures in an industry already challenged to make progress,
  • Responding to emerging market opportunities, such as space-related technology.

No wonder the cost of building airplanes in the USA is going up dramatically – expanded demand and restrained supply. How will top tier manufacturers respond? Our experience says one big way is to force the inevitable cost increases down to their suppliers by demanding long-term agreements (LTAs) at fixed prices for as many years as they can get. And their suppliers will get the message and will work equally hard to pass the pain on down the line to their suppliers, which is where some of our third tier clients get hit.

One client of ours is being asked to accept fixed prices until the end of the decade, after absorbing the unanticipated cost increases of the past few years from the last round of fixed price LTAs. Their big customers know costs have increased and will increase more yet; they just don’t want to pay the price on their bottom line. Better to have the smaller firms spread the pain around, or so their procurement strategy suggests.

We think it’s time to recognize that another dollar of sales may not be worthwhile unless it brings something to the bottom line. We think the big guys should play fair, price their products and services at reasonable levels, require their customers to accept the result, and not use their size and economic muscle to pick on the little guys. We think it may be time to say good-bye to fixed price LTAs. We mostly represent the little guys, of course, because…

We are Your CFO for Rent.

Will you lose your job? Your company?


I have written before about my concerns about AI, ChatGPT and the like, and even used it to write one of my posts (with full disclosure, of course). Today’s post goes into more depth about the potential risks from AI, not just from a security standpoint but from the viewpoint of job security and the transformation of the world economy that may result in the next decade or so. And for that viewpoint I have seen no better description of the potential than a post I read today from Dave Berkus, a long-time business associate and highly successful entrepreneur, who I’ve interviewed in the past and whose writing I continue to follow with great interest. Dave writes well and always has a meaningful message for his readers. I particularly value this one.

For those of you that may think I’m overly focused on cybersecurity and AI, you may be right. And I may be right too. But I see part of our role to be aware of problems before they arrive, not after they’ve hit us. Why do I think that way? Because…

We are Your CFO for Rent.

Risk Management and the Market

A friend and I were discussing our respective investment approaches this week. He is happy with having a lot of cash in safe investments such as CDs and money market funds earning around 5%, a position with which I agree. He also holds marketable securities for which he is hoping for a 5% return this year. Many prognosticators are looking for similar market returns in this up and down year.

But think about that for a moment. If risk-free money is earning 5%, that means that any investment return with risk attached should be earning enough to compensate for the risk. Now the question: Is 0% adequate compensation for the risk of holding stocks with fluctuating valuations that are a bit high by historical standards? Clearly the answer is no. It’s reasonable to expect at least a 10% or more additional return for taking on risk, just as when you own a business. And the riskier the investment or the business, the greater should be the risk premium over safety.

So what should my friend (and I, in full disclosure) be doing with that money that is at risk but not likely to earn anything additional in return for taking that risk?

  • Sell the stocks and move the cash to money market funds, hoping there will be a clear sign when to move it back again, as interest rates are about to decline and market valuations are about to move up again? Hah! Good luck with that bit of crystal balling.
  • Sell the stocks and move the money into CDs and hope we guessed the right maturity for those CDs so that we will be able to convert them back into stocks when the market is about to turn up? Well, at least in this case you only need one crystal ball instead of two.
  • Adjust our portfolios to remove the riskier holdings and add to the more solid companies that are most likely to grow faster than the general market when the interest rate/inflation thing settles down? Probably a sensible strategy except for the crystal ball thing again.
  • Sit tight, trust our earlier judgments, and recognize that some of our holdings will do better than others, some will get sold along the way, and opportunities to add others will arise as well? For better or worse, that is the strategy I’ve taken, although I’m not sure what my friend plans to do.

Every action has consequences. What do you think? What would you do? What are you doing? We welcome your comments and thoughts. And despite the distinctly personal nature of this post,

…we are still your CFO for Rent.

Cybersecurity is (not) our problem


One of the ways I try to make a difference in the world of business is by serving on boards of directors, both fiduciary and advisory, for privately owned companies and nonprofits. A year or so ago I raised the issue of cybersecurity for one of our larger clients, a large operator of franchised fast food restaurants for whom I have served for several years as a member of their Advisory Board. The executive in charge of IT resisted bringing the discussion to the Board because, as they maintained, the data they managed was controlled by their franchisor, who had responsibility for keeping it safe. After some coaxing the issue made it to a quarterly meeting agenda, and was then disposed of after a brief discussion, based on the premise that it was the franchisor’s job and they had no risk they needed to manage.

This week, about a year later and one day before this quarter’s scheduled meeting, the President announced in a short email that they had to cancel the meeting because they have been dealing with a cybersecurity incident. After a week of working the problem they still don’t have access to all their files, and thus were unable to prepare for or participate in the scheduled board meeting. We even got an email from their attackers – likely the same message our client received – outlining the steps to take to make the payment necessary to get access to their files, with lots of warnings if they don’t act in accordance with those steps. Serious language with a very serious intent – to be paid a lot of money.

Admittedly, since we are only an advisory board, the company’s management has no obligation to follow our advice or even hold meetings. We only offer advice, we don’t issue orders. A fiduciary board might have reacted differently a year ago and almost certainly this week, so management has been working within their authority. But you have to ask yourself: Why was it so easy to dismiss the risk management issue a year ago, when systems in place apparently didn’t have the safety that management thought they did. Perhaps an assessment by an outside expert – an option that was offered but not taken a year ago – might have shed fresh light on the nature and magnitude of the risk.

Because only when you understand what your company’s risks are can you formulate an effective defense against them. That’s why we have advisors, consultants, and outside experts. How do we know that?

We are Your CFO for Rent.

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