Financial Statements or Cash Flow Forecast

Which one should you be paying the most attention to?

Some of the most frequent questions that I get asked in my consulting practice are around financial statements and cash flow forecasts. For example:

1.     If I have a cash flow forecast, why do I need formal financial statements?

2.     Which is the more important of the two?

3.     Why doesn’t my cash flow forecast match my budget?

4.     Is my cash flow statement the same as my cash flow forecast?

Often business owners and managers will look at the cash flow forecast and see that they have sufficient cash coming in for ongoing operations and conclude that the company is doing well. The problem is that the cash flow forecast does not address the profitability of your company. It is a model of the future and is as good as the inputs and modelling software used. Many assumptions are made in preparing a cash flow forecast and there are several software programs that the cash flow can be modelled in, including Excel, Dryrun and others.

To get a better understanding of this issue, we will take each of these questions in order.

1.     The cash flow forecast vs financial statements is the most common question I get. This is because, for most small to medium-sized business owners, the most important data is where am I going, not where have I been. The cash flow forecast is forward-looking, what you are expecting in your business, whereas the financial statements tell you where you’ve been.

2.     Cash flow forecasts and financial statements are both valuable in their own way but it's important to understand the difference between them. Financial statements are made up of the Income Statement, Balance Sheet, Statement of Cash Flows and Statement of Owner’s Equity. The Income Statement reports on your company’s profitability over a period, usually a month or a year. The Balance Sheet is a snapshot of your assets, liabilities and shareholders equity. It shows the company’s resources as well as its capital (debts and owners’ equity). The Statement of Cash Flows shows how the company’s money was used, whether for operations, investing or financing.

The Cash flow forecasts are internal management documents that are an estimate of future cash coming into and out of your company. If you are applying for a loan or bringing in an investor, they will most likely ask for both sets of reports.

3.     Cash flow forecasts are not the same as the budget, but both are forecasts of future events. Cashflow forecasts are dynamic but narrow in focus and look only at when your company receives and spends cash. They are usually updated on a weekly or monthly basis. A budget on the other hand is static, it is usually prepared before the start of the fiscal year and should not change over the year. The budget is based on aspects of the company's operations and can be broken down by department or division. Often, the budget includes KPIs that affect bonuses and other incentives for employees.

4.     Cash flow forecasts and Cash Flow Statements are also known as Sources and Uses of Cash and are often confused with each other. As previously stated, a cash flow forecast is a forecast of future events while the Statement of Cash Flows is a formal financial statement that gives a view of how money was used in the past fiscal year.

To answer the question in the subheading, you need to pay attention to both the cash flow forecast and the financial statements. They provide different but vital information to your company.

References:

Corporate Finance Institute, Sources and Uses of Cash Schedule, February 20, 2022; https://corporatefinanceinstitute.com/

Image courtesy of www.freepik.com

Do you have the right employees?

Are your employees helping your company to be the best?

In Jim Collins’ book, Good to Great, he talks about the five levels of leadership. This article is about ‘Level 2: Contributing Team Member.’ 

 What I’ve noticed in my career as a Chief Financial Officer, are managers hiring employees and keeping them even though they aren’t a good fit for the company any longer. These employees were hired for a particular skill set for a specific position and no longer meet the needs of the company, but don’t fill that need anymore.

The most common hire is what Collin’s calls a ‘Level 1: Highly Capable individuals.’ These are people who have the skill set you are looking for to fill a position in the company. These are good employees, but they may not get you to the next level.

What you need to get you to the next level are the ‘Level 2 Contributing Team Members’ within your employee pool. They not only have the skills we are looking for but use their skills to help the company succeed.

You probably already know what kind of employees you have. Some will be level 1; some will be level 2 and you will have some that don’t meet the minimum of level 1. You may not be able to have all your employees be level 2 but having some will inspire your level 1 employees to do better. It’s the employees that don’t meet level 1 that are the problem, (they can bring down your corporate culture and cost you money). To paraphrase Jim Collins analogy of a business being a bus, make sure you have the right people on the bus, in the right seats on the bus.

It's vital to remove from your company the employees that don’t meet the minimum level any longer, as soon as possible. Their attitude and work ethic will undermine the company and adversely affect the rest of your employees. You want all the team members pulling in the same direction.

The bottom line is these underperforming employees are reducing your company’s profitability, increasing your stress and sabotaging the effort of the other employees.

References:

https://expertprogrammanagement.com/2018/05/good-to-great-collins-summary/

What Is a Fractional CFO, and Do I Need One?

How can a Fractional CFO Help your business?

To answer this question, you need to know what a CFO is and what they can do for your business.

First, a chief financial officer (CFO) as the name implies, is the head of an organization's finance/accounting departments and is responsible for the fiscal health of the business. The CFO is responsible for building the finance and accounting team, financial planning and analysis, risk management, budgeting, timeliness and accuracy of financial reporting, government compliance and often the human resources among other duties based on corporate resources and needs.

A Fractional CFO is a fully qualified CFO who is available on a part-time basis or retainer. You get the benefits of a CFO but only pay for the time you need them for.

Who is this service for and why or when would I need one?

1. When your business is growing quickly but you do not have a budget to hire a full-time CFO, hiring a fractional CFO is a cost-effective way to get the services that you need, and you can create a tailored plan to your specific business needs.

What are the three most common challenges that our customers experience?

1. Overworked – having to take care of all the details of the work to ensure everything is being done properly. 2. Overwhelmed– by the myriad of decisions that need to be made, are they making the right one? What problems are looming that they aren’t aware of? 3. Underpaid - (in relation to effort) Cash flow.

What are the top three questions people ask before engaging your services?

1. How much is it going to cost? Answer: We’ll tailor an affordable plan specific to your company’s needs and budget. 2. What does this solution look like? I’m too busy - do I have time to tackle this now? Answer: I’m here to help reduce your business stress. 3. Rarely said out loud but always on their minds: “Is he going to think that I have no idea what I’m doing?” Answer: No, I think you’re brilliant for going this far.

What are your top three tips for working with a Fractional CFO?

1. Prepare to get out of the weeds. To achieve your goals, you need to step away from the day-to-day and work on driving your company forward. This is easier said, than done and requires discipline and accountability. We work on the premise of marginal gains; not tackling overwhelming tasks simultaneously. 2. Understand that you might take you out of your comfort zone and will forward you in taking actions that are more in alignment with your overarching goals. 3. Hone your leadership skills. Your team looks to you for direction and guidance, you need to give it to them with absolute confidence and clarity.

Contact Arbutus Management Consulting to help you find how a Fractional CFO can help your business – patrickh@arbutusmc.com or +1-403-404-6791.

References: Oracle Netsuite, What is a Chief Financial Officer (CFO)? https://www.netsuite.com/portal/resource/articles/accounting/chief-financial-officercfo.shtml#:~:text=Chief%20financial%20officers%20hold%20the,and%20board%20on% 20strategic%20direction

No purchase order? No work

Should you do that work outside of scope that your your client wants you to do?

Anyone who has worked in construction or for a service company can tell you that at some point, the client will ask you to do work that isn’t on their purchase order. A purchase order (PO) is a legally binding document from a buyer to a seller for goods or services (when accepted by the seller). The question then becomes, should you do what the customer wants? Will the customer honour the added charges if they aren’t listed on the PO? The PO will typically say what goods or services are to be provided, the timeline for their delivery and any additional requirements.

If the request is for a small change that you can easily accommodate without spending much money or time, then it makes sense to accept the request. In this case, you build goodwill with the customer for minimal cost. However, if the client wants a significant change that is going to affect the time or cost of the project, then you should carefully consider whether to do the change or not. If you go ahead with the change without a new PO or change order (CO), the client may not pay you for your work. The customer may not be legally obligated to pay you if you do the work without proper authorization (a PO or CO).

I’ve encountered this problem many times over my career. For a small contractor or service provider, it can be confronting to tell your customer that you can’t do something. The customer might not hire you again if you don’t do what they want. If this is the case, you must ask yourself if the risk of not getting paid for a project is more than the possible loss of future income from that customer.

One example I know of; is a small construction company that was working as a subcontractor on a large project in Calgary. They were asked to do approximately $50,000 worth of work not covered by their PO. The company decided to go ahead based on verbal assurance from the site manager. When the customer received the invoice, it was rejected by the same site manager because there wasn’t a PO or CO to cover the work. For the customer, the $50,000 was an insignificant amount compared to the total budget for the project, but for the small construction company, this was equal to their payroll for two months. Even though this story had a successful conclusion with the small construction company eventually getting paid, they incurred added costs, including legal fees and interest expenses. They also lost a customer.

The bottom line is that you need to weigh the risk and rewards of doing work outside of what you and your client have agreed on in the PO.

You can watch a short video on this topic at:  https://vimeo.com/953646779/248218ffca

Image Curtesy:

<a href="https://www.vecteezy.com/free-photos/construction-site">Construction Site Stock photos by Vecteezy</a>

Why you should take your time hiring new employees.

Don’t make the mistake of hiring fast and firing slow.

There are many articles about the advantages of “hiring slow and firing fast,” but many companies do the exact opposite. During my career, I’ve seen managers hire employees as fast as possible to fill open positions. Usually, these employers were looking at only the short-term needs of their company. They had a sudden opening to fill or a project which needed to be done right away. By only addressing only the immediate requirement, you might be hiring an employee that meets your immediate needs but wasn’t a good fit long-term fit for your company. The notion that anyone is better than no one doesn’t always work out in the company’s favour.

Once you have the employee, it can be challenging to let them go. You hire someone for an immediate need, but they don’t fit with your company – you then hold onto them because replacing them is difficult, confronting, expensive or embarrassing.

-    Reluctance to fire the employees because there is a big job coming up that the company is sure to get, and the employee will be needed for that project.

-    The cost of replacing the employee is too high, i.e. recruitment agency and training costs.

-    The difficulty of finding the right person for the job.

-    Not wanting to admit that hiring the employee in the first place was a mistake.

Not firing employees when they don’t work out for your company can be as big a mistake as not taking the time to hire the right employee in the first place.

The Harvard Business Review has an excellent article on “Hire Slow and Fire Fast” at the link below. https://hbr.org/2014/03/hire-slow-fire-fast

Contact Arbutus Management Consulting to help you find how a Fractional CFO can help your business – patrickh@arbutusmc.com or +1-403-404-6791.

Image curtesy:

<a href="https://www.vecteezy.com/free-photos/business">Business Stock photos by Vecteezy</a>

The Life (and Death) Cycle of Small Business

Start-up, growth, plateau, (and often decline)

Entrepreneurs are often experts in their field. An entrepreneur has an idea or sees an opportunity and starts a business. If their plan is successful, their business grows and matures into a growing concern. Over the years, I've seen many small companies go through the cycle of start-up, growth, plateau, and often decline. Not all small companies will experience this cycle, but many of them do

Start-up

Often the most challenging stage of any business is the start-up cycle. Taking that original idea or opportunity and turning it into a business is a challenging step. The entrepreneur is often working on their own and handling all of the activities in the company. These are the most stressful times for the new entrepreneur; they are spending a great deal of time, effort and money to get their business without any certainty of success. Without a proper business plan, this step is even more difficult.

Growth

If the company makes it through the start-up cycle, it often moves into the growth phase. Over time the business expands, taking on more work and adding employees. At some point, many entrepreneurs face the challenge of too much to do without sufficient resources. The cycle continues until they reach a critical mass where their company has outgrown the entrepreneur's ability to manage their business effectively.

 Plateau

Growth is an exciting phase of the business, but it doesn't last forever. The plateau is the phase where the company has reached a critical mass and has outgrown the entrepreneur's ability to manage the business effectively. Operating the business may not stop, but the plateau is where growth and innovation stops.

The plateau occurs for different companies at different points, but in my experience, it is often when the company has between 5 and 20 employees. Some companies will remain there for years and sometimes decades. Having the company plateau is not necessarily a bad thing if the company is stable, and the entrepreneur feels comfortable with where their company's performance.

The plateau occurs for different companies at different points, but in my experience, it is often when the company has between 5 and 20 employees. Some companies will remain there for years and sometimes decades. Having the company plateau is not necessarily a bad thing if the company is stable, and the entrepreneur feels comfortable with where their company's performance.

The decline is often fatal for companies but doesn't have to be. One famous example of business decline is Atari. Started in 1972, they dominated the video game market through the 1980s. The company almost disappeared in the 1990s and early 2000s in the face of intense competition from companies like Nintendo. Atari, like many companies, became complacent about their market domination. They continued to rely on their tried and true products while their competitors came out with new and better offerings. Surprising many video industry pundits, Atari has resurfaced as a force in the video game market with their new retro video games.

The cycle of start-up, growth, plateau, and decline aren't your only options.

Contact Arbutus Management Consulting to help you find how a Fractional CFO can help your business – patrickh@arbutusmc.com or +1-403-404-6791.

References: Atari https://www.wired.com/2012/06/atari-40th-anniversary/