CFO service helps owners grasp financial data
It's understandable to John Lafferty that “the typical business owner is mostly interested in what he (or she) does. That may be selling. Or production. Or consulting. It's usually not financial record-keeping.”
Consequently, Lafferty continues, “Most businesses are not managed as well as they could be. Most business owners were never schooled in cash flow. They don't know what a balance sheet can tell them.”
(Hmm. Cash flow. That's what's left in the company checking account at the end of the month and equates closely with profits. And the balance sheet is OK if there's a positive number at the bottom of the columns.)
“More owners are coming to grips with financial issues,” says Lafferty, founder and principal of CFO-Pro, a Naperville consulting firm that provides short-term chief financial officer services to privately held companies. “P & L (profit and loss) results over the past two or three years haven't been pleasant.”
CFO-Pro isn't the only interim CFO business, and there are many CPAs who take time to educate their small-business clients about financial data. Even so, and despite the fact that he is a CPA who can crunch numbers with the best, Lafferty's most important role may be helping business owners gain an understanding of their finances.
Lafferty's process begins with the initial call from a prospective client. “We get into the guts of the business,” Lafferty says. “We talk operations. We talk about the business' customers. We explore how the business bills, how it collects, when it pays its vendors.”
The intent, Lafferty says, is to help business owners understand how their decisions impact their business' financials — and how those financials impact their decisions.
The issues Lafferty sees most often are declining margins, overhead and break-even sales.
Margins fall because management “is not watching costs,” Lafferty says. Overhead, primarily but not solely salaries and benefits, “should be tracked every month.”
Maybe more disturbing to Lafferty is that “nobody pays attention to break-even sales. How many dollars of sales do I need to balance the bottom line? If I want to hire a key manager who will cost $75,000, how many additional sales (at the proper margin, or profit) must I produce to cover the cost?”
Key indicators Lafferty watches are asset-to-liability ratios, which, he says, should be at least two-to-one, and the number of day sales in receivables and payables. Day sales are the number of days a business takes to collect its receivables — and how long it takes to pay its bills.
That's pretty simple. If you take 60 days to collect but pay in 30, “then you're letting your customers use your money,” Lafferty says. “You have a collection problem.”
Worse, you likely have a cash flow problem.
Ÿ Contact Jim Kendall at JKendall@121Marketing Resources.com.
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