Managing Cash via Working Capital Optimization

Here is a trick question for you: Which is more important – Profitability or positive Cash Flow?

For those of you thinking, “Wait, how are they different in the first place?”…just keep reading.

As you noodle on that question, consider that 82% of entrepreneurial businesses fail because of poor cash management!

 Continue reading

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 Dave Chase is a partner at Advanced CFO Solutions.  At Advanced CFO Solutions, we provide outsourced accounting and financial services. We have served with more than 450 companies. Our clients see us as their strategic, outsourced CFO.  We provide CEOs with critical information so they can make key decisions with confidence.  We do this by leveraging our experience and technology to provide actionable information and results.  And, we do it for a fraction of the cost of a full time employee.  For more information, click here.

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What a CEO wants from their CFO

Hello.  My name is Dave C.  I…am a CFO.  That’s what I do well.  I fancy myself as meriting a few other monikers like Strategist, Leader and Adrenaline Junkie.  Are these appropriate qualities for a CFO?  If so, am I focused on the right output the CEO and the business needs to thrive?  Recently we asked our top CEO clients what information THEY want from their CFO.  130 of them eagerly responded, anxious to let us know what output they value from their CFO and the character traits they expected them to have.  This, part 1, deals with the output a CEO expects.

It shouldn’t come as a surprise for a CFO that number one is Accurate, Reliable, and Timely Financial Statements.  Years ago when I got my first shot at the CFO role I read a Deloitte & Touche pamphlet that should have been entitled, “Training wheels for the CFO”, but was actually called, “Breathing Lessons.”  They agreed with the CEO and labeled solid financial statements as the “dial tone”.  Frankly, without it nothing else a finance team does really matters.

Secondly our CEOs wanted a good Cash Flow Forecast.  Note I didn’t say, “Cash Flow Statement.”  Very few senior financial personnel would have ranked this #2.  They’d have ranked it as important, but #2?…not likely.  Too many of us focus on the income statement and the balance sheet and forget about cash flow.  To use my mother’s words, “Shame. Shame.”

Three (Budget to Actual Comparisons) and four (Key Metrics) are highly ranked as well, but then rest of the activities fall quickly off in the rankings.

Take note that three of the four explicitly (and truth be told, all four in reality) require analysis.  CEOs fully expect that we interpret the information we are feeding the organization.

And the fact that the other work we do is much lower in the rankings doesn’t mean that it is irrelevant.  A more proper interpretation would be that without these four deliverables, we aren’t delivering the basics of what the CEO wants from us. 

Happy analyzing.

David Chase has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 14 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

Bootstrapping Isn’t Dead

While lending is easing again, the lessons and reminders from a difficult borrowing environment these past few years should be remembered.

Savvy entrepreneurs realize that the most readily available and cheapest sources of capital are to be found inside their businesses…aka ‘bootstrapping’.

Finding, developing strategies for, and managing wisely the cash already in your business can carry you through difficult periods in your business driven by either constriction or growth.

In short, these strategies usually amount to the following:

  1. Actively managing the collection of cash owed to you by customers, rather than passively letting it come in;
  2. Minimizing the amount of inventory you carry;
  3. Carefully analyzing and controlling the payments you make to your vendors.

Each of these very general strategies has many options to consider, but some are more impacting than others.

The available information on the internet to help educate entrepreneurs on the strategies to manage their cash for growth is almost endless.  Nevertheless, here is a link to a well written piece by Scott Bergquist of Silicon Valley Bank and posted on CFO.com.

Another source that holds a tremendous repository of articles to help guide entrepreneurs manage their cash is Inc.com.

David Chase has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 14 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

Understanding Your Business Through Trend Analysis

 

 

Trend analysis is a critical, and all too often overlooked, element of understanding what is happening in one’s business.  Far too often we see that companies are looking only at the unformatted, current period financial statements.  By doing so, they are missing a valuable opportunity to be educated by their financials statements about the current period performance, but also the likely near-term performance of their business.

 

Business cycles vary widely by industry, but typically, a one-year look by month (graphically where possible) at the key financial metrics of a business is ideal.  Identifying the key financial metrics to measure is a critical step as well that shouldn’t be glossed over.  In addition to a one-year look, a more detailed trend analysis of the past 3 months and a comparison to the same period from the prior year are two other great comparators and teachers.  Below are some examples:

 

There are many ways to accomplish and view these trends including: reporting software packages (local or in the cloud), accounting software, or simply excel, to name a few.  Some are better than others, but as long as you’re looking at the data in the right way, you’re learning.  Here is a brief but helpful ehow.com treatise on the subject.

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13 Week Cash Flows – An Effective Tool for CEOs and CFOs

The 13-week cash flow has emerged as an indispensable tool to help our clients actively managing cash flow in businesses where cash flow is tight.

By the way, this does not mean that a business is in trouble – rapid growth is just as likely to cause a cash flow crunch as is operating at a loss.

Unlike the common practice of backing into an estimated cash flow based on high level working capital assumptions, the 13-week method is built upon a strong understanding of the underlying cash sources and uses in a business.

Fundamentally, the 13 week cash flow estimates detailed weekly receipts based on revenues, offset by weekly cash expenditures organized by type (e.g. payroll, inventory purchases, taxes, other vendor payments, etc.).  Experience with our clients has taught us that the most important step in creating a 13-week cash flow is to perform an estimate-to-actual comparison each week against the just completed week.

An increasing number of savvy investors and finance institutions are asking for, or even requiring, 13-week cash flow forecasts…an indication that a business has a good handle on short-term cash needs and is less likely to be caught by surprise – a very good thing in the mind of a bank or investor!

There are many websites discussing the merits of 13-week cash flows and the one from wikicfo.com is just one good example.

David Chase has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 14 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.