How a Part-Time CFO Will Conduct Risk Analysis on Your Business
The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.
This means you will have:
One of Canada’s leading CFOs, working with you on a part-time basis
A local support team of the highest calibre CFOs
A national and international collaborative team of the top CFOs sharing best practice (the power of hundreds)
Access to our national and international network of clients and partners
With all that support and expertize at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.
In particular, your part-time CFO will work closely with you to take on the burden of designing the roadmap for the business.
Although our review process will reveal areas of weakness you specifically require help with, we take a very proactive approach to finding out where we can best help you. In other words, we don’t expect you to tell us what you need because that way, you are left to do the thinking. We work through a detailed methodology to ensure that no stone is left unturned.
Your part-time CFO will work with you to understand the risk profile of the business and of the shareholders. Too many initiatives launching or running concurrently can be problematic.
By managing the company’s risk profile and the risk profiles of the shareholders the whole business can be brought into alignment and can operate as a unit rather than as a set of individual parts.
When our part-time CFOs look at ‘risk’ in your business, they also work with you to:
Identify future risk areas across the business and share that information with key employees.
Include significant risk areas in the business plan.
Test assumptions to find weaknesses in the business plan.
Evaluate alternative scenarios and approaches which may lead to improved outcomes.
Consider contingency plans in case things go wrong.
Provide forecasts based on risk analysis.
Provide your organization with an elevated sense of credibility (with a high calibre CFO as part of the team) your organization will be perceived by funders and other third parties as a much ‘lower risk’.
Act as a sounding board to discuss and critique your plans.
Liaise with funders when circumstances change.
Test the effectiveness of your marketing.
Test the effectiveness of your operating procedures.
Identify problem areas before they become unmanageable.
Correct mistakes quickly before they cost too much.
Develop incentive schemes for staff to lower the risk of losing key members of the team. After all, replacing employees is a costly enterprise. The average fee for replacing a departing staff member is £30,614 [$56,000], says Oxford Economics and income protection providers Unum.
Coach you and your department heads through the implementation process.
Safeguard all intellectual property including patents.
Implement hedging strategies where there are financial risks such as currency or interest rate exposure.
Improve resourcing to strengthen performance.
To re-engineer the business as and when the competitive landscape changes.
Improve customer relations where they pose a threat to the business.
Use our own experience and the experience of the wider CFO Centre team and expanded contact network to help surround you with the best possible team.
Help you achieve your work/life balance objectives (careful planning is key to freeing up your time and energy).
Guide you through the business growth stages so you know what to expect and how to deal with changes.
Help create a clear roadmap for delegating responsibilities and tasks out to your team to create more time and space for developing the business.
Help communicate the business objectives to your family where appropriate (it can often help to have a third party involved who understands the needs and concerns of your family).
Devise a reporting structure which acts as an early warning system for problems.
Liaise with lawyers to understand possible legislative changes and ensure compliance.
Investigate existing insurances and make sure that you are adequately covered if things do not go according to plan.
Look into hedging strategies for borrowing abroad for example to fund overseas subsidiaries.
Reduce your personal risk by looking into other types of security/funding.
It is never possible in business to eliminate risk or worry, but it is possible to create a framework and implement systems which lower your exposure to risk. That in turn allows you to focus primarily on growing your business.
Knowing that you have a framework in place to mitigate risk means that you can free up time and mental energy.
Lower your risk today!
Let one of The CFO Centre’s part-time CFOs help you with business risk analysis. To book your free one-to-one call with one of our part-time CFOs get in touch on: tel: 1-800-918-1906 email: [email protected] www.thecfocentre.ca
Business risk analysis is an essential part of the planning process. It reveals all the hidden hazards, which occupy the business owner’s mind on a subconscious level but which have not been carefully considered and documented on a conscious level.
Conducting and regularly reviewing business risk analysis brings huge benefits to a company. In these articles, you will see:
What are the risks facing your company?
How to conduct a business risk analysis
How a part-time CFO will conduct a risk analysis on your business
Not understanding the risks your company faces can bring your company to its knees, as a 2011 report, ‘The Road to Ruin’ from Cass Business School revealed.
Alan Punter, a visiting Professor of Risk Finance at Cass Business School, said the detailed survey of 18 business crises during which enterprises came badly unstuck revealed that in simple terms, directors were often unaware of the risks they faced.¹
This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail. In simple terms, directors are often too blind to the risks they face.
“Seven of the firms collapsed and three had to be rescued by the state while most of the rest suffered large losses and significant damage to their reputations,” he said.
“About 20 Chief Executives and Chairmen subsequently lost their jobs, and many Non-Executive Directors (NEDs) were removed or resigned in the aftermath of the crises. In almost all cases, the companies and/or board members personally were fined, and executives were given prison sentences in four cases.”
“One of our main goals was to identify whether these failures were random or had elements in common. We studied a wide range of corporate crises, including those suffered by AIG, Arthur Andersen, BP, Cadbury Schweppes, Coca-Cola, EADS Airbus, Enron, Firestone, Independent Insurance, Northern Rock, Railtrack, Shell, and Société Générale.”
“And our conclusion? To quote Paul Hopkin of Airmic, the Risk Management Association that commissioned the research: ‘This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail. In simple terms, directors are often too blind to the risks they face.’”
A lot of business owners spend an unhealthy amount of their time worrying about what might go wrong but don’t have a formal risk management framework in place.
It is dangerous not knowing what might go wrong:
When the money might run out.
Whether a new product launch is viable.
Whether a competitor has the resource and motivation to drive you out of business.
What risks are involved in penetrating a new market.
How the market is changing (and how it will react to your future plans/products/services).
Whether a recession will change the playing field.
It is also dangerous not knowing your internal risks:
What products are delivering the greatest profit?
What happens if key members of your team decide to leave?
Are you likely to reach market saturation?
What are the risks facing your business?
Business risks can be broken up into the following:
Strategic risks – risks that are associated with operating in a particular industry.
Compliance risks –risks that are associated with the need to comply with laws and regulations.
Financial risks –risks that are associated with the financial structure of your business, the transactions your business makes and the financial systems you already have in place.
Operational risks –risks that are associated with your business’ operational and administrative procedures.
Market/Environmental risks – external risks that a company has little control over such as major storms or natural disasters, global financial crisis, changes in government legislation or policies.²
The ‘shoot, fire, aim’ approach favoured by many entrepreneurs is great for making things happen quickly but often jeopardizes the long-term stability of the business.
What is needed is a balance.
Once the business understands the risks, it means that it can move forward decisively and confidently. It’s hard to do this when there is a cloud of confusion hanging over the business.
Where to start…
You need to identify potential risks to your business. Once you understand the extent of possible risks, you will be able to develop cost-effective and realistic strategies for dealing with them.
Categories of risk
Financial: This category includes cash flow, creditor and debtor management, budgetary requirements, tax obligations, remuneration and other general account management concerns.
Organizational: This relates to the internal requirements of a business and issues associated with its effective operation.
Equipment: This covers the equipment used for the conduct and operations of the business. It includes equipment maintenance, general operations, depreciation, safety, upgrades, and general operations.
Legal & regulatory compliance: This category includes compliance with legal requirements such as legislation, regulations, standards, codes of practice and contractual requirements. It also extends to compliance with additional ‘rules’ such as policies, procedures, or expectations, which may be set by contracts, customers or the social environment.
Security: This category includes the security of the business premises, assets and people, and extends to the security of technology, information and intellectual property.
Operational:This covers the planning, operational activities, resources (including people) and support required within the operations of a business that result in the successful development and delivery of a product or service.
Reputation: This entails the threat to the reputation of the business due to the conduct of the entity as a whole, the viability of product or service, or the conduct of employees or other individuals associated with the business.
Service delivery: This relates to the delivery of services, including the quality and appropriateness of service provided, or the manner in which a product is delivered, including customer interaction and after-sales service.
Commercial: This category includes the risks associated with market placement, business growth, diversification and commercial success. This relates to the commercial viability of a product or service and extends through establishment to retention and then the growth of a customer base.
Project: This includes the management of equipment, finances, resources, technology, timeframes and people associated with the management of projects. It extends to internal operational projects, projects relating to business development, and external projects such as those undertaken for clients.
Safety:This category includes the safety of everyone associated with the business. It extends from individual safety to workplace safety, public safety and to the safety and appropriateness of products or services delivered by the business.
Stakeholder management: This category relates to the management of stakeholders (both internal and external) and includes identifying, establishing and maintaining an appropriate relationship.
Strategic: This includes the planning, scoping and resourcing requirements for the establishment, sustaining and/or growth of the business.
Technology: This includes the implementation, management, maintenance and upgrades associated with technology. This extends to recognizing the need for and the cost benefit associated with technology as part of a business development strategy.
Before you begin to identify the types of risks you face, you need to assess your business. Consider your critical business activities, including your staff, key services and resources, and the things that could affect them (for example, illness, natural disaster, power failures, etc.).
In particular, consider:
The records and documents you need every day
The resources and equipment you need to operate
The access you need to your premises
The skills and knowledge your staff have that you need to run your business
External stakeholders you rely on or who rely on you
The legal obligations you are required to meet
The impact of ceasing to perform critical business activities
How long your business can survive without performing these activities.
Doing this assessment will help you to work out which aspects your business could not operate without.
Identify the risks
Look at your business plan and determine what you could not do without and what type of incidents could have an adverse impact on those areas. Ask yourself whether the risks are internal or external. When, how, why and where are risks likely to occur in your business? Who might be affected or involved if an accident occurs?
Ask ‘What if?’ questions. What if your company’s critical documents were destroyed? What if you lost access to the internet? What if you lost your power supply? What if one of your key staff members resigned? What if your premises were damaged? What if one of your best suppliers went out of business? What if services you rely on, such as communicationsor roads, were closed?
Think about what possible future events could affect your business. Consider what would lead to such events happening. What would the outcome likely be? This will help you identify risks that could be external to your business.
Assess your processes
Evaluate your work processes (use inspections, checklists, and flow charts). Identify each step in your processes and think about the associated risks. What would stop each step from happening? How would that affect the rest of the process?
Consider the worst case scenario
By thinking of the worst possible things that could affect your company can help you to deal with smaller risks. Once you’ve identified risks relating to your business, you’ll need to analyze their likelihood and consequences and then come up with options for managing them. You need to separate small risks that may be acceptable from significant risks that must be managed immediately.
Analyzing the level of risk
To analyze risks, you need to work out the likelihood of it happening (frequency or probability) and the consequences it would have (the impact) of the risks you have identified. This is the level of risk, and you can calculate it using the following formula: Level of risk = consequence x likelihood
Level of risk is often described as low, medium, high or very high. Assign each risk a likelihood rating from 1 (being very unlikely) up to 4 (being very likely). You can use a rating level higher than 4.
You should also assign each risk a consequence rating from 1 (being low) to 4 (being severe). Again, you can use more than four levels.
Once you’ve assigned each risk a likelihood and a consequence rating, calculate the level of risk. You then need to create a rating table for evaluating the risk (which means making a decision about its severity and ways to manage it).
You need to consider:
How important each activity is to your business
The amount of control you have over the risk
Potential losses to your business
The benefits or opportunities presented by the risk
When you’ve identified, analyzed and then evaluated your risks, you need to rank them in order of priority. You can then decide how you will treat unacceptable risks. To do that, you will need to consider.
To do that, you will need to consider:
The method of treating the risk
The people responsible for the treatment
The costs involved
The benefits of the treatment
The likelihood of success
The ways to measure the treatment’s success
To do that, you will need to consider:
Avoid the risk
Reduce the risk
Transfer the risk
Accept the risk
¹ ‘ The Road to Ruin’, Punter, Alan, Financial Director, www.financialdirector.co.uk, Aug 18, 2011One of our main goals was to identify whether these failures were random or had elements in common.
Establish processes for creating monthly management accounts.
Review computer systems and software to ensure that they are robust and will allow for growth in line with the plan.
Establish a system for expenditure and associated authorization/sign-off.
Design systems for investment approval.
Design systems for new customer approval.
Implement control procedures to ensure customers are paying you correctly and on time.
Design systems for meetings, including board meetings.
Create reports for customer and product profitability analysis.
Create a system for cash flow forecasting and monitoring, including early warning system for peaks and valleys.
Establish and review budgeting forecasts.
Review government grants and incentives regularly.
Design a system for receiving quality advice from third parties regarding tax, Human Resources, IT, and Health and Safety on a regular basis.
Review insurances to ensure the best possible coverage to limit risk.
Establish Human Resource systems.
Design and implement relevant Shareholders Agreement.
Design and implement credit control procedures.
Translate all figures and data in a way which makes sense to you.
Ensure brands and IP are protected.
Oversee the installation of new systems.
Putting the right systems in place allows you to see the business from a much clearer vantage point. Decisions to grow the business can be made in the knowledge that the underlying model is scalable and robust.
A part-time CFO from The CFO Centre will work with you to redesign your company’s architecture and give you some space to move in. That will allow you to go from working in a job to managing a stable, healthy business.
Establish internal controls to protect your company now!
Without internal controls, your company is vulnerable. A part-time CFO can help you to create a strong internal control environment. Book your free one-to-one call with one of our part-time CFOs now: tel. : 514 906-8839 email : [email protected] www.thecfocentre.ca
Internal controls are the procedures and methods used to help companies to achieve their performance and profitability targets and prevent the loss of resources/assets. They are also used to ensure financial reporting is accurate and reliable and that the company is compliant with regulations and laws.
In other words, internal controls can help your company achieve its goals, and limit the internal and external risks and threats you’re likely to encounter.
Every business will feel the pain of not being in control at some point in the growth cycle and, therefore, implementing internal controls in a measured and methodical manner will become essential at some stage.
It’s better to establish internal controls now rather than continuing to operate without them. Not only do they give you more time and freedom but they enable you to manage and control the business rather than allowing the business to control you. In these articles, you will see:
The essential elements of an internal control system
The benefits of an internal control system
The main reasons companies don’t use internal controls
How a part-time CFO can create internal controls for you
Many SME owners mistakenly believe that internal controls are the domain of publicly listed companies or government departments but they are just as critical for small to medium sized businesses too.
Michelle Long, author and financial consultant, says internal controls are necessary for SMEs to reduce the risk of fraud.
“Without any controls or oversight, it is like leaving the door unlocked with the cash register drawer open hoping that no one will steal any money,” she says in a report for Intuit.¹
“Even employees who are honest can be tempted when they see large sums of money right in front of them,” says Long. “This is especially true if the business owner has not implemented any access controls or set up shared control over the company finances.”
“Also, without internal controls, a business owner can never know if their information is complete, accurate, or reliable. Time should be taken to set-up, implement and review a policy of internal controls. Once the policy has been established, management should ensure that the controls are being followed.”
The need to have robust internal controls is highlighted by the case of the Royal Bank of Scotland (RBS), which fell victim to a rogue trader in Hong Kong.
In 2014, the RBS was fined $850,000 by Hong Kong financial regulators after “seriously inadequate” internal systems and controls failed to detect a rogue trader hiding losses totalling tens of millions of dollars.²
The employee was found to have hidden losses of $46 million over a three-year period by regularly cancelling or amending transactions that had been entered into RBS’s internal trading systems.
A subsequent investigation by the Hong Kong Securities and Futures Commission (SFC) found that RBS’ risk management and internal controls within its Emerging Markets Rates business were “deficient and failed to prevent misconduct.”
The losses suffered by RBS are small compared with the staggering $6.8 billion losses announced by French banking group Société Générale (SocGen) in 2008. There too a rogue trader was found to have hidden enormous trading losses. The Paris-based trader used his “in-depth knowledge” of the bank’s fraud control systems to circumvent internal checks.³
This was a lone man who built a concealed enterprise within the company, using the tools of Société Générale, and who had the intelligence to escape all control procedures.Your Balance Sheet shows what your company owes and what it owes at a given time.- DANIEL BOUTON, FORMER SOCGEN CHAIRMAN
SocGen’s Chairman, at the time Daniel Bouton, said: “This was a lone man who built a concealed enterprise within the company, using the tools of Societe Generale, and who had the intelligence to escape all control procedures.”
It’s not enough to create internal controls: they need to be regularly reviewed to ensure they are keeping pace with the company’s growth. Pressure to create, develop and innovate means that old systems can quickly become redundant and need rethinking and rebuilding. This is really one of the biggest headaches a business owner faces. Creating products is easy by comparison.
You have probably experienced a shift from knowing every last detail about the inner workings of your business in the early days to losing a lot of control over the processes which allow the business to operate.
In other words, you have become removed from the day to day operating procedures. This means you probably can’t see what is going on in the way that you would like to or, at least, you can’t see as much as you would like to see. This can manifest itself in different ways. You might not realize that your customers are not paying since you don’t have a system for alerting you to such occurrences or you might have several unproductive employees but have neither the tools to identify these employees nor the time to do anything about it.
Instead, you are frustrated with your staff because you want them to fix the problem (using their own initiative). They, in turn, are frustrated with you for not providing them with clear job descriptions and responsibilities.
It may be that your cash flow is very poor or you are accumulating excess inventory. It may be that you are always turning up for meetings unprepared because the work it would take to uncover the information you need to run a good meeting would just take too long to collect.
You probably initiate a lot of the activity in the business (creating policies, signing CRA documentation, sending off legal forms necessary for compliance) but you may not have the systems set up to manage these various projects going forward. This means that your head is full of concerns which rear their head at the very point at which you have the least time to deal with them. Usually, by then the problem has escalated.
All of this leads to a feeling of being disorganized and overwhelmed. If you were able to delegate the work and feel confident that your business had a stable framework, you would feel much happier about redoubling your growth efforts (a lot of business owners we work with hold themselves back because they instinctively know the business lacks the systems and structure to grow in a manageable way).
The essential elements of an internal control system
There are five key elements in a good internal control system:
Separation of duties. Key duties and responsibilities in authorizing, processing, recording, and reviewing transactions and events should be separated among individuals. This not only protects employees but prevents and detects both unintentional and intentional errors. It also encourages better job performance.
Authorization. Every transaction must be authorized and carried out by people acting within the scope of their authority. This will help prevent invalid transactions.
Documentation. Every transaction (event or activity) must be documented. It helps ensure that assets are properly controlled. It also helps to ensure each transaction is accurate and complete.
Supervision. Competent supervision must be provided to ensure the objectives of the internal controls are achieved.
Reconciliation. This ensures the accuracy and validity of your records. It also means that discrepancies can be resolved quickly and that unauthorized changes don’t occur.
To be effective, internal controls must be appropriate, must function consistently as planned, and must be cost-effective.
An effective control environment will ensure the following:
The effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and regulations
Safeguarding of assets.
The benefits of an internal control system
Having an internal control system in your organization will help:
Prevent errors and irregularities from occurring. If they do occur, they will be detected quickly.
Ensure that errors that do occur are minimized and resolved quickly.
Safeguard employees by clearly outlining their responsibilities and roles; by providing checks and balances; and from being accused of errors, irregularities, or fraud.
The main reasons companies don’t use internal controls
The owners don’t realize such controls are necessary
Forensic accounting expert Steve Dawson says placing your faith in people’s honesty leaves you vulnerable to fraud.
“Believing you don’t need internal controls because you don’t have evil people working for you is irrelevant,” he says.⁴
“Evil people don’t represent the majority of fraud instances: desperate people do. Remember that 95 percent of those I have investigated are truly decent people who rationalize their fraud because of a severe financial crisis. They are able to take advantage of the company simply because their position has weak internal controls.”
One of The CFO Centre’s part-time CFO’s recalls how one of her clients was nearly sent to the wall because its CEO had stolen large amounts of money.
“I got involved immediately after they discovered the fraud. In the first 6 months, it was very doubtful whether the business had any future because of all the money which had been stolen. What I was able to do was give the different stakeholders enough confidence to be able to pull together something which secured its long term viability”.
I immediately called the CRA to explain who I was, what I was doing, and what I was going to do. I asked them to give me a few weeks to sort something out, during which I’d provide constant feedback to them.- THE CFO CENTRE’S PART-TIME CFO
“On my first day, we found out that we were under pressure from a large creditor who was planning to force the organization to court because it had a large amount of payables which hadn’t been paid over a long period”.
“I immediately called the CRA to explain who I was, what I was doing, and what I was going to do. I asked them to give me a few weeks to sort something out, during which I’d provide constant feedback to them”.
“The combination of who I was, what I was doing, and how I was going to do it was enough to persuade them to give me some time”.
“The company had another equally large creditor who also wanted to be paid immediately.”
“I put a survival plan together, and luckily there was someone connected to the business who had funds. We persuaded that third party to provide the business with a long-term loan worth several hundred thousand dollars.”
“That allowed us to pay the creditor, to pay the other creditor and to have some money to go forward so we could try to recover the money that had been stolen.”
Lack of time
Creating internal controls does take time. The consequences of not investing energy into creating internal controls, however, are likely to be very damaging to a company.
Philip Ratcliffe, an Internal Audit Consultant, says in a serious case the opportunity cost of the time that management will lose in attending to the consequences of an internal control breakdown can be massive.
“Strategic issues, tactical issues, business development – all these and many more normal concerns of senior management will have to take a back seat until the problem is resolved. Add to this the loss of reputation and of confidence, inside and outside the organization, because news will inevitably leak out however carefully those involved try to prevent it.”⁵
A lower ratio means your company is more financially stable and is probably in a better position to borrow now and in the future.
It’s too difficult
Creating internal business controls, which are the systems and frameworks that allow all departments of the business to keep up to speed with changes is plain hard work.
To some extent, this hard work is simply a part of building a fast growing business. That said, a lot of it can also be avoided by understanding business growth cycles and by designing an architecture which means your business is able to grow at a steady pace rather than allowing it periodically to outgrow itself (as you struggle to put out the fires).
Strategic issues, tactical issues, business development – all these and many more normal concerns of senior management will have to take a back seat until the problem is resolved.- PHILIP RATCLIFFE, INTERNAL AUDIT CONSULTANT
¹ ’Internal Controls for Small Businesses to Reduce the Risk of Fraud’, Long, CPA, MBA, Michelle L., Intuit, Intuit Inc., 2009
² ‘RBS reprimanded for systems failures following £25m trading losses: Hong Kong regulator fines bank £450,000’, Finnegan, Matthew, Computerworld UK, www.computerworlduk.com, Apr 22, 2014
³ ‘Rogue trader exploits tech knowledge to cost SocGen £3.6bn: Biggest fraud in investment banking history’, Chapman, Siobhan, ComputerWorld UK, www.computerworlduk.com, Jan 25 2008
⁴ ‘Internal Control/Anti-Fraud Program Design for the Small Business: A Guide for Companies NOT Subject to the Sarbanes-Oxley Act, Dawson, Steve, (Wiley Corporate F&A), April 13, 2015
How a part-time CFO will ensure your business is fully compliant
The CFO Centre will provide you with a highly experienced senior CFOwith ‘big business experience’ for a fraction of the cost of a full-time CFO. This means you will have:
One of Canada’s leading CFOs, working with you on a part-time basis
A local support team of the highest calibre CFOs
A national and international collaborative team of the top CFOs sharing best practice (the power of hundreds)
Access to our national and international network of clients and partners
With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.
In particular, your part-time CFO will help you to ensure your business is fully compliant.
Compliance is hugely beneficial to any organization but it is by no means a one-off exercise. It takes time, energy and money to ensure it works effectively.
Your part-time CFO can bridge the gap between money and risk and handle both legal and compliance issues for your company to ensure risk is managed and the bottom line is optimized.
That lifts an enormous burden from your shoulders, leaving you free to focus on the core activities of your business.
Our regional teams of part-time CFOs and our national collaborative network have all the latest regulatory knowledge at their fingertips.
There are many aspects of compliance but by way of a summary, your assigned part-time CFO will work with you to:
Ensure that your financial statements and annual returns are completed and filed on time.
Ensure that employment and related payroll taxes are completed and filed on time.
Use our national collaborative network to access information related to specific compliance issues for your industry.
Ensure compliance with all GST/PST/HST and other statutory filings.
Read and interpret bank/invoice finance covenants and ensure compliance.
Introduce HR checklist and sign off compliance.
Check insurance coverage, relevance and make sure paperwork is complete.
Ensure that all returns are accurate and up to date with CRA
When you allow a part-time CFO to lift the considerable burden of compliance from your shoulders so that you are no longer being sidetracked into time-consuming compliance activities, you are free to focus on the core activities of your business.
You can be confident that your part-time CFO provides an expert level of support in managing compliance functionsand risk.
He or she will help you to cut back on expensive infrastructure so that compliance is managed in a cost-efficient way.
Critically, your CFO will give you peace of mind, leaving you free to concentrate on growing your business.
Protect your company now!
Unless you have an up-to-date compliance programme, your company is at risk. Allow one of The CFO Centre’s part-time CFOs to help you to ensure your company is fully compliant. To book a free one-to-one call with one of our part-time CFOs.
In the light of events over the past weeks, we are very conscious of the heightened levels of concern facing businesses at the moment. The CFO Centre is also an SME and it’s very much a time where we are all in this together.
The purpose in writing was to let you know that we are here to help and have set aside some time to talk to companies in need of urgent advice, on a pro bono basis. We are very well positioned to help and would like to give something back.
As it stands today, the greatest concern for SMEs is cash/liquidity. As Chief Financial Officers, navigating these issues is what we do. Admittedly this is a particularly unusual situation, but there are measures you can take to put yourself into the strongest possible position for the weeks and months ahead – and fast action will of course pay dividends.
Even if it’s just to have a 3rd party perspective and potentially put forward some options you may not have known were available, we’d love to help if we can.
If you know someone who would value a conversation to review their current situation and look at their options to increase liquidity and mitigate risk, please contact us on 1-800-918-1906 or at [email protected] so that we can set up a video conference call to review with one of our virtual CFOs.
If history has taught us anything, it’s that the only constant in life is change.
Over the course of the last century alone there have been a litany of challenges and numerous disasters, all of which have one thing in common – they’ve all passed.
Some months from now – it’s impossible to predict the true timeline – the current situation we face with COVID-19 will too have passed. It will have left in its wake a trail of debris and destruction which we ought not minimise, but it will pass.
As the great German writer Goethe once said: “Fresh activity is the only means of overcoming adversity.” It’s a wonderful way to focus the mind on proactive, practical activity and look forward. To deal with things that you can influence and change rather than those you can’t.
As Chief Financial Officers part of our role is to use our knowledge of the past and translate it into actions that bring about a better future.
With over 600 CFOs in Canada and abroad, many of us spanning 3 or even more decades of service to SMEs, we have weathered many storms. We’ve also come out the other side.
And we have learned from those experiences that there are certain actions we must take quickly if we want to overcome adversity and put ourselves in a stronger position for when the storm abates. In the midst of the storm it can be difficult to make sense of what is happening. This is precisely the time to slow down for a moment, as hard as it may seem, and make some proactive decisions.
To address the negative, we can take it as read that the speed at which many industries will contract over the coming weeks will increase. Primary industries such as aviation, travel and tourism, events and conferencing, restaurants and bars, will suffer devastating blows as will the supply chains they support. The ripple effect will affect everyone, in some way or other. These events are already in motion.
While all that happens, as SME owners, we have to do whatever we need to do in order to weather the storm and come out stronger the other side.
And you don’t have to face that challenge alone. There’s a lot the government and banks are doing to help small to medium sized businesses get through the challenges of the coming weeks and we’re also here to help you navigate the options and put you in the strongest possible position when some sense of normality is restored.
Below are some key considerations, risks, opportunities and resources. If you would like us to help you navigate the options, we are offering a courtesy 1:1 Scenario Planning Call to help you get clarity around what you should be doing now to put you in the strongest possible position.
1. Scenario Planning:
If you are predicting a reduced demand what will be the impact on sales and cash?
What costs can be cut or deferred? Is there flexibility in the cost base that could partially offset a downturn in revenues?
Are there major capital expenditures which could be postponed?
Over what time period might you expect revenues to be reduced?
What impact might you expect in regard to late payments from your existing customers?
2. Supply side:
Are you likely to be impacted by a break in supply of inputs/services from other businesses struggling with the virus?
How much contingency are you holding if supplies of inputs stopped/became erratic?
Are there alternative sources of supply if a supplier fails?
What is the likely impact on workforce – do you have a business continuity plan, can workers productively work from home/remotely?
Could you look at taking measures now to reduce the risk to your workforce; e.g. more virtual meetings rather than asking staff to travel?
Are you operating in an area which could be impacted by “lock down” measures e.g. city centre, does the workforce travel largely by public transport (impact if closed/restricted), would the travel patterns of the workforce mean it would be necessary, for staff safety, to suspend travel to the head office/main site.
Potential impact on sales volumes – e.g. what is your level of exposure to consumer demand, are you B2B or B2C, are your corporate customers likely to be significantly impacted (airlines, cinemas, hotels, restaurants, attractions, events, etc.?
Any delivery issues for goods/services?
What are the contractual implications of failure to service customers (do they have a force majeure protection in contracts?)
Does the client have contracts which enable clients to claim force majeure and cancel commitments without penalty – worst case what might this mean in terms of the liquidity scenario planning.
Who should you be contacting now – suppliers to see what contingency plans they have, customers to reassure, other stakeholders?
If someone has an issue, do they have the means to communicate with you?
Can you post messages on your website remotely if required as a means of keeping customers, suppliers notified?
What is your policy on sick pay if staff have to self-isolate
Are there contingent measures that can be put in place to bring in temporary staff if necessary?
Any business-critical single points of failure?
Can you switch your office phones to an alternative line?
What insurance arrangements do you have in place?
Prepare for the upside
All of the suggestions mentioned above constitute the day to day role of a CFO. These are things that companies ought to be doing as a matter of course, but of course, many do not.
The advantage of going through this process now is that it will enable you to build a better, stronger, more resilient business for the future. Whether COVID-19 or the next major recession, or some other unforeseen event, knowing that you have done all that you can to prepare your business will give you greater confidence in the future.
The future of work is all about remote working, flexibility, greater specialization and outsourcing. The Coronavirus will increase the pace with which we transition to a new global model.
We encourage you to be cautious and use this time to spark ‘fresh activity’ and build a stronger, leaner business for the future.
We are here to help and are offering 1:1 Scenario Planning Consultations to help you make the right decisions to get you through the coming weeks and prepare you better for when the current madness subsides.
To accelerate the growth of your company and organic growth doesn’t appeal, consider merging with or acquiring another company.
Such a move can help business owners like you to grow your top line and profitability, says the FD Centre’s FD East of England North, Lynda Connon.
A successful merger or acquisition can also give your company access to your target company’s technology, skillsets, markets, and target customers.
If the target company is in a different industry, the merger or acquisition can help to diversify and mitigate risk.
Considering a diversification strategy like this is valuable if there is any doubt about your company’s prospects for long-term profitability.
The standard form of an acquisition is when one company (the acquiring company) buys another company.
It does this by either buying all the shares in the acquired company or by purchasing its assets. The shell company is then liquidated.
Likewise, there are several types of mergers, including:
• Horizontal merger (in which you merge with a company in your industry)
• Vertical merger (in which your target company is at a different production stage or place in the value chain)
• Product-extension merger (in which your target company sells different but related products in the same market)
• Market-extension merger (in which your target company sells the same products as your own but in a separate market)
• Conglomerate merger (in which your target company is in a different industry and has different products or services).
Growing your business via a merger or an acquisition has many benefits, including the following:
• To achieve a lower cost of capital
• To improve your company’s performance and boost growth
• To achieve higher revenues
• To reduce expenses
• To achieve economies of scale
• To diversify your product or service offering in your existing markets or move into new markets
• To increase market share and positioning
• To achieve tax benefits
• To diversify risk
• To make a strategic realignment or change in technology
• To obtain new technology, more efficient production, or patents, and licenses.
Dangers of mergers and acquisitions
As beneficial as mergers and acquisitions (M&As) may be, particularly in terms of achieving fast revenue growth, they are not for the faint-hearted.
The merger or acquisition process can take anywhere from a few months to a few years depending on such factors as whether the target company is a public or private entity, the negotiations, legislation, and the involvement of financial institutions and other stakeholders.
“The actual transaction can be done very quickly if you’ve identified your target and if all parties are keen to go ahead and legals can be put in place,” says Connon.
“But typically, a merger or an acquisition takes several months.”
But you also need to factor in the time that will be involved in the identification of suitable target companies as well as the post-acquisition integration.
The post-acquisition integration can take anywhere from six to 12 months, she explains.
“So the actual transaction itself can be done very, very quickly. It’s the process of identifying the target and making sure it’s something that will work for your organisation as a combined entity and making it happen after you’ve done the deal.”
It’s estimated that of all M&As, 70% to 90% fail for various reasons.
Many failures are due to a lack of strategic planning and incomplete due diligence, according to Connon.
They also fail if there is a poor strategic fit between the two companies, a poorly managed integration or an overly optimistic projection of the target company.
The result is a failed growth strategy and a large amount of lost opportunities.
Successful merger or acquisition strategy
So, how can you be sure of being in the 10% to 30% who achieve successful acquisitions or mergers?
Before even starting your search for target companies, it’s essential that you clarify your acquisition strategy and reason for merging with or acquiring a company, says Connon.
Most successful acquisitions happen when companies have identified and understood their own acquisition strategy, says Connon.
They have clarified the company’s direction over the next two to five years, understand the market challenges for their core business, and know the gaps in their own portfolios and skillsets.
“They also take time to identify potential targets and to subtly review and understand the strengths and weaknesses of each of those target companies,” she adds.
“Post-acquisition, the ones that tend to fail are the ones where acquiring companies haven’t taken the time to really understand their own strategy or market challenges and what they want from an acquisition. Often, it’s been done for emotional reasons rather than good, sound business reasons. Those companies will typically fail.”
To develop your acquisition strategy, you’ll need to be clear about what you hope to achieve. What is your business model? What do you want to do? Do you want to grow income, to improve profitability, to enhance cash flow? Where are the market challenges in your sector and can you address them all? If you can’t, do you need to make an acquisition? Do you need to merge?
If you conclude that a merger or acquisition is desirable and will be beneficial in the long-term, then you need to develop an “identikit” of what that potential company looks like, she says.
Every company you consider should be evaluated against the metrics you’ve decided upon.
“Don’t get distracted by personal judgement. If you stick to the metrics you’re looking for, you’re more likely to make a successful acquisition,” she adds.
You and your team of M&A experts need to carry out due diligence and investigate the target company’s business, people (particularly crucial personnel), records and key documents.
The point of the due diligence process is to uncover any inherent risks in the target business, to question the value placed on the investment or acquisition price and to identify critical issues.
Your M&A team should ask questions and request documentation about the following areas:
• Corporate information, including the company structure, shareholders or option holders and directors
• Business and assets, including your business plan, assets and contracts with both customers and suppliers
• Finance including details of all company borrowings and loan agreements, cash flow statement, business reports, plus all tax liabilities and VAT returns
• Human Resources including details of contracts for directors and employees
• IP and IT, including information about IPs, owned or used by the target company and the software and equipment that are used
• Pension plans that are in place for directors and employees
• Litigation including details of any disputes or legal proceedings the company is involved with now or in the future along with licenses or regulatory agreements it has
• Property including information of real estate that’s owned or leased by the target business
• Insurance policy details along with recent or future claims
• Health and safety policies that are in place
• Data protection, including information about how sensitive data is stored and protected and reassurance the target company is compliant with data protection laws
Post-acquisition or merger, you should use your original strategy to measure its success, whether that’s income growth of 25% or improved profits of 2%.
“That would be the target by which you’d measure your combined entity. You’d go back to those numbers and see what have you’ve achieved compared with what you set out to achieve.”
Outsourcing is nearly always cheaper, more efficient, and more flexible than hiring in-house staff. You can use outsourcing to tap into expertise and experience not available in-house (technical or managerial) or to identify and then reduce the costs of support services.
But concerns about the potential pitfalls of outsourcing stop SMEs from seeing the many benefits of outsourcing (which would allow their full-time employees to work on the company’s core competencies).
A part-time CFO can help you to leverage outsourcing, allowing you to operate a leaner, more efficient business and use the savings to drive growth. In these articles, you will see:
The benefits of outsourcing
What can be outsourced
How to use outsourcing in your organization
The main reasons companies don’t outsource
How a part-time CFO can help you to leverage outsourcing
A desire to focus on core activities is one of the main reasons companies of any size choose to outsource one or more of their support functions.
Such was the case with Whitbread, the UK’s largest hotel and restaurant company, which outsourced its IT to Styria and its HR and payroll to Ceridian.¹
After signing an HR and payroll outsourcing contract with Ceridian, Whitbread’s Change and Information Director Ben Wishart said: “This move further supports our strategy of concentrating on core activities while raising efficiency levels across our organisation.”²
The contract meant Ceridian handled HR services covering more than 33,000 employees across Whitbread’s operations. Those operations include well-known UK brands such as Premier Inn, Beefeater, Table Table, Brewers Fayre, Taybarns and Costa Coffee.
You can use outsourcing to tap into expertise and experience not available in-house (technical or managerial) or to identify and then reduce the costs of support services. But outsourcing is something that worries many SME owners. They fear that outsourcing non-core aspects of the business like finance, HR, IT or managing customer relationships will lessen their overall control of the company. Or that it will be restrictive or expensive.
You might feel that not being able to see and talk to your team will mean that you are less in control and that you lack the visibility to spot potential problems and take decisive action.
You might worry too about the track record of your chosen outsourced provider. Will they maintain the high standards you insist on and deliver quality within the deadlines you prescribe?
Or maybe you worry about costs: will the prices quoted by your provider be set in stone or as the relationship develops, will a number of hidden costs emerge (licence fees, annual renewal fees, maintenance fees, etc.)?
Perhaps the reliability of your outsourced provider concerns you. Will your provider respect your company’s confidentiality? Will your data and other assets be safe in someone else’s hands? Will your ideas be stolen or will your customers’ sensitive data be hijacked by the people you hire?
What will happen if things go wrong with your provider? Are they happy to share a detailed contingency plan with you so that you can feel assured that you will not be hung out to dry if a serious problem arises?
What level of importance does your provider attach to compliance?
How can you be sure that laws and regulations will be adhered to and that you will not be held liable for infringements?
It’s these kinds of concerns that stop business owners from seeing the many benefits of outsourcing (which would allow their full-time employees to work on the company’s core competencies).
One such owner was Simon Wakefield, Managing Director of green bean coffee importers DRWakefield, a client of our UK business The FD Centre (note: in the UK, Chief Finacial Officers are called Finance Directors). His bank was asking some pretty tough questions at the time and he knew he needed help.
“Not having enough background information, data and statistics to lay out for the banks to see what we were doing, we soon realized we needed someone who could manage those and help us make those decisions,” he says.
But at first, he was reluctant to hire an FD/CFO on a part-time basis.
“Part-time was something I’d never have considered before because I like to have people in-house that work with us and understand our business. It sounds simple, but when you start drilling into the way we work with multiple currencies, multiple countries, it becomes quite detailed.
“In my previous experiences of part-time employees, they would come, they would be freelance, they would go and it didn’t work with us.”
He eventually overcame his reluctance to outsource and hired a part-time FD from The FD Centre.
“The FD Centre offered us something: if our first FD didn’t work out, they would quickly put in another one. If the FD they installed didn’t have the answer to some information that we needed, he was part of a bigger pool that he could get information from and bring to us.”
Not only did his part-time FD Nick Thompson help improve his relationship with the bank by bringing in a permanent management accountant to take care of the finances but he also helped update the company’s accounting software packages and credit control procedures, so that it had a far better cash flow than it did beforehand.
“In the five years Nick’s been here, we’ve grown about 30% in numbers. He’s helped bring in new software and changed our auditors so that we have a more professional auditor looking after us now. So there have been very clear targets and goals that have been achieved. From the other side, it’s meant that I can sleep better.”
Any functionality that is not core to your business should be outsourced at the best cost and quality, says Kevin D. Johnson, author of The Entrepreneur Mind: 100 Essential Beliefs, Characteristics and Habits of Elite Entrepreneurs.³
“In the majority of cases, trying on your own to produce everything that your business needs is unrealistic and highly inefficient,” he says. “If you have believed the negative hype about outsourcing, quickly disabuse yourself of it and implement the process into your business strategy.
“If you’re subscribing to the propaganda and refusing to even consider outsourcing, your competitors are meanwhile outsourcing and working hard to put you out of business.”
Outsourcing is nearly always cheaper, more efficient, and more flexible than hiring in-house staff. The benefits include:
Access to expertise that you would otherwise not be able to afford
Time savings for you and your in-house staff
Opportunity to focus on revenue-boosting areas of your business
More predictability in costs
Enabling a sharper focus on core competencies
Increasing business productivity.
What can be outsourced? Outsourced services can be categorized into the following two groups:
Companies require advanced IT and communication technologies for their regular operations. Rapid changes in the technology sector bring new capabilities to use for companies that need to select the right kind of vendor to get the best technology at the cheapest cost. The following technology services are generally outsourced:
Software and applications
Web security and solutions
Web hosting, website designing, development and maintenance
Logistics, procurement and supply chain management
Management of travel and employee records (personnel forms, policies, procedures, performance management, etc.)
Managing accounts payable/receivable
Fixed asset management
Advice or disbursing information
Processing sales order entry, claims, loans,
applications, credit cards and reconciliation.
How to use outsourcing in your organization You can avoid many of the issues related to hiring and training in-house staff and build a much more agile, flexible and cost efficient business as long as you adopt the right approach.
In fact, enlisting the services of an experienced part-time CFO from The CFO Centre is one example of how outsourcing can add value, increase efficiency and maximize opportunities.
You want your outsource suppliers to possess all the benefits of a high-quality, reliable in-house team but without any of the drawbacks. There are never any firm guarantees of success, but the right approach can prevent major headaches and save you a lot of money.
The key to successful outsourcing is preparation. By understanding what your requirements are and by spending sufficient time during the selection process to ensure that you find suppliers who share your values and will truly add value to your business (rather than becoming an expensive risk) it will usually follow that you will build a highly efficient outsourced team.
The main reasons companies don’t outsource:
Reluctance to lose control and flexibility
A given function is too critical to outsource
Anticipated adverse reaction by customers
¹‘Whitbread renews outsourcing contract with 14% cost cut’, Flinders, Karl, Computer Weekly www.computerweekly.com, Feb 13,2013
² ’Whitbread signs five-year HR and payroll outsourcing deal with Ceridian’, Berry, Mike, Personnel Today, http://www.personneltoday. com, Dec 11, 2008
³ ’The Entrepreneur Mind: 100 Essential Beliefs, Characteristics and Habits of Elite Entrepreneurs’, Johnson, Kevin D., Johnson Media Inc., Mar 2013, The benefits of outsourcing