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The CFO Centre - Exit Planning

Heading for the big exit: How a part-time CFO can help maximize value when you sell your business

The CFO Centre will provide you with a highly experienced senior CFO with ‘real-world experience’ for a fraction of the cost of a full-time CFO. This means you will have on your team:

  • 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 practices (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 that your business has planned and prepared for an exit. They will ensure that your sales process is managed in an efficient way to minimize challenges on price and prevent advisors’ fees from eating up too much of the sale price. He or she will, for example:

  • Help you to implement your strategy for growth and exit    
  • Identify where value can be maximized and eliminate unprofitable or low profit activities
  • Ensure that shareholders’ interests are protected and consistent with the shareholders’ agreement
  • Explain and introduce incentive arrangements available for key management. These could include bonus plans aligned to the business objectives or option plans
  • Ensure that property is held in the most appropriate manner for the business and any potential acquirer i.e. freehold or leasehold and length of tenancy
  • Review pension arrangements to identify any funding or future liability issues
  • Protect intellectual property and ensure that SR&ED tax credit claims are made to help fund new intellectual property
  • Review contracts and trading terms to ensure they are in place, up to date, compliant and enforced
  • Identify risks to the business from suppliers and customers on whom the business may have become reliant and plan to mitigate the risk
  • Improve the accuracy and timeliness of management information
  • Introduce systems and controls to increase confidence in the integrity of the accounting information
  • Improve and/or introduce forecasting processes and procedures so that budgets and forecasts can be used as dynamic planning tools
  • Identify means of improving margins and reducing overheads to improve profitability
  • Ensure compliance with GST/PST/HST, Employee Source Deductions, Income Tax and Corporation Tax legislation while seeking ways to reduce the overall tax burden to you and your business
  • Introduce you to corporate finance, legal and other advisers to help with all aspects of the exit preparation and process
  • Project manage the exit process internally so that it minimizes disruption to other staff and their continuing responsibilities
  • Create confidence in the acquirer and their advisers so that they have limited opportunity to attempt to negotiate the price down or increase warranties from you
  • Help you achieve the freedom you want after the efforts that you have invested in growing the business.

A successful exit can be very rewarding, but planning is critical to maximizing overall value. By planning ahead, you will be able to sell faster, for more money and ensure that you can plan your tax position to reduce the tax cost to shareholders. You keep a greater proportion of the sale price.

By demonstrating that you and your team have reliable information that allows you to report and forecast accurately, you will be able to instill confidence in an acquirer and their advisors. You will also minimize possible price reductions.

A part-time CFO from The CFO Centre works with you to make your plans a reality by shouldering some of the burden. We give you the opportunities to grow your business further, from a position of strength, in the

knowledge that you will be able to market your business, or take advantage of an offer to acquire it.

Book your free one-to-one call with one of our part-time CFOs now.

tel: 1-800-918-1906

Heading for a big exit : Due Diligence

Due diligence

Due diligence is the process the potential acquirer goes through, usually with a raft of analysts, accountants, lawyers, and the occasional industry specialist advising.

It is normally an extremely extensive check of all aspects of the business, can be time-consuming and stressful, and happens while you still have a business to run.

Advance preparation is essential as it will reduce the workload, give confidence to the acquirer, reduce professional fees and make attempts to reduce the offer price less likely to succeed.

The acquirer needs to know whether what they have been shown is supported by fact. They’ll look at any papered- over omissions and whether the hopes and expectations for future profits are realistic. While appearing to be similar to an audit it can be far more comprehensive and onerous.

The starting point for due diligence is the data room. The data room is a collection of everything that is relevant to the past, present and future running of the company. It will normally include at least:

  • Corporate articles and minute book
  • Property deeds and leases, fire certificates, environmental reports
  • IP registrations – patents and trademarks Product specifications
  • Fixed asset registers
  • Insurance – property, employer’s liability, product liability, vehicles, business continuity, etc.
  • Customer and supplier contracts
  • Debtors and creditors loan agreement and liens search
  • Employee contracts and details including pension and severance obligations
  • Statutory and management reports for the last three years, budgets and forecasts
  • Audit letters and recommendations
  • Detailed accounting policies and procedures Employee Deductions, GST/PST/HST and corporation tax returns and any compliance visits or CRA audits
  • Bank accounts, loans, mortgages, foreign currency (or hedging) and interest rate exposure
  • Commitments and contingent liabilities

Depending on the nature of the business there could be much more.

Do not underestimate the pressure that will be placed on you and the senior team, especially finance, during a sale.

It takes a thorough understanding of the business to know what belongs in a secure data room and significant time scanning documents or copying files to set one up. It should, therefore, be part of the exit planning process to create, over a period of time, a repository for all these documents (in soft copy as the data room will ultimately be a virtual, online room).

In addition to being prepared for the due diligence process, the act of putting a data room together will identify what records do not exist or where copies are missing. It also highlights areas where attention is needed – perhaps a lease needs to be reviewed or IP registered.

The actual sale process can be disruptive for staff and anything out the ordinary can create concern and rumors. A low profile gathering of data will become accepted practice whereas a flurry of activity looking for missing paperwork is likely to disturb the office workforce in particular.

Finally, do not underestimate the pressure and resources required from you and your senior team, especially in finance. Anyone who has been through the process will tell you that they never expected it to be so onerous.

There is a real danger that focuses on the sale process will take the effort away from running the business. It might be advisable to bring in professional assistance to project manage the transaction internally to minimize the impact on the senior team.

Not all offers for businesses go all the way to completion. The worst scenario for a distracted team is to have the business slip and then suffer the emotional backlash of a failed sale; particularly having adjusted to a probable change in ownership and management.

A successful exit can be very rewarding, so planning it is critical to maximizing that reward.

The CFO Centre - Exit planning

Heading for a big exit : Why does one company sell for more than another? Part I

Introduction

Most of us have bought or sold a house and understand that many factors determine the price we pay.

We are attracted by the size of the house, the location, and the proximity to schools, restaurants, and work. We have concerns about the purchase price, a higher mortgage, increased utilities and maintenance costs and what a home inspection might reveal.

It should be no surprise that a business purchaser also has to balance the excitement and ambition of expanding the business with the cost of acquiring it, the availability of finance, future profitability, and unexpected liabilities.

The key to maximizing value is to package your business as attractively as possible for potential purchasers. Once a buyer is found, business owners need to ensure there are no surprises or disappointments leading to a change of heart on the purchase price, extra restrictive conditions on the purchase or the sale falling through.

The price paid for a business is often quoted as a multiple of historical earnings. If a purchaser is buying the expectation of future earnings, the multiple tends to be higher in fast-growing industries and fast-growth companies. This is why many businesses move from low value-added buy/sell business models into higher value-added consulting/service models where profitability and opportunities for growth appear better.

There are many advisers around who claim to be able to sell your business for the maximum price.  You need to be able to select an advisor with the credentials and experience in your industry, in your market and in your size of the business, to work with you over a period of months or years to achieve your goals. The right choice should maximize what is important to you: price, post-tax cash, the future of your staff, or the continuation of your culture and the values of the business. The wrong choice could end up losing a sale and wasting a lot of time and emotional energy that might even damage the business for a few years if handled incorrectly. The house sale analogy is relevant here. We can help with the information and introductions to make the correct choice for you.

The key to maximizing value is to package your business as attractively as possible for potential purchasers.

Planning an exit

Much of exit planning is actually implementing good business practices. As a business owner, you will exit at some time, hopefully on your own terms and at a time of your choosing.  To achieve this, it is necessary to plan ahead to ensure the business you are selling or passing on is in good shape to generate future profits for your successor.

It’s equally important that as much cash as possible remains in the business to be distributed to its owners and employees rather than paid in taxes.

It is an often-quoted truism that you sell a business when someone wants to buy, not necessarily when you want to sell. If the dream buyer turns up with an unsolicited offer tomorrow, would you be in a position to maximize that opportunity? Probably not, but forward planning would make life a lot easier should that call come. When a sale takes place it is often the finance team that is placed under the most pressure, due to the need to prepare documents and analyses. It is, therefore, the finance team that is best placed to help you plan in advance.

Ownership, shares, options
Starting with the basics, look at who owns the business. The simplest structure is for all shares to be owned by one person who makes all the decisions and receives all dividends and payments (after tax) for selling the business.

If you have more than one shareholder, do you have a Shareholders’ Agreement? An agreement governs the relationship between shareholders, as well as if an exit opportunity arises, what happens if there is no unanimous agreement on the terms of the exit. It also includes the procedures to be followed, the valuation method and rights of shareholders during an exit, whether by way of a business sale or the death or critical illness of a shareholder.

Are there others who are expecting to become shareholders, perhaps have been promised that they will be? Would it make commercial sense to reward some members of management with shares or options so that they have an incentive to help add value to the business and remain with it? New shares or options may require a valuation of the business if you are going to take advantage of tax-saving opportunities. The basics of option plans have stayed the same for some time but the detailed rules change in most budgets so it is wise to get professional advice before implementing a plan.

Property
Property can be a major sticking point for a purchaser. Assume it will be regarded by purchasers as a large liability which will be a drain on the benefits they are planning on for their business after the acquisition.

If the company owns the property, has it been appraised recently and is the value reflected in the balance sheet? If a buyer is interested in the property, then it is better to have an appraisal available to include in the accounts rather than have uncertainty when sale negotiations have already started. That said, unless the premises are critical to the business and it has to be included in a sale of the business, many buyers do not want to take on a freehold property. You may need to consider how to dispose of property or lease it to another business going forward.

It is worth considering the sale or transfer of property  to a holding company owned by yourself and/or a family member. The property can then be used by the company on a commercial lease and generate ongoing retirement income. As with any property transfer, there are complications: primarily the interaction of a number of provincial and federal taxes that require proper advice sooner rather than later.

A lease may be viewed the same way by a purchaser, regardless of the owner. It is, in their eyes, a long- term commitment that may be restrictive to a growth company or to a buyer who may want to consolidate operations. Clearly, you need to continue running your business and need some security of tenure but is a ten-year lease with upward only rent reviews the right thing to enter into when you might be wanting to sell within three years?

Pensions
When defined benefit pension plans were the norm, employee pension plans were treated with extreme caution by all buyers.

It is unlikely that you have such a plan but if you do, the funding position and the plan valuation will be major considerations. If there is likely to be a problem, it should be addressed sooner rather than later. There have been many instances of pension funding deficits exceeding the business value, which is not a good place to be.

Pension plans are a terrific incentive for employees, but as a business owner, a defined contribution plan eliminates many of the risks.

Intellectual property
Where intellectual property (“IP”) is obvious – physical inventions such as the bigger and better mousetrap – some businesses have registered patents and/or trademarks to protect the unauthorized use of their IP.

Have you considered what you have developed over time in your business? What products, processes or brands do you use that might be capable of being protected and would be worth spending time and money on to protect? Buyers need to know that if your business relies on particular IP to continue to operate, the IP is protected and the business will not be undermined by a competitor who can copy, produce at lower cost and sell in greater volumes.

Have you considered what you have developed over time in your business, be it a product, process or brand, that might be capable of being protected and would be worth spending time and money on?

Contracts
Do you have formal contracts or Terms and Conditions with all your suppliers and customers? If so, have they been reviewed for any legislative changes? Do you know what happens if you sell? Can the contract be replaced by the new owner (or will it remain in place after a change of ownership)?

It is another case of the buyer gaining confidence that the business will continue to enjoy the same or better terms of sale and purchase post-acquisition.

On a similar theme, are there any significant customers or suppliers (over 20% of sales or purchases) and how might they react to a change of ownership? A highly concentrated customer or supplier base can create risk, not only if they fail but also if they might refuse to deal with a potential acquirer for competitive or other more emotional reasons. If it is possible to reduce customer concentration risk by increasing sales, it’s worth doing (and doesn’t require professional advice).

Numbers
Do you budget and forecast the business? If so, how successful have you been at achieving your forecasts? If not, why not? How do you plan for the resources required to achieve your targets? Buyers can be helped to assess your business by reviewing your budgets and forecasts and gain confidence from your ability to achieve expected results.

Also important is to be able to show a rising trend of profits, profitability and cash flow. This should be demonstrated over several years if possible and is not something that can be done overnight. Any “blips” need to be explained honestly and consistently to be credible.

There may be one or two expenses or assets that are likely to be unattractive to a purchaser. Rather than have an embarrassing discussion during sale negotiations, consider removing anything that has dubious business benefit – company housing, overpaid relatives not contributing to the business, the nanny, gardener or handyman who never come to the office but can be found at the business owner’s home, the sponsorship of the local cycling club because it is a personal passion from which the business gets little reward.

Costs such as these indicate that personal and business expenses tend to get mixed together, leading to a suspicion that there could be more and that the taxman might be interested at some future date when it could be the acquirer’s responsibility.

It is also sound financial sense – the business should sell for a multiple of profits, but if those profits are deflated by extraneous costs, the reduction in the sale price will be several times the benefit from a few personal expenses.

Come back for the second part of this article, detailing the due diligence process, available soon!

How a part-time CFO can help you to resolve your cash flow problems

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:

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 assess your company’s cash flow position and take the following steps:

Identify all the immediate threats to your business

A part-time CFO will look for all those things that could plunge your company into serious financial trouble if they’re not addressed immediately.

These could be factors such as the payment of wages or salaries, the payment of taxes or the payment on a due date for vital goods, etc.

Address those imminent threats

Your CFO will look for ways you can meet your most pressing financial requirements and buy the company more time. This might involve:

  • Chasing late-paying customers. To encourage those customers to pay, consider offering a discount for immediate payment or asking them to pay immediately by credit card.
  • With invoice discounting and factoring, you’ll receive up to 85% of the value of the outstanding invoice, sometimes within 24 hours. You’ll receive the remaining 15% minus a fee once your customer has paid the outstanding invoice.  An invoice discounting service can be confidential so that your customer will be unaware of the financier’s involvement. Factoring companies, however, undertake a full collection service (including sending out statements, making reminder calls and collecting payment), so your customers will be aware that you’re using their services.
  • Arranging short-term loans or operating line of credit with your bank.
  • Considering other funding sources besides banks and other lending institutions such as self-finance, or loans from family and friends, partners, investors and alternative finance like peer–to–peer lending.
  • Asking for better terms from creditors. You may find they’re open to extending your repayment schedule.
  • Identifying and addressing the underlying problem.
  • Assess the business to identify the cause of the cash flow problems. Address those issues to avoid a similar situation occurring again.

Prevent cash flow problems from recurring

As well as identifying and resolving the imminent threats to your business, your CFO will review all inflows and outflows of cash to determine where improvements and savings can be made. This is likely to involve:

  • Working out your break-even sales figure (the number of sales required to cover total expenses without making a net profit).
  • This will mean reviewing your sales figures for the past six months to check that you exceeded that breakeven point. It’s then possible to calculate how much you’re likely to make in sales for the next two months. If you’re unlikely to break even, you’ll need to plan how to increase sales and reduce costs.
  • Looking for ways to increase your profit margins such as raising prices. You can do this without losing valuable customers by offering packages or bundles of goods or services.
  • Reducing your salary or personal draws from the business until your revenue improves.
  • Cutting costs. The beauty of cost-cutting is that it can be done in hours or days, unlike revenue-boosting measures which take longer to implement and to take effect. Such cost-cutting measures might include doing any of the following:
    • Stopping work on non-critical capital projects.
    • Reviewing your inventory and selling off obsolete, damaged, or discontinued products.
    • Eliminating slow-moving products or less popular services from your line since selling unprofitable goods or services is likely to send you out of business faster.
    • Negotiating price discounts for volume purchases from your suppliers.
    • Consider downsizing. Bigger is not better if your company is always struggling to stay afloat. If your profit margins are consistently small, reassess your business goals. Rather than expansion, focus instead on profit.
    • Ditching products or services with the lowest profit margins. This change of focus may mean you can also reduce the size of your borrowings, staff, advertising, and marketing campaigns, premises, etc.
    • Reducing labor costs (without triggering a drop in productivity). Any cost-cutting measure that triggers a drop in staff morale will have negative consequences for productivity. Your CFO may advise you to defer salary increases and bonuses or to cut salaries from the top-down. You might also consider introducing a temporary freeze on overtime. Other measures might include lowering the number of employees through attrition or redundancies.
  • Speeding up the sales process. Your CFO will encourage you to accelerate the speed with which your customers’ purchase orders are converted into cash. In particular, you’ll be asked to consider what steps in the sales process can be combined or eliminated. For example, asking for payment at the time of the order, accepting credit card payments, or offering automatic account debiting.
  • Lowering miscellaneous expenses. You’ll be encouraged to find ways to make small savings on things like insurance policies, office rent, bank service charges, utilities, etc. Lots of small savings across the board can have a significant impact.
  • Refinancing your debt obligations. Your CFO might suggest approaching your lenders to see if you can lower your monthly payments on your term debt obligations by taking the remaining principal amount and spreading it out over a longer period.
  • Analyzing if you can outsource jobs or services. You’ll be asked to look at your operations to determine if any of your activities, services, or functions could be provided at less cost by an outside company or contractor.
  • Holding a sale of surplus or slow-moving inventory.
  • Approaching suppliers to negotiate better deals.
  • Asking your suppliers to take back excess inventory.
  • Selling off your underused assets and renting the equipment instead.¹

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.

Improving credit control.

Your CFO will help you to get tighter controls over your credit. That will mean:

  • Getting written agreement to your credit terms before taking on new clients.
  • Many businesses are not clear about credit terms with their clients and often simply set out conditions on the face of the invoice, but that’s too late in the process. Instead, you should always ensure that an authorized representative of your customer has agreed to your credit terms in writing before you agree to supply products or services.
  • Carrying out credit checks on all new customers, no matter how large or influential they may appear.
  • Invoicing at the time of a sale or close to it. Instead of waiting for the month’s end to issue invoices do it daily or weekly.
  • Making sure your sales invoices are accurate. Unfortunately, some customers will use any excuse for not paying invoices on time and any inaccuracies (such as an incorrect address or date or no purchase order number) could be enough for them to justify delaying payment.
  • Treating the collection of monies owed as a high priority. If you haven’t already done so, set up a computerized system to provide notification of late payments.
  • Setting up an invoice dispute resolution process. It’s important that your company records any documentation related to invoice-related disputes. You should also keep a record of those customers who challenge their invoices or raise questions so it’s possible to see if any do this regularly as a way of avoiding settling their accounts.²

Investigate the use of regular cash flow forecasts

Your CFO will encourage you to use regular cash flow forecasts so you know how much cash is going to be needed in the coming months. It means you’ll know in advance if you’re likely to face a cash shortfall and can make arrangements for extra borrowing, or take other appropriate action.

It will also make it easier for you and your senior team to make decisions such as whether or not to:

  • Hire more staff
  • Change your prices
  • Move premises
  • Tender for a large contract
  • Find new suppliers.

You’ll be able to see at a glance the impact such decisions might have on your cash flow.

Cash flow forecasts can also highlight potential problems so that you have time to take action to avoid them.

Conclusion

Your cash flow keeps your business alive. Having control of your company’s cash flow which allows you to operate within your means, and move away from a ‘feast and famine’ situation is usually a huge relief to everyone within the business.

It means that decisions can be made and checked against the cash flow forecast to determine whether they are viable. This increased visibility can be introduced quickly and can have a hugely positive impact on the whole business.

It also means that reserves can be built up gradually to give the business a cushion and alleviate the stress of not knowing what lies around the next corner.

Having the right cash flow management processes in place and being able to spot peaks and troughs in trading to improve cash flow is one of the most critical components of any finance function.

Put an end to your cash flow problems now by calling The CFO Centre today.

tel: 1-800-918-1906
email: [email protected]
www.thecfocentre.ca

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1 ‘How to manage a cash crisis’, NAB (National Australia Bank) Ltd., 2011

2 ‘Top Tips for Enhancing Your Invoicing Process – and Avoiding Problems with Your Business Cashflow’, Finlay, Mitch, Talk Business magazine, www.talkbusiness.co.uk, Jan 2015

STOP WORRYING ABOUT CASH!

Poor cash flow management can cause huge problems for even the most profitable businesses. Until you find and fix the cause of cash flow problems in your business and put systems in place for managing it, your company can be at risk of failure.

For the stark truth is without cash, your business will be unable to meet its payroll obligations, be more likely to default on payments to suppliers and creditors, and in the worse case, be forced to cease trading.

Without well-defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, many companies will flounder, yours included.

In our 2-part article, we will be covering:

  • The main cause of cash flow problems in any business
  • How a part-time CFO can help you to avoid or resolve your cash flow problems and prevent them from recurring

Introduction

It doesn’t matter if your product or service is outstanding, your market share is bigger than your competitors’, your team is highly productive or if you have a steady stream of new clients, your company is at risk of going under if you don’t have a firm grip on your cash flow.

Even if your business is experiencing a high level of growth, you can risk issues: expansion can exacerbate the problems caused by poor cash flow management.

Cash really is the oxygen on which every business depends. Without a steady supply of it, your business cannot survive.

That applies even if your company is profitable. Business consultant Bill McGuiness says, “The sad fact is that the majority of failing firms are profitable as they enter bankruptcy.”¹

Without clearly defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, many companies will flounder, yours included.

Cash flow management is not a short-term fix to a problem but should be part of the fabric of the business.

It is like an internal insurance policy for your business. Getting to grips with your income and expenditure and understanding where you stand today as well as in the months and years ahead gives you and the rest of your senior team a great sense of clarity and peace of mind.

It also makes it easier for you and your team to plan and make decisions.

For that to happen, you need to analyze and then manage the flow of cash in and out of your company on a weekly, monthly, and annual basis. You also need to create a cash flow forecast for at least three months ahead so you and your senior team are aware of when cash shortfalls are likely to occur. This will allow you to cover your working capital requirements.

The main reasons for cash flow problems

Essentially, your cash flow problems are likely to be the result of one or more of the following:

Slow-paying customers

According to a 2015 report by Taulia Inc. in the US, “for the majority of respondents, Days Sales Outstanding (DSO) averaged 30 to 40 days, with more than 25% of suppliers waiting more than 40 days to receive payment.

Small business suppliers are waiting longer and longer to be paid after delivering goods. This trend greatly impacts their operation as cash flow is one of the biggest concerns facing today’s small and mid-sized businesses. According to Forbes Magazine, a lack of readily available working capital is the main reason many small and mid-sized businesses fail to succeed.

To fill this cash flow gap, suppliers often have to borrow at costly rates between payments – and that only works if they can qualify for a loan.

From a broader perspective, paying later negatively affects the financial health of the supply chain.“²

Similarly in the UK, according to a report by Bacs Payment Schemes Ltd (Bacs),³ more than three-quarters of respondents (76%) are being forced to wait at least a month beyond their agreed contract terms before getting paid.

The knock-on effect of this is that business owners have to make tough decisions to make it through the month. Some 20% of directors in companies that experience late payments say they have taken a cut in salary in order to keep cash inside their businesses.

Over a quarter (26%) use their operating lines to make ends meet and one in ten are experiencing one or more of the following challenges every month:

Some 23% claim the late payment situation is forcing them to pay their own suppliers late.

Poor collection from customers

Many companies don’t issue invoices quickly enough. They’re even worse when it comes to chasing up invoices.

If this is the case in your company, it’s important to realize that every sale has already cost your business something in terms of labor, purchase of raw material, warehousing, advertising, etc. If you don’t collect what you’re owed, you’ll be worse off than if you never made the sale.

American entrepreneur Nolan Bushnell is fond of saying that a sale is a gift to the customer until the money is in the bank. 4

Your fixed costs are too high

If it is to survive, your business needs to bring in more cash than it spends. If it doesn’t, its long-term survival is unlikely.

Three of your biggest fixed costs (expenses) are likely to be payroll, capital expenditure (equipment, hardware, and plant) and office costs.

Your prices are too low

It’s quite common for businesses to set their pricing levels at the low end of the market in a bid to win customers.

If their expenses rise, their profit margins get smaller. Unfortunately, if they raise their prices, they risk alienating customers who have become accustomed to the low prices.

Your sales are too low

The way many business owners tackle the problem of low sales is to look for new clients. That inevitably incurs more costs since it involves spending more on advertising and marketing to attract those new clients.

There are other more cost-effective ways of boosting sales. They involve encouraging your existing or dormant customers to spend more and to do so more often.

You’re giving customers too generous payment terms

If your payment terms are overly generous (say, 60 or 90 days rather than 30), you could find that your business is constantly having to make up the cash shortfall.

Allowing customers to pay in arrears for goods or services received is similar to offering those companies short-term unsecured loans, says financial advisor John Toppin, MA FCA.5

“This form of financing is a fabulous deal for the customer as it is commonly unsecured, interest-free and the customer can pay its debt well beyond the agreed credit terms if it likes,” he says.

“What is more, unlike bank lending, the customer rarely has to pass any form of credit check to obtain these generous and virtually unlimited credit facilities.”

You’re overtrading

This happens when your business experiences rapid growth (which forces you to invest in more inventory, equipment, buildings, staff, etc.) but you don’t have the working capital to match that growth.

You have too many bad debts

Even a couple of bad debts may be enough to put your own business in jeopardy. That’s why it’s best not to rely too heavily on one or two big clients.

You’re holding too much old inventory

Accumulation of old inventory can tie up your cash reserves and prevent you from buying more up-to-date inventory. If this is the case, you should look for ways to sell off as much of that inventor as quickly as possible.

Joins us in part II of this article to find out How a part-time CFO can help you to resolve your cash flow problems.

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1 ‘Cash Rules: Learn and Manage the 7 Cash flow Drivers for Your Company Success’, McGuiness, Bill, The Kiplinger Washington Editors, Inc., 2000

2 “Empowering Suppliers, Insight into What Suppliers Use, Want and Expect from early Payment Programs” Taulia White Paper Q1 2015

3 ‘Late payments are forcing businesses to make tough decisions’, Bacs, www.bacsservices.co.uk, Feb 16, 2015

4 ‘Finance for the Non-Finance Manager’, Siciliano, Gene, McGraw-Hill Companies, Inc., 2003

5 ‘Cash Flow: Advice For Business Owners And Finance Managers’ Toppin MA FCA, John, Nomizon Business Publishing, Kindle edition, Sep 30, 2014-09-30

The importance of a business plan and how to create one – Part II

In our previous article, we have highlighted the importance of creating a business plan.  In this article, we will focus on the key elements of a business plan, the sections it should contain and how a part-time CFO can help you to create your business plan and implement it.

The key elements of a business plan

The most important part of your business plan is its financial information. Your financial forecasts should include your cash flow predictions for the next 12 months or more. You’ll also need to provide monthly sales estimates and costs to prove the business has enough working capital or to show that you understand you need to arrange additional financing.

You need to explain all assumptions in the business plan, with best and worst case scenarios. Detail the risks you’re likely to face and how they will be dealt with.

The Business Plan Sections

Executive Summary
The executive summary is usually the first section of any business plan and provides a condensed overview of what the business is and how you intend to reach your goals. If you’re seeking funding, you should detail the terms of the financing and the amount needed. It’s best to leave writing this section until after you’ve completed the rest. It should be less than 1,400 words.

Company description
This is like an extended elevator pitch. You need to explain your company history, business goals and how you satisfy the needs or wants of your market. You will also need to explain your competitive advantage.

Market analysis
You will also need to provide market analysis, size and expected growth as well as, industry participants, distribution patterns, competition and buying patterns, and your main competitors.

Organization and management
In this section, you need to detail your management team (and plans to fill any gaps within that team), your organizational structure, your Board of Directors, as well as a personal plan.

Service or product line
You need to describe your product or service and any associated copyright information or research and development activities.

Marketing and sales
You need to detail your marketing strategy (including pricing, promotion) and your sales strategy (including sales forecasts, programs, and techniques). Your costs, services, and support will also need to be included in this section.

Financial projections
This section outlines what you expect your business to achieve financially over the next three to five years. It needs to include your projected financial statements, expected cash flow and break-even analysis as well as key financial indicators and ratios. Don’t be tempted to overstate your numbers or expectations to obtain financing. It’s likely to harm rather than help you get that funding.

Funding request
If you plan to ask for a loan or capital, you need to include a formal funding request as part of your business plan. You need to include details of how much money you need now and how much you’ll need in the future.

 

How a part-time CFO can help you to create your business plan and implement it

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:

  1. One of Canada’s leading CFOs, working with you on a part-time basis
  2. A local support team of the highest caliber CFOs
  3. A national and internationally 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 work closely with you to develop your business plan and your timetable for implementation to:

  • Gain a full understanding of the business and its operating
  • Work through the existing strategic plan with you and make necessary changes to build a plan which clarifies how the company’s objectives can be realistically achieved.
  • Agree on milestones and break down the plan into annual and quarterly targets.
  • Conduct a fresh SWOT (Strengths, Opportunities, Weaknesses, Threats) analysis, bringing the plan up to date.
  • Conduct a new PEST (Political, Economic, Social and Technological) analysis, bringing the plan up to date.
  • Carry out a full competitor analysis to understand in detail what is and isn’t working in the market.
  • Explore opportunities for effective market research to enable innovation and development of new products/ channels to market/operating procedures
  • Identify key players in the business
  • Identify skill gaps in the business
  • Agree financial incentive structures to retain and motivate key members of the team
  • Identify five key metrics for determining what the future course of the business should look like
  • Agree on the exit or succession strategy
  • Develop a clear, coherent message (vision/ mission/purpose) to staff and to customers
  • Work with the senior team to ensure individual department goals are aligned with the big picture strategy
  • Agree on a who/what/when set of objectives for all department heads
  • Implement accountability protocol for every member of staff
  • Determine methodology which allows the senior team to course correct periodically when a change in strategy is required
  • Agree on delegation of authority to department heads to spread responsibility across the business and to free up the CEO/business owners time
  • Create a feedback route so that strategic goals are regularly shared with staff
  • Develop a set of relevant KPIs (Key Performance Indicators) and a system which allows for regular (daily/ weekly/monthly/annual) monitoring and reporting
  • Develop a long-term efficient tax structure for the business and for key employees
  • Identify key outsource suppliers/advisors and, in particular, corporate finance contacts

This process will instill a deep feeling of confidence both within the senior team and throughout the rest of the business.

 

Conclusion

Installing an up to date business plan or ‘roadmap’ in your business will allow you to experience a sense of control, which may have been absent since the day you started your company.

The business plan (and the methodology for updating the business plan) will remove a significant amount of confusion from your operating procedures. There will always be challenges contained within new projects but you will have a proper framework against which all decision-making can take place.

The plan provides the blueprint for delegating responsibility to your team and allows you to create some space in your own environment to work on growing your business, with your part-time CFO as a constant guide and sounding board.

You will move out of the chaos and into a more serene working environment where each of the gears, which make up the bigger system, is able to move in harmony.

Potential hazards will have been identified in advance and dealt with before they become unmanageable. You will be able to move from a culture of fire-fighting to a culture of fire-prevention and the benefits will be felt by each member of your team and most probably by your customers too.

The business plan is the first key to profitable growth!

 

The importance of a business plan and how to create one – Part I

Without a comprehensive, up-to-date business plan and an implementation timetable, companies may be missing out on opportunities for growth and not realizing their full potential. A formal plan can be an extremely valuable tool for managing and growing a business, as it allows a company to recognize its strengths and weaknesses. Furthermore, research has shown that SMEs that have a business plan in place are consistently more profitable than those who do not have a business plan.  In this article, we will highlight the benefits of creating a business plan.

Introduction

Planning is the key to the success of any business, no matter its size or age, but nearly 30% of the UK’s small to medium-sized businesses don’t have a plan of any kind1

The majority of those without such a plan which sets out the company’s strategic direction, its main operating and financial targets, the actions it will take to achieve those objectives, the new initiatives and investments planned, and their impact on the company’s performance say they don’t believe it’s necessary. Nearly a fifth say they prefer to keep plans in their head, according to research by Close Brothers Asset Finance.

Mike Randall, CEO of Close Brothers Asset Finance, says, “It’s concerning that so many small and medium-sized firms do not have a business plan. Without clear direction, they may be missing out on opportunities for growth and not realizing their full potential.”2

He suggested that those who weren’t prioritizing it or “didn’t feel it was necessary” should rethink their approach.

“Planning is key to any business throughout its lifecycle. A formal plan can be an extremely valuable tool for managing and growing a business, as it allows a company to recognize its strengths and weaknesses.”

The study also asked those who did have a plan, how often they reviewed it. Almost two-fifths said they considered it at least once a year while a fifth said they looked over their plan every two years. Some 14% reassessed it once every two to five years. Randall said this was an area SMEs should be focusing on as “a plan is only useful if it is reviewed regularly to ensure it meets the current and future needs of the business.”

He added: “It’s vital business owners regularly review their financial strategy to ensure they have the right funding in place to meet the needs of their business, at its current stage of the business lifecycle.”

Rebecca McNeil, MD for Business Lending and Enterprise at Barclays, says, “A lack of a succession plan can put the future success of a business at risk, so this needs to be considered far earlier and more formally than the results show.

Having a business plan is fundamental, she says. “It defines exactly what you want to achieve, how you plan to achieve it across a set time period and is a sure-fire way to ensure that growth targets and plans are being met.

“Business plans are dynamic documents – meaning they should be revisited and adjusted as the business develops. In addition, a strong plan can help applications for finance from a business loan to alternative forms of finance and investment.”

She continued; “Importantly, when a business is in trouble, having a solid plan can help to steer it back to good health.”

SMEs that had a business plan in place last year was consistently more profitable (70%) than those that did not (52%), according to yet another survey, this one commissioned by business and finance software provider Exact.3

It showed that those who had a business plan in place were more than twice as successful in achieving these goals than those who did not (achieving a 69% success rate versus 31%).

Creating a well thought-through, comprehensive business plan is an arduous task. Thinking through objectives and likely outcomes which may occur many years down the line is, by nature, challenging. But it is the hard work up front which makes for lighter work down the road as all of our team of part-time CFOs will attest to.

Most CEOs and business owners simply don’t have the time to spend on quality strategic thinking or to document and communicate that thinking in a way which allows the whole business to buy into the vision.

Harder still is managing and implementing the business plan. Significant strategic course corrections are commonplace in fast-growing companies. These should be embraced. The tricky part though is in managing regular change. That requires a combination of time and specialist knowledge.

There is an art and science to effective business planning and getting it right brings a real sense of clarity and direction to business – this is where an experienced part-time CFO can make a significant contribution

Not spending quality time on strategic planning usually leads to a chaotic working environment. Our clients often talk about ‘not feeling in control’ and ‘not really knowing what is coming around the next corner’.

When the plan is weak, business owners tend to operate without the same sense of conviction as those who allocate time and expertise to the planning process.

Our part-time CFOs often find their clients have done some good planning and strategic thinking but need a devil’s advocate to ask the right questions and help to steer the ship in the right direction.

Being a CEO or business owner without a high level ‘finance person’ to bounce ideas off can be tough. CFOs often possess a different, albeit complementary, set of skills to CEOs/business owners.

It is natural for business owners to bring people into the company who see the world in the same way they do. It is often more valuable to have key members of your team who possess very different skills to your own. Constantly doing the same things in the same way as the same people will usually lead to achieving the same results.

If you are worried about whether you have the right team in place to fulfill the vision you have for your business, or whether you have the funds you require, or whether your business plan is sufficient to reach your objectives, then we would recommend you take the time out to work through the detail. It is rare to see a company succeed if it doesn’t have a robust plan.

Our part-time CFOs often work with clients who started off with intentions to run a business and have ended up working in a job. However, with the right business plan in place and a robust implementation approach, the business owner is able to run the business without getting drawn too far into the day-to-day details.

The benefits of creating a business plan and implementation timetable

Proper business planning is very liberating for the business owner, whatever their objective might be. A well-constructed and regularly reviewed business plan will instill real confidence that the goal is indeed achievable.

Writing a business plan has many benefits for businesses of any size and in any industry. It can help owners and senior managers to:

  1. Clarify objectives and develop suitable strategies. They can create a clear path for management to follow in the early stages and identify targets for performance measurement (or ‘milestones’), says David Cromwell, former head of JP Morgan & Co’s Private Equity and Venture Capital Division and co-director of Yale School of Management’s Entrepreneurial Business Planning Course. “Research forces companies to learn what they can expect to make and what the industry trends are. Where has the industry been the last five years, and where is it going? If the research indicates your idea is viable, the actual construction of your plan depends on the goods or services you offer, how much funding you need and your goals.”
  2. Understand the market. You have to research your market to understand it and that will always be beneficial. “Research is one of the big value-adds of writing a business plan,” says Joseph Ferriolo, Director of Wise Business Plans.5
  3. Identify and overcome internal and external threats Organize the company
  4. Organize the company
  5. Access external funding (banks, venture capitalists, and angel investors are unlikely to look at any funding request that isn’t accompanied by a very solid business plan.)

“A professional investor’s decision to pursue a proposed new opportunity will turn on the quality of the business plan and the accompanying materials,” says Cromwell.

“There is no chance whatsoever of raising the needed financing without a business plan. Even with a plan, the content and packaging must be excellent.

“The business plan is management’s first, best, and probably only chance to capture the attention of investors,” he adds. Investors need assurance that management has thought of its corporate goals, management team, products, strategies, competition, and the necessity of capital.

They also want to know that the management team has considered weaknesses as well as strengths, problems as well as opportunities.

“At JP Morgan & Co., we received over 4,000 business plans every year,” recalls Cromwell. “We invested only in about 1% of the incoming situations.” That ‘deal flow’ versus the rate of investment is typical for venture capital investors, he says.

“Venture investors think they are busy people. Instead of trying to find a reason to pursue a new investment opportunity, most VCs try to find a reason to kill it ASAP.”

There is no chance whatsoever of raising the needed financing without a business plan. Even with a plan, the content and packaging must be excellent.

Read our next article on the key elements of a business plan and to learn how part-time CFO can help you to create your business plan and implement it.

_________________

1 ‘Worrying number of SMEs don’t have a business plan’, Business Matters magazine, www.bmmagazine.co.uk, May 1, 2015

2‘ Are business plans redundant? Nearly a third of British SMEs don’t use them’, Smith, Rebecca, Real Business, www.realbusiness.co.uk, May 1, 2015

3 ‘UK SMEs losing out on nearly 20% extra profit by not having business plan’, Exact, www.exact.com, Apr 10, 2014

4 ‘The Business Plan: Lecture 3:1’, Cromwell, David, David Cromwell’s and Maureen Burke’s Entrepreneurial Business Planning course, Yale School of Management

5 ‘How to Write a Business Plan: Outline, Format & Sections’, Arline, Katherine, Business News Daily www.businessnewsdaily.com, Feb 5, 2015

 

 

 

Financial reporting | The CFO Centre Canada

Keys to Profitable Growth – Financial Reporting

Have you ever been so far off the grid – on a wilderness expedition, maybe – that your smartphone doesn’t know where you are? If you click on your “maps” app, your phone just shows you a blue dot, figuratively shrugs its shoulders and says, “You’re on the blue dot. But I have no clue what’s around you, where you’ve been or where you’re going.”

That uncomfortable “lost” feeling applies to more than just wilderness trekking. It can apply to your business – when you have no clear idea of which products or services are most profitable, how much you can afford to spend on new equipment, and whether you are on track to your goal (maybe, a comfortable retirement?).

So what’s the “maps app” for your business, so you can see how to get where you want to go? It’s your financial reporting system.

Financial Reporting – One Key to Profitable Growth

To be successful, you and your senior managers need regular access to accurate insights into your business. You need to be able to spot problems when they first emerge; measure and assess what’s working; identify and capitalize on opportunities, and recognize and manage threats.

When you know the reality of how your business is actually performing, you have a platform to confront the reality and can make decisions based on facts rather than speculation, bias and anecdotal evidence.

The importance of business reporting is twofold:

  1. To have visibility into the future (knowing what is likely to happen around the corner).
  2. To have retrospective visibility over past performance (that is, to analyze performance data and use it as a tool to course correct for the future).

A lot of businesses wait too long to introduce a proper business financial reporting structure. But without the right information collected in a timely way, effective analysis and robust planning is impossible.

Well-constructed business reports are the secret weapon for CEOs and business owners of ambitious growth companies. They will reveal how your company is performing and how far you are from reaching your goals.

Three key aspects to your financial GPS

While large companies have sophisticated financial systems tied to human resources metrics, production equipment, and inventory controls, you don’t need to get that elaborate – yet.

Start with mastery of three key financial statements:

  • The Balance Sheet
  • The Cash Flow Statement
  • The Profit and Loss Account

These reports can reveal such information as:

  • How effective your team is at controlling costs and deploying expenses to generate sales
  • Which of your products or services are the fastest growing and the most profitable
  • Your highest growth potential and most profitable customers
  • Where your break-even point is (how much sales the business needs to produce to cover all its costs)

Having all your business data at your fingertips means that you can spot gaps and weaknesses at a glance, have clear visibility over the future and course correct daily to ensure you are still en route to your destination.

Your company’s balance sheet: shows what your company owes and what it owes at a given time.  It reveals:

  • The net value of your company (which is useful if you plan to raise capital to finance future growth, sell your business, etc.)
  • Current and long-term debt obligations
  • Asset management (how effectively you’re managing your assets) and liquidity ratios

Lenders, investors and potential customers can use your balance sheet to assess your company’s creditworthiness, as well as its stability and liquidity – indicating its ability to fund growth without resorting to outside financing.

Profit and loss account: while the balance sheet is like a still image posted to Instagram, the P&L account is more like a video. It is the main way businesses determine how well they’re performing over time.

This is the main tool businesses use to gauge their profitability. It shows how well (or not) your company performed over a particular period of time in terms of revenue, expenses and earnings.

The Profit and Loss Account reveals the steps you can take to increase profitability (for example, whether to focus on more profitable product lines or services or to cut unnecessary expenses).

Investors will use your Profit and Loss Account to assess the ability of a Company to generate cash from operations, service current financing obligations and assess the level of risk involved in extending additional credit or venture capital to your company.

Cash flow statement: reveals how your company spends its cash (cash outflows) and where the money comes from (cash inflows) during a period of time. It is divided into three sections related to your company’s business operations: cash flow from operations, financing, and investing transactions.

Essentially, the Cash Flow Statement reveals whether or not your company has the cash to cover its daily activities, pay bills on time and maintain a positive cash flow. It also helps you to determine whether you’ll need additional working capital to buy inventory or to fund seasonal fluctuations.

Interpret your key financial statements using ratios

To interpret and understand the numbers contained in your financial statements, you should use financial ratios. The ratios are computed from numbers taken from the Profit and Loss Account and the Balance Sheet.

They measure performance in percentage terms rather than raw numbers. This means you can compare your company’s performance with other businesses in your industry, with your previous results and with your projections. _

Typically, owners, managers, and stakeholders look at four categories of ratios to analyze a company’s performance:

  • Liquidity ratios – show your company’s ability to meet its financial obligations
  • Profitability ratios – help evaluate your company’s ability to generate a return on its resources
  • Leverage ratios – show how your business is using debt, relative to capital
  • Efficiency ratios – reveal how effectively your company is managing assets.

Some ratios will be more applicable to certain industries and businesses than others. If you provide a service rather than sell products, then ratios like return on assets and inventory turnover are unlikely to be relevant to your company whereas the receivables revenue is critical to your business operations.

It’s best to choose the five most relevant ratios to your business and track those as part of your monthly management operating plan.

Conclusion

The benefits of having regular access to high-quality financial management reports are far-reaching. Good reports reveal the efficiency (or otherwise) of the constituent parts of the business and enable you to deal with potential threats and take advantage of opportunities to grow your business.

The compound effect of making regular, quick and high-quality decisions based on a strong set of data and reports cannot be overestimated.

7 keys to profitable growth | The CFO Centre Canada

7 Keys to Profitable Growth

Planning for growth is something every business owner will say they do, but not all business owners will do this effectively and with a focus that will generate profitable growth.

Many businesses plan for growth, but not profitable growth.  Some businesses focus on growing sales without a focus on margins while others build infrastructures to support sales and growth that never materialize.

Michael Porter said, “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”

A business must focus on profitable, scalable and sustainable activities if it is to grow. Profit and the generation of cash to re-invest in your business must be made a priority, as it is an essential part of the financial strategy and structure of a successful business.  Profit and a clear business plan will create a focus and the alignment of the organization, as well as attract investors and other sources of funds to fuel growth – all of which impacts the underlying business value of the business.

CFO Centre has identified 7 Keys to Profitable Growth:

  1. Define your business goals & objectives
    Produce a formal plan from which you can articulate a vision
  2. Critically review your business
    Identify competitive advantage, scalability & sustainability
  3. Establish a financial plan
    Identify milestones, KPIs & dashboards
  4. Create organizational alignment
    Nurture your culture, hire the right people & communicate the vision
  5. Identify the financial resources required
  6. Support the business with systems & processes to optimize performance
  7. Measure, review, evaluate & course correct
    Be proactive & prepared to be reactive

If you follow these 7 Keys and plan for profitable growth, you will ultimately:

  1. Improve and grow profits
  2. Maximize the scalability of your business
  3. Enhance management team and organizational structure
  4. Attract investors and other sources of funds
  5. Increase business value

To enhance the value of your business and grow successfully, follow the 7 Keys and Plan for Profitable Growth.

Welcome to the team | The CFO Centre

Thank you for a great year, 2018!

Well, with 2018 in our rear-view mirror and as we move forward along the 2019 highway, it is a  great time to reflect on the past year’s journey.  For us at The CFO Centre Canada, the last 12 months have been rich in opportunities to help SMEs thrive as well as our overall growth.  Our road was paved with outstanding relationships, both new and growing, from clients to collaborators.

We are pleased to have welcomed several talented individuals to our team. It is our great pleasure to spotlight the following CFOs who joined our ranks:

Calgary
John Cassels
Brenda Krause

Durham / Peterborough
Robert Ackford

Edmonton
Kathleen Engel
Arthur Madden

Montreal
Marc Chartrand
John Giove

Quebec City
Serge Falardeau

Toronto
Liz Nadeau
Lyndon Rollit
Nicole Ballestrin
Kent Smallwood
Paul Mason

Vancouver
Joel Thompson
Paul Riegel

Western Ontario
Byron Dyck 
Bill Bouwmeester
Chester Lai
Eric Martin
Gareth Nichols

York Simcoe
Jeff McLellan
Andy Williams 

Thank you to all for a great 2018.

Now let’s see what 2019 has in store for us!

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