My name is Michael Barbarita and the name of my company is Next Step CFO. At Next Step CFO we provide Chief Financial Officer Services. You see, companies from start up to 10 million in sales cannot afford nor do they require the services of a full time CFO. We provide Cost effective CFO services on an as needed basis.
Feeds for CFO [Information and Resources For Business Owners from an Interim CFO ]
It is often said, that in order to succeed in business you need 3 things. One is the ability to take action. Two is Self Mastery which is taking control of your mind and thoughts and three is you need the proper tools.
The ability to take action and self mastery come from within, but the proper tools can come from a good CFO.
Your CFO needs to use tools that:
1. How much cash they will have or need at any point in the future.
2. Allows business owner to choose multiple scenarios to see what can happen if:
* Sales/revenues change up or down.
* Expenses change up or down.
* Inventory changes up or down.
* Debt structure increases or decreases.
* Capital Expenditures increase or decrease.
* Headcounts increase or decrease.
3. Determines optimum inventory levels.
4. Determines optimum timing of making trade and expense payables and determines
how much to pay.
5. Determines a company's ability to make capital expenditures.
6. Determines whether a company should lease or buy capital equipment.
7. Determines when a business owner can retire and still pull out a paycheck from the
business.
8. Determines how much debt you will have at any particular point in time.
9. Determines what the business owner has to do to increase cash flow.
10. Determines Break even points.
11. Determines optimum inventory receipts or manufacturing output.
12. Determines optimum expense levels.
13. Helps develop operating budgets.
14. Helps determine optimum headcount.
15. Assists in determining Business Valuation.
16. Helps Determine key operating metrics.
17. Determines the effect of adding or eliminating a product line or business segment.
18. Determines the effect of adding or eliminating a store location.
With the Proper tools from the CFO the tripod of success can be completed and success will be achieved.
One of the CFO Services available to my clients is an expense review. During this analysis I look for alternative vendors with more value or negotiate with existing vendors for lower pricing. No matter how good the CFO is in cutting expenses I have never seen a P & L with zero expenses. Eventually you are going to need sales growth.
With this difficult economy still continuing, businesses are still looking to cut expenses which is a good thing and cutting expenses should be an ongoing practice no matter what economic condition we find ourselves in. However as this current economic difficulty continues I see businesses now cutting into their advertising and marketing budgets. Like other expenses, a review and analysis of advertising and marketing expenses should be ongoing no matter what economic condition we are in. When this analysis is done and certain advertising is determined to be ineffective then it should be cut. I am fine with that. However, what I am seeing is that business owners are starting to cut more effective advertising and putting off new promotions that they believe will be effective and in my view this should not be done. Cut elsewhere but not advertising and marketing unless said advertising and marketing is determined to be totally ineffective. As a CFO, I am well aware of the risks involved in advertising and marketing. However, I am also aware that businesses owners cannot retreat forever or they will retreat right into bankruptcy court.
I am also well aware that in difficult economic times your most effective form of advertising isn't as effective in difficult economic conditions as it is in peak economic conditions, but it is still your most effective form of advertising and cannot be cut. Making the decision to keep more effective advertising going and making the decision to take on new advertising and marketing opportunities that you believe will work is where the risk of entrepreneurship in its most precious and sacrosanct form comes to the front. This is what separates the good business people from the not so good business people. More importantly this is what separates you from your competitors because your competition is retreating!
When someone either cuts more effective advertising and marketing or passes on a new advertising and marketing idea that they really like, I am reminded about the story of the Hot Dog Vendor.
A Man lived by the side of the road...and sold hot dogs.
He was hard of hearing, so he had no radio. He had trouble with his eyes, so he had no newspaper. But he sold good hot dogs.
He put up a sign on the highway, telling how good they were. He stood by the side of the road and cried, "Buy a hot dog, mister!" And People bought.
He increased his meat and bun order, and he bought a bigger stove to take care of his trade. He got his son home from college to help him. But then something happened. His son said, "Father, haven't you been listening to the radio? There's a big Depression on. The international situation is terrible, and the domestic situation is even worse."
Whereupon the father thought, "Well, my son has gone to college. He listens to the radio and reads the newspaper, so he ought to know." So, the father cut down on the bun order, took down his advertising sign, and no longer bothered to stand on the highway to sell hot dogs.
His hot dog sales fell almost overnight. "You were right, son", the father said to the boy. "We are certainly in the middle of a Great Depression."
If the business is cutting into advertising and marketing because the advertising and marketing is ineffective that is one thing, but if the business is cutting more effective advertising and taking a pass on new advertising and marketing opportunities that they believe will be effective, I think they need to re-think that!
* What if a new hire is only a sub par performer on the job? Here you are risking all this money and the productivity isn't even there. This employee who you interviewed multiple times and had your current employee's interview multiple times who all giving this prospective employee rave reviews isn't working out. Now you have to lay off this employee adding to your unemployment insurance contributions.
* The risk of rising health care costs and the latest health care plan providing much uncertainly among many business leaders and small business entrepreneurs.
* Take a look at existing employees. Can you really afford to have sub par performers?
* The risk of laying off or firing an employee is another burden of having an employee. One never knows when they layoff or fire an employee what legal action awaits. Even if you win the case you lose as you lose the legal costs to defend!
In the final analysis, subcontracting work and responsibilities has got to be a more viable option than ever before.
Today's business owner needs to take a look at this option. Subcontractors can be interchanging movable parts and if they do not work out it is easy to let them go. When you let go a sub contractor there is virtually no risk of legal action especially when compared to the risk of letting go an employee. With subcontractors there are no health costs and no benefits. Keep in mind that I am talking about Sub Contractors, not independent contractors who in the eyes of the taxing authorities could be employees in disguise. Hiring people as independent contractors could get you into a lot of trouble. Subcontractors are real businesses that can do work for you and other customers that needs to be done within your business. Independent contractors are individuals who are looking for work and really do not operate a business in their field and come and go as an employee would. For IRS distinction click here.
A reputable Part Time CFO who is a subcontractor and not an employee or independent contractor can help you assess the risk associated with your current or proposed employees. A good CFO will also help you identify, assess and mitigate other risks in your business.
I wrote an article on understanding the risks of business ownership some time ago but I wanted to revisit this topic under the heading of "Business Risk". The more I think about Business Risk the more I think it is valuable for the business owner to understand what Business Risk means. As I see it, especially in this so called "New Economy" the business owners must be more sensitive to risk than ever before.
When you are a business owner, risk is all over the place. The critical element that keeps your sanity is your assessment of that risk. What should be going through your mind is whether the risk you are assessing is mild, concerning or severe. Just by opening up for business and putting the lights on there is risk. Every single day you are likely to encounter at least one (likely more than one) of the following risks:
Buying equipment
Not Buying Equipment
Leasing Equipment
Not Leasing Equipment
Purchasing inventory
Not purchasing inventory
Hiring employees
Not hiring employees
Incurring debt
Not incurring debt
Do you see where I am going with this? Every decision you make whether you do something or you do not do something carries risk. This is by no means a complete list! I could go on and on with inventory mix, collections of accounts receivable, choosing suppliers and so on. This is why it is so challenging to be a business owner. This is why it takes a certain mentality, a certain make up and a certain mindset to be a business owner. The job of the business owner and CFO is to assess each and every one of these risks. If the risk is severe or cannot be tolerated then the risk must be mitigated.
Do you see why the business owner needs help with this? Do you see why the Chief Financial Officer can play such an important role no matter what the size of the business is? Even in the smallest of businesses these risks need to be assessed and mitigated if severe.
I had a prospective client/business owner recently who was ready to hire me. He said before he hired me he had to ask his bookkeeper their opinion. The bookkeeper had not met me and did not know me and although I thought it was a strange way to operate I said that was fine. When I followed up with the prospect he said that the bookkeeper thought that a Part time CFO was not needed and based on that, the business owner said he was not going to hire me.
I was surprised by this. I felt bad for the business owner on how he would let the bookkeeper make such a decision. I told this prospective client and business owner that in my experience there were only two reasons why a bookkeeper would say no to CFO services without knowing or meeting the CFO:
1. The Bookkeeper is acting very inappropriately in the day to day responsibilities of their job (possibly stealing) or;
2. The Bookkeeper is afraid to have their numbers scrutinized in fear that inadequacies in the bookkeeping will be exposed.
The point is that bookkeepers and CFO's work famously well together. They compliment each other. The Part Time CFO goes into the engagement happy when they know a bookkeeper is on staff preparing the numbers and the CFO and bookkeeper work together to make sure the numbers are right so the best business decisions can be made for the client. The Bookkeeper and CFO are a powerful combination in terms of helping the business generate accurate financial numbers. That is why when a bookkeeper repels a CFO who they do not even know or never met, that should raise the eyebrow of the business owner.
When you click on the link some software will download and only take a minute or two. The play button to the presentation is in the top left hand corner just beneath my name
Thank you
Michael Barbarita
Next Step CFO
Tel: 781-326-3822
Web: Part Time CFO
One of the biggest challenges I have as a Part Time CFO is working with distressed companies. These are companies that are very insolvent and have had a recent history of significant operating losses or were companies that were always on the edge and then developed more significant problems during the current economic downturn. These are usually companies whose business owners never admitted there was a problem until it was too late. These are usually companies who did not prepare business or cash flow forecasts or a strategic plan or exit plan. These are usually companies who are reactive versus proactive. Since in business is is 80% ingenuity and guts and 20% luck. These could be companies that were simply not lucky. Most of the time the softest landing possible crushes the hopes and the dreams of the business owner and it is not an easy position for the CFO.
When working in these situations you look for the softest landing possible. 95% of the time the softest landing possible is viewed by the business owner as a nightmare. This is understandable because the softest landing possible usually isn't selling the business for millions of dollars which is the dream of most business owners.
The personal liability situation of the business is an important consideration when seeking the softest landing possible. Usually the rule of thumb is the more personal liability exposure the harder the landing. This is usually the case because the more personal liability exposure the business owner has the less the impact the corporation has to protect the business owner.
I am going to write about 3 possible options when a business is insolvent that may provide the softest landing. I am going to explain each one only briefly because I am not an attorney and I urge everyone contemplating these options to consult an attorney.
1. Bankruptcy. I think we are all familiar with this one. This may have to be combined with personal bankruptcy of the business owner due to excessive personal liability incurred in the business. Another consideration with this route is also the cost. It can be expensive especially the business bankruptcy. Sometimes a bankruptcy filing can be used as leverage with creditors and also at times with hostile partners. You have two forms of business bankruptcy which are Chapter 7 which is a complete liquidation and closure and Chapter 11 which is a reorganization. With a Chapter 11 or reorganization one of the most important factors is will the trade supply you? This is when the business owner has to rely on whatever relationship equity they have built with the trade. Chapter 11 is only viable if there is some type of debtor in possession financing available or if operations can be funded by only paying current expenses and a very small piece of old debt.
2. Private Foreclosure Sale. This is when there is a bank or other senior creditor in first position to be able to take all of the assets under a security agreement with a filed UCC. An acceptable offer is made to the senior creditor by an outside investor usually for less than what is owed the senior lender but probably for more than the senior lender would get if they liquidated the company. Only the assets of the company are simultaneously seized and sold to the investor in a private foreclosure sale. The liabilities are left in the old company. A deal is made by the outside investor with the current business owner for either equity in the new company or a job/consulting position or both depending on the business owners desires. Available cash before the foreclosure sale is used to pay down or negotiate with personal liability creditors. On one hand the trade loses what ever the company owed them, but on the other hand they could perceive new management and new majority ownership and a new day to do business with someone who will pay.
3. Strategic Buyer. This is when you can find a buyer who is in the substantially the same business. A strategic buyer will be in a better position to work fast and also will pay the most while seeing an opportunity to expand their business. The strategic buyer buys all or selected assets and none or selected liabilities. The purchase price and earn out (there is likely to be an earn out as we are talking about a depressed business with an uncertain future) needs to exceed personal liabilities and any secured creditors with perfected security interests (filed UCC's). The seller needs to be prepared to offer settlements to creditors giving priority to creditors with personal guarantees. This is not easy to do but can be a way out. In this option the trade knows the strategic buyer and although the trade knows they have probably lost the receivable they have a stronger company to do business with who they are familiar with.
Once again, these are all complex strategies and every situation is different. Experienced lawyers must be obtained to see if any of these options is right for you. I have personal experience with all of these scenarios and it is important to review each option carefully to flag the risks and opportunities. These are 3 possible options to provide the softest landing possible for an insolvent company. The challenge here for the CFO is to explore all of the options available to the company knowing that each option likely presents unpleasant downsides for the business owner and you must identify the option that presents the least unpleasant downsides. Keep in mind that it is also likely that the worst thing you can do is nothing. Therefore it is important that the Chief Financial Officer stays focused on continuously influencing the implementation of the softest landing possible.
Should I acquire new equipment and if so should I lease or buy it?
Can I afford another employee?
Should I layoff an employee?
Where is cash going to be next week, next month or even next year?
My name is Michael Barbarita from Next Step CFO where we provide Chief Financial Officer Services to small companies on an as needed basis.
Through the use of my exclusive forecasting and modeling tool called "CashTell" I can create multiple what if scenarios to get concrete answers to all of these questions that business owners literally stew over.
Michael Barbarita
Next Step CFO
Tel: 781-326-3822
The reason you need a Part Time CFO and the reason why I am in business is to empower the business owner with the information and analysis they need to achieve business success. I do this through the use of proprietary tools and strategic planning and the end result is improved cash flow, increased profit and reduced business risk.
Michael Barbarita
Next Step CFO
Tel: 781-326-3822
There are 3 components of cost. These 3 components of cost are material, labor and overhead. As a Part Time CFO, I see a lot of business owners eliminating overhead from their cost calculations. This can lead to operating losses and cash flow problems.. Usually the reason the business owners misses overhead is they do not understand how to calculate overhead nor do they know how to incorporate overhead in their analysis.
The easiest way to calculate overhead is as a percentage of sales. Take all of the projected overhead expenses for the period you want to analyze. The period can be a month, quarter or year and divide these projected expenses by the amount of projected sales. As you go forward if sales are lower or higher than projections by 10% or more you should recalculate the overhead rate based on the new projected sales. The same recalculation needs to be done if your projected expenses are off higher or lower by 10% or more. This percentage needs to be applied to the sales dollars associated with each sales transaction or quote. You can also simply take last year's actual results for overhead and sales and perform the same calculation on actual results instead of projected results. I like to use projected results. Other than sales there are other ways to calculate overhead using labor dollars or labor hours, but I like to use sales.
There are many schools of thought regarding the calculation of overhead and incorporating overhead in cost calculations. Some do not like accounting for overhead in their cost calculations because they say no matter how much the sales price exceeds material and labor, the overhead will begin to be paid and that is their only objective. I say a couple of things about that. First, sales better be high enough otherwise if you employ this school of thought you will guarantee yourself you will not be profitable. Even if sales exceed material, labor and variable overhead by just a few dollars you will eventually pay for all of the fixed overhead but the sales must be high enough and that is a huge risk. Second, an argument can certainly be made that a sale that at least covers some overhead is better than no sale at all, however are you sure there is no other sale out there that you are not making that covers more of your overhead or all of your overhead or do you justify giving your product and service away just to make a sale knowing it is covering some overhead?
Note I added the term Variable Overhead above. Sometimes there are expenses that a business owner calls overhead, which can be considered overhead but are actually expenses that are variable to sales. Expenses such as credit card fees or gas where a service performed is going to require going to a specific location need to be identified as variable. Variable overhead should be incorporated as part of the expense component deducted from the selling price to determine profit before fixed overhead.
My view on overhead is that the business owner needs to know what the overhead component of their product or service is so that they know what their true bottom line is on each and every transaction/quote. Unless your expense and/or revenue projections are way off, knowing the true bottom line on every transaction will give you the piece of mind that all costs are accounted for and that the bottom line on the transaction/quote is credible. At the end of the day the business owner can use their own discretion as to whether a sale that does not entirely cover fixed overhead is worth making. If it were me I must be extremely confident that there is no other sale to make that will give me a better return before I would accept a sale that only partially covered fixed overhead. For example let's say you know with reasonable certainty that your business is in a state of low demand maybe due to seasonality or economic conditions. If I am convinced there is no other sale out there that is going to give me a better return or if I think the customer is worthwhile to keep because the customer will give me long term potential at higher profit margins then I would make the justification that I am at least covering some fixed overhead. Otherwise make sure your selling price covers all three components of cost which once again are Material, Labor and Overhead.
Calculating Overhead is one of many important CFO Services.
As a CFO for hire I notice that many business owners do not calculate labor burden as part of their actual labor costs. Many put these costs in as overhead or do not include them at all when they are clearly a labor cost which in most cases is variable to the use of labor. The most common labor burden costs are:
Payroll Taxes This includes the employers contribution to FICA and Medicare as well as both Federal and State unemployment taxes,
The employer portion of all employee Benefits: - Health insurance, Dental Insurance, Life insurance etc ,
Payroll processing costs,
Workers Compensation Insurance
In order to calculate labor burden take all of the projected labor burden expenses for the period you want to analyze. The period can be a month, quarter or year and divide these projected burden expenses by the amount of projected labor dollars for the same period. As you go forward if payroll is lower or higher than projections by 5% or more you should recalculate the burden rate based on the new projected payroll. The same recalculation needs to be done if your projected burden expenses are off higher or lower by 5% or more. You can also simply take last years actual results for Labor Burden expenses and payroll and perform the same calculation on actual results instead of projected results. I like to use projected results. This percentage needs to be applied to payroll dollars applied to each sales transaction or quote.
Calculating Labor Burden and incorporating it as a labor cost is one of many important CFO Services.
I have a client who called me and told me that he really appreciated the time I spent and the explanation I gave him with respect to his financial statements and that for the first time he had a handle of what is going on and how to interpret the information.
When I got off the phone I thought about what he had said. I thought to myself I just made sure he understood what was going on. I did not prepare some elaborate report, I did not give him a financial forecast and I did not prepare the key metrics of his business. Those will all come during the engagement. I simply clarified some information that he already had to make him understand what was happening. It made me wonder how many other business owners are out there where all they want to do is understand and how it may only take an hour or two to help them to understand.
This experience gave me a new perspective on my business as a Part Time CFO. The first thing I will do now when meeting a client is instead of first identifying their need I will first identify what they do not understand. One I identify what they do not understand I will work to make sure they understand and then work on their specific needs.
One of my clients is having a real good year. I know that is unusual for the current economic environment but this particular client makes very unique and effective sales presentations which has lead to his success.
My client recently (within the last two weeks) added some new employees in order to keep up with the demand and he asked me if he should buy a new truck. He said he thought it would make one of his new crews more productive.
I said "hold it" as I immediately went back to my business experience and how when I had a peak in demand and was doing really well how I went overboard with capital expenditures, how I added locations and how I added product lines as I thought the great demand was never going to end. This was a big mistake. I said to my client "Exuberance" as I thought of my own exuberance. I went on to tell my client that we have not even tested our new employees to see if they are going to make the cut as permanent employees and we are thinking about buying trucks to make them more efficient. My client went on to say that he could take one of the new guys and let him go solo on the truck to do some lower end jobs. I told my client that we should do nothing and review this in another two months. In two months we will see if we still have the same sales backlog, we will see if the new employees are working out, we will also have a better idea how as a business we handled this excessive amount of sales activity from a quality standpoint and we will know if it is profitable to do these smaller jobs. We will also have a better idea to see if there is time to market the smaller jobs for the truck strategy my client talked about. I told my client that business owners (me included) have a tendency to really over spend when times are good. They almost do it because they have the cash available to do it and things are going so well so they think they need to capitalize on this success without thinking that these great times are not going to last forever and the overspending still has to be paid for. As I told my client this he began to understand and he thanked me for putting the breaks on the idea. I told him you must be equally as disciplined in managing upturns as in managing downturns and you must never think you can afford something just because the cash is currently available. You must constantly look to conserve cash unless a real return on the investment can be forecasted with accuracy and all of the other areas of the business are stable and tested as cash is the lifeblood of your business.
This exchange between my client and I is just one more example of how it is a great advantage for a business owner to have an entrepreneurial chief financial officer. The entrepreneurial CFO can reflect back on the many real life business experiences and apply those experiences for the benefit of their clients.
Below is an interview that took place on April 16, 2010 on WBNW 1120 AM in Boston between the host of Money Matters in the Afternoon, Scottie McCall and the President of Next Step CFO, Michael Barbarita. The subject is Chief Financial Officer Services:
