Within an organization there are many different career paths to get to the top such as Operations and Sales but in the end no matter your background, an understanding of finance is key to reaching that top position. Most business decisions involve some type of financial impact. With this in mind, when organizations are thinking of promotions they want their senior leaders to be comfortable in the world of finance.
During financial management workshops that I led for participants without financial backgrounds there were a couple of common themes of why they were attending the workshop:
- Lack of understanding of key financial terms
- Inability to financially analyze key information
- Inability to follow financial conversations in meetings
- Uncomfortable when financial topics were discussed
- Required as part of a company development plan
Trying to navigate the world of finance can be overwhelming. There is so much information out there. A business finance coach could help you navigate this world. With a business finance coach you could:
- Cope with the fear factor around business finance
- Explain finance in easy to understand terms
- Build up your financial acumen to properly analyze results for decision making
- Only focus on the key financial indicators relevant for your company
- Assisting you with real time problem solution scenarios
Based on your finance level, sessions can be delivered over the phone or in person as often as you like. It is recommended that sessions occur weekly as skills are developed on a step-by-step basis in order for you to build confidence and skills. In addition, our coaching sessions generally follow along this course:
- Package 1: Five sessions – Gaining financial understanding of business finance
Covers key financial definitions, basic financial statements, key performance indicators and the world of capital raising.
- Package 2: Five sessions – Using financial information to manage
Covers the concept of management accounting and includes product costing, product pricing and organizational and department budgeting processes.
- Package 3: Custom program
This is available for specific needs such as assistance with an urgent business decision or specific financial areas when the participant already has some knowledge of business finance.
Call today to discuss what package is best for your needs at (312) 772-6105. Loftis Consulting has over 20 years of helping business leaders succeed in finance. To learn more about Loftis Consulting visit our website.
11.14.16 | Loftis Consulting Question of the Week: How Much of the Profits Should I Put Back Into the Business?
In order for your business to grow, you must reinvest in the business in a way that fits with the company’s strategic short-term and long-term goals as well as the owner’s personal goals. By reinvesting, in other words, taking profits and putting them back into the business, you ensure the long-term financial health of the organization. Do not view reinvesting as just spending money or increase expenses. It is more than that. It is enabling you to free up time to focus on growth to increase profits.
Benefits of Reinvesting
- Eliminates expense surprises from delayed or deferred maintenance. When you do not maintain or replace as needed the equipment necessary for your business to run such as retail fixtures, production equipment and website design until an emergency occurs, this may cause a cash crunch due to the emergency need to spend cash to fix the problem.
- Allows owners to put into place the needed infrastructure as the business grows such as increasing locations and updating equipment for improved productivity
- Allows for outsourcing of tasks that are not your area of expertise to free up time for the areas that you are good at doing and that grow the bottom line.
Amount to Reinvest Depends
If your company is a start-up, then almost all of the profits will be reinvested back into the business. If you are a fast growing or stable company then the profits to reinvest will be dependent on your strategy in the short-term and long-term. Once you have your business strategy, the items that make up the strategy should be prioritized. This prioritization will drive business reinvestments.
Reinvestment Prioritization (growing and stable companies only)
- Set aside enough profits to cover business needs for the next six months as well as an increase in expenses due to growth over that same time frame. This should be considered your emergency fund for the unexpected. If you have a line of credit then the emergency fund can be reduced to three months of expense coverage.
- Invest in yourself and your team through training as well as outsourcing of non-value added tasks such as bookkeeping, administrative tasks and so on. Remember time is money.
Reinvest profits to cover additional staffing and training until the reinvestment pays for itself into a higher return
For example, you have a sales person who can drive revenue of $200/hour six hours a day with an additional two hours a day making appointments. If you invested in staffing by adding an appointment booker position costing $30/hour and after they have been trained frees up the sales person’s two hours to drive additional revenue. By investing in staffing you have increased profits by freeing up staff to do what they do best with the cost structure that makes sense.
- Invest in business strategy specifics. For example, if part of your business strategy is to grow online sales by 20% in two years you most likely will need to invests in web design and online advertising. Figure out what costs will be needed to get this done and decide over the next two years of profits that the business would need to invest in order to achieve the 20% in growth.
When investing in business strategy, prioritize the items that are the most vital to achieving your long-term goals. Those should be the ones that are invested in first rather than items that have a longer time to payoff.
Kimberly Loftis is the founder of Loftis Consulting. A Kellogg Business School graduate, Kimberly has helped both small and large businesses grow successfully through finance and strategy.
An important part of having a successful business includes minimizing risks. Many executives and business owners are so busy running the business they do not take the time to step back and see the big picture of what is working and not working from a profitability perspective. Eventually this will cause the business to stumble. In order to prevent this make sure you are doing the following:
- Track cash flow
Most businesses have to spend cash in the form of salaries, rent, inventory and so on even if they don’t make a sale right away. If this is the case, you want to make sure that your business is cash positive. The only way to do this is to track your cash weekly or at the maximum monthly.
After tracking your cash position and you discover that is negative you can do the following:
- Tighten your credit terms with your customers where possible
- Stretch out your payments to vendors
- Sell off slow moving inventory by slashing the price to move quickly
If your cash flow is positive or you have been able to turnaround your negative cash position, make sure to put into place a line of credit with your bank. All businesses are cyclical and will have changes in cash needs over the course of year and a line of credit can help alleviate short-term cash needs.
- Develop and track key performance indicators (KPIs)
Key performance indicators are basically health measures for your business. The right indicators will be dependent on your industry; however, there are some key performance indicators that all businesses can use.
- Days Sales Outstanding (DSO) – Measures how long in days, on average, it takes your customers to pay you for the services or products provided. Best in class companies are ahead of other businesses in their industry. The lower the number the better.
- Days Inventory on Hand (DIOH) – Measures how long inventory that is resold to customers sits in the warehouse. Money tied up in inventory is not a good thing. The lower DIOH is the better for your business.
- Gross Margin – Measures how much of every dollar is left after covering direct costs to produce a product or provide a service that then can be used to cover overhead costs such as your salary and rent as well as profits.
These are just a few metrics that focus on the financial health of the business; however, there are many others. You do not want to overwhelm yourself with too many KPIs and should limit yourself to a few for each category such as financial, customer satisfaction, employee satisfaction and operational performance. For free benchmark information for your industry for these financial metrics, call Loftis Consulting today at (312) 772-6105.
- Plan for the future by using financial projections
Financial projections are not numbers thrown on a page but financial statement projections in the form of an Income Statement, Balance Sheet and Cash Flow Statement. These projections allow you, interested investors and potential bank lenders to understand how the business will make money, how the business will use the money it earns and how the business will use the money that was invested in it or lent to it to grow.
In summary, remember cash is king, to make sure you’re headed in the right direction you need to track performance and use that information to project the future through financial projections to prepare you for where the business is headed.
Loftis Consulting is a interim and part-time CFO firm that focuses on small to mid-sized businesses and non-profits. If you are need of assistance in benchmarking, financial projection development and other financial or strategy issues, give us a call at (312) 772-6105.
Given that you as an executive have progressed nicely in your career, you may not realize that in order to move to the top levels of the organization you must understand the value of the business and how it is performing both operationally and financially. I have met many executives who know and excel at the specifics of their specialty area within the business but know nothing about the financial aspects of the business.
As a corporate board, you would not put someone in charge who would not know how to grow the value of the business and thus executives become stuck in their specialty area. Having a basic understanding of the numbers is not enough. For example, focusing on sales only is not enough since one must also understand the cost structure to not only achieve the sales but support the sales. There are steps you can take now to raise your financial acumen.
- Talk to your finance team
- To explain the pain points in the business
- To review financial statements
- To review key operating and financial metrics of the company
- Make sure you understand the language of finance so when financial conversations occur you understand what is going on
- Understand why certain key metrics are tracked within your business and what influences these metrics
Some general metrics that are usually tracked include:
- Net margin: This is calculated by that net profit divided by sales. The trend over time is key with this metric. If net margin decreased year over year then the business is being effective in controlling cost, increasing sales, or managing overhead. If it is vice versa then the business is not being effective and a solution needs to be put into place by the management team.
- Cash flow from operations:This reflects how much cash is being generated by the company’s regular operations for a specified time period. Even with strong sales, a company could run short of cash if most of the sales are coming from credit sales rather than cash sales.
There are a multitude of metrics that can be used but you want to understand the ones that are relevant to your business. If you are a little confused or just need some one-on-one coaching to get a better handle on financial know how, Loftis Consulting can help. Loftis Consulting can walk you through the ins and outs of financial statements and metrics in a language that you can understand.
Give Loftis Consulting a call today to schedule an appointment at (312) 772-6105.
03.07.16 | How Long Should You Keep Financial Records?
I often get asked by clients how long they should keep their financial records. It can be cumbersome to keep records forever. Here are some general guidelines just in time for spring cleaning.
- Accounting records – 7 years
- Financial statements – Forever
- Bank statements – 7 years
- Cancelled checks – 10 years
- Vendor invoices – 7 years
- Contracts (after termination) – Forever
- Fixed asset (e.g. equipment purchase) records – Forever
- Employee application (not hired) – 3 years
- Employee records – 7 years
- Insurance claims – 10 years
- Legal items – Forever
- Payroll records (after termination) – 10 years
- W-2 records – Forever
- Payroll check records – 7 years
- Tax records – Forever
Loftis Consulting provides CFO services to small to mid-size businesses ready to take their company to the next level of growth. To learn more about Loftis Consulting, contact us today at (312) 772-6105.
A financial dashboard can help your business keep on top of important financial information such as cash flow, accounts receivable and sales. A financial dashboard provides a real-time snapshot of the key performance indicators for your business. For example, daily billable hours would be important to a service company. If the billable hours are down, by looking at it daily you would be able to take action to increase sales immediately. If you waited until the financial statements came out you would have lost time to act, which could be very damaging to a small business.
To learn more about financial dashboards I recommend the American Express Open article “How a Financial Dashboard Can Help Your Business”.
Loftis Consulting is a provider of CFO services to small to mid-size businesses or an interim or part-time basis. To learn more about Loftis Consulting, call (312) 772-6105 or visit LoftisConsulting.com
07.06.15 | Profit Does Not Equal Cash in the Bank
Many entrepreneurs consider profits reflected on their Income Statement as cash in the bank from running their business. This is not the case for many reasons.
Reason 1: Cash can come from non-operational sources
If your business is lucky enough to get cash from outsiders, this cash is not considered profits. It is cash (i.e. funding) from investors in the form of bank loans or equity stakes. This type of external funding will not show up on the Income Statement, where we determine if the business has accounting profits. Accounting profits means the business has profits by accounting for all the revenue and expenses that were incurred for the measurement period (e.g. one month) regardless if the revenue was collected or the expenses paid. In other words, there can be accounting profits with zero or negative cash flow.
Reason 2: Not all revenue is equal
For most businesses, when a product or service is sold, the customer can pay using cash or credit.
- If it is a cash sale, the business has cash flow immediately
- If it is a sale on credit, the business has credit revenue; however, the customer doesn’t have to fork over any cash until the agreed upon due date. Let’s use an example of 30 days. On the day of the sale there is credit revenue recorded on the books; however, no cash comes in the door until 30 days later. The credit revenue is not converted to cash revenue until the customer pays.
If your business provides sales on credit, just because there is revenue it does not mean that you have that much cash in the bank due to payment terms as well as the fact that some customers may default. In other words, the Income Statement Revenue shows customers’ promises to pay for products received for services provided by your company.
Even though profit is not the same as positive cash flow as explained above, profit is still important. Business profits show how well the owners of the business are using the resources it has to make sales at a price or rate high enough to cover all expenses, long-term investments such as equipment and provide a return to the owners of the business.
Now that you understand why profit and cash flow are not the same, it is important to understand the ins and outs of cash flow. To get started on understanding cash flow check out “How to Keep Your Business Cash Flow Healthy with Financial Checkups”.
Loftis Consulting is an outsourced CFO service provider. In addition to CFO services, Loftis Consulting offers one-on-one professional financial coaching for individuals looking to improve their financial intelligence to advance their business or career.
A recent article in Crain’s stated that Series B funding is taking longer to secure. According to Crain’s, it took 3.7 years on average for a start-up to get Series B funding in 2006 but took 4.4 years in 2011. With this in mind understanding cash flows and profitability are keys to the successful startup. In order for your start-up to survive, it is critical that profitability is achieved sooner than later because Series B funding may take longer to achieve. If your key managers/owners don’t understand the differences between cash flow and profitability then it is critical for them to learn now. This lack of financial knowledge can be the undoing of the business in the long-term.
04.27.15 | Finance 101: CapEx Defined
Many business owners and executives know everything about their business from an operational or technical side but ignore the finance side. The owners and executives either leave it to someone else or just play along like they understand the numbers side but really don’t. It is critical for long-term success to understand the numbers. One term not fully understood by many is Capital Expenditure also known as CapEx.
Capital Expenditures represent long-term (asset that will last for more than a year) investments back into the business. These may include:
- Business acquisitions
These assets have future value to the business and will help the business grow. There is a lot of analysis that goes into determining if a capital expenditure is worth it. One tool is determining the return on the investment (ROI) for the purchase. For example, if you decide to buy a competing business and that business is expected to give you a ROI of 15% but your costs to make the acquisition is 20% you would not do the deal because you would be losing money (return of 15% vs cost of 20%).
If you are struggling to understand concepts like these, Loftis Consulting can help. We offer one-on-one coaching on business finance. Contact us today to learn more at email@example.com or (312) 772-6105.