Q: What are the first repairs you make when hired as CFO (Chief Financial Officer)?
A: Despite every business owner’s belief that no one can operate their company quite like they do, the issues I first tackle with each new job have been remarkably similar, no matter the company’s size or industry. When I break out my financial toolbox, it is usually to address any or all of the following.
1. Financial statements
I start with a look at the company’s financial statements, checking for inconsistencies or variances that pop off the page, as well as what is missing, such as a statement of cash flows. To back up this review, I employ a third-party analysis package to give me all of the statement’s financial ratios and provide me with a comparison of those ratios over time as well as to the ratios of other firms of the same industry, size, and geographic region.
Once I have identified holes in the statements, I talk with the staff to get a feel for the financial reporting processes and learn who does what, when and how (e.g., who sees the statements and how errors are handled). From there, I can figure out what the company needs to do in terms of staffing, training, processes, and systems to make the statements more timely, accurate and, ultimately, more useful.
2. Accounts receivable
This area invariably needs attention and provides the quickest opportunity to improve a company’s cash position. First, I run reports of the company’s receivables grouped by customer (largest to smallest); date (oldest to newest); and amount (largest to smallest). The customers at the top of these reports are my priorities. Then I work to collect these high-priority items while weeding out and writing off the junk receivables that will never be reasonably collected.
Going through this process often highlights issues with a company’s AR system that I can quickly correct. More often than not, billing—not collections—is the major issue: Invoices are not sent immediately, are going to the wrong people, or are filled with errors. At one $25-million company I joined as chief financial officer (CFO), we made straightforward changes that led to collecting $750,000 in six months—extra cash that allowed us to completely pay down our bank line of credit.
As CFO, I am all about the numbers, so I work with the owner/CEO and C-level executives to find out what makes the company tick and how to measure it. Sometimes the answer is simple, such as billings. But other times it may be units produced or quality measures. In those cases, we boil everything down to a few key performance indicators, build a system to collect that data, and a dashboard on our accounting software to track it. This way, whenever I’m asked, “How are we doing?” I have a precise answer.
4. Cash forecasting
Nothing harms a business and stresses owners more than cash-flow surprises. To avoid them, I quickly institute a formal cash-forecasting system. If cash flow is tight, I will build a rolling 13-week forecast that I update weekly. If the cash position is stronger, I might back off to monthly forecasting.
As time goes by, I will review the previous forecast with the next, determining why we were short or ahead on any given week. After a few weeks at this, the forecasts become remarkably accurate, which results in more confidence throughout the business.
Case in point: Early in my career, I joined a company that could not forecast its cash position a week out within $1 million. Six months later, our forecasting system got that uncertainty down to less than $50,000.
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