When Does Your Business Need a CFO?

Bookkeeping is one of the first services that businesses outsource or hire for. Time running the business is too valuable to spend it recording transactions and running reports. A bookkeeper records your transactions, provides you with regular financial reports, etc., etc. All important tasks for running your day-to-day. Planning for growth or other long term business decisions requires analytical and management skills that focus on the broader view, not the day-to-day.

A Chief Financial Officer, or CFO, provides the analysis and financial direction that businesses need to get to the next level. Most small businesses can’t afford a fulltime CFO, but can afford to engage a CPA firm or financial consultant to perform the CFO role for a few hours a month. A part time CFO is a business investment in sustaining and growing your business.

Businesses need a CFO when:

  • Cash Flow Projections Aren’t Reliable

Knowing how much cash is available to run and invest in your business is crucial to keeping your doors open. Dire and expensive surprises happen to businesses that aren’t confident about their bank balances, revenues coming in, and payments going out. If monthly cash flow looks nothing like your cash projections, a CFO can establish a cash flow process that provides useful results based on reliable information.

  •  Budgeting is Ad Hoc or Doesn’t Happen

A budget articulates the financial resources needed to deliver your services or product, maintain your infrastructure, and invest in growth or improvements. It should be zero-based, or “built from scratch” to identify the cost of the resources needed for each budget category. For example, determine how many staff is needed to meet operational objectives and the “fully loaded” cost of each staff member. A CFO can help you build a budget that effectively addresses all applicable costs and revenues.

  • Prices Aren’t Covering Costs

Charging the same price as the competition might work for the other guy, but if it doesn’t cover your costs you won’t be in business for long. Pricing your service or product requires knowing your costs and understanding the value that distinguishes your business from that “other guy”. A CFO can examine your costs, identify the fixed, variable, direct and indirect cost components, and advise you on pricing and profit margins.

A CFO’s skill set and experience focus on the analysis, planning and management required to make higher-level financial decisions needed to get to the next level. Whether it’s growth, innovation, or sustainability, a CFO can provide insights and perspective to help achieve your financial and operational objectives. Getting a CFO is a business investment that pays you back over and over again, as your business launches to the next level.

The Budget: A Waze App to your Financial Destination

When you’re going to a new destination, you use a navigation app like Waze. Your financial goals are just like that new destination – you’re not quite sure how to get there. So how can you navigate towards achieving your financial goals? You set-up and follow a budget. Your budget is your Waze App (a.k.a. Road Map for most over 50) to finding your organization’s financial destination (a.k.a. your goals).

 

A budget navigates your organization toward achieving Three Financial Goals:

 

  1. Immediate Needs

Identify the amount of income and expenses that you expect to receive and pay out for the year to operate your organization. Build the budget line-by-line, carefully considering the reliability, amount, and timing of each item. Start with income and expenses for which a contract or agreement is in place. Include other items based on their likelihood to occur and your organization’s track record. Be realistic and document any assumptions that you make.

 

  1. Infrastructure

Beyond the day-to-day operations, you need to invest to keep up with technology or replace equipment that has reached the end of its useful life. Assess the condition of your vehicles, computers, and other property that you depend on to manage your operations, data, and communications. Determine what needs to be replaced, when, and the cost. Any replacements that don’t fit into the current year’s budget should be included next year, or in the future.

 

  1. Future Growth

Growing your market, programs, or services takes money. Budgeting is a thoughtful process that helps you plan for growth and funding. Budget time is when you assess your current financial scenario and previous track record, and plan your future. It’s the perfect time to weigh the costs and benefits of growing, and determine how to fund those costs. If those costs exceed what you can fund yourself, does borrowing or bringing on an investor make sense?

 

You wouldn’t drive to a new destination without a navigation app. Why would you navigate your organization toward its financial goals without a budget? Developing a budget and using it as a navigation tool will help your organization stay on track to achieving financial goals for immediate needs, infrastructure, and future growth.

 

 

Monitoring Nonprofit Finances

Nonprofit Boards have a big job. One of the biggest parts of that job is fiduciary responsibility — making sure that the organization is funded, and that funds go to supporting the mission. Reviewing organization’s financial condition is one way that Boards fulfill their fiduciary responsibility.

 

How do Boards review the organization’s financial condition? It all starts with receiving and reviewing periodic financial statements, and analyzing financial performance in relation to the budget and financial ratios.

 

Nonprofit Boards should monitor financial performance and take action in four areas:

 

  1. Budget vs. Actual Performance

The year-to-date budget should be compared to actual performance. Analyze variances between budget and actual performance, especially for key income and program or administrative expense categories. Identify why variance from plan are occurring for significant differences and line items.

 

  1. Liquidity

Periodically assess four financial ratios to identify trends and their impact on fundraising and other plans:

  1. Days Cash on Hand – days of operation with no funds received and no investments liquidated
  2. Days Cash and Investments on Hand – days of operation after liquidating investments and before borrowing funds
  3. Current Ratio – divide current assets by current liabilities to assess overall financial health
  4. Debt Ratio – divide total liabilities by total unrestricted net assets to assess the need to reduce leverage

 

  1. Fund Raising

Assess the potential for overreliance on one individual funding source, indicating the need to diversify. Benchmark fundraising expenses in relation to funds raised against Charity Navigator or another metric to determine the return-on-investment of individual fund raising events and activities.

 

  1. Program Expenses

Measuring the relationship of each program’s expenses to overall expenses helps the Board to prioritize their attention on programs where more organizational resources are invested.

 

Nonprofit Boards fulfill fiduciary responsibility by monitoring the organization’s financial condition and making prudent decisions to maintain financial stewardship. By focusing on the four financial areas above, Boards can assess and act appropriately on financial performance.

 

What is a Fiduciary?

A certain presidential candidate recently used the term “fiduciary” when referring to his personal income taxes. I was confused. Fiduciary responsibility is not about personal taxes or finances. It’s about the legal obligation to act in the best interest of another party or organization. It’s about keeping a promise to use funds for a specific purpose.

 

Other listeners were probably as confused as I was when hearing “fiduciary” in a personal finance context. Three facts about fiduciary responsibility should clear up that confusion:

 

  1. Obligation to Act on Others’ Behalf

A fiduciary relationship is based on mutual faith and confidence between the individual(s) placing and accepting legal responsibility to serve the best interests of others. That includes the interests of individuals or an organization. The duties of a fiduciary include loyalty and reasonable care of assets in custody.

 

  1. Relationship Extends to All Actions

A fiduciary relationship extends to every possible case in which one party places confidence in the other party and such confidence is accepted. Placing and accepting confidence creates dependence by one party and influence by the other. The fiduciary is trusted by the dependent party to act in its best interest at all times.

 

  1. Scrutiny of Fiduciary Actions

Financial transactions between parties involved in a fiduciary relationship are subject to higher scrutiny. The spotlight on these transactions is due to the fiduciary’s dominant role that provides the capacity to profit or otherwise gain from financial decisions at the expense of the party under her or his influence.

 

It’s no wonder that these three facts will never be included in any political speech. They’re pretty dry stuff. Regardless, understanding these facts is important, whether you are accepting or placing confidence as part of a fiduciary relationship.

 

Business Finance Fundamentals

I often open my workshops with the question: “How many of you started your business to keep the accounting records?” Funny thing; no one ever raises her or his hand. Can it be that people start a business to engage their passion and serve customers?

 

Last week at the Whole World Workshop for health and wellness practitioners, I got the usual response to that question. No hands, but several chuckles. At that point, everyone was relaxed and ready for my presentation about Finance Fundamentals.

 

My presentation focused on four essentials for a healthy business:

 

  1. Separate Business and Personal Finances

The risks of commingling funds are a negative impact on your personal credit and cash flow and an inability to get a clear, isolated view of business finances. It’s never too early to open a separate business bank account, one for each separate and distinct business. Also, apply for a business credit card to help with payments and cash flow.

 

  1. Keep Up-to-Date Accounting Records

Keeping up-to-date records means you always know your financial situation. Separate accounting records should be kept for each business to substantiate income and expenses. No particular record keeping method is required – accounting package or spreadsheets – to capture the date, amount, business purpose, and income/expense type.

 

  1. Develop Budget and Cash Flow

Use income from existing sales and vendor contracts, leases, and historical data to develop an annual budget. Identify operating expenses by category. Remember seasonal and one-time items. Include plans for investment and growth. Project cash flow needs for 12-to-18 months based on when payments are due to make sure bills are covered.

 

  1. Track Financial Performance

Prepare and review a monthly bank reconciliation, income statement (i.e., P & L) and balance sheet. Compare actuals with budgeted income and expenses to identify where your plans need adjusting. Assess cash flow inflows and outflows to make sure you keep enough funds on-hand to meet expense obligations.

 

Maintaining a healthy business means keeping it “alive” and ready to deliver its products or services. The four essentials described above are as good as “an apple a day” to keep your business in good financial health.