Deep Cuts: Have you Restructured Enough?

Is it time to make deep cuts

There is a saying in the turnaround world that when you cut staff, cut deep and deeper than you think – but only make the cuts once. This approach helps reinforce the morale of the remaining team members, reassuring them that no additional cuts are expected.  I’ve worked with turnarounds for 20+ years and almost every time, we didn’t cut deep enough.  There was always a rationalization as to why we need to keep this person or that person. In the end though, the majority of the time, we wish we’d made the deeper cuts, difficult as they would have been.

With the crazy 2020 economy, all of my clients have restructured in some way.   Business as we knew it changed, and we are all doing things differently than we did a year ago.

But now as we move into the new year, we need to ask the question, “Have we restructured enough?”  When advising clients, I recommend they think from the viewpoint: “If we started this company today, what would we want it to look like?”  Most admit they would want a leaner and stronger team.  Often, there’s a “Sally” who has been there for years but didn’t adapt as the company grew and remains difficult to work with.  Or a “Bob” who was enthusiastic when the company began, but has settled in and coasted for too long now.

My clients often would not have the same systems and processes, either. It’s natural for these to evolve over time. If they don’t, that’s actually concerning. While you don’t have to jump on the latest technology crazes or change a smooth operations procedure frequently, you could be missing out on productivity if you don’t at least stay aware of how you can adapt and take advantage of new tools and ideas.

Now is the time to take a look at staffing, process, and systems, with the new year coming quickly.  If you don’t, you may experience what a business-owner friend did.

He tried to keep things the way they were.  Their business was significantly impacted by the C-19 virus.  He had trouble facing reality.  He told himself, “Things will come back. I want to keep Bob and Jean, I’ll need them.”  He bled through all the excess cash on payroll and rent.  When his cash started to run out he called me.

We looked at his business as if it was a brand new start-up.  Would he need Bob and Jean if he was starting the business today? It was a definite “no.”  He also wouldn’t need his beautiful, but now 3/4 empty office.  He could do 100% remote if necessary.  He was focusing 100% of his time on worry and expense reduction rather than 90% of his time on revenue generation and strengthening his team—key roles for the CEO of a small business.

To be fair, these considerations aren’t easy.  And to his credit, he did the following:

  • He started to work within the 80/20 principle, giving 80% of his effort to the top 20% of priorities for the company.
  • He adopted the 13-Week Cash flow process, and stopped the cash bleed.
  • He gave serious consideration to his business plans and budgets for 2021, even if some decisions wouldn’t be easy.

Things still aren’t perfect for him, but his business is surviving. And these days, a surviving business can almost be considered a thriving one.

How about you? Do you need to make some deep cuts? Do some hard thinking? Make some significant changes? It’s not easy, but being a business owner often isn’t. There are ways to handle these decisions with grace and helping your people adapt or even find new places to spread their wings if your company isn’t the best fit for them anymore. You all may find you come out of this global difficulty a little stronger and better positioned for the future.  Let me know if I can help.

Budget Time – Time to Reflect, Review, Refocus

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It’s budget season.  Time to get your budget process started and formalize your plan for 2021.  (And before you panic and say, But I’m Not an Accountant! remember that all executive leaders need to develop at least a basic understanding of the financial outlook for the companies they own or help to manage to make wise decisions! Use this as an opportunity to learn and enhance your leadership skills.)

It’s also a good time to reflect, review, and re-focus before you actually start crunching numbers.

When I help business owner clients with budgeting, I do the following:

  • Reflect: We take a look back to where they were five years ago (in this case, 2015).
  • Review: We look at the transformation (or not) from 2015 to now and determine where things stand right NOW.
  • Refocus: We look at where they want to be five years from now and tighten our focus on those goals.

The look-back is important to appreciate where we are. The lessons are, yes, painful at times, but are good for us in developing as individuals and successful business owners. The look forward primes us to seize what is ahead and make it count.

This exercise helps us develop goals to move toward the five-year vision. We look at sales and marketing, operations, profitability, working capital, EBITDA, and lifestyle. This helps clarify the vision. It’s a simple, but very effective exercise. This helps us activate our brain’s reticulate activating system to do the right things to move toward that five-year vision.

After the reflect, review, refocus process comes the nuts-and-bolts part–creating the budget.

As you start forming your 2021 budget, use the following as a guide to having the budget finalized by the end of November.

  • Sales Budget: The overall company budget starts with the Sales budget. Look at customers’ sales and gross profit history. Synergistically work with your sales team to develop what is possible for your business. Look at your current customers. Set targets for new customers. Look at your current segments–are there any new segments for 2021? Put your customer data into a size/profitability matrix. If possible consider fully absorbed gross margin (i.e. some customers use more operating expenses than others). Consider allocating variable operating expenses to your cost of goods sold by customers. Understand your average transaction size and number of transactions per customer. Fact: Super-successful companies focus on sales growth more so than expense reduction. Make that your focus too. What are your planned sales by segment by month for 2021? What are your gross margins by month?
  • Production Budget: This depends on what type of business you’re running. The production plan must be able to support the sales plan. For example: Do you need to adjust shipping schedules? Is production driving revenue or is revenue-driving production? Focus on lean, smooth, and efficient processes.
  • Personnel Plan: Plan your organization chart with salary dollars and key responsibilities. Here’s a Personnel Plan (on my resource page) you can use.
  • Operating Expenses: Look at your trailing 12 month-by-month to see any seasonality or sales relationships. Forecast each line item by month and document the assumptions in a summary of significant assumptions document.
  • Interest Expense: Calculate planned debt usage. Ensure all debt on your balance sheet ties out to an amortization schedule. Plan to meet with your bankers to improve your borrowing capacity.
  • Depreciation: Plan your capital expenditure budget. What fixed assets are you buying, when, and how (lease/buy, cash/finance)? Use your fixed asset register to forecast your current depreciation for 2021 and needed fixed asset additions.
  • Cash Flow: Can you make improvements in your DSO or Inventory Turnover to improve cash flow? Your forecasted balance sheet will be driven by your cash flow drivers.
  • Calendar Your Quarterly Accountability: I use a Year-at-a-Glance Calendar and schedule everything: holidays, important dates, vacations, quarterly meetings, etc. It’s a good idea to get this drafted now.

A step-by-step budgeting process preceded by a “Reflect, Review, Refocus” exercise can help you tackle this sometimes intimidating but very necessary project in preparation for the new year. If you need help, contact me!

Image by Gerd Altmann from Pixabay

The 13-Week Cash Flow Forecast

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I’ve been harping on using the 13-week cash flow forecast (13WCFF) process for years.  It is one of the basic tools for the turnaround professional to quickly get a handle on the short-term cash needs.   It forces the business owner to run their business based on cash the typical income statement lens.

The typical monthly balance sheet and income statement are not enough to effectively run your business.  I’ve seen many profitable businesses run out of cash – and conversely, I’ve worked with struggling companies that have stayed alive for months allowing them to the runway needed to return to profitability.

Whatever stage your business is in, I highly recommend implementing a 13wcff process now to help in these extremely uncertain times.

The concept is the 13WCF forecasts cash receipts and cash disbursements by week for a 3-month period.   In a turnaround, the 13WCF is updated constantly, but for a typical business, I like to update it weekly so it’s always a rolling 3-month look forward.

With all the current uncertainty it’s more important than ever to use the 13wcf process to better predict your cash position, see any bumps in the road, and help you sleep better at night.

The 13wcf forces businesses to think in terms of cash vs typical GAAP accounting.

I created this short demonstration video on how to use the 13-Week Cash Flow template in my resource section.  It takes some work to get started and discipline stay with it update it weekly, but I guarantee this process with help your business.

I hope this helps.

As always, if you need help, reach out to me.

The Art of the Close

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Controllers and CFOs know that having a quick and accurate financial close is essential to manage your company effectively. Accurate and timely financial statements allow leadership teams to get a view of the organization’s financial picture and allows managers to make changes to improve performance.

We all can become relaxed in our company processes, but the financial close must be attacked with discipline and rigor. It’s early in the year so now is a great time to evaluate your close and improve your close process now so you have the best information as early as possible to make the best decisions. Test your close process this month-end.

I use a closing checklist with all of my clients. See an example here. The checklist lists the closing tasks, who is responsible and the expected completion time-frame. It is a simple process and keeps everyone on the same timeline. Using a closing checklist will improve your accuracy, completeness, and efficiency. You will have better information, sooner.

Once the general ledger is closed and the checklist is complete, a basic (or sometimes not so basic) reporting package can be produced, distributed, discussed, and reviewed.

I know many business owners who don’t look at their monthly financial statements very closely or they don’t fully understand what they are looking at. Some business owners don’t even look at their financial results at all. I believe it’s important to look at your monthly report-card (earlier vs. later) and to fully understand what they are telling you or trending toward. This holds teams accountable, which improves performance and allows you to make changes and improvements earlier to avoid any bumps and improve financial performance.

The other day I met with a very experienced and talented business owner who was surprised by his company’s recent situation – his company was profitable most months, but he was having trouble making his payroll. He didn’t understand the balance sheet very well. His accounts receivable and inventory were using all his cash. After a quick review of his financials and a brief lesson on asset velocity, the balance sheet, and cash flow, he saw his problem. He is developing ideas and solutions to improve this and breathe easier.

Are you experiencing similar challenges? I can help. Contact me!

Stop Wearing So Many Hats: Who Can Help You?

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I see it all the time as I travel the country talking to business owners. They try to do everything. Sales, HR, Operations, Marketing, Accounting, and oh yeah … leadership.

It’s time to delegate responsibilities and focus on what you’re good at – delegate, double-check and disappear (or go do what you’re good at.)

Generally, business owners develop their skills and expertise through sales, operations, tech, or the finance side of business. Most of the business owners I talk to cut their teeth on sales which makes sense based on their “take action” personality types. This works great – in business, sales start everything.

However, what most business owners are weakest at is their accounting and finance skills.

They understand the P&L. Simple – sales minus cost minus expense equals net income. However, they generally don’t want to understand the balance sheet or cash flow.

I find the biggest need for these businesses I’ve been talking to recently is 1) a complete understanding of their financial statements (the business report card) and 2) clean, basic reporting for visibility and accountability. This includes tracking key business drivers for profit, asset velocity, business efficiency, corporate effectiveness, and cash flow.

I find the biggest need for these businesses I’ve been talking to recently is a complete understanding of the financial statements (your report card) and clean basic reporting for visibility and accountability tracking key business drivers for profit, asset velocity, business efficiency, corporate effectiveness, and cash flow.

Many of these owners don’t trust their numbers and therefore they run things by the seat of their pants. With data analytics tools now, it’s easy to get real-time data to look at customer psychometrics and data, as long as the information is current. That often takes delegation to someone (for lack of a better term) more excited about keeping up with it. You don’t have to be the accountant to understand the basics that will help you make the best decisions you can for your business. Who can you utilize on your team that will help you have the data you need?

So delegate it, double-check by getting regular updates, and spend the bulk of your time doing what YOU do best!

If your business doesn’t have this system in place, let’s talk.

The Second Half – continued

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In my last post, I discussed the 2nd Half Year Business Plan (2HYBP) as an opportunity to reassess and re-plan the second half of your company’s performance for the year.  Hopefully, you were able to get your June financials closed tightly, analyzed the business trends and re-forecasted next two quarters.

I have all my June reporting packages completed, but I’ve had some challenges getting all the 2HYBP’s done – one of my clients is having trouble nailing down the sales plans.  And since the sales plan is the basis for the overall financial plan, we’re a little behind.

Maybe it’s paralysis analysis, but we are just finishing a deep dive into the sale forecast, slicing sales by product, by segment, by customer, by region, and by sales rep.  The sales forecast now is a driver and a scorecard.  The team is engaged and totally committed.  Sometimes it pays to be patient.  The rest of the 2HYBP is being developed around the sales plan.  The organizational chart got slightly reconfigured, and we added some additional expense provisions for a segment’s revenue growth and production efficiency.

We also developed goals around the cash flow drivers—primarily days sales outstanding (DSO) and inventory turnover.  This is a large global company and the impacts on small improvements are massive.  Plus, they have much too much inventory (calculated at 272 days).  We have developed plans to smooth imports and improve purchasing operations and feel we can easily drop on-hand inventory by 90 days.  Based on their sales volume, this improvement will add $17 million to cash!

The cash flow driver principle works the same way for smaller companies too.  Consider a $2,000,000 company with $250,000 in accounts receivable.  Bringing DSO to 35 days adds $58,000 of cash to the balance sheet.  Small improvements in accounts receivable and inventory turns are important to continually work to improve cash flow.

The 2HYBP goals should focus on 5 things from the financial side: sales, gross margin, employee efficiency, expenses, and cash flow.  How are yours doing?

 

 

How Your Business Can Get $350,000 More Cash in the Bank

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One of the things I do for clients is to help them evaluate cash flow and some basic profitability and efficiency data points. This identifies areas in which I can provide more help.

Generally, to get clarity, I spread out months of financial statements. Recently, I did this for a client, using 24 months of statements. I then apply a basic template to get to the level of detail we needed. By doing this early in the relationship/project, it helped me understand their business industry and peculiarities.

This company had $18M in revenue. We discussed the income statement efficient and asset turnover on the balance sheet. The “days sales outstanding” calculation indicated that the accounts receivable turnover was averaging 48 days.

I applied a calculation I typically use:

Last three months of sales divided by 90 / total accounts receivable to calculate the average number of days from when sales turn into cash. (You can invert the calculation to determine what your accounts receivable would be with a certain number of days.)

How does this help?

In this case, we looked at the possible results if the company could reduce the turnaround average by eight days.

An extra $350,000 of cash in the bank.

Obviously, this is an appealing outcome, so we brainstormed ways to improve accounts receivable turnover.  Here’s what we came up with:

  • Doing a better job upfront to ensure customers understand your credit policies
  • Proactively calling customers before the invoice is due to ensure there are no problems with their order (making it easier for them to pay on time.)
  • Build a better relationship with the customer’s accounts payable department.  People will prioritize payments to people they have a positive relationship with
  • Provide clearer and more timely invoices
  • Offer easier payment options

Maybe you don’t think about how everyday processes affect your cash flow – but they do. Take the time to review and think over regular tasks and workflows like this. You may be surprised where you can improve a process – and the bottom line.

Image by David Schwarzenberg from Pixabay
 

 

 

 

 

 

 

 

 

Back to Cash

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It’s ironic when a business is surprised that they need $80K to pay sales tax.

I am just starting to work with a new client, and one the first practices that I start for most companies is to create a simple cash flow forecast and process, to help avoid surprises like this.

It’s amazing to me how few business owners forecast actual cash needs.  They shoot from the hip and are surprised when that sales tax deadline looms.  How did they not know that sales tax is due on the 20th?  Bad or sloppy planning, that’s how.  Sometimes we need to focus on the fundamentals.  In business, predicting cash needs is a basic fundamental.

For this client, we did a very simple estimate of cash receipts and cash disbursements for the next three months.  We looked at accounts receivable and estimated weekly internet sales.  We forecasted payroll, due dates for medical and insurance premiums, all deadlines for debt payments, vendor payments, telephone, utilities, etc. (See a basic template in my resource section.)  The first pass of the worksheet took about an hour.   This was a fundamental first step.

This client was tracking cash transactions daily with an involved spreadsheet noting activity in three cash accounts and their working capital lines.  The spreadsheet was prepared daily and the controller and owner would pontificate on it constantly.  It was mostly historical though, with very little accuracy for the forward-looking three months.

This was the main problem. They weren’t predicting future cash needs very effectively at all.  I see this a lot—the need to look further down the road.  Things get hazier as we look out, but the first few weeks and months should be much clearer.

We simplified their spreadsheet by changing the perspective to a horizontal look (vs. vertical).  We changed their daily tracking to tracking by week.  (By day was too granular for this company – they got too caught up in the detail.)

We created a weekly update process that will take some time to prepare, but it’s done once and formally reviewed in a structured way.

Over time, accuracy will improve, but in a couple of days of work, the owner already has a much better view of the future now.

If you’re not using a basic cash flow forecast process for your business, and you’re constantly stressed about cash, start today! Not sure how? Contact me for help!

 

Image by Deedster from Pixabay

Predicting the Future without a Crystal Ball

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As a business owner, you need to be able to predict the future.

Verbeck Associates has been doing a lot of business modeling lately.  It must be the time of the year and the type of clients I’m working with now.  I am currently working with two turnaround companies and four startups – both require financial modeling for forecasting results and developing successful strategies to deal with tight cash flow.

We use business modeling to:

  • Develop internal goals and targets – and provide a budget and scorecard.
  • Determine feasibility and what-if scenarios to test growth and survival strategies.
  • Pitch new financing or new equity capital to show cash investment needs.
  • Evaluate capital investments and strategies.
  • Produce forward-looking financial statements for your bank and existing lenders.

Keep in mind: projections are wrong by definition. They are future-state, and no one has a crystal ball.

We can certainly get in the weeds with modeling – I run that risk all the time. That’s why I aim to keep it simple.  The more complex, the more confusing and subject to error. My models are generally simple 24-month forward-looking financial statements. Here’s how to take a simpler approach to reduce the number of inputs and reduce potential errors.

Take a higher 30,000-foot view first thinking more strategically in both the short-term and down the road.  For example, “Based on this revenue, we require this headcount and should be able to deliver x net income and cash flow.”  What would happen if we do this or if we do that?  This then develops into a more granular approach with a 24-month working model.

It’s interesting to observe the thought process of many business owners.  Most understand the income statement, but many have trouble with the balance sheet and the statement of cash flow.  All business models start with the income statement so it is important that we understand the revenue model, the go-to-market and sales plan. But that’s not enough. Owners need to understand product costing, product mix, margins by segment, customer acquisition costs, etc.

When I review all this with owners, I start with historical financials numbers for the last 24 months: revenue, margins, headcount, operating expense growth, accounts receivable and inventory turnover, accounts payable days, debt repayment schedules.  For startups, historical information is non-existent which can make this more challenging! We work with whatever information we have, and/or consider the following elements and questions:

Plan: The essence of a model starts with the sales plan.  What are the expected monthly sales by customer and by segment for this coming 12+ months?  Consider the basic business model of:

Leads x conversion = customers x number of transaction x average selling price = revenue.  See more discussion in an earlier article

Process:

Develop a realistic sales plan by customer and by product segment.  Understand units sold per month and sales potential growth.

Develop a detailed personnel plan (see template).  People are generally your largest cost and your biggest asset.

Based on the sales plan, understand the timing of raw material purchases.   This obviously depends on your business.  For one of my current clients who purchase a product from China, significant lead times must be considered.

Document all assumptions.  What is true and what you predict will happen.  Prepare a summary of significant assumptions document to attached to final projection printout.  The document walks through the income statement sections discussing the thought process with units shipped, sales growth, cost of sales, gross margin by product segment, selling costs, customer acquisition, personnel costs, operating expenses, interest, and depreciation – each line of the income statement.  Do the same with the balance sheet – documenting the turnover and asset velocity assumptions, cash and debt needs. (The forecast model and assumptions support the 13-Week Cash Flow process if your company is tight on cash.  More on that later.)

It’s essential that the assumptions are reasonable, supportable, and documented. And updated.

I like to go through this plan/process in three ways, producing a conservative, moderate and aggressive model.  This helps a business owner make wise decisions, and the more historical data that surfaces as time goes on, the more accurate the modeling can become. But you have to start somewhere — because you probably don’t have a crystal ball (at least not one that works.)

Image by Alexas_Fotos on Pixabay

 

 

 

 

 

 

Business Leaders Must Understand the Basics of Financial Statements

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As a financial business consultant, one of my primary responsibilities to clients is to create timely, accurate financial statements and quality performance metrics. As the treasurer of several organizations, I also lead reviews of monthly financial statements. Annually, we review the year-end CPA financial statements at the annual meetings.

I like to start off these presentations by explaining the three basic generally accepted accounting principles (GAAP) financial statements.  As a business owner, it is so important to understand each specific financial statement and how they relate to each other.  The financials tell a story of the entity’s financial performance.

I often get the “I’m not an accountant” or “I’m not a numbers person” feedback (excuse?) when I make these presentations.  However, to me, if you can add, subtract, multiply and divide, you know enough about numbers to fully understand what the financial statements are telling you.

The three basic GAAP financial statements are the balance sheet, the income statement (or profit and loss — P&L), and the cash flow statement.  They all show different information, but each financial statement is connected to the others.

The balance sheet show assets, liabilities, and equity of the company, organization, or medical practice.  It is for the specific day – a snapshot at that day.  It shows what you own and what you owe with each category listed in liquidity order in three sections: Assets, liabilities, and equity.

For the asset section, the balance sheet shows cash, accounts receivable, inventory and fixed assets — in that order.  Cash is cash.  Accounts receivable will become cash soon, inventory will become A/R then cash.  Fixed assets can become cash if necessary in a liquidation.

The income statement is the financial statement most business owners understand.  It presents sales, cost of sales, expenses, and net income for a period of time – a month, a quarter, or a year.

The statement of cash flow ostensibly shows the sources and uses of cash from operating, investing, and financing activities.

The way to understand the what these financial statements are telling us can sometimes be confusing.  It helps to ask questions such as:

  • How we are doing?
  • Has our output improved?
  • Are we moving in the right directions?
  • What improvements do we need to make to do better?

Use basic techniques to understand the financial performance by comparing actual results last year’s results and to your business plan – looking at vertical and horizontal ratio comparisons.  I like to do this monthly, quarterly, and annually.

I compare the overall income statement results to the prior years (periods) and compare to the business plan.  I look at sales, gross margin, significant expense categories like salary expense and supplies.  How are we doing compared to last year and how are we doing compared to our budget and business plan?  I look at simple ratios to measure output – gross margin to sales, payroll to sales, interest to sales.  I also like to use trailing twelve months (TTM) of income statement data to mitigate potential timing and seasonal fluctuations.

I compare the balance sheet to the prior period and to the business plan.  Why are the significant assets and liabilities significantly different than those of last year?  I calculate some turnover ratios and leverage ratios.  I look at days sales outstanding, inventory turnover, accounts payable days, etc.  Again, why are these better/worse than last year and how are they relating to our business plan?

I look at the statement of cash flow for large sources or uses of cash.  Do these sources and uses make sense versus our increase in output?  What improvements are necessary to improve cash flow?

These questions and processes may seem complicated or even boring to those not interested in numbers. But if you own or run a business, you HAVE to be interested in the numbers, at least to some degree. You don’t have to be the CFO, but you should have some understanding of how financial statements work and the health of your business.  If this or any of my content hits home, please contact me for a free 15-minute strategy session.