Gear-up For Q2

Well, happy spring!  I hope you had a successful first quarter.

Now that Q1 is over – how did you make out with your first quarter goals?  For me, the year-end CPA audits are done, my “big rock” goals were completed, and my teams are ready to jump into the second quarter.  It feels good to finish strong, and I hope you did too.

If you didn’t finish as strong as you hoped, I urge you to get your first-quarter financial results wrapped up early and do a solid comparison to your projections.  Take another look at your 1-year plan to ensure that you are on target.

Also, set up a meeting with your banker to ensure they are up-to-date with your financials.  A strong relationship with your bank can be so important in good and bad times.  Banks don’t like surprises and will appreciate you being proactive. Review your year-end financials, first-quarter numbers, and forecast for the future so they can have a clear view and be confident that you know what you’re doing.

As the second quarter kicks off, it is a great time to evaluate your team. How did they perform over the quarter? Are the right people on the bus and in the right seats?  I’m currently going through an exercise with one of my clients to evaluate the finance team.  We are reviewing the org chart based only on accountabilities, not names.  We will be making some adjustments. We are starting with what needs to be done, then ensuring we have the right people in the right spots.

As I look back, Verbeck Associates and my clients had some huge goals for Q1 that seemed unreachable at the time … and yet … we nailed them.  We held each other accountable, reviewing the ‘Weekly Big 3’ weekly, and if someone is behind, we help them with resources and reprioritize priorities so we hit the targets.  That process was the key to our reaching those ambitious Q1 goals.

Let’s check on your progress:

Compare your Q1 financial results to your Q1 budget and to Q1 last year. Look at sales and gross margin by segment, overhead and payroll expenses, and cash flow. How did the quarter stack up compared to your plan and to last year?

If you’re behind on your goals – be honest – face it head-on and up your discipline. Don’t use the excuse you didn’t have enough time. There’s never enough time. You need to make time and keep your focus on the important things.

Now, set up your next 90 days. Set your “big rock” goals in place and get to it!

 

Q1 Review Time: Goals, Closing, Tasks

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It’s almost the end of the first quarter of 2021. Hard to believe. That was quick!

Let’s take a look at a few things you should be reviewing as the quarter comes to a close.

Goals and Targets

Business leaders who want to have strong and profitable businesses tend to set big goals for the year, and often, per quarter.  How did you do with your goals?  I’m slightly behind on a couple of the “Rocks” (high priorities) that I intended to get done by the end of this quarter.  I still have a couple of weeks to turn up the heat and get them done, and so do you!

How are your financial results so far? Are you close to where you thought you’d be? There’s still time!

Q1 is tough for us accounting types. There’s a lot of activity, including closing the prior year, meetings with your CPA, preparing for taxes, finalizing your budget and goals, and communicating with your team.  It’s not unusual to miss some targets in Q1, even significantly.

There are three options if you are missing your targets already:

  • Realign
  • Refocus
  • Give up

Option three is already off the table for an intentional business leader. But realign if you discover that your sights were set too high, and refocus if you came close but didn’t quite make it. Perhaps there are a few details you can narrow in on for the next couple of weeks to hit the target.

Financials and Recordkeeping

I’m amazed at how few companies and organizations have a solid financial close process and still don’t use a simple closing checklist – every month.  I know it’s easy to try to wing it, but from experience, things will slip – not all balance sheet accounts will get reconciled, dates will pass without action, and the overall accuracy will degrade.  I’ve experienced this myself.  We need to maintain the monthly discipline of following a checklist – every month.

A monthly close should take no more than 10 days, and should actually take less time than that. Huge companies can do it – GE, a 95 BILLION dollar company with 250,000 employees, can close in three days.

I have one client that has a complex billing process.  When I began working with them, their month-end close took 30 days.  Not only did the slow billing process affect the close, but it also caused delays in customer payments and cash flow. By focusing on changing the process, we were not only able to improve the close timing, but accounts receivable turnover also increased significantly.

If you are having closing in 10 days or less, investigate what’s slowing the process down.  A recent survey indicated the month-end close (close to disclose) process has slowed due to internal levels of review, growing need to identify and consolidate more detail for financial statements and more time to check for errors.  While these all sound good, the problem seems to be that the close is run by memory rather than clear and specific protocols and checklists

With the quarter ending – plan now to get back to basics.  Get your financials closed quickly (download the closing checklist), compare to your forecasted results, determine what is necessary to get back on track, and plan out an action plan to get back on course.

Tasks and To-Dos

All work isn’t created equal, despite it all feeling urgent.  Step back and ask yourself

What is of highest value right now?

Sometimes, I will look for the path of least resistance.  I can still feel productive checking my email or knocking a small task or two off my list. But deep down, I know I’m avoiding the significant project or important initiative I should be working on.  I have found the following three actions helpful when this occurs, and suggest the following for you:

  1. Delegate routine tasks. An administrative assistant (in person or virtual) can help with recurring tasks so you can focus on what only YOU can do.
  2. Batch tasks. Try to do your “lower value” tasks in batches. Schedule time to process email, read professional development articles, clean up files, etc. as one appointment block so you can knock off a lot of administrative tasks at one time.
  3. Automate.  When possible, utilize apps and other systems to take care of routine details. Automatic payments help you avoid late charges. Weekly reminders through tools like Outlook or Google Assistant help you stop the “try not to forget to …” thoughts swirling in your head. Using tools that snooze email to a more appropriate time can keep you from feeling distracted by a full email inbox.

A quarterly review is invaluable in helping you, and your company, succeed.  I love to help clients grow stronger in their review/closing process. Is it time for some extra help? Schedule a free strategy call today!

 

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