Cash Flow Management

Cash is to a business what blood is to a human, no matter how much you have, it won’t do you any good pooled in one place. That may sound rather strange coming from a Chief Financial Officer, but in order to grow and sustain itself, every organization must have cash flow. Simply sitting on a pile of cash will not allow for long term growth.

There are three sources of cash flow that we monitor, Cash from Operations, Cash from Investing and Cash from Financing. Combined these three sources tell the story of the organization for the most recently completed period. When we look at these sources over time, we can tell the completed story.

Cash from Operations begins with the Net Income for the period and then adds or subtracts the Balance Sheet changes for the same period that consumed or produced cash. This translation of the Income Statement proves out the old accounting saying ‘Profit is an opinion, Cash is Fact’. A set of financial statements that show Net Income but cannot show positive Cash from Operations should cause some alarms to be ringing in the mind of the reader.

Cash from Investing takes into account the use of cash to purchase assets or invest in other organizations. Any organization that is not regularly spending on replacement of its assets may be hurting the organizations chances in sustaining itself over the long haul. Periodic drops in investing in assets as a result of economic conditions are not as harmful as not doing any investing over time. One of the keys is to have a plan, you may have to modify the plan to match circumstances, but reviewing Cash from Investing over time will demonstrate what the plan has provided over time.

Cash from Financing demonstrates how much the organization either borrowed or paid back to its lenders or investors over the period. It is not unusual for an organization to consume all of its Cash from Operations on its Cash from Investing section and therefore have to borrow additional funds from its bank. In today’s environment, most banks are asking their clients to lower their borrowing, which can be done either by reducing its Investing activities or increasing the Cash from Operations.

As a child, I remember a television station would say, its 11 PM, do you know where your child is? I would like to paraphrase that, we are knee deep in a recession; does your organization know where its Cash Flow is?

©Strategic Financial Leadership, Inc.

Profitability Analysis

Most people think that this is the easy part of running an organization. Yet it is often ignored because usually the financial results are not available until after the fact. An Outsourced CFO can provide four resources to advance this analysis.

The first one is to streamline the Financial Statement process in order to have interim statements available while the data is still fresh and something can be done to improve the operating results. It may be as simple as downloading Banking statements instead of waiting for mailed statements, or streamlining the Expense Accrual process, or automating the Payroll and Accounts Payable processes. Often a fresh set of eyes can find ways to streamline a process without compromising the integrity of the results or violating standards of Internal Control.

A second resource is the ability to determine what drives the business process and how can we measure it. As an example, If we know that our Sales Force needs to average 15 appointments per week to land enough sales to continually grow Revenue, then reporting weekly activity as well as process results can help decision makers to direct the organizations efforts to be more profitable. Or the CFO maybe able to analyze a Not for Profit’s contribution patterns and establish what activities drive donations.

The third resource the CFO can bring to bear is the ability to create models that allow a small amount of data to forecast results. This is very important when an organization is considering making a major change to its processes in order to have an idea what the impact the change will have on sustainability of the organization. Sometimes these models can substitute for the interim Financial Statements for more real time decision making.

Fourthly, the CFO can provide historical trend analysis to the data to help identify what story the recent history is telling us.

I was once the Finance Director of a Not for Profit, our accountants were producing statements showing the changes in expenses from last year compared to the spending for this year. The variance was almost 50% and caused a good deal of concern for the Board. However, the analysis was not complete, it failed to show that we were serving 90% more people and generating 65% more Revenue than the same period of time in the previous year. So if Revenue grew by 65% while expenses only grew by 50% (assuming we ended the prior year at no worse than Break Even) than that is actually a Good Thing. Adding a small amount of data to the report gave a truer picture and allowed for better decision making.

Do you really understand what drives your organization? Are you able to get the full picture in a timely manner? Do your Financial Reports generate more confusion than clarity among your Board or Bank? Perhaps now is the time to invest in the resources that can lead your business into the future.

Outsourced CFO

Most people hear this title and connect with the Outsourced piece rather well. It is not hard to imagine in our economy outsourcing almost anything that a business or not for profit needs. However, a lot of people do not seem to fully understand the Chief Financial Officer (CFO) part of the title. I have found that while smaller organizations are looking for the specific tasks provided by a CFO, they often believe that they are too small to have their own CFO.
This is where an Outsourced CFO can fill the gap. Working on either by the project or on an hourly rate, the Outsourced CFO can become a valuable asset while assisting the organization in meeting its goals. Almost every organization has a different view of what a CFO is responsible for. However the following list contains some of the more basic needs that the CFO will fill.

• Profitability analysis and maximization: identifying the drivers of profit and how the organization can maximize the outcomes of those drivers. In the Not for Profit world, identifying the drives of the organization’s mission.

• Cash Flow Management: cash is the lifeblood of every organization, managing the cash flow well can be the difference between failure and success.

• Strategic Pricing: by helping to fully understand the organizations costs, serves to set pricing to maintain market share and grow the enterprise while maximizing cash flow.

• Formalized Cost Containment: What are the real cost’s of the organization? What expense reductions will actually make it more difficult to generate Revenue or Cash Flow?

• Strategic Forecasting: attempting to drive a business simply using its historical Financial Statements has often been likened to driving a car by only looking through the rear view mirror. The CFO can take historical numbers and use them to build a forecast to manage the future. This forecast will allow the organization to see the impact its Strategic Plan is expected to have on the organization. When compared to actual results, it will allow for faster and more strategic adjustments to the plan as conditions dictate.

• Internal Control: Smaller organizations lack the staff and training to design effective controls to safeguard the organizations assets and protect its staff.

• Debt Financing/Equity Development: the CFO is invaluable in making sure that the organizations needs are properly presented to investors and lenders.
If you are the CEO of or on the Board of a privately held organization, which of these items would best serve the organization?

Fourth of July

Since this is the 4th of July, I am reminded of the following; “When in the course of human events… And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.” The opening and closing words of that unanimous declaration that came forth from the Representatives of the united States of America, in General Congress, Assembled in Philadelphia on JULY 4, 1776.

The final sentence has always grabbed at my heart and mind. These guys (yes, they were all men) pledged to each other their lives, fortunes and Sacred Honor. They knew that by the mere signing of this declaration, they were providing the British with grounds for their immediate execution and surrendering of all their property. Books have been written about the fates these men suffered for having the courage and leadership to write and sign this document.

It is easy to sit in this 21st century America and criticize this group, I mean they were all men, some owned slaves, there were vast differences in their wealth and their view of who should lead and how. Yet they pledged to each other their lives, fortunes and sacred honor. We could spend the rest of our lives trying to figure out why they did this. But I fear that would be a waste of time. Instead I propose that we find a way to apply their example in our lives.

When we are entering into a business agreement do we bring into the agreement commitment and integrity from which we could truly pledge our life, fortune and sacred honor to the outcome? When we consider our neighbors, can we find enough common ground to allow us to pledge our life, fortune and sacred honor?

Our political leaders of today are the positional descendants of these men. Perhaps in the next campaign, we need to ask them, when have they represented us in a manner that would allow them to pledge their lives fortunes and sacred honor to each other and not to their party only.

What I am saying is this:

We need to return honor to all of our business affairs, our Yes needs to be Yes and our No needs to be No. The field of honor does not lie in the ethics of circumstances. We as a society need to re-discover how we can hold ourselves and our leadership to the standards that existed for the Congress of July 1776.