The Virtual CFO

The Business Plan - Who Will Be Reading It?

There are both internal and external users of business plans.  

The internal users of business plans are owners, employees, and closely related outsiders (such as family members and friends who have invested in your firm). Every business plan is created for the internal users and it documents:

• The objectives for your business,
• How you plan to accomplish those objectives, and
• What means are available to accomplish those objectives.

I believe that the business plan should be available to all internal audience members of the firm in some form or fashion (for example, remove sensitive financial information of officer's compensation from plan, verbally discussing the plan with employees instead of giving out copies, etc.). My experience shows that this practice helps get everyone on the same page and it facilitates constructive dialogue which improves a firm’s performance and profitability.

For small businesses, the external audience is usually sources of financing such as banks and unrelated investors. Generally, one of the first steps in gaining outside investment is providing investors with a business plan.

When constructing business plans for the external audience, you need to pay particular attention to spelling, grammar, and the way in which you present your ideas. You may need to use a CPA for the financial information and projections included in the plan because the external audience is more likely to accept this information when prepared by a CPA than when it is produced by company employees. 

The Business Plan - You Have to Know Where You're Going

My grandfather used to take me on car rides when I was young. We'd jump in the car and he's start driving. One of the things we used to say to each other on these rides was: "we don't know where we're going, but we're on our way". This may be great for grandfather/grandson bonding, but it isn't the best plan when starting and running a business.

If you fail to plan, you plan to fail.

This well-known business motivational axiom is particularly true for small businesspeople who fail to work through and create a business plan for their company.

Business plans force you to think out, research, and put in writing every function and aspect of your business, including:

• Sales and Marketing
• Products and Services
• Finance, Accounting, Taxes, and Budgets
• Operations and Human Resources

The greatest advantage to creating a business plan is that it forces you to critically analyze your business (or prospective business). Through this process, you will be able to identify your company’s strengths and weaknesses as well as the opportunities and threats you will be facing. This is often referred to as SWOT Analysis in business (Strengths, Weaknesses, Opportunities, and Threats).

No one I know who has worked through the process of creating a business plan has regretted doing it. 

Accounting - The Scoreboard of Business and Why It is so Important

In the 1990's I was the CFO of a construction company where one of my responsibilities was to visit and monitor out-of-state jobsites. On the mornings that I traveled, I would normally leave my apartment between 4-5 am in order to arrive at the jobsite early. On many of these drives I experienced dense fog until sunrise.

Driving in the fog on a rural two-lane highway at 55 miles an hour can be uncomfortable and disconcerting. It was on one of these drives that I thought of an analogy that I gave to the owner of the company later in the day.

Imagine yourself driving fifty-five miles an hour down a two-lane highway at night in a dense fog. If a deer were to jump in front of your vehicle, you would hit it at the approximately the same time you were aware that the deer was there.

Through 23 years of small business management experience, I've learned that a small business that fails to implement adequate accounting and financial reporting systems are also driving in the "fog" of a similar looming disaster. Without a good accounting, you may not discover that your company is in the middle of a financial crisis until it is too late to take the correcting action necessary to save your business.

I like to tell clients that accounting is the scoreboard of business. It allows you to know your company’s current financial standing and track your firm’s performance. Accounting can also identify the areas of your business that are excelling and those that need to be improved or eliminated. As a small business owner, I know personally that it is comforting to know exactly where your company stands financially.

A good accounting and financial reporting system can definitely help you run your company more effectively and profitably, thus keeping you out of the fog.

The Small Business Owner Didn't Like Surprises

I had a 10 year career as a financial manager at entrepreneurial firms before I started CPA for Small Business. Early in my financial management career, I worked for an owner who was having a hard time dealing with the stress and pressure of maintaining the firm he had built. In a meeting he expressed in frustration that he didn't like surprises and that as the CFO I should work hard to make sure there weren't any.

Ten to fifteen years later, I'm sorry to say that I still haven't mastered the art of mitigating surprises in small, entrepreneurial businesses.

Change is normal in life and so are surprises. The sooner you accept this as a business owner, the better you will be at adapting and overcoming the surprises that life will throw at your business.

It's Hard to Listen to Advice When You've Been Successful, But You Should

My last blog post on cutting expenses made me think about how hard it was for me to listen to objective criticism when I owned my first entrepreneurial venture.

Prior to the market falling, I had obtained a Small Business Administration loan for my logistics company. Most of the proceeds were in the company's bank account when it became evident that the market was going through a permanent changed.

When my logistics company started to falter, my father offered to look over my financials and give an objective opinion of what I should do. My father was a successful entrepreneur in the construction industry in Nashville in the 60's and 70's and I valued his opinion. So I agreed to hear what he had to say.

Upon looking over Justice Freight System's financials and hearing how the market had changed because of the new federal trade agreements, he made a some tough suggestions. In particular, my father recommended that I let all my employees go, move my company to where I was living, and concentrate on rebuilding my customer base and revenue. He felt that I should not add employees until I had revenue to support paying an employee.

I didn't want to hear what he had to say. Part of my problem was ego and part was over-confidence in my ability as a sales manager and salesperson. I had cheated death three times in my business and I had faith that I could do it a fourth time. If I had listened to my father, my company may not have survived but I probably would have had enough cash in reserve to avoid bankruptcy by negotiating cents on the dollar with my vendors. Instead, I used the SBA loan primarily for payroll when the company's revenue didn't support having employees.

I learned the hard way that it's good business to listen to objective parties insight into your business and operations. Employees and vendors will often tell you what you want to hear because they want to keep their jobs or your business as a customer. It's best to have an independent third party with business experience provide this type of feedback (i.e., been there, done that, lost a lot of money). It could be a professional such as a CPA (I offer this service at CPA for Small Business) or management consultant who has owned a small business. Constructive criticism may also come from a good friend has lead or owned an entrepreneur business. 

Happiness is a Positive Cash Flow – Cutting Expenses

I love serving entrepreneurs and their businesses in part because entrepreneurs are optimistic and positive people. Optimism is a great trait to have when you are building a business because it gets you through the ups and downs that are associated with any new business venture. But optimism can also cause problems and keep an entrepreneur from objectively looking at their business's performance.

When the entrepreneur’s company is performing poorly and there is a need to objectively analyze the performance and cash flow of the business, being optimistic and positive makes it difficult for the entrepreneur to make the prudent decision to cut expenses and possibly even employee’s jobs. It can also cause the entrepreneur to take risk that are not in the best long-term interest of the firm.

I know about this first-hand. Two-and-a-half years after opening my first entrepreneurial company (a logistics company in the 1990's), there was a major downturn in the market my firm served. The downturn was caused by two factors. The first was Federal government rule changes for the imported materials we moved (if you're interested, more information can be found in Wikipedia under "Voluntary Export Restraints"). The second was a shift by manufacturers to domestic sources of the raw materials we moved as a result of the rule changes.

Prior to this, my company had cheated death three times after the start-up phase. Two were the result of losing a large customer and the third was when a large customer went bankrupt. My optimism and positive attitude allowed me to pull my business through the bad times and to motivate my employees to work to turn the company around.

The fourth time I was not so lucky. A few months after the downturn began, it was evident that this was not a temporary situation. I remember sitting down and running a cash flow analysis one Friday evening after all the employees had left for the day. The analysis showed that my company was about to face a major cash crisis.

At no time did I consider letting employees go or cutting expenses. I had willed my company to succeed before and I was sure I could do it again. I was also very loyal to the employees who had helped me build a successful business.

In the end, this decision cost me a lot of money, my business failed, and I had to bankrupt the business. I also had to take a personal bankruptcy because when the business failed my vendors sued me personally for the balances due because I had personally guaranteed all of my company's debt and loans.

If I had it to do all over again, I would have cut employees and expenses to match the expected cash flow immediately after analyzing the cash flow that Friday evening.

I learned the hard way that it is better to cut expenses and payroll when there are cash flow problems in order to save a company and the remaining employees’ jobs.

Happiness is a Positive Cash Flow – A Warning About Who You Pay Slow

In my last post, I explained some of the strategies that can be implemented to improve cash flow. After thinking about this post I felt that I need to give a warning about paying vendors slow.

There are some vendors who will not work with you, even if you present them with a payment plan or explain that you are having cash flow problems.

Early in my CFO career I was the financial manager of a startup company that was spun off from a larger firm. When we separated from the larger company, we moved into a building the owner of the company owned in a rural town an hour outside of Nashville. The first month I was responsible for cash flow the water bill was due at the latest on "X" date. We were tight on cash and I decided to ride the water bill for a week or two. I had paid the Nashville Water Department slowly in the past with no issues. On "X" date, I was the only employee left in the building at 5 pm. Shortly after 5 pm, I watched out my window as a water department employee arrived and shut the water off to the building. It took almost 24 hours to get the water turned back on. This was not a good thing to happen when there are 10 employees or so working in the building during the day.

So be careful when deciding who to approach with a plan to pay outside of agreed upon terms. I've learned the hard way that some vendors just don't care what you are experiencing.

Some of the vendors who may not work with you include:

• Banks and lending institutions
• Equipment Rental Firms
• Landlords
• Credit card companies
• Utilities

Though slowing down payments is a good strategy, give careful consideration to which vendors you pay slowly as part of your cash flow strategy.

Happiness is a Positive Cash Flow – Strategies to Improve Cash Flow

Here are some strategies that I suggest that may help you improve your company’s cash flow:

• Analyze the cash flow, prepare a budget, and then synchronize cash inflows with cash outflows.
• Include capital expenditure (major physical asset acquisitions such as equipment and buildings) and their associated periodic payments, insurance, and maintenance costs in the budget.
• Implement credit policies that weed out customers who will either pay slow or who may not pay at all.
• Make routine collections calls (i.e., the squeaky wheel often gets the grease).
• Take advantage of vendor discounts.
• Maintain as small an inventory as possible.
• Slow down your firm’s payments to vendors (within reason).

If you do choose to slow down payments to vendors, you may want to think about communicating with them that you will be paying slower than expected. As a CFO and now as an entrepreneurial CPA firm owner, I am generally open to working with customers who proactively communicate with me that they are having cash flow issues. If you choose this strategy, it is important to either pay a little at a time or meet the estimated time of payment you give the vendor. Trust in a relationship can be broken quickly if you don't fulfill your commitments and the vendor will likely cut you off if you don't do make a payment when you say you will.

Happiness is a Positive Cash Flow– Prioritizing Payments

One of the best ways to navigate tight cash flow is to prioritize your payments. By doing so, you can focus on paying the important payments first and less important ones later.

Here is the way I generally prioritize payments when cash flow is tight or negative:

1. Payroll (As a CFO I usually tried to hold two to three weeks of estimated payroll in reserve when budgeting for a negative cash flow – employees generally don’t keep working when you don’t pay them).
2. Taxes - payroll, sales and use, business, personal property, etc. (You will pay late charges and a hefty fine for not paying these on time. You could also face criminal charges if you knowingly fail to pay tax obligations.)
3. Rent, utilities, phone, data lines (i.e., the things that keep the company open for business)
4. Equipment rent and notes, bank notes, mortgages, and other items that have been financed (Late payments to finance companies are usually reported to credit reporting agencies such as Dun & Bradstreet and TRW.)
5. Vendors from whom you’ll need services in the near future.
6. All others.

Prioritizing payments may not lower the stress of tight cash flow much. But it will allow you to have a plan and not worry about who you are going to pay when cash is received. It also helps you estimate when you will be making payments when you receive collection calls, which most small businesses receive from time to time.

Happiness is a Positive Cash Flow – Managing Your Cash Flow

It would be safe to say that it is natural for entrepreneurial businesses to experience cash flow problems. This is why it is so important for you to actively budget and managing your cash flow.

On a regular basis, you need to estimate the cash you expect to receive from customers, identify the payments that are due (payroll, taxes, vendor payments, etc.), and then create an analysis that compares the estimated cash inflows to the payments that are due. From this analysis you create a cash flow budget.

The cash flow budget will provide a guide for you to use to manage your company’s cash flow.

If the analysis shows that a positive cash flow is expected, you can budget to pay all of your obligations on time and take comfort that there will be funds available to do this. If the analysis yields a negative cash flow, you will need to prioritize your payments in the cash flow budget in order to conserve your liquid funds.

An additional benefit to cash flow budgeting is that it gives you an early warning that you need to start collected receivables from your customers or hustle to increase sales. At my entrepreneurial public accounting firm, CPA for Small Business, I regularly review and make cash flow forecasts. Doing so keeps me from being surprised when cash flow slows down.