The CFO'S Perspective

The current economic climate, combined with the fact that September is National Preparedness Month, has many of us thinking about how we can prepare for possible threats and business disruptions. This kind of strategic planning allows a business to approach a worst-case scenario with a growth mindset instead of fear – increasing the likelihood that your business will come out of a crisis stronger for having gone through it.

During a worst-case scenario, leadership must decide whether the organization will make the necessary adjustments needed to continue with business as usual or change how the company will operate. And while the conversation will undoubtedly include operational and capacity considerations, it is primarily a discussion about financial capabilities.

Accounts receivables are a hot topic for business owners because they are the primary driver of cash flowing into the company. Unfortunately, in the US 39% of invoices are paid late and 52% of businesses have been asked by clients to extend their payment terms. This creates a difficult situation for business owners because late payments not only hurt cash flow management but may also serve as an early warning sign that payment is not coming.

Typically, the longer invoices remain outstanding the less likely they are to be paid. When invoices cannot be collected on, they become bad debt and are written off, erasing the revenue they would have generated for the hardworking businesses that earned them. Bad debt hurts short-term cash flow and long-term profitability. In fact, every year an average of 4% of accounts receivable are written off as bad debt, which equates to $400,000 in lost revenue for a company with $10M in sales annually.

So, what can you do to reduce your accounts receivables problems?

Financial projections are a critical component of a sound business plan. These projections (or “financial forecasts”) are used externally to obtain funding as well as internally to create a strategic growth roadmap with key milestones.

At the core of these projections are logical assumptions for revenue, COGS (cost of goods sold), SG&A (sales, general, and administrative) expenses, capital investments, and cash flow that serve as building blocks for the final figures that result. Because your financial projections rely on these pillars, it is crucial to find a balance with these inputs. Being too conservative or too aggressive with your assumptions will skew the resulting projections, damaging their overall credibility. The goal is to inspire confidence externally as well as internally while maintaining high ethical standards, which requires a balanced approach toward creating assumptions for financial projections.

Use existing financial information, even if it is limited by the newness of your business, to justify these assumptions and inform your financial forecasting process. Your resulting financial projections should include a P&L statement, cash flow statement, balance sheet, capitalization table, and strategic investment plan.

Effective cash flow management requires careful control of both money coming in and going out. While practices like shortening payment terms, offering variable pricing, and pursuing collections can increase the timeliness and amount of money coming in, delaying payments to vendors can slow cash outflows, providing the float needed to sustain operations during difficult times.

In an article about re-opening your business, Jeff Dunn explains succinctly, “Determine which vendors are critical to your day-to-day operations and pay them as timely as possible; which are important but can be paid slowly; and which are not important going forward that will be paid when able.”

How do you decide who to pay now and who to pay later, and how do you abide by vendor management best practices while doing both? This quick guide will help you answer those questions to improve your cash flow position right away.

What now? One thing is certain, most businesses have been impacted and their 2021 results will differ significantly from previous budgets and forecasts.

Now is the time for serious planning and strategizing. Business owners and CEOs should be considering what reopening looks like in all markets in which they operate. Will your business return to normal operations or will there be significant changes needed? Involve your key leadership team and advisors in these planning sessions.

The recently signed Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") contains over 800 pages of legislation to provide financial relief during this time of crisis. The bill provides emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.

In response to numerous requests, we are providing resources to help you understand the CARES Act. To the best of our knowledge, these resources are current, but please check with the appropriate agencies to confirm the details.

Find out what the CARES Act means for you, your family, and your business.

The purpose of human life is to serve, and to show compassion and the will to help others.” - Nobel Peace Prize winner Albert Schweitzer

Entrepreneurs and CEOs quickly learn how lonely it can be at the top. In many cases, you may be the sole employee when your venture is first created. When it grows, and you have a more complex organization with a sizeable staff, accountability for success still rests mainly on your shoulders. 

As your company’s leader, employees look to you for guidance and vision. Investors expect you to successfully manage the company and provide them with an excellent return on their investment. When dealing with a difficult situation or approaching uncharted territory, the CEO has no peers in the organization. 

It is for these reasons that CEOs form a board of advisors to give them guidance or expertise. An increasing number of organizations are forming advisory boards. But how can you best define the role of your board and its members?

There’s nothing wrong with taking your business in a different direction. Some of the world’s most successful companies started out doing one thing and ended up succeeding at something else. Cell phone giant Nokia began as a rubber bootmaker, and oil conglomerate Shell was an importer of actual seashells. 

You can certainly reinvent yourself at any time, and sometimes it’s the best idea to guarantee success and longevity. But have you considered all of the risks and possibilities as you plan your roadmap for the next chapter of your organization’s growth?