Tim McLellan, B2B CFO®

Do you have a marketing and sales plan that helps you know which customers to target? With that information, have you created a budget? Do you have clear goals for the year and do you have a way of measuring your success in achieving those goals?

The best companies that I’ve encountered have tremendous focus on their customers and know whom they want as new customers. In turn, their sales plan creates incentives for the sales force to work to match desired new customers with those in the sales plan. The marketing plan is designed to help drive potential customers to the firm and then for the sales team to recognize those possible clients.

The sales and marketing budget should drive your general business budget. A budget provides a business roadmap much like a GPS does, for your company. Without a budget, companies don’t have a clear path to follow that helps the company achieve financial goals. Common sense tells us that optimizing success requires a plan. Good things don’t typically happen by accident. It takes thoughtful preparation. With a sales and marketing plan, you should be able to forecast sales requirements. Those needs should drive your planning for sales personnel, the size of the operations team and the support team needed for operations as well as any ancillary personnel needs. You need to think this out.

Just as the military has a plan for battle, firms should have a plan. Companies should know what steps they plan to take with specific measurable objectives. Then the company needs to drive to meet those objectives. The company should also have a secondary plan that describes the steps that are planned if it becomes obvious that the organization will not be able to meet the primary goals.

The company should also have the ability to check actual results against the budgeted plan. Do you have the ability to check your actual revenue and expenses against the budget? With this information, management can focus on the exceptions to the budget, save time and generate more profits.

This level of planning may be more intensive than you have experienced. Many companies try to go through this process but may attempt to speed up the process and take unwise shortcuts. Engaging an experienced guide helps keep the process well-grounded and effective. Our partners at B2B CFO® have remarkable experience and are happy to talk to you about providing support!

In 2012, the first wave of more that 66 million baby boomers become 65 years old and will begin to draw Social Security.  By the end of 2012 10,000 people a day will be turning 65 years old.   Many of these baby boomers own their own Company.  What will happen to these businesses as the owners continue to age?

 Recently, Jerry Mills, the founder of B2B CFO®, was interviewed by Morningstar on this upcoming Small Business Tsunami      See video here

 Jerry noted that of the 12.5 million American businesses owned by baby-boomers it is estimated that 8.4 million of them will undergo some kind of significant ownership change.  Other estimates say that most small business owners have 80 to 90% of their personal wealth tied up in their business.  Those are staggering numbers.

 So what is a business owner to do?  The answer is to make a resolution.  Resolve that you will position the business for sale long before you want or need to sell it.  In his book, The Danger Zone, Jerry suggests you think like a buyer.  Here’s how you do that:

• ·Make sure you have a robust financial infrastructure in place. You should be able to produce accurate and timely financial statements that not only stand up to the scrutiny of third party audits or reviews but also serve as the credible basis of future projections.
• Make sure you are current in all tax jurisdictions where your business operates.
• ·Be sure the procedures to build the goods or deliver the services are well documented.
• ·Bring your information technology up to current industry standards and be absolutely sure that you have proper backup and recovery procedures and no illegal software.
• ·Ensure that customer relationships are not dependent on the owner remaining with the company.
• ·Assemble a top-notch management team in key positions within the company.
• ·Make sure that all warranty and contingent liabilities are identified and quantified.
• ·Take all steps necessary to protect and document the company’s intellectual property.

 When the day comes that you are negotiating with a potential buyer there are two additional things to remember.  First, do your due diligence on that buyer to make sure they have the financial capacity to follow through on giving you the full value of your business.  Second, do not become emotionally tied to your business or to your potential buyers.  Step back and be objective.  Listen to your advisors.  That’s why you hired them!

 A tsunami watch has been posted for American small business.  Take precautions now to prevent financial injury when the wave comes crashing.

 A B2B CFO® can help you survive the sale of your business.  Putting all of the above processes in place is a 12 – 24 month process.  The process needs to start well in advance of the date that you would like to sell your business.

Most business owners and executives I know are passionate and hard working, and failure is not in their genes.  Unfortunately, many businesses do fail, more so in today’s tough economic climate.  You should be alert to these warning signs below and understand they may be fatal if not properly addressed.

1.  Low Sales- You will be in big trouble quickly if there are not enough sales at a price high enough to cover your expenses and produce a profit.  Spend time on pricing strategy.  The old cost plus pricing doesn’t work very well these days in many industries.  Know what the market price is and work backwards to see what your target costs should be.  Research and validate markets before you spend time and money pursuing them.

 2.Insufficient Capital- To capitalize your business properly, it’s essential you have a realistic business plan and plan for contingencies.  You should stress test your plans to understand how far you can get off your plan before you have serious trouble.  Establish a realistic plan and monitor and update it frequently.   You should take time to develop a Plan B and Plan C so you’ll know what to do if you run low on capital.  It is extremely tough to survive, let alone grow a business, without sufficient capital. 

3.Competition- You must have a sustainable competitive advantage.  You must understand the marketplace, who the major competitors are, and how/why you can beat them.  You must respond to new competitors and respond to changes in your marketplace.  Think buggy-whip manufacturers.  Even the best in class didn’t do well when horses were replaced with cars.  Be careful about taking on industry leaders without a niche or competitive advantage and don’t take on a niche too small.

 4.Poor  Use of Business Funds-  This includes borrowing or investing too much in the business and making poor spending and investing decisions.  Know that external accountants hired to do your bookkeeping, auditing, or taxes cannot watch all your business finances.  The owner must be the CFO until one is hired!

5.Poor Credit Arrangements-  Agreeing to a credit facility that has oppressive terms and conditions can be a major mistake.  Talk to various experts to find out current debt market conditions for a company like yours.  Spend time making sure you get the type of credit you need at a competitive cost and with an organization that can help you grow. Don’t take on more debt than you can comfortably service in a bad year.

6.Poorly Managed, Unexpected Growth- Everyone loves to see sales growth but it can also be deadly if you don’t manage it.  Growing a business takes capital.  Growth is good if you have the infrastructure and capital to handle it and it is profitable.  If you don’t manage the growth, it’s very easy to run out of money or drag down your entire organization until you can no longer provide good service to anyone!  Know that profit is more important than sales in the longer term.  You should know which sales and customers are profitable and which are not.  Don’t chase a new market if you’re not sure you can be consistently profitable in a reasonable amount of time.

7.Poor Inventory Management- In many businesses, this will likely be one of your largest assets and needs to be aggressively managed.  Too much inventory and you waste capital, incur storage and insurance costs, and increase the likelihood of excess and obsolete inventory.  If you have too little inventory, you risk long lead times and stock outs- alienating your customers.  Spend time on inventory, understand what best practices and norms are in your industry.  Good inventory management leads to better customer service, leaner production, more efficient capital management, and increased profitability.

8.Insufficient Management Expertise-  You may have great skills in manufacturing a product or providing a service, but unfortunately that’s only part of running a business.  There are other core skills you need including such things as Sales, Marketing, and Finance that need to be done effectively and efficiently to be successful.  It’s not unusual for an entrepreneur (or manager) to reach a level exceeding their expertise (or time) and find they need more professional management help.  The key is to recognize the situation before it becomes a major problem.  It’s a wise man who understands when he needs help and then goes out and gets it!

 9.Poor Location- This is important for all businesses, not just retail.  You need to consider the availability, quality, and expertise of the local workforce, access to transportation and logistics, and proximity to your suppliers and customers.

10. Over Investment in Fixed Assets- Carefully screen and prioritize your capital expenditures.  You should know each investment makes financial sense by understanding things like payback, internal rate of return and other basic financial concepts so you can build value in your business.

B2B CFO Announces the Call for Nominations and Event Sponsors for the Inaugural

“Smart 25 Awards”

Nominations for the Inaugural “Smart 25 Awards” are being accepted through March 20, 2012

B2B CFO, the nation’s largest CFO services firm, is accepting nominations for the first annual “Smart 25 Awards” through March 20, 2012. The award program recognizes outstanding companies and individuals for driving smart business growth in one of the toughest economies.  

Honorees and finalists will be celebrated during the awards ceremony on May 4^th, 2012, at the Aria Resort in Las Vegas, Nevada, during B2B CFO’s annual National Partners Conference.

The Smart 25 Awards were launched to coincide with B2B CFO’s silver anniversary and recognize the critical components of best business practices that create jobs and improve the economy.  Open to all growth-oriented privately-held businesses from around the United States, the awards honor companies and leaders for their significant accomplishments.

Award categories include:

•  Fastest Growing in Sales – presented to companies that demonstrate strong sales growth over a period of three years 2009-2011.

 •  Top Job Creators – presented to companies that created most jobs over a period of three years 2009-2011. 

 •  Largest Loan Secured – presented to companies that managed to secure the largest loan (single or cumulative) during a three-year period 2009-2011.

  
•  Best Working Capital Increase – presented to companies that demonstrate the healthiest growth in their working capital.

“Businesses are thriving despite these tough economic conditions and the Smart 25 Awards is our opportunity to celebrate and showcase their accomplishments,” said Jerry L. Mills, founder and CEO of B2B CFO. “These awards recognize the smartest business practices and provide a platform for national exposure. So we encourage the business community from around the nation get involved and get recognized for the great impact they are making in our economy every day.”

Company nominations and self-nominations are accepted. Up to five finalists will be chosen for each category by a selection committee comprised of distinguished representatives from the media and financial community.  
 
The inaugural Smart 25 Awards will be presented at the B2B CFO National Partners Conference which brings together Partners and Service Providers from around the country.  More than 300 attendees are anticipated to participate.

“2012 marks a very big year for B2B CFO,” added Mills. “It’s our company’s 25^th anniversary and we cannot think of a better way to celebrate then by launching an awards program that recognizes other successful businesses.”   

Conference sponsors include Morgan Stanley Smith Barney, SAP, and Intuit among many others.

Is your business one of the many that has gotten flabby from lack of exercise during this down turn? Have you and your business been on the sidelines the last couple of years? Sitting on the couch waiting for things to get better? Are you still waiting to see? We need to change that.  Many economists and business experts believe that things will never be the same as they were before the financial crisis. I happen to believe they are right. Things will be different but that doesn’t necessarily mean they need to be worse for your business. How do we make that your new reality? We create a game plan!! Below are some simplified steps to crafting a winning game plan:

1)      Take a realistic look at yourself.  Have you been holding back? Unsure of what direction to take? In the wake of all of the negative news did you stop leading your team? Did you try to do too much by taking on tasks that should have been done by others? What are you good at and what are you not so good at? Areas that are not your strength should be supplemented with the skills of others (head coaches generally hire others to run their offenses, defenses, etc. It isn’t that they don’t know how, it’s that they know that the team will perform better by utilizing the skills of others)

2)      Take a realistic look at your business. Is your product or service still relevant? What about the quality of the product or service? Do you have the right people to deliver the “goods” ?

Ok, so we have completed the introspective piece of work and we will assume that the answers were supportive of continuing.  So let’s go.

3)      We need to establish a set of goals for the business (remember the SMART acronym when setting your goals… it is broken down for you at the end of this article).

4)      Create a game plan for attaining the goals. Many business owners struggle with this but it doesn’t have to be so daunting.  Remember to walk backwards. Or, if you prefer, in the words of Stephen Covey, “begin with the end in mind”. Isn’t that really what goal setting is about? Once you have set the goal walk backwards until you get to where you are standing today. For example:

Let’s say that you are a sales person and you want to buy a $70,000 sports car one year from today and you want to pay cash. GOAL!!! 

So let’s take the steps backward.

1)      Do I currently have the cash? Nope.

2)      In order to buy the car I will have to earn an extra $70K in commissions this year (after tax).

3)      In order to earn $70k extra I will need to sell and extra $700K

4)      In order to sell and extra $700K I will need to close an additional 10 orders at my average of $70K.

5)      In order to close an additional ten orders I will need to have an additional 100 appointments

6)      To set an additional 100 appointments I will need to make an extra 1,000 calls this year.

We have just walked backward from the  goal through each of the metrics that you need to achieve by engaging in a specific set of activities…starting today. I have just established a game plan for my success.  Of course this can and should be broken down further to include intermediate steps, measurement points, and an assessment of the resources required (for instance; in the example above where am I getting the names of the extra 1000 people to call?). By breaking this down to smaller measurable components and reviewing ongoing results I receive the necessary information to modify my activities as necessary to achieve my goal.

In your business the game plan for improving your sales would have to include sales team goals, production goal, etc. 

In a recent NFL game the Kansas City Chiefs  defeated the previously unbeaten and far superior (in terms of recent performance) Green Bay Packers. Their goal, which no one expected them to achieve, was to win the game.  In order to achieve that they came up with a game plan for all the parts of their “business” and then executed the plan.

By crafting and executing the right game plan for your business you may achieve a similar and perhaps equally improbable victory in 2012. Remember the key to moving forward in 2012 may be walking backward.

B2B CFO® recently introduced The GamePlan®, our unique system to help business owners thrive while reducing their overall stress level.   Businesses that have adopted The Gameplan® have experienced increased company value, greater personal wealth, and more free time, among other significant benefits.

The first step of the process is The Discovery Analysis™.   The Discovery Analysis™ is a complementary first step offered free to Business Owners.   This process includes a confidential meeting with the business owner and company staff, a review of the company’s financial information and computer systems, benchmarking your company data against industry averages and creating a confidential report, The Strategy Gameplan™.

The entire GamePlan™ process can be viewed by clicking on the below link.   Please contact me at tmcellan@b2bcfo.com if you would like a free Discovery Analysis™.

B2B CFO Gameplan

One of the most common questions among small business owners seeking financing: “What will the bank look for from me and my business?” While every bank has its own unique criteria, many use some variation of “the five C’s of credit” when making credit decisions. Broadly speaking, they are:

• Character
• Cash Flow
• Collateral
• Capitalization, and
• Conditions

Let’s take a look at each of these ingredients and review how they may impact your funding request. Review each category and see how you stack up.

 Character — Your willingness to pay back your loan

What is the character of the management of the company? What is your payment history and patterns in other loans you have taken? What is management’s reputation in the industry and the community? Bankers want to lend their money to those who have impeccable credentials and references. The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling your obligations are all parts of the character question.

Cash Flow— Your capacity to pay back your loan

What is your company’s borrowing history and track record of repayment? How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks, such as debt and liquidity ratios, that bankers evaluate before advancing funds. Become familiar with the expected pattern in your industry. Some industries can take a higher debt load; others may operate with less liquidity. There should be an adequate cushion in the company’s cash flow that allows both principal and interest to be repaid.

Collateral — How lenders get paid if the business fails

While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or manufacturing equipment. Alternatively, your accounts receivable and inventory can be pledged as collateral. Generally, lenders will want a 1:1 ratio, or $1 of collateral for every $1 you borrow. Bankers typically discount an asset and lend on that basis. So for every $1 of collateral, the bank will lend anywhere from 70% to 85% of the value depending on whether it is fair market value or liquidation value.

Most lenders will also require collateral that is based on the business owner’s individual assets such as personal real estate and / or a personal guarantee supporting the business loan.

Capitalization — How much money have you put into the business?

How well-capitalized is your company? How much money have you invested in the business? Has your business grown? Have you reinvested the profits, or paid yourself a bigger salary? Banks often want to see that you have a financial commitment and that you have put yourself at risk in the company. Both your company’s financial statements and your personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will you be prepared to add more of your own money? How far will your personal resources support both you and the business as it is growing?

Conditions — SWOT: What are the Strengths, Weaknesses, Opportunities, and Threats that affect your business?

What are the current economic conditions and how is your company affected? If your business is sensitive to economic downturns, for example, the bank wants a comfort level that you’re managing productivity and expenses. What are the trends for your industry, and how does your company fit within them? Are there any economic or political hot potatoes that could negatively impact the growth of your business?  

Keep in mind that in evaluating the five C’s of credit, bankers don’t give equal weight to each area. Lenders are cautious. One weak area could offset all the other strengths you show. For example, if your industry is sensitive to economic swings, your company may have difficulty getting a loan during an economic downturn — even if all other factors are strong. And if you’re not perceived as a person of character and integrity, there’s little likelihood you’ll receive a loan, no matter how good your financial statements may be. As you can see, lenders evaluate your company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be you.

If you would like to learn more about how to qualify your business for a loan, please contact me.

On October 26, The New York Times published an article titled, “When Should a Small Business Hire a Finance Chief?” This piece deals primarily with growing businesses and some of the major issues they confront. I recommend this article as a good summary of the complex range of issues that all small businesses face.

 The article defines a number of tipping points that confront companies as they grow. But the primary issue was summarized by one business owner, who said: “I needed to hire someone who could function as my business partner and allow me to step away from the books so I could manage other aspects of my business.”

 Among the challenges that organizations face, the Times identified the following:

• Financial Analysis, Accounting, and Budgets, Forecasts
• Insurance
• Banking
• Lending and Securing Financing
• Real Estate
• Health Insurance
• Accounts Receivables
• Legal
• Dealing with Investors
• Due Diligence in preparing for an acquisition or preparing to be acquired.

I would add cash flow and working capital management, as well as human resources and IT management, to the list. And the CFO is critical to exit planning.

 Can’t Afford or Don’t Need a Full Time CFO? Hire One Part Time

 As the Times points out, “no matter how small, any company can benefit from having a finance chief to help organize its finances and track its performance.” But a full time CFO usually commands a six figure salary plus benefits. The solution, say the Times, is to hire a part-time CFO. It is sort of like a time-share condo: you get the high quality seasoned finance leader you need for a fraction of the cost of a full time CFO.

Read the article from The New York Times

I remember those days preparing the annual budget at some of the large corporations that I used to work for.   The majority of the budget process consisted of taking current year amounts and multiplying them by a factor for inflation.  I would take current year numbers and assume 3 – 5 % inflation for the next year, and I was 90% done with the budget.  

But is that really any way to prepare a budget?   The budget should represent a genuine plan to increase the cost effectiveness and efficiency of the business.   So before you start the budget process for 2012, here are some things to challenge.

Health Insurance – When was the last time you received new quotes for health insurance or considered changing your plan?   Have you ever considered joining a Professional Employer Organization (PEO) to outsource your benefits management?

Business Insurance – When was the last time you reviewed the details of your business insurance coverages?  Do you still own / lease everything that is listed in your insurance policies?   I once worked for a company that was insuring twice as many vehicles than physically existed.

Technology – Are you paying to maintain computer equipment on site when it might be much cheaper to use cloud computing?  When was the last time you received quotes on your land line, internet or cell phone carriers.  One of my clients has reduced their communication costs over 80% in the last five years by upgrading to current technologies on two different occasions.

Sales Compensation Plans  – When was the last time you challenged the assumptions in your Sales Comp Plans?   Are the plans still meeting business objectives?   Should there be additional incentives added for new products?

Equipment Leases – Are your leases cost effective?  I knew someone who paid $6,000 in lease payments for a $300 fax machine.

Property Taxes – Have you challenged your assessments and gotten your property taxes lowered?

These questions could really be asked about every line of the income statement.  So make it a project to challenge three or four of these line items each year in the budget process.   Don’t just take the current year expenses times 1.05 and call the budget done!

If you need help with any challenges in the budgeting process, please call me.  Thanks.

All businesses have large key customers.   Business owners spend a lot of time managing the relationship with these customers because they provide significant amounts of revenue and profit to the business.  But a customer can get too big, and cause significant problems for your business when the relationship sours, either financially or operationally.

Here are some examples of what can happen when a company becomes too reliant on one customer:

Company XYZ performed specialized building wiring services for a Fortune 100 Company which represented about 80% of their business.  Through the years Company XYZ opened several remote offices to better serve their customer.   Then one day this Fortune 100 Company was purchased by a Fortune 50 Company.   The newly merged companies now had too much real estate, and temporarily stopped working with Company XYZ.   Within 90 days, Company XYZ went out of business because they could not survive the 80% revenue cut.

Because of the economy, a Contractor was desperate for new work.   The Contractor bid and won a job that was three times bigger than any job had previously done, and the job was located 300 miles from the Contractor’s normal geographic area.  The job proved too big for the Contractor to manage effectively due to the size and distance of the job.  The Contractor incurred losses for 18 months as a result of this job.

An Entrepreneur was approached by a large company to set up an installation business to install products manufactured by the large company.   Through the years, the Entrepreneur’s business with this large company grew exponentially.  The large company represented at least 80% of the Entrepreneur’s business.    At some point, a senior manager from the large company approached the Entrepreneur about providing some illegal kickbacks to the senior manager.   The Entrepreneur did not want to lose the large company’s business so kickbacks of significant amounts were paid.

A company that has built commercial buildings for the last 30 years decided to get into the residential construction space.  The company was awarded two high rise residential condominium projects.   These jobs started in 2008 and continued into 2009 and provided a large amount of revenue and income to the company.  As the housing market faltered in late 2009 and 2010, both of these condominium projects declared bankruptcy.   The company incurred bad debts equal to 25% of sales. 

I certainly don’t advise people to fire large customers.   The best way to reduce risk is to pick up more customers so that the larger customers become a smaller piece of the pie.  Business owners need to always have a Plan B in case a significant customer is lost. 

A  B2B CFO® can help you manage this risk, as well as other risks in your business.