One thing that I’ve learned over my career is that if you try to compete strictly on price, you better have the lowest cost model of all your competitors or you are dead and just don’t know it yet. This can be a death spiral that you may not be able to control and that will ultimately lead to losses faster than you can cut or manage costs.

By allowing yourself to compete primarily on price, you are admitting that your product or service is a commodity – that it is really no better than all of those offered by your competitors. Talk about a fast way to make your business become “un” -unique in the eyes of your customers!

I read an article recently in the MIT Sloan Management Review on this topic and it reminded me of the need for management to focus on performance in order to compete effectively in the realm of premium pricing. It is critical, however, that your product actually is superior to the competition.

Even though you can, and many companies do, claim to have the highest value product or service, your customers will learn the truth very quickly and you will be punished in the market for your deceit if you are not honest. It is also critically important that the executive team have good information about and the ability to track and manage its costs as well as a clear understanding of and a simple, compelling message on its value proposition to its customers. I like to see an ROI (return on investment) calculation customized for the customer, using their own data, as a key sales tool – it is a great way to have them convince themselves rather than me trying to convince them!

In order to build a performance-pricing model along with the cost and expense drivers to make sure it will work in your busiess, you will need good information and a strategic financial partner to work with you in the process. Give us a call and let one of our experienced professionals show you what we can do and the benefits that you can derive from implementing this strategy.

Kent Thomas, Founder

1. Transition the company from basic cash financials to GAAP based (or equivalent outside the US) including the completion of audited financials on an annual basis;
2. Implement scalable financial processes and systems to support the growth of the company;
3. Ensure that the company is compliant with various government and legal requirements;
4. Facilitate the deployment of key operational processes and systems to support the growth of the company (such as, a robust budgeting process or an HR system);
5. Develop the board, CEO, senior team level operational dashboards;
6. Facilitate the operational reviews across all functions of the company to help the senior team in setting strategies and goals;
7. Support the company exit strategy by representing the company externally to media, government agencies, funding agencies, and the public.

While the OpenView post focuses on the value of having a CFO in an early stage company, indicating that those who bring the CFO on earlier tend to be more successful than those who forgo the hiring of a CFO due to cost constraints, the value proposition also applies to established companies.

In reality, companies do not have to pay the cost of another highly-compensated executive in order to receive the value of a highly experienced CFO for their business because CFO Solutions can provide all of the CFO’s value that small to midsized companies need on a part time basis and at a fraction of the cost of a full time employee. We have been doing it for more than fourteen years for over 450 companies. If your business needs a CFO but you can’t afford (or don’t want to pay for) a full time employee, call or e-mail us for a no obligation consultation and assessment.

—Kent Thomas, Founder

I recently taught a session on Advanced CFO and Controller skills to a group of 23 CFO’s and Controllers. At the beginning of the class I asked how many could give me a concise summary of their company’s strategy – only three raised their hands. Apparently this is not unusual. In a recent study, Right Management Consultants found that less than one-third of employees are fully engaged in and know their employer’s missions. My greatest concern is that if the CFO or Controller does not know the Company’s strategy, what does that say about their ability to provide valuable data to employees and management?

A good CFO must be able to align the internal reporting systems with the Company’s strategy and translate it into key performance indicators (measures of important activities that are quantifiable, measurable and meaningful) that the other managers and employees help to identify and take responsibility for. These metrics must be reported frequently and used to evaluate the employee, team or company’s progress towards achieving the stated goals.

Every CEO needs and deserves to have a strategic financial partner on her or his team to provide valuable and actionable information in order to have confidence in the decisions he or she makes every day. If you do not have or have not experienced this in your business, please call us, we can help – and the good news is that when we act as your outsourced, strategic CFO, the cost is a fraction of what you would have to pay for a full-time CFO!

Well the answer is not a political one – it is because medical insurance and healthcare costs are a significant cost to businesses, especially small businesses, and since at least part of the reform legislation has become law, entrepreneurs, executives and owners need to understand how this new law is likely to impact their business.

I received an e-newsletter from the law firm of Dorsey & Whitney LLP that contains a truly non-partisan, unemotional summary of the new law and analyses of its potential impact on everything from insurance premiums to tax credits and new programs to payroll tax rates. I suggest that you take a few minutes to read this summary and that you start thinking about how this may affect your business and what changes, if any, may be strategically important to plan for in the future.

Since many changes that will impact business don’t take effect until 2011 and beyond, management and owners should have time to properly plan for and minimize the negative impacts, if any are to occur. I recommend a thoughtful review now, not later, however because it is entirely possible, and quite likely in my opinion, that insurance companies who are impacted almost immediately, will start to make changes in policies, coverage, terms and premiums and business owners need to be well educated in order to  navigate successfully through this changing environment.

Here is a link to Dorsey’s article titled ‘Health Care Reform Is Here’ – please contact me or your CFO Solutions’ consultant if you would like help modeling how this landmark legislation, and potential strategies to deal with it, may impact your business.

—Kent Thomas

Remember the following rules for selecting metrics to track and report, they must:

1. Be clearly identified, defined & understood
2. Be aligned with the company’s goals
3. Address key pressures or challenges in the organization
4. Be measurable & actionable

Have accountability clearly defined & assigned for each.

Need help creating your metrics for your Financial Dashboard? We’re professionals with experience establishing financial dashboards for startup entrepreneurs and seasoned CFOs. Whether your company is just starting out, or well on your way to the Fortune 500; CFO Solutions has the experience and know-how to improve your financial outlook. Give us a call.

Although this survey does not exactly equate to what happened in Utah, Silicon Valley certainly sets the standard and establishes the trend for venture capital investing in the U.S. and in Utah.

Here are some interesting insights:

1. For the second quarter in a row, ‘up’ and ‘flat’ rounds exceeded ‘down’ rounds (interpretation: company valuations are increasing and the new investors are receiving less ownership for the same total amount invested – good news for founders and prior investors), this time 70% to 30% and the average price increase was 19% for the quarter. This is great news and portends good trends for good businesses that are looking to raise capital.
2. In the 4th Quarter series A rounds (usually the first institutional financing round) represented 23% of all financings, up from 17% in Q3 and a low of 8% in Q2. This is great news for earlier stage companies and indicates that VC’s are starting to open up to their financing needs again.
3. The survey indicates that financing terms are starting to relax (i.e., becoming less onerous) for the companies receiving capital but preferences such as participation rights and liquidation preferences are still being used in the majority of financings. In other words, it is still a ‘buyer’s market’, however, the trend continues towards a relaxing of some of the more stringent and onerous terms.
4. The total invested by venture capitalists during the quarter increased by 17% over Q3 but is still down compared to earlier years. Also, the total funds raised by VC’s during the quarter increased by 80% over Q3, however, the total raised in 2009 represents a nearly 50% decline when compared to 2008. The message here is that with less total funds to invest, fewer companies will qualify for investment in the future. As a result, the better the management team and the better they (you) understand and solve customer ‘pain’ and the better prepared they (you) are to execute on your plan, the more likely they (you) are to attract serious VC interest in the future.

If you are considering venture capital or angel investor equity investment for your business or if you would like to better understand what this information means for your situation, Contact Your Utah CFO for a free consultation.

In our first example, the entrepreneur received a set of financial statements on the 15^th of the following month – a fairly typical situation but all of that information is historical and out of date (i.e., the executive cannot affect January’s results with information received on February 15^th.)

The second executive received information about last week on Monday morning and although he cannot impact last week’s results (an argument perhaps for daily dashboard reporting) he can affect the rest of this month’s results.

Selecting the right metrics (measurements) is a difficult, but important part of this process.

You don’t want to have too many key metrics that you are tracking on any given dashboard – I recommend no more than five or six and always weigh the cost of tracking and measuring the information against the value received there from.

Finally, a dashboard will likely change over time and as a key pressure or challenge in your company is resolved, that metric may be removed from the dashboard and another that is now a higher priority selected to replace it.

If you long for timely and more accurate information about your business and to become a confident and proactive decision maker, I suggest that you make the investment to implement dashboards and key metrics reporting for your business. If properly planned and executed, it will be a journey of discovery and insight that will pay dividends well into the future.

In the next post of my four-part series I’ll identify five basic rules for the metrics you need to incorporate into your financial dashboard plan. If you’re ready to get your financial dashboard set up, Give us a call right away.

Foremost in this process is getting the right people who are competent, properly trained and who know what is expected of them.

Although all businesses have procedures and some level of controls, it is rare to find one where they are well documented and communicated to employees.

Finally, I recommend that you take a step back and think of the culture that you, as the CEO or General Manager has created. Are you consistent in requiring all employees, including yourself, to follow the company’s policies and procedures? If not, you have to start with yourself and establish a culture of transparency, trust and consistency – only then will the foundation properly function to provide you with the kind of information that our second executive enjoyed.

In the next post of my four-part series I’ll quickly review how timing can effect your financial outlook. If you’re ready to get your Financial Dashboard set up, Give us a call right away.

The busy entrepreneur sits at his desk reviewing the January financial statements. It is the 15^th of February and he is somewhat frustrated that the reports are so difficult to understand. He knows that they may contain critical information but he has neither the time to research nor the competence to properly analyze it to make it more meaningful. After 30 minutes of reviewing key accounts, he files the financial statements in his 2010 binder and moves on to another important project, fearful that he might be missing something important about his business but hopeful that he is not.

Contrast our first executive with the CEO who arrives at his office at 7:30 AM on Monday morning, opens an e-mail from his Controller and finds last week’s dashboard – a collection of the Company’s key operational and financial measurements in an easy to read graphic format with a one paragraph analysis and explanation from his finance team. In the same 30 minutes, this CEO reviews a high-level overview of the Company’s sales, costs, productivity and financial highlights.

In the process, as he notes some concerning production information, a quick telephone call informs him that the Manufacturing Supervisor, after seeing the same information, researched the problem and has a list of recommendations in order to remedy the situation so that the same results do not happen this week. The CEO approves the Manager’s plan and leaves his office to conduct a staff meeting, confident that he is making good decisions with the information available to him.

If you own or manage a business, you undoubtedly want to operate like the second example but implementing effective dashboards or timely and accurate reporting is easier said than done.

In the next post of my four-part series I’ll quickly review how to set up your financial dashboard. In the meantime, if you have questions about how to better manage your business’ financials, don’t wait for the next post: Give us a call right away.

All of these could be reasons for you to “need” to have an audit done.  Banks and investors will normally require an audit.  If you are looking to go public, you need to have three years of audited financials.

One of the biggest stumbling blocks for companies seeking funding is the time and money it takes to get an audit completed, especially if they are not prepared for an audit.  Usually, it is best for you to prepare to be audited from the beginning.  Your business should already be ready for an audit.  Just because you haven’t “needed” an audit, is no excuse for not having your financial house in order and doing things right.  Doing things right will lead to more control and better information.  Better information leads to better decisions, which will lead to higher profits and eventually a higher valuation.  You have to have your financial house in order when you look for investment or a sale in order to maximize your valuation.

If you are going to get an audit, you are going to pay an outside CPA firm to audit your financial house and your goal is to get an “unqualified opinion”, sometimes called a “clean opinion”.  Simply put, this means that the auditors audit your books and find nothing that will make investors uncomfortable about the numbers (nothing “materially misstated” in audit speak).  So, what steps do you need to take in order to be prepared for your audit.

1. Accounting staff. Your accounting information is only as good as your accounting staff.  That does not mean that you have to have a full staff of CPA’s, but you do need to have competent staff at all levels.  Most companies are better off to have a part-time CFO and Controller until they are large enough to justify a full-time person in that position.  The Controller is the main accountant for the company.  The Controller must be well versed in GAAP and have several years of experience in actually closing the books of a company.  A CPA is helpful, but not required.  The Controller will supervise all of the accounting staff and insure that proper accounting is set up from the beginning and is consistent every month.  The accounting staff will depend upon the size and complexity of the accounting for the company.  Companies who have inventory or revenue recognition issues may have to have staff specifically for those issues.  It may also be necessary to have larger Accounts Receivable or Accounts Payable staff, depending on the industry and number of transactions that flow through the accounting records.  In any case, it is mandatory that your Controller is strong enough to build a strong accounting staff that is familiar with GAAP and with the highest of integrity.  The Controller should also be familiar with reporting issues facing the company.  These issues will also change depending on the company and will range from internal reporting, job costing and managerial accounting to external financial reporting, SEC reporting and other required reports.  Companies with more strategic financial issues, especially those with large bank loans and investors should consider hiring a part-time CFO and as the company has over $30 million in revenue, should consider a full time CFO to be the strategic financial partner of the CEO and the Board.
2. Audit your balance sheet. All audits start with the balance sheet.  It is critical that the company has a balance sheet approach to preparing financial statements.  This means that every month the books are closed, the balance sheet accounts are reconciled and there is supporting documentation for each of the accounts.  No exceptions!
   1. Cash. It is amazing how many small companies don’t reconcile all of their cash accounts every month.  It is critical that someone reconciles the general ledger to the bank statement as soon as possible after month end. For control purposes, this should be someone who does not have access to check signing, nor check preparation.  This not only makes the statements more accurate, it is a good control on cash, which is the most easily stolen asset.
   2. Accounts Receivable. If the company has customers who owe them money, it is necessary to have a subsidiary ledger of all accounts who owe them money.  This subsidiary ledger must be reconciled to the general ledger every month.  One of the hottest audit areas is the “Allowance for Doubtful Accounts”. This is an area where companies have been able to manipulate earnings in the past, so auditors will scrutinize this area very closely.  You need to have some historical statistics to support the amount of allowance you are keeping on the books.  If you are a new company with limited history to support your allowance balance, you still will be required to justify your number.
   3. Inventory. Probably the most scrutinized item on any balance sheet is the inventory balance.  Not only is it critical that you have accurate inventory records, but also any allowances that you have set up for purchase allowances, damage allowance, coop advertising allowance, etc., will all be scrutinized by auditors very closely.  As with other allowances, this is an area where earnings management could be an issue.  Many companies don’t realize that if they want an audit done, they need to have not only year-end inventory balances audited, but the beginning of the year balances need to be audited also.  So, if a company wants an audit for December 31, 2009, it had better make sure the auditors review the inventory balance as of December 31, 2008.  It is imperative that the company performs a physical inventory count at year end and beginning balances plus the auditor must participate in both inventory counts.  Inventory is probably the biggest issue that will stop companies from getting an “unqualified opinion”.  If a company doesn’t want to hold up its financing, then inventory MUST be properly accounted for.
   4. Current liabilities. The issues related to accounts payable, accrued payroll and accrued expenses can also be an issue for most growing companies.  It is critical that there is a clean cut off and that all of the expenses are included in the proper time frame.  Auditors will perform what is called a “test for unrecorded liabilities”, which will look at all checks cut after year end to make sure they were recorded in the proper period.
   5. Deferred Revenue. Many companies don’t even know they have a deferred revenue issue.  If a company receives money up front for services to be performed in the future, they have deferred revenue.  The money must be put on the books as a liability until the service is performed.  This is a HUGE issue with software, technology and businesses who collect money up front.
   6. Equity. Behind inventory, the equity of a company will usually be the next most scrutinized area on the balance sheet.  It is critical that all capital contributions are properly recorded and for the proper amounts.  Stock options, warrants and other equity compensation are areas that have been abused in the past, so a company needs to have an expert in FASB 123r and IRS 409A help them prepare the correct accounting of these issues before they have a chance to blow up with cheap stock issues, large compensation issues and tax issues that can be avoided.
3. Internal controls. Auditors have always put significant weight on internal controls.  If the auditor can rely more on internal controls, then the amount of testing can also be reduced and potentially reduce the cost of the audit.  After Sarbanes Oxley was passed as legislation, auditors are now required to do more of a review of internal controls.  The size of the company will dictate how in depth the internal controls can be.  Auditors will be looking to make sure there is a proper “segregation of duties”, which means employees with access to assets, do not have access to records.  So, simple controls over cash as mentioned earlier are a great control for cash.  Individuals who prepare and sign checks should not reconcile the accounts.  The internal controls in place should do two main things for the company:
   1. Protect the assets of the company and;
   2. Insure the accuracy of the financial statements.
4. Policies and procedures. Accounting policies and procedures need to be put in place for the entire company.  These procedures need to be in written form and include GAAP rules for all of those that are specific to the company.  This will include procedures for handling cash, inventory and fixed assets plus the revenue recognition policies.  There should be policies in place prohibiting personal use of company assets and expenses.  It is also critical that these policies are the same for everyone in the company from the CEO to the receptionist.  If it is not proper for the receptionist to run through personal expenses, then the CEO should not be allowed to do so either.  This type of commitment to policies will insure the strength of the accounting records.  Policies and procedures should include detailed job descriptions of all of the accounting staff as well as other staff.  Internal controls should also be documented as part of the procedures.
5. Month end close checklist. Each member of the accounting team should have a month end checklist to follow.  This checklist will insure that financial records are prepared consistently month after month.  It will also insure that the nothing is forgotten and that the records are complete.  The checklist should include such items as auditing the balance sheet every month and insuring that reconciliations are completed.  Normal adjusting journal entries such as depreciation and amortization expense, month end accruals and revenue recognition should be captured in the checklist and should be used as a guide for insuring proper accounting.  The Controller is the main individual responsible for insuring that the checklist is followed and that it is complete each month.

Once a company has put the proper staff in place, audited all of its balance sheet accounts, developed internal controls and put in proper policies and procedures, then the audit will be easy.  Each month end should be a mini audit of the accounts to insure that the year end and quarter end statements are proper.  Companies should get in the habit of preparing the statements that are required in an audit, which always includes a balance sheet, an income statement and a statement of cash flows.  The year- end audit will require significantly more reporting, such as footnotes to the financial statements, but if the above steps are taken, then the audit will go much smoother and should cost significantly less than normal first year audits will cost.

If a company is unsure if it is really ready for an audit, then it may be worth hiring a firm that has significant experience in managing audits for companies.  An audit should not be something that a company should fear, but an audit should be a chance for the company prove that it is a financially strong company and that its accounting procedures and policies are proper and in place.

—By JB Henriksen, CPA – CFO Solutions, LLC