The sole objective of the CFO is to enable CEOs to deliver to their companies continuous improved financial returns, increased cash flow, improved financial position and increased overall business value. The successful CFO is an enabler for entrepreneurial companies to increase profits, cash flow, working capital and financing sources to fund growth.  

Successful CFOs deliver value and high ROI to CEOs by:

• establishing the right financial processes, tools and practices to enable efficient day-to-day financial management and enhance controls;
• establishing the right benchmarks and ROI targets to measure operational and capital investment efficiencies;
• providing CEOs with the right historical and prospective financial and operational data needed to make critical business decisions;
• increasing confidence as to relationships with bankers, investors and other outside parties with financial stakes in the company;
• determining the best means in which to bring financial resources into the company to support growth;
• analyzing the best means to allocate resources, fund capital investments and manage working capital;
• recognizing value drivers as well as value detractors within the business and take steps to mitigate detractors and facilitate value drivers;
• providing the skilled “special ops” talent for successful execution on non-recurring significant business transactions;
• reducing management stress and burn out;
• helping CEOs and business leaders to gain a sense of financial control thereby creating a better overall working environment;
• being a partner with CEOs in reducing risk in forming strategy.

Harvest CFO Consulting brings to entrepreneurial companies the “mindset” of making good CEOs great CEOs and delivering value and high ROI to CEOs and their companies.  Just as there is expected ROI from any business investment there should be an expectation of high ROI delivered by the CFO. From an initial financial assessment through harvesting returns, Harvest CFO Consulting provides entrepreneurial CEOs with ongoing measure as to the ROI that is being delivered.  Contact us today to determine how Harvest CFO Consulting can enable you, the CEO, to fulfill your vision of building a great company and harvest success.

In general, high return companies generate increased value through growing revenues, whereas low return companies increase value by increasing their ROIC, which means increasing profitability. Growth strategies based on organic new product or new service development typically have the highest returns as these investments usually require the relatively lowest amount of capital investment. Companies can add new products to existing manufacturing lines and new services can be offered to existing customers.

The companies that create the most value over time are those that grew revenues while maintaining their high ROIC. Low return companies sometimes pursue growth strategies based on the assumption that revenue growth will increase their profit margins and returns reasoning that their growth will increase profits by spreading fixed costs across more revenues. Except for small start-up companies or companies with low capacity utilization, faster growth rarely fixes a company’s ROIC problem. Low returns usually indicate a poor industry structure, a flawed business model or weak execution. Until a company fixes its ROIC problem it should not attempt to grow. Over time, companies that had low growth but increased their ROIC outperformed companies that grew faster and did not improve their ROIC.

Harvest CFO Consulting works with companies to increase their ROIC by increasing earnings and related cash flows. We do this by implementing the financial discipline and the processes and tools to determine where a company’s capital should be deployed to maximize returns, improve sales processes and gross margins on sales, squeeze out costs that do not add value, provide the financial roadmap and ongoing measurements to ensure value is being created and put into place the financial structure necessary to finance growth profitably.

Prospective buyers have many options in which to invest their cash.  As such, company leadership should incorporate into their overall ongoing operating goals the following five key characteristics  of continuous value:

1.    Good growth prospects
2.    Unique products or services with operational strengths
3.    Proven trends and profitability
4.    Good management team and high employee retention
5.    Repeat customers with low customer concentration

Continuous measureable operating benchmarks should specifically link to the above and be evaluated on at least a quarterly basis. This process will clearly show value adders and detractors within the business.

In addition to the above, leaders should view their business from a standpoint as to how the company would be perceived through a buyer’s due diligence perspective. If your time frame for a potential sale is five years or less, then performing your own internal due diligence as a means to prepare can uncover weaknesses that can be mitigated thereby strengthening the company’s overall value and minimizing negative price adjustments. This process should include utilizing a detailed due diligence list to determine areas that need more focus. From a broad perspective, leaders should:

•         Examine financial records and internal financial controls
•         Review internal and external agreements
•         Document policies and procedures
•         Mitigate employee, litigation or environmental issues
•         Comply with applicable government and industry regulations

Business leaders who incorporate the above  value-focus activities within their continuous operations will realize higher valuations for their company. A highly-skilled and experienced Harvest CFO Consultant will help business leaders to understand, evaluate and measure value drivers as well as value detractors. A CFO Consultant can also play a key leadership role to improve a company’s value drivers and mitigate or eliminate value detractors.

Many recognizable large companies have completely discarded their budgeting process as and replacing with rolling forecasts or flexible budgets and event-driven planning. Given the increasingly continuous changing and uncertain business environment that we all compete in, which is marked by volatility in financial markets, restricted credit, rapid commodity price changes, etc., businesses are adopting more flexible means to make sound business decisions. Converting or combining a static budgeting process into a dynamic continuous forecast brings many advantages.

Skilled CFOs assist companies to improve their ability to manage the future rather than dwelling on the past. Their ability to help managers to prepare quality forecasts is a core competence. Accurate and meaningful forecasting is more art than science and only highly skilled and creative CFOs truly perform this function well. Most management teams make the mistake of assuming that forecasts are about predicting and controlling future outcomes. The purpose of forecasting is to inform decision making (to help shape future outcomes), not to predict the future. In reality, forecasting is necessary only because businesses typically cannot react instantly to changing events. That’s why fast reaction is more important than (even accurate) prediction—because exact accuracy is rarely achieved.

To be useful, forecasts should tell managers something about the trajectory they are on compared with their medium-term goals and thus whether further action is necessary. That means they are concerned with constantly “managing gaps” rather than closing them. Medium-term goals are best viewed in terms of ranges of desired outcomes rather than specific targets. Rolling forecasts, if well prepared give senior management a continuous picture both of the current position and the short term outlook. In effect they are the aggregate of business as usual forecasts (extrapolations of existing trends), all the action plans in progress, and all plans in the pipeline. In other words, forecasts should be “baseline plus anticipated events,” with the effort being focused on “events.”

The only certainty about a forecast is that it will be wrong. The question is the amount of variability of the forecast compared with actual results/outcomes. Narrowing the variation of the forecast should be a continuous exercise. At a minimum conduct monthly post-mortems on forecasts. The purpose is not to attribute blame but to learn if forecast accuracy is improving and how it can be further improved. Forecasting inaccuracy can be seen in the same light as process variability; teams therefore need to better understand the causes of that variability and work to reduce them.

A CFO should always include business managers in the continuous process of preparing short term forecasts as a means to develop the absolute best forecasts and at the same time build a company culture of forward-thinking decision making. Adaptive and market leading organizations focus less on annual budgets or long-term views and more on rolling views—usually rolling forecasts that always look twelve to eighteen months ahead.

When performed properly forecasting becomes THE KEY financial management process. Exceptional forecasting skills come from learning, experience, decent information systems, and ultimately, judgment. A Harvest CFO will greatly enhance your company’s forecasting capabilities and as a result greatly enhance your company’s overall financial and operational performance.

Small to middle market companies expected 2011 to be the moment a years-long credit freeze would finally begin to thaw. However, as pointed out in a recent Wall Street Journal Article, borrowing has only gotten worse.  As a matter of comparison, loans outstanding to small businesses totaled $609 billion at the end of March 2011, an 8.6% drop from a year earlier, according to the most recent data from the Federal Deposit Insurance Corporation, which analyzes loans of less than $1 million.

Another lending analysis, by the Federal Reserve Bank of Kansas City, shows that big banks’ outstanding loans to small businesses dropped 14% between March 2010 and March 2011, while loans by smaller lenders fell 3%.  “This area of the economy is in such crisis,” says John K. Paglia, a finance professor and senior researcher for Pepperdine’s report. The lack of credit “is improperly penalizing companies that will be very successful down the road.”

The numbers for smaller businesses also stand in sharp contrast to what had appeared to be a recent rebound in lending. Last summer, after years of tightening standards, a majority of banks reported they had eased underwriting criteria for small businesses, according to a quarterly survey of loan officers from the Federal Reserve. In the 2011 first quarter, a majority reported stronger loan demand from small firms, reversing a multiyear trend. But most of the loan recipients appear to be the largest of independent businesses—such as those with multiple revenue streams and ample loan collateral—rather than smaller companies. Commercial and industrial lending, an indicator of business-loan demand, totaled $1.26 trillion in May, up 3% from a year ago, according to the Federal Reserve.

However, March data from the FDIC shows that commercial and industrial loans of less than $1 million, which are generally issued to small firms, dropped 10% from a year earlier. Many small to medium sized companies frustrated by lack of options from their banks are now trying to secure capital from private investors which is typically the most expensive form of financing and have expected investor payouts that is of a much shorter time horizon than the business owners.

For their part, banks say that they are trying to comply with federal regulators, who want to ensure that the financial collapse—in part caused by lenient underwriting—doesn’t happen again. The main issue facing lenders, is that regulators are asking for proof that the loans will be repaid. That can be tricky with smaller, historically riskier businesses, particularly in an uncertain economy where property—often used as collateral for loans—keeps falling in value. Further, regulators are requiring banks to hold more capital in case loans default, leaving them with less to lend. Indeed, according to the Pepperdine study, more than three-quarters of bankers said they felt increased pressure from regulators, and 61% of those bankers reported that they have rejected loans they otherwise would have made to please the federal overseers.

That’s hampering many small-business owners’ plans for growth. In many cases business that would have bought equipment and capital assets to expand their business are instead entering into more costly short-term renting arrangements for equipment or leasing.

A highly skilled CFO Consultant will assist a company to understand how and what to present to prospective lenders to obtain needed financing. The financial presentation will very clearly show lenders the company’s current and projected financial position as well as current and projected operating results and cash flows. This financial presentation needs to very clearly show what the new funds will be used for and the expected increased operating profits, cash flows and liquid working capital that will be generated from the company deploying this capital. In addition to the financial presentation, a highly skilled CFO Consultant will add a level of confidence to the lender(s) that the financial presentation and underlying assumptions are sound. Also as we have found, Harvest CFO Consultants bring to companies their existing banking relationships which greatly improves the probability for success.  

Too often, CEOs/management of distressed companies view engaging a CFO Consultant as a turnaround advisor as an admission of defeat or failure, and for the entrepreneur, it is hard to cede even partial control of the sum total of a life’s work. However engaging the right CFO Consultant maximizes the chance that the company will survive and avoid bankruptcy. If bankruptcy becomes necessary, a skilled CFO Consultant maximizes the chance that the company will survive Chapter 11 intact and avoid liquidation. Instead of defeat, engaging a skilled CFO Consultant is usually the first step in returning to profitability and success.

A skilled CFO Consultant is vital to preserve the future of a distressed company and the following are 6 reasons every struggling company needs a skilled CFO Consultant:
 

1. Accurate financials, projections. A company in distress must monitor its financial situation constantly to avoid disaster. There are two types of insolvency: a cash crunch, which occurs when a company cannot pay its debts as they come due, and balance sheet insolvency, which occurs when a company’s assets are worth less than its debts. Many companies fail simply because they are unable to foresee a cash crunch; they may be balance sheet solvent, but the cash shortfall prematurely ends their life before they can reach their upside potential.

Companies in distress need to have especially accurate financials, cash projections, and performance projections, as well as tight cash controls. This is almost never the case, and unpleasant surprises bring unpleasant endings. A skilled CFO Consultant enters the crisis and immediately assesses the financial situation. A substantial part of their focus is to create accurate financials and projections, including 13-week cash-flow analyses, so that a company can determine its position and react accordingly.

2. Developing an exit strategy. For a distressed company to survive, the key is to act quickly to develop an exit strategy, whether this involves recapitalizing the business, restructuring debts, filing Chapter 11, or selling the company or certain nonperforming divisions. A quick strategy creates momentum, allows a company to seize opportunities that arise, and creates buy-in with creditor constituencies.

Developing an exit strategy to return a struggling company to profitability is a complex task and involves intensive financial analysis. Unless the CEO/management team has been through it before, it can be difficult to understand the options and then develop a strategy. It is almost impossible for the uninitiated to do so in the limited window of time that most distressed companies have. Skilled CFO Consultants are experienced in triaging the immediate situation and then working quickly to develop a practical exit strategy for the company. This same work product can also be used later to help in finding buyers for any nonperforming assets that the company decides to sell.

3. Professional testimony. Among the most unpleasant experiences associated with financial distress is being forced to testify, whether at collection hearings, in litigation, or in bankruptcy proceedings. One of the best ways to avoid, or limit, testimony by officers and directors at these proceedings is with the appropriate CFO Consultant, who is often designated to act as the chief restructuring officer (CRO) of the company.

CFO Consultants skilled as turnaround advisors are experienced at testifying and are considered experts on financial issues, so as CRO, they can usually take the witness stand on behalf of the company. This puts a professional in place for courtroom matters and allows CEOs/management to focus on what they do best — running the company day-to-day. They can then focus on selling products, building the company’s business, and managing customer relationships, rather than the stressful task of preparing to testify on a regular basis.

4. The forbearance chit. One of the best ways for a distressed borrower to obtain forbearance from a lender is to agree to engage a skilled CFO Consultant. Lenders are no strangers to workout situations, and they often want a turnaround advisor involved to assess the situation much earlier than the company does. Options erode swiftly as a company’s position worsens, and its leverage with the lender erodes as well.

The lender will often give forbearance in response to a company’s engaging of a skilled CFO Consultant. As for the cost of retaining a skilled CFO Consultant, banks sometimes will forego some debt service or interest payments to free up cash to pay for the advisor. Also a skilled CFO Consultant will quickly make enough adjustments to a company’s cash flow to immediately justify their own value.

5. Negotiations with creditors. To stay in business through a difficult time, a company needs the trust of its vendors (so that they will ship), its customers (so that they will buy), and its lenders (so that they will continue to lend and allow use of cash in bank accounts). Credibility is usually a significant problem for the existing management team of the distressed company because of missed payments or shipments in the past and the fact that the company has gone from health to distress. These problems are the source of constant complaints from creditors.

Not only is this a problem for the company, but it also makes for very uncomfortable situations for the management team who must continue to field angry phone calls from creditors. A CFO Consultant can shift the focus immediately because he or she has the benefit of being independent and new to the situation. A skilled CFO Consultant is experienced at building rapport with angry creditors to help the company get credit terms and move back toward profitability.

6. Outside Perspective. As mentioned earlier, denial is the most common reason that companies that should succeed instead fail. Too often, managment declines outside help until most good options have already evaporated, and they fail to recognize opportunities when they arise.

Having a skilled CFO Consultant on hand to make an independent evaluation when options still exist is critical. Entrepreneurs who remain in denial usually get marginalized by creditors and ousted before the end of the restructuring process. On the other hand, those who accept the reality of the workout and move proactively to return the company to profitability are seen as part of the solution and are welcomed at the table. The willingness to accept the help of a skilled CFO Consultant is usually a strong indication that the management team is proactively looking for solutions.

Engaging a Harvest CFO Consultant may be the single most important decision of an entrepreneur’s career. Recognizing that the right CFO Consultant is an irreplaceable asset in a company’s time of greatest need is crucial to the survival of a struggling company and crucial to making sure that a company that can succeed does. 

CFO Consultants work as a filter between the accounting staff and the CEO/management to ensure the critical business information is being properly analyzed to enable enhanced decision making. When should companies engage a CFO Consultant? Every small to medium-sized company should have a CFO Consultant as part of their management team. Even startup companies can more quickly realize growth potential with reduced financial risks. A CFO Consultant brings confidence to CEOs/management, investors and bankers. At Harvest CFO Consulting, we have experienced banks including in covenants that client companies retain our CFO Consultants as a key member of their management team. Accurate and clear financial reporting enables bankers to gain the trust and confidence in the business enabling companies to obtain the financing the company needs to grow.

Bookkeepers, controllers and your CPA play a vital role in the financial aspects of the company. However, this team without a CFO Consultant in many cases can lead to a company not meeting its growth and profit potential, which can result in unforeseen financial burdens. Having a clear and accurate knowledge of your company’s financial position, financial performance versus benchmarks and goals is essential for the ongoing success of the business. A skilled CFO Consultant will clearly articulate your company’s financial past and present and also give you a clear picture of the financial future. A skilled CFO Consultant will help you to anticipate future financial needs that result from growth before they actually happen. The result is CEOs/management gain complete control  and confidence over the direction of their company with clarity to focus on future goals.

All small to mid-sized companies can benefit from a skilled CFO Consultant. Typical scenarios in which a CFO Consultant adds immediate value include:

• Company is experiencing financial difficulties and needs a higher level of expertise to create and lead the company through the path to success.
• There are specific high-level projects, financial commitments that need high-level financial leadership.
• There is uncertainty as to how to structure or price larger customer opportunities.
• The company’s financial management needs surpass your financial staff’s knowledge and experience. 
• There is uncertainty as to how the company will fund growth goals, customer needs. 
• The company is not experiencing the anticipated financial returns.
• CEO/management is uncertain as to the company’s financial performance.

Harvest CFO Consulting provides highly-skilled and experienced CFOs to assist in your company’s success. The goal of our CFOs is to enhance your overall company value by providing the financial roadmap to success. Engaging a Harvest CFO Consultant could be one of the best financial moves your company can make.  

Factors that you need to be considered in a pricing policy include:

·         Positioning – How are you positioning your product in the market? Is pricing going to be a key part of that positioning? Pricing has to be consistent with the positioning. People really do hold strongly to the idea that you get what you pay for.

 ·         Demand Curve – How will your pricing affect demand? You’re going to have to do some basic market research to find this out, even if it’s informal. Is the best long-term prospects for your business a model based on high volume with lower per unit gross margins or low volume high gross margins? Your pricing strategies impact this strategy.

·         Cost- Calculate the fixed and variable costs associated with your product or service. Variable costs fluctuate with sales volume whereas fixed costs remain essentially the same regardless of sales. Knowing your cost structure and the variable versus fixed components is critical for pricing strategies and also for business modeling to understand break-even point, forecasting and profitability at different sales levels.

The next step to define in your pricing objectives is what are you trying to accomplish with your pricing?

 ·         Short-term profit maximization- While this sounds great, it may not actually be the optimal approach for long-term profits. This approach is common in companies that are bootstrapping, as cash flow is the overriding consideration. It’s also common among smaller companies hoping to attract venture funding by demonstrating profitability as soon as possible.

  ·         Short-term revenue maximization- This approach seeks to maximize long-term profits by increasing market share and lowering costs through economy of scale. For a well-funded company, or a newly public company, revenues are considered more important than profits in building investor confidence. Higher revenues at a slim profit, or even a loss, show that the company is building market share and will likely reach profitability.  

·         Maximize quantity- There are a couple of possible reasons to choose the strategy. It may be to focus on reducing long-term costs by achieving economies of scale. This approach might be used by a company well-funded by its founders and other “close” investors. Or it may be to maximize market penetration – particularly appropriate when you expect to have a lot of repeat customers. The plan may be to increase profits by reducing costs, or to upsell existing customers on higher-profit products down the road.

  ·         Maximize profit margin- This strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable.

·         Differentiation – At one extreme, being the low-cost leader is a form ofdifferentiation from the competition. At the other end, a high price signals high quality and/or a high level of service.

  ·         Survival – In certain situations, such as a price war, market decline or market saturation, you must temporarily set a price that will cover costs and allow you to continue operations.

Here are common pricing policies:

·         Cost-plus pricing – Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your products or service cost $200 in variable costs (raw materials) and production costs, and at current sales volume your fixed costs come to $50 per unit. Your total cost is $250 per unit. You decide that you want to operate at a 35% profit margin. Therefore, your targeted price should be $385 ($250/(1-35%)).

 ·         Value-based pricing – Price your product based on the value it creates for the customer. This can be the most profitable form of pricing, if you can achieve it. This pricing policy is based on the expected ROI to the customer. This requires additional analysis and in addition to being a sound pricing practice is extremely helpful in sales negotiations. For this method the business analyzes the value to the customer, such as cost reduction, increased revenues and profitability and then uses this data to create pricing based on the ROI or payback period to the customer. It is an excellent practice to always understand your value proposition to your customers.

 ·         Psychological pricing- Ultimately, you must take into consideration your customer’s perception of your price, figuring things like product positioning, other popular price points and what would be considered “fair” pricing.

 Sound pricing policies are critical in every business. Harvest CFO Consulting can assist you to understand if your pricing policies align with the company goals and improve pricing policies and practices.

Regular job schedules normally include: original estimates; actual billings, costs and revenue recognized to date; percentage of completion; and costs and profits in excess of billings.

Whether you need to establish a bond for the first time, maintain an existing surety line or increase capacity, it’s important to understand which indicators surety underwriters monitor most closely.

1. Liquidity and working capital. A surety wants to have an assurance that a contractor can finish a job, and the best candidates are those with adequate working capital. Working capital is a measure of liquidity and is measured as current assets — cash, current receivables and some inventory — minus current liabilities. Sureties and banks carefully monitor the value and quality of a company’s working capital as this measure reflects the ability of a company to fund its operations and is a good indicator of the shorter-term financial strength of the business.  Managing and improving working capital is a critical task of financial leaders in every business.

2. Cash flow. Most contractor job defaults arise from weak cash flow. To increase bonding capacity, maximize cash flow and also establish a strong line of credit with a lender.

Sureties often calculate free cash flow as net income plus depreciation and other non-cash items, minus principal payments on debt. Too low a figure — especially if the contractor is carrying high debt — will reduce bonding capacity. Financial leaders need to continuously forecast cash flow (for a prospective period of at least six to ten weeks) and take steps to improve a company’s cash situation through improved financial management, operations improvements and financing activities.

3. Work-in-process (WIP). A surety and banker wants to see steady work, accurately tracked and estimated as opposed to wide swings of gain or fade. Substantial profit fade indicates the contractor either over estimated WIP or recognized revenue too early and will face the revenue shortfall sooner or later. Substantial profit gain is not as troublesome, but still brings into question a contractor’s ability to provide accurate estimates. Financial leaders need to ensure they have in place the systems, processes and disciplines to timely and accurately compute WIP, not only for the surety and bankers, but also for the business leaders as this is critical to overall project and company profitability.

4. Over billings and under billings on WIP. Some over billing is acceptable, but too much can mean a struggling contractor is borrowing from one job to fund another. A surety knows that deficit will show up eventually. Under billings can indicate poor working capital and/or project financial management. A contractor that has not billed an owner for completed work may have overestimated project gross profit. Under billings of 25% or more of a company’s overall working capital may raise red flags to your surety and bankers. Financial leaders need to ensure they have in place the systems, processes and disciplines to timely and accurately bill for work performed and to also ensure that contract cost estimates are accurate.

5. Backlog expressed as a percentage of overhead indicates whether a contractor has enough other work on hand to pay its expenses. Financial leaders need to ensure that there is in place the processes and disciplines to accurately forecast on a prospective basis revenues for projects in process and also expected revenues for closed projects not yet started, outstanding proposals and known opportunities.

Tips for Strengthening Bonding Capacity

• Break down large jobs. A surety that balks at a large contract may be more willing to write bonds for a series of smaller jobs. Contracts can often be broken down in this way without affecting a contractor’s profits.
• A joint venture can help some contractors increase their own surety limits by leveraging the strength of another larger company.
• Find the right surety. Look for a surety whose clients include companies similar to your own, and understand which metrics and ratios it considers most important.
• Communicate. Set regular meetings and deliver a clear stream of reports. If trouble appears, speak up. The surety understands that problems occur in construction, but it wants the facts early, not as a last-minute surprise. And don’t talk just with the local agent, but get to know the home office as well.

Strengthening a contractor’s bonding capacity should be a continuous focus. Leaders of contractors need to assemble a solid team with strong financial leadership. Harvest CFO Consulting provides leaders of contracting companies the highly skilled and experienced financial leadership at the right cost.

Financial management aims to boost the levels of financial resources available to the company. Continued business success is directly correlated to best practices in financial management. Harvest CFO Consulting develops with business leaders based on their goals best practices in financial management of their companies including:

• Interpreting financial reports and financial and operations data
• Cost controls and reducing/eliminating non-value-added costs
• Improving the allocation of working capital within business operations
• Review and fine tune financial budgeting, and revenue and cost forecasting
• Financial management of production and/or projects including costing and profitability
• Product and project pricing strategies to achieve targeted margins
• Selecting the best funding options for business expansion, including both long and short term financing
• Providing a clear game plan as to improving overall company valuation across the organization
• Applying critical financial decision making techniques to assess whether to proceed with an investment
• Benchmarking and measuring financial and operational results against goals and targets and guidance for improvements