This first-hand CFO account from Entrepreneur magazine provides a good, quick overview of how a CFO can help startups and SMBs. Here at CFO Growth Advisors (CGA), we also always look at the improving the growth strategies for companies in addition to the 4 areas listed below.
Here are some of the key areas that this CFO focuses on improving immediately with a startup or SMB. We’ve added a few comments of our own reflecting on how our approach is more detailed and focused for the growth-oriented tech startups and traditional SMBs here in the San Francisco Bay Area and Silicon Valley:
“1. Financial statements
I start with a look at the company’s financial statements, checking for inconsistencies or variances that pop off the page, as well as what’s missing, such as a statement of cash flows.”
In addition to this important accounting-based check, we always dig down deeper into the financial statements to derive crucial strategic and operational insights about the business. For example, what are the various growth rates for sales, customers, expenses, etc.? What are the trends in the various crucial ratios like Gross Margin, SG&A, and Operating Margins? What is the capex level? Who are the top 10% and 20% of customers by size and profitability?
“2. Accounts receivable
This area invariably needs attention and provides the quickest opportunity to improve a company’s cash position. First, I run reports of the company’s receivables grouped by customer (largest to smallest), date (oldest to newest) and amount (largest to smallest). The customers at the top of these reports are my priorities. Then I work to collect these high-priority items while weeding out and writing off the junk receivables that will never be reasonably collected.
Going through this process often highlights issues with a company’s AR system that I can quickly correct. More often than not, billing—not collections—is the major issue: Invoices aren’t sent immediately, are going to the wrong people or are filled with errors.”
Not only is a focus on AR crucial, it’s equally important to look at the vendor side and Account Payable (AP) of the business equation. We constantly are amazed at how poorly run the vendor management process is at both tech startups as well as more traditional small businesses. Not only are payment terms not negotiated well (which can affect business credit), but other key items like pricing, discounts, and quality are often neglected for various reasons. All of this can dramatically hurt profitability and cash flow.
As CFO, I’m all about the numbers, so I work with the owner/CEO and C-level executives to find out what makes the company tick and how to measure it. Sometimes the answer is simple, such as billings. But other times it may be units produced or quality measures. In those cases we boil everything down to a few key performance indicators, build a system to collect that data and a dashboard on our accounting software to track it.”
This a critical area that we also focus on. Identifying and establishing the handful of KPIs that are both significant, relevant, and not overwhelming in quantity is absolutely crucial in giving the CEO / Founder / Owner a true management dashboard.
“4. Cash forecasting
Nothing harms a business and stresses owners more than cash-flow surprises. To avoid them, I quickly institute a formal cash-forecasting system. If cash flow is tight, I’ll build a rolling 13-week forecast that I update weekly. If the cash position is stronger, I might back off to monthly forecasting.”
We couldn’t agree more about the need to forecast cash flow and minimize unpleasant surprises. In addition, it’s often important to establish a pro forma business model to understand better how to grow the business more profitably (i.e., scale the business) as well as where and how to make investments in the business.