CFO Outsource Blog

Having  a good CPA is essential to the success of your business. To get the most from your CPA, it’s important to understand what they are good at and what they are not.

Most CPAs are very good with taxation. This includes tax planning, preparing tax returns, and dealing with the IRS. If their practice includes compiling financial statements and financial auditing, they are also good at understanding the requirements of financial disclosure.  This includes presenting financial information in accordance with Generally Accepted Accounting Principles (GAAP).

Your traditional CPA is probably not the best person to help you with the Chief Financial Officer (CFO) function or for the management of your Finance Department.  the reasons are because traditional CPAs generally do not specialize in this area, and their profit model is centered on tax returns and certified audits.

But your CPAs love working with someone who has a background in public accounting because such a person understands what they do and need.  This person can give them everything they need on a silver platter, which makes their job of preparing tax returns and giving opinions on financial statements much easier.  Additionally, your CPA many not be permitted to prepare or alter the financial information upon which they rendering an opinion.  In these cases, it becomes essential to have the help of a qualified part-time CFO who has a background in public accounting.

To get the most out of your CPAs, be clear on what they do best and then have them do it.  Have your regular CPA do your taxes, compilations, reviews and audits.  If your business needs the CFO function, hire a qualified part-time CFO, preferably one who holds a CPA certificate AND has had hands-on CFO experience.

To learn more, visit www.CfoOutsource.com.

The balance sheet is one of the three basic financial statements.  What exactly is a balance sheet? It is a financial statement that shows your company’s financial position at a given point in time.  Essentially, it is a snapshot.  It tells the reader, as of this date, the company has X dollars in cash, X dollars in Accounts Receivable, and so on.

Businesses that have good financial information will produce a balance sheet at least once per month.

The Balance Sheet is based upon what is called “The Balance Sheet Equation,” which is: Assets = Liabilities + Equity.  Assets are the things that the company owns, such as Cash, Accounts Receivable, Inventory, and Equipment.  Liabilities are the amounts the company owes to others, such as Accounts Payable and Loans Payable.  Equity is the difference between assets and liabilities, or stated another way:  Assets minus Liabilities = Equity.  Generally the assets are shown at the amount that was paid for them.

If the Balance Sheet is properly prepared it always balances, meaning, Total Assets = Total Liabilities + Equity.

Forecasted Balance Sheets are ESSENTIAL to include in your business plan because bankers and investors want to know what you believe your financial position is going to be after executing your plan.  It’s also the statement upon which some of the most basic ratios are calculated, including the current ratio, the quick ratio, and the debt to equity ratio.

Remember, the Balance Sheet is only one of the three basic financial statements, the other two being the Statement of Operations (aka, the Income Statement), and the Statement of Cash Flows.  For a simple understanding of the other two basic financial statements, visit the video section at www.CfoOutsource.com.

Does your company have adequate contractual protections?  Although this is the area that is the purview of your attorneys, it’s important that someone within your organization understands where the contractual risks are and knows when to engage your attorneys.

There are many areas where it’s important to have contractual protection, and the exact areas depend upon the nature of your business.  Common areas include customer agreements, lease agreements, loan agreements, employment agreements, vendor agreements, licensing agreements, and agreements with your investors.

It’s the job of the CFO to be able to read and understand these agreements, especially from a financial prospective.  Even with the help of an attorney, the attorney will often look to the CFO for assurances that the financial aspects make sense and are being met.  Additionally, the CFO must also understand if they are over their head in relation to legal issues, and when they need to engage the attorney.

Some of these agreements contain triggers that are based on financial results.  For example, a loan agreement may contain a provision that the loan will be called by the bank if certain financial ratios are not met.  Common examples of such ratios include the quick ratio, the current ratio, and the debt to equity ratio.

Often the CFO is called upon to assist in the financial structure of a contractual agreement.  For example, if new space is being leased, can the tenant improvements be financed by the lessor and factored into the lease?  If so, how is that increase in rent to be determined, and how should it be accounted for in the books?

Part of the job of the CFO is to have a working relationship with your attorneys.  To learn more, visit our website at www.CfoOutsource.com.

Cash is the grease upon which a business runs. Many a business has crashed and burned because they couldn’t free up cash that was tied up in receivables.  To prevent this from happening, there are a few rules of thumb:

1. Avoid sales on credit, unless you industry demands it.  It’s less risky if you are selling a product with a high profit margin.  But if your selling expensive products with low  margin and without a secured interest, look for other ways for your customers to finance the purchase.
2. If possible, let your customers use credit cards.  There is an associated cost which has to be factored in to the sales price.  But generally, this cost outweighs write-offs and the costs of collection.
3. If you have existing receivables, be assertive in getting them collected in a timely fashion.  There are many ways to do this, including reminding the customer that the negotiated price was based upon timely payment.  Sometimes just pointing out that the arrangement was based on the word of an important person in their company will be enough to get to the front of the payment line.
4. Be creative in collecting receivables.  I once negotiated exchanging a large receivable for a short-term note secured by real estate, which we were able to sell to generate needed cash.

Chances hard you worked hard to create your receivables.  If you have a specific receivable collection problem, call me at 805-377-0405.