What are some finance-related areas where business owners need the most help?
gregory pfeuffer, CPA, consulting services senior manager, mueller prost
As a provider of CFO services at Mueller Prost, I always suggest business owners first focus on understanding these basic areas: the factors driving the value of their organization, the critical numbers impacting profitability and cash flow, and their CPA firm’s resources.
Ultimately, the value of an organization is translated into a number. However, the factors that drive value are more than numeric. Organizations just focus on profitability, as well as key personnel, product and service lines, internal processes and industry trends. Generally, organizational value increases as those kinds of value-drivers are understood and improved.
Often, an organization manages according to its revenue. Managing revenue is important, but so are profitability and cash flow. An important step to managing profitability is understanding fixed and variable expenses, while an important step to managing cash flow is understanding the timing of cash receipts and disbursements relating to accounts receivable, inventory, capital expenditures and new personnel. An ideal organization is profitable and has strong cash flow that allows for growth.
Most organizations use CPA firms to file tax returns and audit financial statements. However, the right CPA firm has the ability to assist clients with much more. Organizations should work with their CPA to identify opportunities to add value, increase profitability and improve processes.
—bill purk, CFO and founding shareholder, purk & associates
A business owner wears many hats and can use help in various financial areas. Cash flow management and business valuations are two such areas.
Cash flow management has been made more difficult the last few years as vendors are rarely paid in fewer than 60 days. In fact, some of the larger companies have doubled this and may not pay for 120 days after being invoiced. If you add two months to start and complete the job, you could be looking at up to six months from the start of the job until you receive payment. This has forced many companies to question whether they can afford to take on more work and wait for payment. You should talk to your banker to determine whether your working capital loan is sufficient or needs to be increased. Rapid growth can also lead to a cash crunch. If you anticipate rapid growth, you should apprise your banker of this to determine if you can obtain the financing to fund the growth.
With baby boomer business owners reaching retirement age, the question of business valuations (what your business is worth) becomes paramount. There can be a big difference in value when using accepted methods of valuation and the real-world amount a sale will bring. This makes it critical for the owner to communicate to the valuation professional the purpose of the valuation: for gifts, the sales of majority/minority interests, sales to key employees and sales to trusts and other entities.