Our client had been in business 12 years. Growth and profitability had been reasonably steady. The company was getting bigger, as were the problems, risks, and opportunities. The company had a controller and an accounting clerk, both of whom had been there several years. The main issue was that the company had grown, but the controller had not. Virtual CFOs was engaged to address that issue.
Our first step was to assess the current situation, and to determine where improvements were needed. We analyzed the existing financial and operating information reporting systems. We identified several areas for which system modifications were required to produce accurate and timely information. We also recommended three new tracking and reporting systems. These new systems provided key decision-making information that had not previously been available. The changes represented the first steps toward bringing the company’s financial function to a level that supported its current size and its future aspirations.
We then began addressing the company’s other concerns and identifying its risks and opportunities. At this point the company owner was ready to make a decision on the controller. Early in the engagement we had discussed his options. Virtual CFOs could:
- Make the necessary improvements and changes to the company’s financial and operational reporting systems, identify current risks and opportunities, and enhance the existing controller’s skills through training.
- Implement the same improvements as in 1 while assisting the client in hiring a more skilled controller.
- Replace the controller, becoming the client’s part-time (Virtual) CFO/controller.
The client decided he would like us to take the place of his controller. He would then be able to continue to take advantage of the higher level of skill and business insight provided by his Virtual CFO. He appreciated having a sounding board and a virtual business partner.
We had determined that the existing accounting clerk had excellent skills and would be able to take on additional responsibilities. Many of the tasks the controller had been doing could be systematized, allowing them to be completed by the accounting clerk. After implementation of those changes, day-to-day functions could be completed by the existing accounting clerk plus a new, part-time clerk. Virtual CFOs would be retained one day a week to oversee and train the clerks, make adjustments to systems and assumptions, analyze results, help modify strategic plans, and continuously monitor growth, risk, opportunities and the business environment. After the changes, the client found he was actually spending less money on his financial management function.
Our client manufactures and sells a consumer product. There are dozens of different designs of her product, and she periodically targets older designs for discontinuation and replacement with new designs. Our client did not have a cost accounting system, so Virtual CFOs was retained to create one.
We analyzed the manufacturing process, and determined the basic activities involved. Our next steps were to:
- Measure the number of times each basic step is performed while producing each design.
- Determine the cost of each step included in the manufacturing process.
- Use the first two steps to determine the cost of each individual design.
- Develop a system to determine the cost of each new design as it is created.
Our client uses the new systems to:
- Measure profits derived from the sale of each design.
- Target low profit designs for earlier discontinuation than was previously planned.
- Help determine pricing of new designs.
- Help determine which designs to promote to customers.
- Help determine appropriate discounts on large orders.
Our client also found the system to be helpful in the process of developing new designs. Once we had identified the cost of each aspect of the manufacturing process, the design team was able to use that information to help them design product that was less costly to manufacture.
There was one additional benefit derived from the development of the cost accounting system. Prior to that work, our client did not have a method for measuring production efficiency. Using the knowledge gained from developing the cost system, we were able to easily develop a system to measure performance of each manufacturing department. We created a system that reported results for each department each week which resulted in increased manufacturing efficiency.
Our client had a successful, growing business. His problem was that he knew his organization was not structured to support the current size of his business, much less the growth he anticipated. He knew he could continue down the same path, avoid change, and be moderately successful. Or he could take time to reassess and restructure to maximize his company’s success. He decided to hire Virtual CFOs to help him reassess and restructure.
Our client’s Virtual CFO began the process by interviewing the client’s key personnel. This provided not only an understanding of the company’s business, but also an assessment of each key employee’s skills, business acumen, knowledge, and potential. Combining this information with the client’s plans for the future, we were able to develop a plan for reorganization.
The first step in development of the plan was to envision the most efficient functional structure for the company. In this case, it involved eliminating one department, combining two others, and making three key changes to process flow. These changes produced a much more streamlined and efficient process, one that could handle rapidly increasing volume with limited increases in personnel. It also created a shorter lead-time to fill customer orders.
The second step in the plan was to identify the required capabilities for each department or function head, given the company’s anticipated growth. All key employees’ capabilities and potential were assessed and compared to the capabilities needed. Recommendations were made that involved moving people to different departments, promoting people with unrealized potential, hiring department heads where the requisite talent was not available in the organization, and terminating people who lacked the talent and/or positive attitude to contribute to the company’s success.
The next step was development of an implementation plan. The timetable and order of events were key to the plan’s success. We coordinated and conducted a series of meetings with all employees, departments and individuals to communicate the need and process for change. Organizational and personnel changes were then implemented.
In the final step, during the next several months we checked in on our client periodically to see that everything was working as it should. Our client went through the effort to change. His profit growth now exceeds his revenue growth.
Our client had been in business a few years. His cash flow was acceptable, but his books were, in his words, a “mess”. He was a little embarrassed that he had operated this long without straightening things out. He hired Virtual CFOs to clean it up.
The first thing we did was assure our client that his situation was far from unique. His is a far too common situation.
Our first goal was to reorganize the general ledger. We talked with the client and obtained an understanding of the company’s processes and how the general ledger and chart of accounts were organized. We then created a general ledger chart of accounts that reflected its organization structure and processes. We conducted training with some of the employees, particularly the accounts payable clerk, to make certain everyone understood the new plan and why it was important. We decided that since the current year was nearly over we would not go back and reclassify transactions from earlier in the year.
Having created a clearer picture of the company’s ongoing results, we were able to identify key financial statistics that quickly measured progress each month. Additionally we were able to identify statistics that measured operational efficiency each week. One of the statistics was important enough that we set up a system to measure it every day.
Our client was pleased to have smooth running, professional looking books and systems. He was not expecting to have improved efficiency and profitability, but he was very happy to have it.
Our client hired Virtual CFOs with one particular problem in mind. Growth was not the problem. His company had 30% revenue growth in each of the last two years. Profitability was not the problem. Gross profit margins were over 40% and net profit margins were over 12%. The problem was cash flow. The additional business required additional working capital (inventory and accounts receivable) to support it.
Prior to the growth spurt during the previous two years, business had been steady. Revenue growth had been in the low single digits, and cash flow had been positive. The only debt the company had was a small line-of-credit. The operation was in a nice comfort zone.
Then the company introduced a new product. The new product was very successful, which led to increased revenue. And that led to complications. Cash flow was no longer positive every month. Each month brought an uncomfortable balancing act whereby cash coming in from customers did not always cover payments to employees and vendors. The company was in trouble, but it did not need to be.
Virtual CFOs was engaged to bring back stability. Our client’s Virtual CFO assessed the financial reporting process and verified the underlying health of the organization. He made some adjustments to more accurately reflect the company’s results of operations and bring those results into alignment with Generally Accepted Accounting Principles (GAAP). He produced professional looking financial statements and a realistic projection of results for the next 5 years.
He then presented the case to the client’s banker and secured a line-of-credit that allowed the client to absorb the increased growth he was experiencing. When the client’s business normalized at the higher level of growth, he was able to pay off his line-of-credit and enjoy cash flow at a rate that corresponded to his growing revenue.
Our client company had been through some difficult times. Sales were still good, but expenses had grown faster than sales, and cash flow and profits were in the red. The company was behind on its obligations to its bank. Both the company owner and the bank thought the business was still viable, and so they hired Virtual CFOs to recommend and help implement changes.
The first thing we did was assess cash flow and immediate cash needs. We evaluated the potential to improve cash flow by collecting receivables faster and paying vendors more slowly. We then proceeded to negotiate faster collections from customers and slower payments to vendors.
We then assessed the company’s organizational structure, financial structure, markets and products. We agreed that the company was viable and could have a profitable future. We created a plan that would make the best use of the company’s departments, systems, people, processes, facilities and inventories. We prepared a timetable and assisted the client in implementing the plan.
We identified some inefficiencies which, upon their elimination, led to a more streamlined operation and improved financial results.
Our client’s Virtual CFO prepared projected financial statements including cash flow. These statements were used to renegotiate the client’s bank loan and payment terms.
An essential element to the successful turnaround plan was communication. Everyone involved was informed of the process, so they could visualize its success. If vendors, customers, lenders, and employees do not have faith that the turnaround will succeed, they will not stick around for its completion. In this case, the turnaround plan was completed, and the company returned to positive cash flow and profits.
Our client performs services for its customers. These services can be fairly simple, involving fees of only a few thousand dollars covering work performed over just a few days. At the other extreme, these services can involve hundreds of thousands of dollars covering work performed over many months. Our client hired Virtual CFOs because she did not know how much each job cost to deliver or how much profit, if any, was made on each job.
Our first step was to create a system to track the costs incurred on each job. Each type of cost was categorized as either direct or indirect. Direct costs were allocated to specific jobs. Indirect costs were captured in general ledger accounts from which they were spread among all jobs. The indirect costs were spread as overhead using a factor that measured how much of the company’s general resources were utilized by the different types and sizes of jobs.
Once this system was in place, our client was able to measure cost and profitability on each job. This knowledge was valuable by itself, but there were other, even greater benefits to our client’s new job cost accounting system.
The knowledge gained from the job cost system is now being used to project costs on jobs prior to a proposal being made to customers. Pricing decisions can now be based on projected costs and expected profitability. Our client has found that in cases where she needs to propose a higher price than she would have in the past, her customers generally accept her higher proposed price. She has also found she is better off not accepting some jobs because they would not be profitable.
The new system has also shown our client how to structure her service delivery to take advantage of her most cost-effective materials and methods, without affecting the company’s reputation for quality. This has led to some fundamental changes in the way the company serves its customers. Our client’s profits have gone from “OK” to “better than I ever expected”.