How a fractional CFO can help with cash flow management

Richard Branson once said, “Never take your eyes off the cash flow because it’s the lifeblood of the business.” 

And there is good reason for that. Without access to working capital, companies may struggle to make payroll, to pay back their suppliers, or to even meet the covenants set by their creditors. 

However, a good fractional CFO can help you manage your cash flow, ensuring you always have enough money in the bank to meet your obligations. And it all starts with the basics of managing your working capital.   

The basics of managing your working cash flow

Cash flow is all about the money coming in and going out of your business. And unlike your income, the cash flow focuses on the actual money moving around, bringing your accounts payable and receivable under scrutiny. It also forces you to review your relationship with your creditors and inspect different ways you can strive for better rates.

Additionally, optimizing your cash flow means working on your internal operations, including your spending and pricing. This is not to mention the importance of evaluating your compensation plans to ensure that they aren’t straining your finances too much.

Let’s inspect how a fractional CFO can contribute to each of the above elements individually and be a leader to your company in the process.  

1. Managing your relationship with creditors

Before anything, any fractional CFO worth their salt will tell you that you should ask your creditors for more money than you need. If you project that you will need $100, you should ask for $150 just to cover your bases and provide yourself with a safety net.

Once you have received a loan, the next thing a fractional CFO needs to do is to ensure that your company maintains excellent communication with your creditors. The CFO will make sure that the lenders know how things are going without holding anything back. 

After all, your creditors are on your side and want you to succeed because it is the only way they can recoup their loan. Moreover, no banker wants to look bad to their boss and have to explain to them why they gave you a loan in the first place. 

The good news is that with consistent communication and excellent progress, you can later negotiate for extra loans with better interest rates. You can even shop around and use your improved credit score to get the best rate possible. 

Alternatively, if you fail to communicate and the bank feels that you might become delinquent, your company’s file will move from the normal banking people to what is known as a workout group. It suffices to say that this is not where you want to be. So, even when you are struggling, good and clear communication can save you a lot of heartache down the road.

Finally, if your company is in dire straights with the creditors, your fractional CFO can help you explore other financing alternatives. For example, they might suggest that rather than just borrowing against your expected income, you try different types of asset-based lending, such as getting loans against your receivables or inventory.

2. Managing your relationship with suppliers

Regarding suppliers, things can be tricky, especially if you are a smaller company. For starters, they won’t give you the best terms, charging you higher prices than some of their more prominent clients while giving you fewer account payable days.

Therefore, the first thing a fractional CFO can do is to help you shop around till you find favorable terms. Afterward, the CFO will work with you to ensure that your company develops a reputation for paying on time, every time. 

Then, as your company grows and starts to make larger orders, you can negotiate better deals, lowering your unit costs and improving your unit economics. And should your current supplier refuse to give you better terms, your fractional CFO will start conversations with other suppliers, sharing with them your payment history and negotiating for better terms.

And given how critical these relationships can be, your fractional CFO will always want to communicate with your suppliers, whether you’re doing well or not. Again, if your company is struggling financially, your supplier needs to know about this so that they can be more lenient. 

At the end of the day, it is all about your company’s reputation in the market, and a big part of your fractional CFO’s responsibility is making sure that your company is known as a reliable borrower and business partner. 

3. Managing pricing

Pricing is a tricky subject, one where your competition has a large say in what you do. For instance, when the competition decides to drop their prices, do you feel compelled to do the same just to keep up? And if you do lower your price, how long can you afford to keep your prices depressed for?

Another critical variable for pricing is your costing. This examines how much it costs to make and sell your product or service. For example, when it comes to labor costs, does it make more sense to hire only permanent staff members, or should you have a mixture of permanent and part-time workers? Also, what are your costs when your entire team is remote vs when they have to show up to the office 5 days a week?

These are all questions a fractional CFO will help you figure out. They will start by highlighting what a typical profit margin is within your industry as well as how close or far you are from that. And if your company is receiving lower margins than average, then the fractional CFO will start investigating why that is the case. 

In the event that you are getting healthy margins, a fractional CFO might choose to model different scenarios with different price points, painting a picture of what the world might look like if you were forced to lower your margins due to competitive pressures or some other forces.

4. Managing payroll

We just saw how your labor costs can impact your pricing. Yet, even though every company owner would like the largest margins possible, labor costs and payroll are areas where skimping can have detrimental effects.

As a result, a fractional CFO will start by ensuring that your compensation and benefits are competitive, offering your employees the best rates in the market. After all, the loss of an employee could cost your company 1.5-2 times what you used to pay them annually. 

The fractional CFO will also look for ways to streamline the payroll process. For example, they might suggest monthly payroll disbursement instead of weekly. They might also recommend using a service to help manage the payroll system and reporting to make the entire process as economical as possible.

Over and above, they will make sure that your severance and bonus policies are within regulation and competitive norms.

Different cash flow mistakes/ issues by company size

Having gone over the different ways your fractional CFO can help you manage your cash flow, let’s look at some of the mistakes they can help you avoid, whether you are a startup of a fortune 500:

1. For starters, the most common mistake that plagues almost all companies is missing revenue. This is when the company expects a certain amount of revenue, only to be surprised that what it has raked in is much less. One reason for missed revenue could be lost customers, also known as customer churn. Simply, many businesses make future projections based on their current customer base. But if they are losing customers faster than they are creating ones, the business will never be able to reach its targets.

2. Another common issue that could impact your profitability is that your sales and marketing departments are off somehow. For instance, they might not understand your cost dynamics, so their negotiations are hampered. Or the cost of customer acquisition might be higher than anticipated, throwing off your margins. 

3. A third issue could be excessive hiring, which was very much the case during the pandemic. What usually happens is that a company gets overly optimistic and zealous with its hiring practices, which leads to either bringing in the wrong talent or bringing in more human resources than the company needs. 

4. Moreover, even if everything seems alright at face value, something as simple as poor collection processes could lead to a problem with your working cash flow. For example, if your company fails to collect from your customers on time while still paying your supplier punctually, money is going out the door faster than it is coming in. 

5. Alternatively, it can be just as bad when your company falsely assumes that your vendor or supplier will give you a longer grace period than they are willing to. For example, if you are supposed to pay in 30 days, but due to working capital considerations, you need to pay in 60 days, you might find yourself in a real bind if the supplier starts pressuring you right after day 40.
6. Over and above, it can be a real problem when the executive team is unclear on the bank covenants. So, they might be violating it, e.g., their current assets to current liabilities might be out of balance, without a clue that the bank could be knocking on their door any day.
   

With larger, more mature companies, the mistakes tend to differ slightly. 

7. The most common issues tend to pertain to the outside environment. For instance, the company might not realize what the competition is doing until it is too late. Or the macroeconomy might be going downhill, yet the entire executive team is asleep at the wheel.

Simply, the main issue is over-optimism, regardless of what the writing on the wall might be saying. As a result, the projections end up being completely off.  

So, to combat these potential problems, a fractional CFO’s greatest weapon can be a forecast model. 

The power of a good forecast model

According to Ed Schultz, a CFO with decades of experience working with companies big and small, the best way a fractional CFO can help manage all of this chaos is through a well-thought-out modeling system. In other words, the CFO will put together a model forecasting the company’s cash flow for the next quarter, usually dubbed the 13-week forecast. This forecast will become a compass that helps point all relevant stakeholders toward where the company is headed. 

Now, for the 13-week forecast model to be of any use, the fractional CFO needs to make sure that the data being used is correct and comprehensive. This means checking the sources of the data as well as making sure that all the relevant metrics have been collected, cleaned, and input into the model.

Furthermore, the model needs to be dynamic. So, when things change, the model should accommodate for said change. And if the model can’t keep up with significant changes, then this becomes a severe problem with the model itself. 

At a higher level, the fractional CFO might also decide to build out a longer-term model, one that looks further into the future. This snapshot of the larger picture should help answer some of the problems and questions posed above, such as the following:

• What could happen that would lead the company to be unable to make payroll?
• How bad could things get if the company fails to collect from your customers on time?

These models and the ensuing answers can be critical for your company to make strategic decisions and to navigate the uncertainties of the business world.

These forecasts can be tricky for non-seasoned professionals

Part of what distinguishes good fractional CFOs is the breadth of their experience. They have seen countless scenarios, so they know where the sinkholes are. 

As a result, without a solid fractional CFO at the helm, a company might find it challenging to perform the aforementioned forecasts on its own. Here are just some of the mistakes they might make:

For starters, if they don’t understand the various tax liabilities in different states, including sales and use tax, they might find themselves on the wrong side of the IRS. In fact, some companies may forget entirely that they should file both sales and use tax returns. So, when the time comes, these same companies realize that the taxman has almost taken 7-8% of their revenue. Other types of taxes that are usually forgotten are property taxes and real estate taxes. 

(In fact, the nuances of the American tax code can be so impactful on a company’s bottom line that one of our CFOs managed to bring in an influx of $800k to a client due to underutilized tax breaks.)

Similarly, some companies forget to account for bonus or commission agreements, and because they didn’t include that in their thinking, it comes as a surprise when the CEO is looking over their company’s financial statements. 

On the plus side, there are a few pleasant surprises that company owners tend to overlook. For example, they might forget to consider credits for prompt payments to suppliers. In other words, many suppliers will offer your company credits for paying on time, and these credits will amount to 2-3% of the total sale.

In the same vein, your company might offer its customers discounts in return for on-time payments, which can be a double-edged sword. On the one hand, the overall revenue will go down because of the discounts. But on the other hand, the working cash flow will improve due to the prompt payments.

In addition to all of this, some companies get their cost of goods sold wrong. For instance, they might not account for inflation. 

Luckily, experienced fractional CFOs are trained to consider all of the above elements, ensuring the model they produce is as accurate as possible.

Putting it all together…

When managing your cash flow, a fractional CFO will be working on many fronts, such as your suppliers, creditors, pricing, and so on. However, they will also help your company avoid all the major mistakes that could throttle your working capital, with the strongest tool in their arsenal being an accurate forecast model. However, for this forecast model to carry any weight, it needs to account for multiple elements, several of which can be easy to overlook.

That said, if you have any questions or want to explore how a fractional CFO can help make sure that you are always capable of making payroll, we would love to help. Please do not hesitate to reach out, and we’d be happy to offer you a free consultation to explore how a fractional CFO can streamline the money going in and out of your business.