A Financial Vision Statement

Entrepreneurs are aware of the need for realistic Vision and well-defined Mission statements for their businesses. Vision and Mission statements are generally broad in nature and can encompass more than financial objectives.

Entrepreneurs might want to consider developing a specific, long-term Financial Vision statement to have clear objectives on their financial goals. Such a Financial Vision should be time-related and include realistic targets and interim milestones related to areas such as but not limited to:

• Revenues
• Gross Margin
• EBITDA
• Company Valuation
• Exit Strategy

Actual progress towards these objectives should be measured periodically and performance strategies could be modified to ensure that the company is moving along the path to achieving these targets.

While your Vision and Mission should be broadly shared with your stakeholders, the Financial Vision could be kept confidential to limited few so as not to detract from the main focus.

Ravi Patel

www.patelCFOservices.com

Which is preferable – Revenue or Profit?

If you ask an Entrepreneur whether he/she would prefer growth in Revenues or Profits, the answer would probably be – both.

However both might not be possible for Entrepreneurs in growing companies. Depending upon the stage of growth of a company, there is a potential for a Catch-22 situation. If I have profits, I can have internally generated cash to invest in growing the top line. Or, if I had more Revenues, I would be able to squeeze out more profits due to certain economies of scale.

Choices have to be made at different stages of growth as to whether Revenue or Profit is more important to focus on. These choices would most probably change over time.

However, have you ever thought about what is better in the long-term – growth in Revenues or Profits? You might be surprised by your quandary!

Ravi Patel

Monitoring Financial Trends

As Entrepreneurs grow their companies, they learn to read financial statements to assess the monetary performance of their businesses.

Reviewing the Balance Sheet  (at a point in time) and Statements of Income and Cash Flows (either for a month or year to date) gives them only part of the picture.

What is necessary to better  analyze your financial performance is reviewing and assessing trends. If you monitor trends in your financial statements over a period and analyze the reasons for such, you might have a better gauge of what is happening in your business.

Monitoring and analyzing trends in your business could improve your financial performance.

Ravi Patel

 

Warning Signs

Entrepreneurs, are you faced with any of these situations in your company?

Employees do not take time off; changes in lifestyle of employees; living beyond their means; possessive of their work; missing documents; books out of balance; delayed deposits; records not organized; duplicate payments; payments to same individuals, numerous times; and so on.

These are warning signs of potential fraud or unacceptable behavior. Time to check things out!

Ravi Patel

www.patelCFOservices.com

Budgeting Viewpoints

Entrepreneurs have interesting thoughts on an annual Budgeting process.

Some Entrepreneurs believe that they can control the “budgeting” process in their head and don’t need a formal process. In their view, it is cumbersome and puts too much burden on preparing the budget and reporting actual results against it.

Others embrace the budgeting concept and have their leadership team involved in preparing the annual budgets for each functional area and the company. The monthly results are measured against the budget and variances are analyzed to improve performance. Entrepreneurs who adopt Pay for Performance use the budgeting process to establish performance targets.

The Budgeting process could be used by Entrepreneurs to effectively manage performance. You might want to consider that!

Ravi Patel

www.patelCFOservices.com

To Allocate Overhead or Not

As Entrepreneurs set up separate business units to grow their companies, holding managers of such units responsible for P&L results becomes important. Most compensation systems reward business unit managers based on P&L results.

If the business units are totally separate and self-contained, the P&L is mostly complete, eliminating the need for allocating any overhead costs.

However, if the business unit receives significant support from corporate staff, such as Accounting, IT, HR, Marketing and so on, or shares office space, then an allocation of such support/space costs to the business unit P&L seem fair. The objective would be to evaluate the business unit results as an independent unit.

Corporate overhead allocations are often controversial, so care should be given to making them as fair as possible when such allocations are necessary.

Ravi Patel

www.patelCFOservices.com

TCOR – Total Cost of Risk

At a recent professional CFO forum, I was intrigued by a concept on risk that might be of interest to Entrepreneurs.

Instead of the traditional view of insurance, Dana Coates of United Agencies Insurance (www.tsbic.com) presented a concept of TCOR – Total Cost of Risk.

TCOR includes all of the costs associated with managing a company’s financial risks. TCOR equals risk management administration costs, retained losses related to deductibles and uncovered claims, insurance premiums, and outside service such as consulting, training, sub-contracting.

Viewed from this perspective, Entrepreneurs can appreciate the cost of managing financial risks. It is not just about insurance premiums!

Ravi Patel

www.patelCFOservices.com

Revenue per Employee

A useful macro measure for tracking productivity is Revenue per Employee.

Revenue per Employee can be tracked on a monthly basis by dividing the rolling 12-month revenues by the average number of employees during the month.

Monitoring the trend line demonstrates your efforts in increasing revenues per employee. More importantly, Entrepreneurs should compare the Revenue per Employee measure for their company to the standard in their industry. Is your company above average in your industry?

Ravi Patel

www.patelCFOservices.com

Variable Financial Management

Many articles and books have been written about the needs of different types of management as the company grows from a start up to a mature level. Start ups require more of an entrepreneurial spirit  that might not work in a well-seasoned, stable growth company.

Similarly, financial management has to be variable to the needs of the organization at different stages during the growth and aging of the company.

 As your organization grows are you aware of what stage it is at and what type of financial management is necessary? Blending the financial management needs with the general management requirements of the company at different points in the growth curve of a company is crucial.

As a savvy CEO, are you paying attention to this? What are you doing to influence the changes required in the financial management of your company?

Ravi Patel

www.patelCFOservices

Return on Marketing Investment

A well accepted, but not necessarily true, axiom is that it is impossible to measure the return on your marketing and advertising investments.

Entrepreneurs desire to grow their businesses and need to spend certain monies on marketing their products and services. However, there is some reluctance as the true return of their investment is not readily known.

However, if a marketing program is well-designed, it could be possible to track the benefits of such a program and calculate the return on investment. Paying attention to the measurement of results while designing the marketing program may prove beneficial.

Ravi Patel

www.patelCFOservices.com