Small businesses face continuous financial challenges. Some challenges are good (e.g., how do we achieve revenue optimization?), while others are difficult (how do we find money for unforeseen expenses?)
At our fractional CFO firm, we believe there are three primary financial issues that small businesses face:
- Planning growth through uncertainty.
- Detecting downturns quickly and managing them successfully.
- Turning numbers into insights.
Growth planning through uncertainty
Business owners struggle to forecast new business growth due to uncertainty. How quickly will the new sales hire ramp up? How effective will the new marketing channels be? When do we need to hire another operations FTE? Planning through uncertainty follows a simple process:
- Develop a comprehensive business plan (often already complete in the CEO’s head)
- Build an operating forecast to project growth and help cash flow management.
- Create a sensitivity analysis to determine critical assumptions.
- Gather the executive team to tweak the business plan to maximize growth, minimize risk, and optimize cash flow.
- Determine KPIs and financial reporting to measure progress.
- Meet weekly or monthly to review reports and collaborate on financial strategy.
Growth planning should include your executive team and a CPA for tax planning purposes.
Detect downturns quickly and manage them successfully.
The most common mistake for small businesses is to respond too slowly to downturns. Therefore, downturn detection is critical to avoiding catastrophe.
Use the following strategies to detect downturns and respond early:
- Monitor macroeconomic indicators such as GDP, CPI, unemployment, and real wages.
- Compare notes against peers outside your business. (A fractional CFO working with other clients offers an easy way to add this perspective.)
- Identify your “top of the funnel” KPI as a bell weather for your business’ demand. Examples include website visits, prospect meetings booked, or CPM (for paid advertising.)
- Collaborate with your management team routinely (at least monthly) to analyze trends and interpret the signals. Make sure you have and respect the opinion of at least one contrarian on your team – someone who is always pessimistic and cautious.
Once you have detected a downturn, a CFO will respond by customizing the following recession playbook to your business situation.
- Develop an array of forecasts from bad to terrible to predict impact.
- Develop a cash flow management plan to improve the runway. Effective cash planning includes:
- Establishing and drawing on debt instruments.
- Reducing workforce.
- Selling assets like real estate, equipment, or excess inventory. Use sales/leasebacks to create short-term cash without losing access to critical assets.
- Negotiating with vendors to defer or cancel purchase orders, extend payment terms, and lower costs and expenses.
- Pause or cancel capital investments like new equipment purchases. Consider leases instead to reduce the initial cash outlay.
- Implement cost controls on labor, supplies, and raw materials to match lower demand.
- Defer long-term maintenance.
- Analyze long-term opportunities from the downturn. Downturn opportunities may include:
- Taking market share from competitors.
- Shifting investment focus from growth to efficiency.
- Recruit discounted talent (if the labor market is weak.)
Knowing when to lean back into growth mode is crucial to surviving downturns. Like identifying the downturn, you should rely on various sources, including top-of-the-funnel metrics. Accountants are conservative and tend to keep expense controls too long, constraining financial growth and hurting profitability. In contrast, salespeople are optimistic and jump back into growth spending too quickly. A CFO or finance manager is an excellent compromise whose expertise weighs risk against reward in a balanced manner.
Turn numbers into insights.
Financial reporting is only helpful if it improves your management. One client hired us because they experienced tremendous sales growth but slumping profits. We analyzed the situation and discovered that the sales team focused on low-margin services, which consumed operations resources and generated little profit. Neither the sales nor the operations team knew this because nobody had told them which services make the most money!
Ineffective communication of financial results creates conflict and inefficiencies. Build financial reviews into your daily, weekly, and monthly business processes to avoid debates about what is truly happening.
Daily individual metrics
Daily push metrics customized to each employee are the ultimate reporting. Individuals with real-time feedback will improve performance with less effort from management. Team metrics should also be part of a daily morning huddle.
Weekly Team KPIs
KPIs should be published weekly and monthly for every team plus the company overall. Weekly team meetings should include reviewing the KPIs and discussing the cause and implication of trends and variances.
Monthly financial strategy
You should receive financial statements by the 15th of each month. If not, your feedback loop is too slow. Once published, you should meet with your managers and fractional CFO to study the statements, variance from budget, and forecast.
Other financial challenges
You may encounter hundreds of small business challenges, and an experienced CFO will help. Don’t let financial issues keep your small business from reaching its full potential. Schedule a consultation with CFOshare today, where our expert team can provide personalized solutions tailored to your unique business needs.