Marty Koenig , Your Colorado CFO

Helping business grow

EXECUTIVE SUMMARY and FINANCIAL MODELING

The job of the executive summary is to sell, not to describe. The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. You need to convey its essence, and its energy. You have about 30 seconds to grab an investor’s interest. You do not need to explain the entire business plan in 250 words. You want to be clear and compelling.

This means your executive summary should be about two pages, maybe three. Business owners are usually too close to their products and the everyday grind of building a company. It is usually a challenge for the business owner to boil down hundreds if not thousands of pages that exist on paper and in their mind to succinct set of words. I produce an excellent, attractive and informative executive summary using what I call the Jerry Bruckheimer approach (American film, television and commercial producer best known for CSI: Crime Scene Investigation and movie Pirates of the Caribbean). Jerry’s approach is “Every single frame counts. Literally.” You have to be able to tell a story, sometimes with humor, sometimes with emotion, very quickly. I equate a good executive summary to producing a commercial versus producing a movie, where every frame does not count because the story carries so much of it. Whereas in advertising sometimes the execution is the idea. When producing a commercial the creator takes the time to finesse the words, play on the emotions, carefully architect the flow and the look and feel. If the investor can’t get past the first 30 seconds, their interest in your company disappears. The goal of a good executive summary is not to get them to invest, but to get them to flip back to the financial section, which also has to rock their emotions.

My Executive Summary development service starts with gathering all the information you have already prepared. I do a gap analysis to figure out the price, which typically ranges from $3,000 to $6,000 and takes about a month to create for you.

FINANCIAL MODELS

In order for an early stage or emerging company to raise money, it must provide investors with a set of financial projections.  Typically, companies will pull together a top-down P&L projection going out for three to five years.  I have learned from hard experience that this is wholly inadequate.  You will need a complete Business Plan which once the company starts executing the plan becomes an Operating Plan. The development of financial projections is an interactive exercise with the me working alongside the entrepreneur, not created in a vacuum and thrown over the wall. My business planning work includes teaching the business owner(s) how to explain the financials and you get an understanding of fundamental financial terminology you can show potential investors and lenders.

We have developed a set of financial tools for comprehensive Business Plan financials, which embodies the experience of nearly 2,000 combined years of my CFO partners’ experience building such plans for these type firms in all industries:

· Pre-funded, pre-revenue startups

· Funded, pre-revenue startups

· Hyper growth entrepreneurial companies

· Revenue generating companies that want to grow

These tools provide a platform for the rapid development of custom Business/Operating Plans which clients can then use to optimize their funding strategies.

These are the financial elements of a Business Plan/Operating Plan suitable for presentation to investors, please see below.

• Revenue Model
• Department Budgets
• Expense Summary
• Fixed Assets
• Income Statement / P&L
• Cash Flow Projections

There are many reasons why a simple top-down P&L will not suffice for raising capital. Firstly, before contacting investors, the company should determine how much capital it needs to raise. A P&L projection can tell you the operating losses that you will need to fund, but it misses at least three other major items that consume cash, and it does not show any relation to what other companies in your industry are doing and have done. It does not properly reflect your purchases of equipment, software and other capital assets (a minor ongoing depreciation item in your P&L, but a lump-sum up front cash outflow). It ignores your accounts receivables (booked income as far as your P&L is concerned, but in reality cash that is NOT yet in your bank account). And it misses your inventory (not yet expensed in your P&L projection, but again an up front cash outflow).  In many cases the total amount of cash required to reach cash flow break-even can be two to three times the operating losses indicated in the P&L projections.

I include analysis of Industry benchmarks, which are included to validate assumptions, ratios, profitability, and financial ratios. These industry benchmarks are used as a starting point, and then the differences between the company and the industry are explained in detail.

Moreover, a P&L alone cannot answer a wide range of questions concerning the company’s business model and possible performance.  For instance, does the company consume more cash before reaching cash flow break-even by growing quickly or slowly?  How much cash needs to be raised to reach the first milestone at which the company’s riskiness (and therefore its cost of capital) drops sharply?  How many assets can be funded with inexpensive asset-based debt finance rather than expensive VC equity?  The answers to these and many other questions determine the optimum financing strategy to avoid unnecessary dilution of the founding team’s ownership percentage in the company.   They can only be answered by a thorough analysis of the P&L, Balance Sheet and Statement of Cash Flow.

For all of these reasons, it is critical that a startup develop a complete economic model of its business, a living, breathing set of interactive relationships modeled in a spreadsheet that behaves like the actual business and can be used for scenario generation, analysis and optimization.  This document is not just a pretty picture for investors, it is a hardcore Operating Plan with all of the gritty details of who, what and when.  Properly done, the management team can analyze and discard many alternative approaches to launching or growing the business, including testing different pricing schemes, distribution strategies, sales force models, support options, payment cycles, hiring plans and marketing budgets, to name just a few.

The output of such an Operating Plan is a set of P&L, Balance Sheet, and Cash Flow projections.  But standing behind these is a complete model of the business that provides the following benefits:

• • The entire management team knows exactly what each individual needs to do in each month of the plan.
  • The management team has a yardstick against which to measure execution.
  • The management team knows exactly how much cash it needs to raise to reach cash flow break-even, and how sensitive that number is to changes in key operating assumptions.
  • The Company has hard evidence to provide investors that it has thought through every aspect of execution.
  • The Company can strongly support the credibility of its projections by showing investors that its forecast is built from the bottom up, sale by sale, hire by hire, with all key assumptions clearly articulated.
  • The Company has a cash forecasting tool that can be adjusted for actual results to provide invaluable early warning of the need to start looking for another round of equity with time to raise it before running out of cash.

A savvy management team will have all of this in place before getting in front of investors.

REVENUE MODEL

The Revenue Model starts by defining the basic unit of sale, which might be a single product sale, a long term project, a subscription, a service transaction, or a customer relationship.  Whatever the unit is, the Revenue Model defines the economics of a single unit sale, and then builds revenues by generating multiple transactions across all product and service lines.  Revenues are generated by definable inputs, such as the number of salespeople hired times the average productivity per sales person, or the number of retail outlets carrying the product times the average units sold per outlet.

This granular bottoms-up approach builds real credibility for your projections.  It transforms arguments from investors along the lines of “We don’t think your revenue ramp is achievable” into conversations such as “Yeah, hiring one salesperson a month doesn’t seem unreasonable” and “Your projected revenue per salesperson is about industry average, and we like the way you don’t show any sales for the first six months after a new sales hire”.

DEPARTMENT BUDGETS

The Operating Plan includes a spreadsheet detailing expenses for each department in the enterprise.  Since most expense items are driven by headcount, a department budget starts with a section that tracks personnel and salary costs.  The second section then extrapolates an expense line for each expense item.  Expense items are generally defined to match exactly to the Company’s General Ledger account structure, so that historical data and future updates for actual results can be easily copied in.

Special expense categories such as rent, travel, outsourced Server Farm charges or Help Desk expenses are calculated in their own sub-models within the appropriate Department spreadsheet.  All variable expenses are ratio driven and tie to primary drivers, such as unit sales, total number of customers or headcount employed, which in turn are driven by the primary revenue assumptions so that all variable expenses shift up and down naturally with changes in revenue projections.  This approach ensures that the model behaves like a real business and can be used for accurate scenario generation and sensitivity analysis.

EXPENSE SUMMARY

The Operating Plan includes a spreadsheet called Expense Summary which summarizes total corporate expenses by Expense Item and also by Department.  This summary provides investors with a complete picture of how you intend to spend their cash.

INCOME STATEMENT

The Income Statement ties together the Revenue Model and the Expense Summary to create a P&L for the Company.  Since the expenses for certain Departments are split between Cost of Sale and SG&A categories, the Income Statement includes sophisticated checksums to ensure that no expenses are left unaccounted for.

BALANCE SHEET

Many entrepreneurs approach investors without a Balance Sheet in their projections because they figure that investors don’t really care about this aspect of their company.  Moreover, it’s very difficult to get a projected Balance Sheet to actually balance, so why bother?   The answer is simple.  You can’t get an accurate Statement of Cash Flow without a Balance Sheet, and EVERYONE cares about cash.

The Balance Sheet contains the critical assumption for the average number of days in the customer payment cycle, which in turn drives the amount of cash tied up in Accounts Receivables.  For product companies, the Balance Sheet also calculates the amount of cash tied up in the inventory needed to support the sales volumes from the Revenue Model.  And for all companies, the Balance Sheet draws in the cash consumed by the asset purchases indicated in the Fixed Asset Schedule.

STATEMENT OF CASH FLOW

The Statement of Cash Flow is the Queen of all financial statements. Sophisticated entrepreneurs and investors alike care most about this view. Entrepreneurs want to know how much cash they are going to have to raise to reach cash flow break-even. Investors want to know how much more money will be needed to support their initial investment, and, failing that, how much dilution they stand to absorb from follow-on investment.

The Statement of Cash Flow integrates cash consumed or generated from operating activities flowing in from the P&L with the cash consumed or generated by changes in Balance Sheet items such as Accounts Payable, Accounts Receivable, Inventory and Plant, Property & Equipment.

KEY RATIOS and ASSUMPTIONS

Investors want to see the story behind the numbers, and they need to see the rationale and assumptions the entrepreneur used to create the numbers. There are a lot of numbers in financial projections, some are derived, others are entered based on discussion with a competent B2B CFO® and documented thoroughly in the plan. Many entrepreneurs make the mistake of not including the thoughts, how they arrived at each of the numbers, and they often fail to prepare the backup material and assumptions that show the investor you have put some serious thought and work into your planning. Those that have not planned this way are seen as financially unsophisticated which leads investors to believe you probably are not the type of person in which they want to invest.

Are You Pleased with Your Sales Force?

My greatest skills reside in business strategy and planning, execution, business analytics, daily/weekly/monthly management reporting, and financial modeling. Yet, I’ve spent my fair share of time this year helping my clients evaluate, motivate, and coach their sales forces. It’s about the people.

During some of this work, I’ve noticed a trend across some of these businesses relative to their respective sales forces–weak to underachieving sales performance.

In every situation, I know the cause of this undesirable performance. The cause can be traced to two of the most critical requirements to be successful in sales according to Ron Willingham, author of Integrity Selling for the 21st Century:

Strong goal clarity

High achievement drive (to reach goals above)

If your sales team members are not performing to par, start with their goals. While you may provide them targets each month, are they going the next step by setting clear personal goals to make sure they reach the corporate targets? If not, you have a coaching opportunity to make sure that happens.

Regarding achievement drive, a sales team member either has it, or they do not. Such drive cannot be taught or driven (no pun intended). If the drive does not exist in the sales team member, do not let that situation linger. Make a change quickly. Go get the book so you can see what I mean.

By the way, I cannot say enough about Integrity Selling for the 21st Century. More than a book, Ron Willingham’s sales method has been taught to some 2 million students worldwide. As a proud graduate of this system, I highly recommend it.  Joe Worth, another partner in our firm, is a certified facilitator of this sales training, and I’m sure he would field your questions if you would like to learn more.

Why We Shouldn’t Fear the Failure of Some Firms

The Smart Money article is an excellent view of how our fears about “a big crash” are sometimes unjustified.

Few have questioned the basic premise — the notion that many of our financial institutions are truly too big to fail. The underlying theory is not, of course, that the world cannot live without Bear Stearns, but rather that if Bear failed, it could pull under other financial players to whom, through a complex array of trades and credit obligations, it is linked.

For more SmartMoney Magazine features, turn to the October issue.

Exponents of this view often employ the metaphor of a house of cards. Remove one card and the rest collapse. I have never — not when I wrote a book about LTCM, and not now — thought the metaphor was quite right.

Is the economy really so fragile, and is finance really a house of cards? A single firm certainly may implode. When Enron’s books were exposed as a sham, no one would lend to it, and the company did collapse.

But the economy is composed of thousands of firms. They do not all fail at once. David Ranson, an economist at H.C. Wainwright Economics, thinks we are unduly alarmist. A better metaphor, he suggests, is a beehive.

Picture thousands of bees furiously building — and when necessary, rebuilding — the hive. When one bee falls, another takes its place. The bees work in association with each other, but not in a pyramid. If a section of the hive crumbles, the rest of it continues to function. Meanwhile, nature compels the remaining bees to repair the damage. With bees, the motivation seems to be collective. With capitalist human beings, the motivation is individual — but the result is not dissimilar.

Of course, when a house of cards collapses, the entire structure is leveled; the restoration must start from scratch. But that isn’t what happens in the U.S. economy. No sooner does an enterprise fail than others swoop in to snare either the fallen firm’s assets or market share or both. This is how humans repair the hive.

See the entire article here: http://www.smartmoney.com/smartmoney-magazine/index.cfm?story=october2008-financial-firm&split=0

Lonely at the Top?

THE ROLE OF CEO / BUSINESS OWNER can be a lonely one. It is all too easy to be surrounded by good people but still feel there is no one with whom to share your fears and concerns, or brainstorm new ideas and strategies.

People from outside a firm can often ask seemingly simple questions that illuminate an issue or prompt change. Initiatives from other industries can help spark ideas and generate new business models. Often friends and family give all kinds of advice, byt most have very little experience that can help you. For any new and growing company, securing the right external advice and support is fundamental to success.

Too often, senior personnel keep problems close to their chest so as to avoid worrying staff unduly. However, this approach can cause additional stress and make a small problem seem larger than it really is. It is also easy to become entrenched in a situation where it is not possible to see the wood for the trees and it becomes difficult to think of solutions or innovative ideas. Getting the right advice. There are five simple steps that can influence the quality of the advice you receive:

Find the right accountant – The mere fact that someone is completing your tax returns does not mean you are getting the best out of your accountant. A fast-growing enterprise needs a financial advisor who can plan ahead and proactively suggest ways to make strategies financially possible. Not to mention, I have plenty of contacts and can help my clients find a great bookkeer quickly. 

Select the most appropriate professional for individual tasks – A common mistake is to appoint a lawyer or accountant to handle all legal or financial matters. It is wiser to pick and choose specialists for different functions. For example, payroll differs from corporate finance, while drawing up employee contracts does not require the same skills as protecting intellectual property.

Assess your banking needs – A conventional retail bank can provide an excellent business service but if your growth plans are more aggressive, then it would be beneficial to enlist the skills of a corporate banking advisor. The key to success is in finding a service that supports the company you want to become, rather than the one you are now.

Work with people you like – In business, it is often necessary to cooperate with individuals whom you may not like or respect. However, when seeking advice on the future of your firm it needs to come from someone you trust. It is worth spending time to find professionals you ‘click’ with and who complement your company. Ask yourself whether they understand and have an affinity for what you are trying to achieve.

Don’t be too proud to ask for help – Never see it as a failure to ask for guidance. No one is infallible, and having people to support you can make the journey to success so much smoother. Nowadays, there is a proliferation of mentoring schemes, where experienced specialists are on hand to offer guidance and information on a range of topics. It is important to remember though that a mentor is not the same as an advisor; their role is to question and motivate rather than to offer instant solutions. Even if suggestions are never acted upon, their value is in helping to shape an alternative strategy.

Summary - The Need For Experience - The discussion above only touches on the need for professional advice that can turn your business into a success.  B2B CFO^® partners are real-world experts in managing working capital, building the infrastructure to scale your business and working with companies at the highest levels of America’s fastest growing companies. Cash. We Help You Get It^TM is not only our slogan; it is what we do with hundreds of clients every day.

Marty Koenig, Partner
Your Colorado CFO 
B2B CFO^®

How Bill got his business moving again by filling a management void

About two months ago, Bill was having a drink with the president of a Fortune 1000 company and came home quite upset.

For two hours he had listened to tales of the great things his company was doing in the marketplace to increase product awareness. He had also carried on at length about the wonderful ways his CFO suggested of taking advantage of an inconsistent economy. By the end of the evening he realized just how wide the gap has become between big companies that can afford to hire top-notch talent and smaller firms that can’t.

Resolving to find a way for his small business to get access to the type of talent usually employed by top firms, he did some homework and found that it is possible for small companies to hire high-level executives ― provided that there is a willingness to hire them on a part-time basis.

The part-time executive provides a combined continuity and expertise that is difficult to duplicate for the price being paid. Bringing skills that specifically suit the business needs, and usually with a minimal learning curve, the part-time executive works for a set period each month (usually a couple of days on-site) and is available for limitless discussions by phone or email. The individual is paid a set monthly retainer. Staff and senior management have a rare opportunity to learn from someone who has a wealth of professional knowledge and is “out there” learning from other professionals.

So is working with a part-time executive a better way of operating than other avenues available to a business? Not necessarily. Frequently a company’s senior management has the expertise to function at the high level in the marketing, financial or operations area. In that case it probably makes more sense to bring a consultant in to deal with specific issues.

The part-time executive is an idea whose time has come! Before you do without or write that next “Help Wanted” ad, consider bringing in a part-time executive instead. Like our friend Bill, you’ll find your business growing much faster than you expected and with considerably lower overhead.

Marty Koenig, “Your Part-Time Colorado CFO”

303-995-4523

Nice $105M deal

British Telecom buys Ribbit in a nice exit. Makes me wonder about if all the hype about no VC backed IPOs last quarter is really that big of a deal. Clearly the darling of VC exit strategies, is an IPO really that great any more? As a CFO, I can relate to how my CFO brethren are leaving public companies in droves, moving towards small and mid-market, privately held or non-public PE or VC backed companies. To blame mostly is Sarbanes-Oxley, and now the prospect of IFRS (International Financial Reporting Standards) and the extra headaches of transitioning.

http://www.siliconvalley.com/latestheadlines/ci_10039612

Sound Credit Practices For Your Business

“Sound Credit Practices For Your Business”

B2B CFO® founder, Jerry L. Mills, among small business experts featured on national webcast

Phoenix, AZ - July 25, 2008 — Gilbert, Ariz. resident Jerry L. Mills, founder of B2B CFO®, nation’s largest CFO services firm that services small business market exclusively is among business experts featured on Wells Fargo’s fifth small businesswebcast, “Sound Credit Practices for Your Business,” which will premiere on Tuesday, July 29th.

The webcast will feature a panel discussion with leading financial industry insiders and business owners on how to establish sound credit practices for managing business credit and cash flow. The program focuses on financial management principles that support long-term stability and growth.

Launched in 2007, the Small Business Webcast Series is one of Wells Fargo’s many resources to help small business owners succeed financially.

WHO: Panelists: Scott Anderson, Ph. D., Wells Fargo Senior Economist Michael Billeci, Wells Fargo Regional President, Greater Bay Area Gerri Detweiler, Co-founder BusinessCreditSuccess Sharon Evans, President and CEO, The Business Resource Group Jerry L, Mills, CPA - Founder and CEO, B2B CFO® Moderator: Rich Sloan, Co-Founder, StartUpNation.com

WHEN/WHERE: Tuesday, July 29, 2008 11 a.m. PT/12 p.m. MT/ 1 p.m. CT/ 2 p.m. ET Free Registration: www.wellsfargo.com/biz/webcast Approximately 45 minutes WHY: Maintaining the financial stability of a small business can be especially challenging in today’s uncertain economic climate. As business owners look for ways to safeguard and strengthen their businesses, this webcast will provide informative, relevant, and timely advice on how to implement and manage sound credit practices.

With headquarters in Phoenix, AZ, B2B CFO® was founded in 1987 by Jerry L. Mills. B2B CFO® is the nation’s largest CFO firm serving entrepreneurial, growth and mid-market companies with revenue under $75 million. The firm has more than 90 partners across all major markets in the United States. Partners have an average of 25 years of experience and each individual partner is a senior level executive with a broad range of expertise. Please visit online at www.b2bcfo.com

Jerry L. Mills, CPA is also the author of two books “The Danger Zone – Lost in the Growth Transition” and “Avoiding The Danger Zone – Business Illusions” – non-fiction business books aimed at entrepreneurs. He is a frequent speaker, and contributor on small business finance topics. He has more than 30 years of business experience. He is frequently quoted in various media outlets such as Fox Business, NY Times, Smart Money, Business Week, and Entrepreneur Magazine, among many others. For additional information, or to purchase a copy, please visit online at www.dangerzonebook.com.

MEDIA CONTACT:

Ania Kubicki, ANGLES PR for B2B CFO® 480-277-9245 ania@anglespr.com

Kathryn Ellis AVP, Wells Fargo Small Business Communications (415) 222-4682 kathryn.d.ellis@wellsfargo.com

What does this have to do with finance?

A lot. Creating and maintaining a good online presence can mean the difference between a deal that you win or a deal you loose (this can go for employment as well). Say you are competing for a job and there are two estimates/bids….yours and theirs. Suppose they are very close in price and features, functions and benefits. Suppose both competitors are new to the buying company, so relationships have little influence. What’s the buyer going to do? Google you. Google your company. More and more people are doing that and they should. So, what does the buyer think when he sees you and/or your company with none of the top ten search results on the first page. He goes to page 17 and finds you there. What if he sees your competitor on six of the first 10 results. How do you look in comparison? Not that the buyer will base her entire decision on that, but you get the idea. All else equal, who’s going to win? You or them?

How do you know when Google finds you or your company? Google Alerts!

When the Google bots go out and crawl the sites and finds your name or your company name, Google Alerts sends you and email. You can track your competition this way, too.

You might say, “Online presence, so what.” What does good online visibility get you? It can mean that you are perceived as a national leader, a published expert, that you are bigger and better than the next person. It can mean that people will get to know you and will want to learn more about you and more from you. It can mean you get international recognition as an expert in your field. It can help you compete for the project or the job.

When I win a project because people found me on the web and they liked what they saw, it has a lot to do with finance. It helps them make more money because they hired me, and I get to help them make even more money so they can hire even more super people to take their company to the next level. I get to help business owners realize, track and manage the benefit of winning more business.

You cannot expect to win every deal because of having good online presence, just that every day that goes by and you have a pitiful showing online, more people will turn to those that have a good one.

I have found that even CFOs care about the web. There are both very positive and very negative challenges when a small and mid-market company starts executing on its online strategy. If you wonder why you should have an online strategy, well, you can stop reading now because this won’t matter to you.

If you want to learn how to increase your online exposure see the blog posting at www.ResourceNation.com for a good starter article to get you going.

Benjamin Franklin was a blogger - without a doubt. You think you’re social, read what he knew about social media.

Why I am blogging now

So, why should I blog?

I want to accomplish these things by setting up and doing a blog:

1. Help others, especially my B2B CFO^® partners get setup and start their blog sites.
2. Get more online exposure.
3. Share interesting articles, links, blogs, and stories relevant to my life and career.
4. A place to put all the articles I have written over the years in one place.
5. Share nuggets about how a Colorado CFO can help your business grow and keep more of your cash.
6. A way for others to comment on posts, versus just sending an email newsletter.
7. Show a greater level of expertise to my clients and potential clients
8. Help business owners get bankable, capital attractive, work on profit improvement, increase sales, financial and management strategies, timely and accurate financial reports. Believe it! All of this stuff combines to make sure businesses keep more of their cash.

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