4 Red Flags Your Business Needs a Part-Time CFO

Running a small business can be extremely challenging. Often times, entrepreneurs don’t have the accounting or financial background necessary to manage small business finances. As your small business begins to grow, it is essential you understand your small business financials and are able to recognize possible red flags your business is in trouble. Many small and growing businesses turn to a part-time CFO for experience and knowledge, especially if they can’t afford to hire a full-time CFO.

1.Facing a Cash Crunch

If you haven’t heard it yet, now is the perfect time to hear that profits don’t equal cash flow. Even though a business shows a profit on paper, it may still be cash poor. Profit and cash flow are very commonly at odds for a small business which must invest in assets in order to grow. The reasons can always be seen on the balance sheet.

Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity. It measures the ability of the company to pay its bills. The cash balance is the cash received minus the cash paid out during the time period.  This is where things can get tricky with cash flow management.

Does Your Business have a Debit Ratio of .04 or higher?According to a U.S. Bank study, 82% of business failures are due to poor cash management.  Small Businesses owners and CEOs need to make decisions that sometimes can cause negative long term results with their business’ cash flow.

In some cases, business decisions lead to cash flow issues. Once you are in the cash flow crunch, your decision-making ability is further impacted by the lack of resources and fear.  This can lead to bad decisions in three main areas of your business:

• Pricing: We highly recommend to not lower the price of your products or services. Offering great discounts/promotions to get any customer through the door can affect your margins resulting in lower margins than your target, and can cause serious cash flow issues.

• Hiring/ Firing: When small business owners are facing a cash crunch they often hold out on hiring since cash is tight. If you have work coming in, holding off on hiring or firing employees can affect the quality, timing, and customer service of your work. This may result in negative reviews and unsatisfied customers ultimately making you lose business.  Additionally, you may keep bad clients because you need the cash flow, but bad clients that don’t pay timely can really affect your cash flow.

• Spending: It is tough to spend the money in the places you should when you feel like you can’t afford it. For example, with your business marketing, you may not do a marketing campaign because you don’t want to spend the money and are too worried about the ROI. You are unlikely to take advantage of opportunities or take educated risks for the benefit of your business because of costs that may be involved. A part-time CFO in Gilbert can assist your small business and ensure you are spending in the right places even while faced with a cash crunch.

2. Struggling Accounts Receivable

Although a large account receivable figure may seem like a good thing, it is only profitable if it can be collected. In the business world, the longer an account goes without being paid, the more unlikely it is that your company will see compensation. When receivables begin to mount, it may be necessary to adjust your collections process and become stricter with your credit policies. Practicing receivables management can make the difference in succeeding or going out of business! Over 50% of small businesses have troubling collecting payments, either at all or on time, and it throws a major wrench into their business’ financial health

3. Low-Profit Margin

A low-profit margin means that your business isn’t efficiently converting revenue into profit. This could result from, prices that are too low, or excessively high costs of goods sold or operating expenses.

Companies typically track three different profit margins: gross margin, operating margin, and net margin. In some cases, low-profit margins align with a company’s efforts to aggressively grow market share. You may sacrifice short-term profit to generate traffic. However, low margins that aren’t part of a strategy mean you aren’t creating strong profit from your business activities and revenue. Without margin improvements, your business may struggle to keep up with debts and expenses, invest in expansion and distribution income to owners. Hiring a part-time CFO can help your business better understand your profit margins and how to increase them.

4. High Debt Ratio

The debt ratio for a given company reveals whether or not it has loans and, if so, how its credit financing compares to its assets. It is calculated by dividing total liabilities by total assets, with higher debt ratios indicating higher degrees of debt financing

A ratio greater than 1 shows that a considerable portion of the debt is funded by assets. In other words, the company has more liabilities than assets. A high ratio also indicates that a company may be putting itself at risk of default on its loans if interest rates were to rise suddenly.

From a pure risk perspective, lower ratios, 0.4 or lower, are considered better debt ratios. Since the interest on a debt must be paid regardless of business profitability, too much debt may compromise the entire operation if cash flow dries up. Companies unable to service their own debt may be forced to sell off assets or declare bankruptcy. A part-time CFO in Gilbert will be an extra set of arms, legs, and eyes to help asses debt ratios and how to keep them as low as possible.

Final Thoughts

There are many business scenarios such as a cash flow crisis, high debt ratios, low-profit margins, or struggling accounts receivable where a part-time CFO could be extremely useful. The knowledge and expertise they possess can help get your small business from struggling to running great. Additionally, you may not even be aware of these scenarios which a part-time CFO can quickly spot from looking at your financial statements.

Limitless Investment and Capital’s Part-time CFO services in Gilbert

Is your small business struggling to understand your financial statements? Limitless Investment and Capital’s expert part-time CFO’s in Gilbert, Arizona can quickly spot red flags and areas of improvement, and help your business make proactive decisions instead of reactive ones. Our team can give your small business immediate answers to help eliminate stress and give small business owners a peace of mind. What are you waiting for? We offer a free financial analysis for small businesses in Gilbert, Arizona!