🔒How To Be Your Own CFO

Few if any business leaders are more invested in the success of their companies than small-business owners. They’re there, locked in hand-to-hand combat with fate and fortune — often risking the financial well-being of their families as well as themselves.

But many if not most small-business owners face this formidable challenge with scarce or even no formal training in managing and nurturing the economic dimension of their companies. This financial knowledge is key to managing a business that’s built to last.

That’s where Judy Otton comes in. Otton, of Oxford, is principal of GrowthCast, which she founded in 2013 to help small-business owners manage cash flow, maximize profits and ensure the long-term financial well-being of the enterprise.

Otton says she can help entrepreneurs find reliable accounting help or hire a bookkeeper or a controller for a growing business; that’s not what she does. Her mission is to help the business owner see the big financial picture. “They need to be steering the ship,” she says.

To accomplish that, “I want to make sure they have the right systems in place, the right people in place, and they understand the handful of things they need to be keeping an eye on — cash flow, profitability, profitability by line of business, or other metrics specific to their business.”

For example: “Most business owners know how to read a P&L [profit-and-loss statement],” Otton says, “but they don’t all know how to read a balance sheet — which [is a snapshot] of the [financial] health of your business at a current point in time — or a cash-flow statement, which is really important, because that’s where [many business owners] get into trouble.”

For example, “You can be profitable but still have cash-flow problems,” explains Otton. “And sometimes that’s a disconnect with small-business owners.”

• Create a budget, monitor it regularly — and adjust as needed. You would think, like, duh. Au contraire. “Many businesses in the $1 million to $10 million [annual sales] range don’t have good budgets,” Otton says. “And if they have growth plans for the coming year, they really need to budget to make sure they have resources allocated to any new initiatives, and they’re keeping track of that.

Other key metrics that need to be part of the budget? “The [sales] pipeline — business coming in,” Otton says. Also related to sales is customer retention and lead generation — knowing how many leads, on average, it takes to close a sale. “If you say, ‘I want to do $5 million [in sales] next year,’ it’s critical to know that it’s going to take 100 new leads to get to that number,” Otton explains. “And are you on track to do that?”

And speaking of sales…

• A sale isn’t a sale until you collect the cash. Many business people “close” and book a sale, send out an invoice — and think they’re done. They’re not. “Until the money [from a booked sale] comes in the door and you can spend it, it’s not your money,” says Otton. Also, many business people shun collections calls because they’re afraid of angering or alienating customers. But you don’t have to be “mean” to get your money.

In collections, “You catch more flies with honey than with vinegar,” Otton says. “It starts with regular [phone] calls — very courteous, very professional: ‘Mr. Client, I was just wondering when we can expect our money.’ Firm, but not nasty. I also recommend alternating between phone calls and emails, because different clients respond to different [communications]. Most of the time that’s enough to shake things loose. And even if the [client] company is in financial trouble, if you’ve been calling them every week, when they get some money you’ll be in the front of their mind” to make whole.”

• Calculate your actual cost of goods and services. “Many business owners get into trouble by not really understanding the cost of the services they’re delivering,” Otton says. She cites the example of a client in New York that wanted to sell a permit-expediting service to commercial clients for $300 — because that was a price point that “seemed” about right. But the actual labor cost to deliver the service was $500. Otton was able to work with the client to streamline the process of service delivery and drive down the actual cost — and to raise the price charged to the client.

• Beware of profit leaks. “There’s a lot of money that just leaks out of businesses through neglect” or inattention, Otton notes. These include bank fees, interest charges, subscriptions to periodicals or membership fees that renew automatically. Business owners need to monitor these and, for discretionary expenses, continually ask themselves if they’re still benefiting from the subscription or service. “None of them may seem like a lot of money, but when you add them up it gets to be real dollars,” Otton notes.

• Marketing is not a luxury. “Many people who start new businesses — especially retail business — naively believe, If you build it, they [customers] will come,” says Otton. Uh, no. “They don’t know, and they don’t care. They’re not going to come unless you give them a reason to come.” And, except for business owners with thousands of close personal friends, perhaps, the only way to tell potential customers that you exist is to invest in advertising and marketing. And that costs money.

On the other hand, “You can spend a lot of money on advertising and marketing,” Otton notes, “but if it’s not effective it’s not going to get you anything. You need to speak to the right people” — those who are most likely to buy your product or service. Niche marketing is therefore key.

• Don’t be afraid to raise prices. In many industries there’s a powerful correlation between price and perceived value, Otton notes. Would a pair of Air Jordans be as sexy if they retailed for $29.95?

• What if you have no revenues? Otton cites the example of an entrepreneur who pours his or her life savings — not to mention hopes and dreams — into a new business, expecting customers to flock to it from the day the doors are first flung open. But is that entrepreneur financially prepared for a launch where sales don’t begin to meet expectations? Often not — and that can spell disaster not only for the nascent enterprise, but sometimes for the financial fortunes of entire families.

“I tell business owners they should be able to live for a year” with no revenues, Otton says — ”to pay your rent, pay your personal expenses. It may be a year before you can take a paycheck out of that business — and maybe two years before you can expect to earn a decent living.”

On the other hand, “If you’ve been in business for five years and you’re still not making a decent living,” she adds, “there’s something wrong with your business.”