Financial Modeling Mistakes to Avoid

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Financial modeling is an important part of any type of forward looking financial planning. Contrary to popular opinion, increasing revenue and returns is not as simple as “turning on the faucet”. In order for revenue and returns to follow growth, you’ll need to model out exactly HOW you’ll get there, tweaking different levers until you see the revenue where you want it to be.

Financial Model

What is a Financial Model?

Financial modeling is used to create a financial representation of the business at a future date. It is also a tool used in forecasting that relies on key assumptions to perform calculations and make recommendations based on that information. Good models are built out using varying assumptions, because of the somewhat unpredictable nature of forecasting. By modeling out the results of a range of values for each assumption, you can see if your business is on track to meet your goals, or if you’re headed for trouble. Models inform your financial planning, helping you to set better goals and reach them over time.

How to Use a Financial Model

Modeling can be used to do a number of things, depending on the assumptions and calculations you use. Here’s a good list of the top 10 types of financial models, though it’s in no way complete. While models can be used to value companies and options, they can also be used to help make key decisions in business, such as the decision to go public, or to open a new product line. They’re also helpful in deciding whether or not to acquire a company, or to expand to a new market. Depending on how you structure them, models can be extremely helpful in making informed business decisions.

Avoiding the Pitfalls of Financial Modeling

Avoiding the Pitfalls of Modeling

While financial models can be very useful in forecasting and planning, the model is only as good as the one building it and the assumptions feeding into it. When building a model, be sure to avoid these common mistakes:

Pulling From Incorrect Financials

Because many models pull from the financial statements, if your financial statements are a mess, it’s probably safe to say that your model will be too. Be sure your financials are accurate and up-to-date before building a model that relies on them. In most businesses, this also requires appropriate controls and processes to be in place so that the model is correct going forward. Not sure where to start? Here’s an article that may help.

Building a Concrete Model

As with most planning and forecasting, it’s nearly impossible to get every aspect of a model 100% correct. That’s why it’s so important that models are living, breathing documents. As time goes on, assumptions change, and your business progresses, you can use your model as a template, adjusting the levers and assumptions as needed.Don’t make it too difficult to alter your assumptions and you’ll save yourself a ton of time by not building an additional model.

Trying to Nail Down One Assumption

Assumptions are the core of a model. Yet, while incorrect assumptions lead to incorrect recommendations, it’s extremely difficult to make an accurate assumption, especially as you model out farther in the future. Instead of trying to nail down an estimate, try to get a range of values for that particular assumption. Then, use the model to calculate the different outcomes for a few different values in the range. Modeling this way also gives you a set of expectations, should things go awry. Now that you’ve got a few different outcomes to work with, you can plan for the best and the worst.

Using Too Many Assumptions

The more informed your model is, the more information it can give you about the business. However, there is a point where using more assumptions doesn’t provide more benefit. Particularly in startups, it’s difficult to assume anything very far into the future, let alone making accurate assumptions for 20 different factors. Though it may seem beneficial to spend hours planning and calculating every assumption, Dave Chase suggests focusing on 5-15 assumptions that you can really hone in on. You’ll save time and get a more accurate model in the process.

Financial models can be effective tools for planning and forecasting. By modeling out revenue, businesses can more readily “turn on the faucet” and begin reaping the rewards.


Advanced CFO consultants are experts in modeling and forecasting. We offer the full suite of financial services, from CFOs to Controllers and Accountants. You can trust that your business is in the hands of seasoned veterans, ready to take your business to the next level.

The post Financial Modeling Mistakes to Avoid appeared first on Advanced CFO.

from http://advancedcfo.com/financial-modeling-mistakes-avoid/

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Business Basics: The Difference Between CFO and Controller

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In many small businesses, the financial team may be made up of one or two people. However, as the function grows, it’s important to ensure that you’re utilizing the right people and skills for different financial functions. Two roles that often have a lot of overlap as businesses grow are the roles of Controller and CFO. Here’s why your business needs both.

Controller

The controller of the business is essentially the head of the accounting department. At larger companies, the controller usually manages a team of accountants to ensure timely and accurate reporting, budgeting, tax compliance, payroll, and other accounting functions. In smaller companies, the controller may be the only accountant, supported by other accounting clerks. The controller traditionally reports to the CFO, however, in small companies they may report directly to the CEO or President.

If business were a game of football, the controller would be the scorekeeper. Their function usually is more retroactive, consisting mostly of record keeping and financial reporting, as opposed to working to alter the financials of the future.

CFO

The CFO, as opposed to the Controller is more forward looking. While the CFO really owns the entire finance function (again, the Controller reports to the CFO of the company when there is one), their main value add is in forecasting and strategizing for the future. While the Controller is only expected to have a good understanding of the finances of the business, the CFO is also expected to have a good understanding of the business as a whole, being able to contribute value across many aspects of the business and assist with strategizing for each of them. They are also expected to use this understanding to know when and how to leverage different business elements to drive growth and revenue.

Going back to the football analogy, the CFO is like the coach — planning, reviewing film, and deciding what do to next. With just a bookkeeper or a controller, the business misses out on key opportunities for growth because of the lack of planning and strategy.

How They Work Together

While they are separate functions and each is necessary to run a successful business, the CFO and Controller work together closely. Without a Controller, the CFO may not have accurate financial data to make good decisions. Because their analysis and strategy relies on accurate financials, the CFO is also, in part, responsible for the performance of the Controller.

While separate roles, the CFO and Controller work closely to realize the vision of the CEO and to drive the business forward. The Controller needs to have a great understanding of accounting, GAAP, and best practices. The CFO needs to have a good understanding of the accounting function, as well as finance and business strategy. For this reason, having a good Controller isn’t enough for most businesses. Without the experience and expertise a good CFO brings, companies miss out on the strategic and financial planning available. Likewise, if you have a CFO, but they’re more of a bean counter than a key advisor and strategist, you’re not fully leveraging the finance department of your business.


If you’re thinking it might be time to hire a CFO, check out this article, or contact us. At Advanced CFO, we provide outsourced CFO services that fit your needs and help you take advantage of opportunities for growth and avoid pitfalls.

The post Business Basics: The Difference Between CFO and Controller appeared first on Advanced CFO.

from http://advancedcfo.com/business-basics-the-difference-between-cfo-and-controller/

When To Hire A CFO For Your Startup

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So you’ve got a new startup. You’re the CEO and you’ve got a partner and a small team. You are managing the finances of your business because no one else knows how to, but your only experience is from a few courses in college and many YouTube videos. How do you know when to bring on a finance team member or hire an outsourced financial services company? Here’s everything you need to know about bringing in financial help.

Why Your Startup Needs a CFO

According to an article on TechCrunch, the ‘old rule’ for hiring a CFO was to wait until the business reaches around $100M in revenue, or is preparing for an IPO. However, new best practices show that this is no longer the case for most startups. Nowadays, finance departments contribute more to the company than ever before. Once “bean counters”, CFOs are now expected to not only acquire and package the right data, but also to model, forecast, and strategize across the organization.

Because of these major changes in the finance department of all businesses, startups can especially benefit from hiring a CFO early. Because of the key role a good CFO plays in strategizing and planning, hiring early can allow your startup to take advantage of opportunities and avoid threats early on. This additional financial planning and analysis can be the difference between a failed startup and a successful one.

Hire Early, But Not Too Early

Working for a startup often means loose job descriptions and working in several different areas of the business. Many founders start by doing their books themselves, while managing the business. Dave Chase, CEO of Advanced CFO says,

CEOs have to be honest with themselves in how they should be spending their time. If they could have a greater impact and provide more value doing something else, get out of the financials.”

As CEO of a startup, ask yourself, am I really contributing the most value by spending my time working through the financials?

While it is important to hire a CFO early, it is possible to hire too early. Because many startups are cash-strapped, it may be appropriate for a founder or other key team member to handle the finances of the business for a time. However, as Dave Chase recommends, once their expertise, experience and time is better used elsewhere, it’s time to bring on someone else. CEOs should consider their funding and make a decision based on the experience of their team and the expertise needed to succeed.

Explore Outsourced Services

Another great option for startups are outsourced CFOs. Outsourced CFOs are experienced CFOs who work on an hourly or fixed basis. Most do part-time, full-time, and interim CFO work, depending on your company’s needs. With the average CFO making a salary of $300,000+ a year, most startups don’t have the luxury (or need) to hire a full-time CFO.

Not only will Outsourced CFOs save you money in the long run, but you’ll also get access to experienced professionals who have worked with several other startups. They’ll be even more equipped to spot opportunities and threats, then to act accordingly. Hiring this way puts the experience of the experts in your hands, giving you the best bang for your buck.

Advanced CFO offers the full suite of financial services, from CFOs to Controllers and Bookkeepers. You can trust that your business is in the hands of seasoned veterans, ready to take your startup to the next level.

When it comes to your startup, hiring the right CFO at the right time is crucial. Once your time as a founder is better spent running the business, rather than managing the books, you should start considering hiring on a CFO. Whether outsourced or in house, a good CFO can be a game changer for your business.

The post When To Hire A CFO For Your Startup appeared first on Advanced CFO.

from http://advancedcfo.com/when-to-hire-a-cfo-for-your-startup/

The Best Way to Clean Up Your Financials NOW

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Clean up your balance sheet today and your other financial statements will fall in line. Messes in the balance sheet make for messes in the income statement and cash flow statement. By cleaning up this one financial statement, you’ll be one step closer to more informed decision making and more accurate forecasts.


The most important aspect of a CFO’s job is to help the CEO make informed, strategic decisions. These decisions rely heavily on the availability of accurate, timely, and appropriate data. If the financials are a mess, it’s infinitely harder, if not impossible, for the executive team to make good decisions on behalf of the business. Apart from problems with processes and controls, many financial messes can be cleaned up by cleaning up one key thing: the balance sheet.

Balance Sheet Basics

The balance sheet accounts for the company’s assets, liabilities, and equity at a given point in time. During the course of a month, the balance sheet is changes with every transaction the company makes. Significant changes in the balance sheet can inform executives of changes in the cash conversion cycle, receivables turnover, and can warn of cash flow problems. When coupled with the income and cash flow statements, a CEO can more accurately gauge the health of the business. If the balance sheet is incorrect, so follows the income and cash flow statements and, consequently, any decisions made as a result of those.

Record Transactions in the Correct Period

Accidentally accounting for a transaction in the wrong period can throw off cash flow forecasts and make it difficult to balance the balance sheet. Double check to make sure that payables are resolved in the correct period. Check your previous month’s balance sheet to see if it’s changed — if it has, changes have been made since the books closed. Correct any transactions recorded in the wrong period and account for them in the correct one.

Balance Your Balance Sheet

Rudimentary, yes, but your balance sheet should always balance. If your Assets don’t equal Liabilities + Equity, you’ve done something wrong. At least monthly before close, double check accounts to ensure that they are accurate. If there is an incorrect account balance, you’ll need to go through the entries associated with that account to find the error or make appropriate adjusting/correcting entries. Common errors are: posting entries to the wrong account, misclassifying as debit/credit, and duplicating entries.

Build On Your Corrected Financial Information

Once you’ve corrected errors in the balance sheet, you’ll need to double check your other financials. Because the it informs other financial statements, you’ll also need to update anything that is pulling data from your balance sheet. Most importantly, make any necessary corrections to your income and cash flow statements. If your balance sheet is correct, then everything it informs should be correct. If you still don’t trust the numbers, it may be time to bring in an expert to take a look.

A CEO relies on accurate, timely financials. Financial strategies based on incorrect financials are destined for trouble. If your business’ financials are out of line, start with the balance sheet. Messes in the balance sheet make for messes in the income statement and cash flow statement. By cleaning up this one financial statement, you’ll be one step closer to more informed decision making and more accurate forecasts.

The post The Best Way to Clean Up Your Financials NOW appeared first on Advanced CFO.

from http://advancedcfo.com/the-best-way-to-clean-up-your-financials-now/

Trust Performance Disrupts the Cycling Industry

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They’re at it again.  Dave Weagle, Hap Seliga, & Jason Schiers, all legends individually in the cycling, world have gotten together and been secretly planning to disrupt the mountain biking space.  Now four years into their skunkworks project, they’ve blown our minds with their new product, the Message from Trust Performance.

The Message

The Message is leading the cutting edge technology for front suspension. Featuring a twin-tube, thru-shaft damper housed in a carbon chassis, this fork changes the game for serious riders and joyriders alike. The Message boasts an impressive lack of chatter, more traction around corners, and precise, predictable steering. Trust Performance says, “If we told you how good we think the Message is, you probably won’t believe us… [it’s] a mind-blowing reset of what you think a front suspension should do; it’s something you feel from the instant you start riding.”

The Message’s revolutionary design is sure to disrupt the cycling industry… big time. This complete redesign of such a rudimentary element of the mountain bike is literally going to positively shift the experience for all mountain bikers.

What Makes Them Different

Grit

Entrepreneurs come from all backgrounds and culture, vary widely in what they look like and we have a hard time identifying one characteristic common among all.  The one exception to that may be the ability to stick to the mission, or grit.  The founders of Trust Performance, knew that the path they were on would be complex and that they would also be fighting giants every step of the way.  Their tenacity to stick to their vision of a new and better riding experience and what they knew ‘could be’ has carried them through many business challenges in which I have witnessed others give up.  And while never giving up can look messy at times, one thing is certain, giving up results in failure 100% of the time.

Brand Loyalty

I first observed the rigorous adherence to brand in my 10 years at Honeywell where, as a finance professional, I learned the value of maintaining a consistent commitment to a brand.  That commitment related to both the imagery and the brand promise. Alignment between the two is a beautiful thing. The company name (Trust Performance), the product (the Message), and the overall brand promise of reliability, delightfulness, & leading technology that actually performs all are remarkably consistent.  And this wasn’t by accident. Jason, Hap & Dave stuck to the script in the creation of their company, product and brand.  Brand matters.

Expertise

Another major advantage the Trust Performance team has going for them is their expertise in the field. All respected cyclists, Hap, Jason, and Dave are truly passionate about the sport. However, their expertise doesn’t stop with being well known cyclists. Hap was the co-founder of Competitive Cyclist, the ecommerce destination for bike specialty retail. Jason, founded ENVE Composites, the world leader in carbon fiber wheels. And Dave, “founder, designer, engineer, and everything else” for the DW-Link, revolutionized rear-end suspension. Together, the three of them are the dream team and they’ve synced up to create the ultimate upgrade for your mountain bike. Trust Performance is disrupting the industry in a big way.

 

As CFO of Trust Performance, I’ve had a front-row seat to their disruptive entrepreneurship and have been on a ride with them in an influential startup in an industry I love. Time and time again, Advanced CFO has privileged to be part of many emerging outdoor brands.  Each of them has taught and reminded of the key characteristics of entrepreneurial success. Trust Performance is a Harvard Business Review quality case-study of entrepreneurship.  Through their grit, brand loyalty and expertise, they are sure to rock the world of avid riders. Learn more about Trust Performance and The Message here.


David ChaseManaging Partner at Advanced CFO, has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With nearly 20 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $0.5 billion.

The post Trust Performance Disrupts the Cycling Industry appeared first on Advanced CFO.

from http://advancedcfo.com/trust-performance-disrupts-cycling-industry/

3 Ways to Improve Finances for Q1

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Preparing for the start of a new year can be daunting. Long-term, short-term planning, and clean financials will give your business the springboard it needs to launch into its best year yet.


As we approach the end of a year and the beginning of the next, there are several things that you can be doing to prepare your business for the best year yet. Here are 3 suggestions to improve finances for Q1.

Long(er)-Term Planning

To make the most out of the new year, prepare your business to start strong in Q1. Your strategic plan is your guide to continued and healthy growth. This plan should be specific, identifying key levers in the business and when to leverage them. Your plan should also identify Key Performance Indicators that are perfectly aligned with the near-term goals of your strategic plan, and allow you to check in on your progress periodically. For startups, a “long-term” plan could be as short as 3-6 months, depending on the stage of the business. For a more established business, shoot for at least 2-3 years.

Your long-term financial plan should also reflect your strategy. If you are planning to grow by 20% in the coming year, how will you increase revenue? Your strategy should be evident in the financials. For example, to increase revenue, you may need to allocate additional resources to Sales and Marketing in order to see the growth you’re looking for. You may also need to hire additional employees in order to accommodate the additional sales. And you’ll need to understand how much you can reasonably expect from each sale rep. This level of detail creates a long-term plan that reflects your growth strategy and is a plan you can operationalize.

A good long term plan also explores possibilities like: changes in the economy, capital needs (human and financial), and unexpected growth. Prepare a plan for an economic storm. What does your business need to do to survive? If necessary, create a plan for raising capital. Think about how, when, and from whom to raise funds.  Or conversely, determining what options can you take to reduce spending to help weather the storm will help give you confidence to move forward

Short Term Planning

Short-term planning is essential throughout the year, but particularly as your business prepares for another Q1. You should create a short-term cash forecast to know how you’re doing and if you’re on track to reach your long-term goals. Be sure to consider any foreseeable potential cash shortages related to accounts receivable and accounts payable. You should also have a short-term plan should disaster strike — think: unforeseen legal fees, natural disasters, economic downturn, etc. Startups, in particularly should have a plan in the event that the money dries up and they can’t raise capital. 

Clean Up Your Financials

One common issue for many businesses is that the financials are a mess — balance sheets aren’t balanced, reporting isn’t timely or accurate. With inaccurate information as its baseline, forecasting and planning are misinformed and worthless. Year end is the best time to perform financial cleanups so that the messes don’t carry into the new year.  Too frequently companies overlook the status of their balance sheet, but an inaccurate balance sheet almost guarantees an inaccurate income statement. You should begin with your balance sheet.

If you’re worried about the integrity of your financials, it may be a good time to review your processes and controls to ensure you’re getting timely, accurate information. You might consider bringing in a professional to help ensure that you’re getting the information you need, when you need it.

 

Overall, when prepping for a new year, make sure your long-term and short-term plans are laid and that your financials are accurate. Doing these 3 simple things can help you hold your people accountable and ensure sustainable growth for your company.


David ChaseManaging Partner at Advanced CFO, has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With nearly 20 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $0.5 billion.

The post 3 Ways to Improve Finances for Q1 appeared first on Advanced CFO.

from http://advancedcfo.com/3-ways-to-improve-finances-for-q1/

How Traeger Found its Spark

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Entrepreneurship has increasingly become the hot career recently.  Many of us are trying our hand at it and frequently we look around to see who’s doing it right.  For me, a shining example of who’s been doing it right for years is our friend Jeremy Andrus at Traeger Grills.

It may make him uncomfortable but I’m letting it be known that he is officially my man-trepreneur crush…and I know I’m not alone.  Not only is he a fantastic entrepreneur but he makes my top 10 man’s man list.

Jeremy is an example of one who is doing it right in and out of the office.  For Jeremy, there isn’t a difference between his office persona and his out-of-office persona…and I applaud him for that.  CEO.com’s interview of Jeremy recently was a great reminder of why he’s been so successful in growing a vibrant business, filled with people who love the culture, and maintaining life balance.  Bravo Jeremy.


David ChaseManaging Partner at Advanced CFO, has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With nearly 20 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $0.5 billion.

The post How Traeger Found its Spark appeared first on Advanced CFO.

from http://advancedcfo.com/how-traeger-found-its-spark/