Managing Profitable Growth — June 2015

In this post we address financial management.

For a small. growing company revenue growth is paramount. As we have stated in other posts, the CFO can help contribute to this growth through financial and strategic analysis. Growing companies must also effectively manage the costs they incur to drive this growth. Doing so is a crucial role of the CFO.

We are not proponents of wholesale cost cutting, but we do believe that smart cost management will not hinder growth; allow employees to focus on revenue generation; and prevent costs from getting out of control to the point where the only solution is dramatic cost reductions.

To be effective in this role, a good approach for the CFO is to construct a template that lists the common areas of overspending, questions to ask, proposed solutions; and the results from the implementation of these efforts. In a growing company, the template should be updated at least yearly and reviewed quarterly or monthly.

Below we list several examples of areas on which to focus and hypothetical questions to ask. Each will vary depending on the nature of a firm’s business. This template is essential to the success of cost management efforts. It should address approximately 50 areas of interest with corresponding questions. Significantly more would dilute focus; significantly less could mean missed opportunities. By answering these questions the CFO and other managers can devise solutions which should then be monitored.

The following shows examples of several key financial accounts; common areas of focus and related questions; and proposed solutions. The solutions will vary from company to company and require input from functional managers.

A) Sales
Why does the collection of receivables take so long?
Review timeliness of invoicing and frequency of follow up calls

B) Cost of Sales
How much are stagnant inventory items costing the company?
Evaluate the cost of holding versus the gross profit generated
Part of the cost includes the returns if the funds were otherwise invested.

C) Advertising Expense
What is our return on advertising spending?
Evaluate the benefits of using an advertising agency.

D) Travel and Entertainment Expense
What is the cost per person and is it profitable?
Relate the cost to gross profit generated by each sales representative.

E) Accounts Receivable
How do we handle uncollected accounts?
Compare the realistic benefit of collection versus the cost of a collection agency.

F) Inventory
Are stock outs hurting us?
Evaluate the costs of a lost sale versus the cost of holding the inventory item.

G) Capital Spending
What is the profitability of investments in our growth opportunities?
Devise system for evaluation for evaluating the profitability of new projects including monitoring actual results once the
expenditures are incurred.

For a small. growing company revenue growth is paramount. As we have stated in other posts, the CFO can help contribute to this growth through financial and strategic analysis. Growing companies must also effectively manage the costs they incur to drive this growth. Doing so is a crucial role of the CFO.

Capitol CFO Solutions serves clients in Washington D.C., Maryland, and Virginia. Please contact us for a free consultation.