What Can an Experienced CFO See That a Business Owner Might Miss?

Business owners know their businesses intimately. But when you’ve been operating a certain way for years, some financial arrangements and operating practices can become accepted simply because that’s how they’ve always been done.

Kyle Paterson sat down with Part Time CFO Services CFO Atul Swarup to talk about some of the things he notices when he steps into a business, and how a different financial perspective can uncover opportunities that aren’t always obvious from the day-to-day.

Kyle: When you’re working with an owner or leadership team, where have you been able to see something in the business that they weren’t necessarily seeing themselves?

Atul: Inventory is one area.

Sometimes a company has a significant amount of money sitting in inventory and they don’t really appreciate how much of it isn’t moving anymore.

They may still be looking at that inventory based on what they originally paid for it or what they hoped to sell it for. But when you start going through it, you find things that have been sitting there for a year or two years without moving.

At some point you have to ask what it’s really worth.

In some cases, you’re better off reducing the price and getting something for it rather than continuing to sit on it. You’re recovering cash, you’re freeing up space, and you’re getting a more realistic picture of what you have on the balance sheet.

I had one business that was bringing in new inventory and running out of room. They were getting to the point where they were considering renting a trailer for additional storage.

My view was: before you go and rent more space, let’s look at what’s already sitting here.

There was older inventory that wasn’t moving. Sell some of it at a discount. Recover some cash. Free up the space for the products you need now rather than adding another cost to store products you haven’t been able to sell.

Kyle: And there are a few financial benefits happening there at the same time, aren’t there? It’s not just about clearing some room.

Atul: That’s right.

You’re freeing up cash that was tied up in inventory. You’re also making sure the inventory showing on the financial statements is realistic.

If some inventory isn’t worth what you’re carrying it at, you may need to recognize that loss. It’s better to deal with it than continue showing an asset at a value that isn’t really there.

That improves the quality of the financial information you’re using to run the business.

It can also matter when you’re dealing with the bank. They’re looking at the balance sheet. They may be looking at working capital or covenant requirements. So you want those numbers to properly reflect what is happening in the company.

The owner may look at it and say, “We have all this inventory,” but the CFO has to ask how much of that inventory can realistically turn back into cash.

Kyle: Banking was another area you mentioned. What kinds of things do you see there?

Atul: Sometimes owners have financing arrangements that were established a long time ago.

When they originally borrowed the money, maybe the business was smaller or there was more risk, so the bank required personal guarantees or security against the owner’s personal assets.

Then five or ten years go by and nobody really revisits it.

The company may now be stable. It’s generating income. The financial statements are much stronger. The bank has years of history with the business.

So one of the things you can look at is whether those original requirements are still appropriate.

I worked with one entrepreneurial business where, when the owner purchased the company, virtually everything was personally collateralized between him and his wife.

We started having those conversations with the bank because the company had become an established business with proper financial statements and a good operating history. There was an opportunity to reduce some of that personal exposure.

Kyle: I think that’s a good example of something an owner might not even think about. They signed those agreements when they needed the initial loan and just assume that’s the way it has to stay.

Atul: Exactly.

And that’s why you go back and look at it.

Maybe the existing bank gives you better terms. Maybe you negotiate the interest rate. Maybe you reduce some of the security.

Or maybe you look at other banks.

Doing an RFP with banks isn’t a simple process, but there can be a lot of money involved in your financing arrangements over the years.

You have to look at whether you’re still getting a good deal.

Kyle: And I would imagine the quality of the financial information becomes pretty important if you’re asking a bank to reconsider its terms.

Atul: Absolutely.

If you’re going to the bank and saying the business is stronger now, you need to be able to demonstrate that.

You need proper financial statements. You need to understand your income and cash flow. You need to be able to explain what’s happening in the business.

The better the financial information is, the better position you’re in to have those conversations.

Kyle: That’s probably one of the interesting parts of being a CFO. You could start by looking at something like inventory or banking, but pretty quickly it touches a number of other parts of the business.

Atul: It does. That’s the job.

You don’t look at inventory just as an accounting number. You look at how long it’s been there, whether it’s selling, how much cash is tied up in it and whether the company needs the space.

You don’t look at the bank just as somewhere the company borrows money. You look at the rates, the terms, the security and what alternatives might be available.

It’s about understanding what the numbers mean in the context of the business.

Kyle: What have you enjoyed about doing that work through Part Time CFO Services?

Atul: I’ve enjoyed the variety. I’ve worked with a number of different companies and organizations, and you get to meet different people and help businesses in different ways.

I’ve also learned industries that I didn’t necessarily have experience with during my full-time working career.

You bring your finance experience, but you also learn something new every time you go into a different organization.

That’s been very valuable for me.

The part-time model also gives me flexibility. I can work as much or as little as I want and continue doing work that I enjoy.

Kyle: You’ve also been heavily involved in the Peterborough community over the years.

Atul: Yes. I’ve been involved in Peterborough for more than 30 years.

I’ve been Chair of Showplace and involved with the hospital board, YWCA, United Way, Fleming College and the Community Foundation of Greater Peterborough, among others.

I’ve always enjoyed community work.

You meet people, you develop relationships and friendships, and you learn a tremendous amount.

You’re helping local organizations, but there’s also a lot of personal development that comes from being involved. It’s been an important part of my life.

This conversation has been edited for length and clarity.

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Atul is one of the experienced finance leaders at Part Time CFO Services, working with owners and leadership teams on the financial issues behind the day-to-day operation of their businesses.

Sometimes that means improving reporting or forecasting. Sometimes it means looking more closely at cash, inventory, banking arrangements or financing.

And sometimes the opportunity starts with a fairly simple question:

Why are we still doing it this way?