Roj, Author at Gray Feather CFO

Challenge

When we engaged with a distribution client recently, the business was facing a precarious financial situation. Rising material and freight costs were eroding profitability, Their lender had raised serious concerns, requiring capital contributions from ownership and closely monitoring their line of credit, which was extended in six-month increments. At the outset, there was significant uncertainty about whether the company could weather the storm. The risk of a forced sale loomed large.

Financially, the company struggled with delayed and inaccurate financial reporting, which left leadership without a clear picture of their financial health.

Solution

We approached the engagement with urgency, focusing on immediate stabilization and building a foundation for long-term financial health:

1. Immediate Stabilization

Addressed critical tax preparation issues to meet lender requirements and provide clarity to leadership.
Streamlined the month-end close process, reducing it from 10–15 days to just 2–3 days, enabling timely and accurate reporting.

2. Strategic Financial Initiatives

Conducted a detailed historical profitability analysis and reviewed it with the client, allowing us to clearly define the company’s key performance indicators that would guide their turnaround.
Introduced a KPI dashboard to track targets and results over a rolling 13-month period.
Held monthly financial review meetings to ensure accountability, analyze trends, and prioritize actions, to improve operational performance.

3. Cost Optimization

Initiated a freight RFP process and implemented a competing broker strategy, resulting in significant reductions in freight expenses.
Recommended hiring a purchasing manager to address rising material costs, leading to ongoing rfp efforts and steady cost reductions.

4. Financial Department Reorganization

Transitioned the controller, who was not in the right role, to another department, enabling the finance team to function more effectively.
Developed the staff accountant’s skills, empowering her to take on greater responsibilities and refine the month-end close process.
Reduced overall finance department costs while improving the quality and timeliness of financial reporting.

Results

Over the next 12 months, the company’s transformation was remarkable:

For the first time, leadership had clarity on what success looked like, and used those KPIs to create measurable goals moving forward.
Stabilized Lender Relationships: Improved financial visibility and operational efficiency reassured the lender, reducing the risk of a forced sale.
Cost Savings: Freight and material expenses steadily decreased due to strategic procurement efforts.
Operational Efficiency: Month-end close times were reduced, improving both accuracy and timeliness while lowering departmental costs.
Team Empowerment: The finance team operated more effectively, with improved clarity and accountability.
Record Profitability: By 2024, the company achieved its best financial performance to date, generating $1.5M in EBITDA.

Key Takeaways

This case exemplifies how businesses on the brink of financial failure can recover and thrive with strategic financial management. Through trust-building, hard conversations, team realignment, and a focus on both immediate and long-term goals, we transformed a struggling distribution company into a success story.

Why Budgeting is Important

Although budgeting for the upcoming year can be a daunting process for many small business owners, it is an essential planning step to (a) define/reinforce your company’s strategy, (b) establish an actionable plan for the upcoming year, and (c) align your team behind that plan.

When done properly, budgeting for the upcoming year is a strategic exercise that sparks thoughtful discussions with your team to establish and refine agreed-upon targets. These targets will then serve as the baseline for measurement of your business’ performance for the upcoming year and can foster an environment of accountability throughout your organization.

Step 1: Create A Sales Plan

A robust and achievable sales plan is the cornerstone of the annual budgeting process. To achieve buy-in from your sales leader, it is imperative that they are meaningfully involved in this process. If they are not, it is likely they will not feel accountable towards the outcome. You will have a plan without any real buy-in which is not a formula for success.
You or your financial leader will need to also work cross-functionally with the sales leader to lend technical expertise (excel, financial modeling) to the exercise. This individual will also be responsible for incorporating the outcomes of the sales plan into a cohesive company-wide budget and should therefore lead the modeling aspects of the project.

Another critical step at the onset of this process is determining the level of granularity at which to project your sales. Most small businesses have a roster of recurring customers that make projecting sales at a customer level feasible. While this exercise may seem daunting if you have a number of customers, it is really quite manageable with access to historical customer data and a bit of Microsoft excel expertise.

For this purpose, we suggest reviewing your past sales data (sales, gross profit, gross profit margin) by customer over the past three years. From this historical data, identify outlying customers (+ or – 1 standard deviation is a good rule of thumb for this exercise) in the following categories:

Sales (Size Of Customer)
Gross Margin (Profitability Of Customer)
Growth Rate Of Customer (Trend)

Once you’ve identified significant customer outliers across these criteria, work with your sales leader to answer the following questions:

How can we deepen our relationship with our largest customers?
Have our smallest customers become a distraction?
How can we increase the profitability on our low margin customers?
Why are we winning and losing business across our customers?
Who are our customers with the most potential for growth?

These discussions should lead to next steps that will be the outline of your 2024 sales strategy.

Once you’ve broadly outlined this sales strategy for the upcoming year, work with your sales leader to prepare reasonable 2024 projections for those customers that incorporate realistic expectations for those initiatives. In some cases, revenue will not be expected to recur for customers that you determine are a distraction from your best customers / core business.

Now turn your attention to the group of customers that are not outliers (the “core group of customers”). Determine the historical growth rate for this core group of customers and project a reasonable rate for the upcoming year. Apply that rate consistently across prior year sales levels across this group of customers.

Take a step back and review the outcome of this process (your 2024 sales forecast!) for reasonableness. Most small business owners are optimists but it is important to bring a skeptical mind to this exercise. Scrutinize sizeable increases in sales and gross profit margin — are they really achievable or is it a best case scenario?

Make any final adjustments to create an achievable sales plan that has the buy-in of both your sales and financial leaders.

Step 2: Determine company staffing needs

Now that you’ve formalized your 2024 sales forecast, it’s time to align your human resources with your strategic objectives, ensuring you have the right team in place to execute your sales plan effectively. If you are a growing organization, you will likely need to create new roles to fulfill increasing volumes of business and administer an increasingly complex business. Conversely, if your sales are declining, you may need to terminate some of your existing staff to maintain or improve profitability.

Start by exporting an employee roster with pay rate information from your payroll processing software. Tailor the list to be specific to each department leader and be extra careful not to share sensitive pay information of anyone other than the employees who the leader oversees. Engage with department leaders to assess staffing needs for the upcoming year. Prompt your department leader to identify potential terminations, incremental staffing requirements, and individuals warranting promotions within their teams. Pose the questions:

What skill sets will be pivotal in the coming year?
Are there new markets or product lines that require specialized talent?
If you could rebuild the department, what changes would you make?

This is the time to review your organizational chart and map out any significant staffing or restructuring initiatives for the upcoming year. Add any necessary positions to the roster and pencil in an estimate of the annual salary for the role. Don’t forget that payroll taxes and health insurance for these additional roles could cost 10-20% in excess of the base salary.

Take a step back and review the outcome of this process. Scrutinize incremental staffing requests:

Is there software or other tools that could make existing staff more effective?
Are there underperforming members of the team who may be prompting the need for additional labor?
Is staffing growing faster than expected sales growth?

When you have settled on a staffing plan for 2024, incorporate expected changes in base salary including cost of living adjustments / raises, promotions, and bonuses. Ensure that payroll taxes and health insurance costs reflect reasonable changes based on the change in your underlying compensation and full time employee headcount, respectively.

Make any final adjustments to create an achievable staffing plan that has the buy-in of both your department leaders.

Step 3: Establish departmental operating expense expectations

Once you have a clear picture of staffing needs, turn your attention to the other expenses that keep your business running. Start with a multi-year income statement and focus on the non-compensation related expenses. Sit down with department leaders to forecast costs associated with facilities, supplies, technology, repairs, and maintenance.
Facilities and administrative costs: evaluate your workspace requirements. Will your current facilities support your projected growth, or is downsizing a more practical move? Consider rent, utilities, insurance, and any upcoming lease negotiations that could impact your budget. Review your lease to determine the rental rate for the upcoming year and do not forget about recurring common area maintenance (“cam”) charges.
Supplies, equipment, and technology: assess the supplies and equipment necessary for daily operations. Are there opportunities to buy in bulk or renegotiate with suppliers? Don’t forget to factor in technology upgrades or subscriptions needed to keep your systems current and competitive.
Maintenance and repairs: regular maintenance can prevent costly emergency repairs. Schedule a review of all major equipment and facilities to determine any anticipated repairs or maintenance needs in the upcoming year.

Remember in this exercise that not all expenses are created equal. Work with department leaders to prioritize spending based on strategic goals and return on investment. This exercise will helps ensure that your budget allocation aligns with your business priorities.

Step 4: Reviewing and finalizing the budget with team involvement for buy-in

Bring together your leadership team to review the proposed budget. Encourage open dialogue about resource allocation and priorities and solicit concerns from the team about the achievability of the plan. This collaboration helps identify potential oversights and can foster a sense of ownership and accountability amongst your team.

Once reviewed, finalize your budget with the leadership team’s approval. Then, communicate it clearly to the entire company. Enter the budget into your accounting software to allow you and your team to systematically track your progress towards your agreed-upon plan for the upcoming year.

Conclusion

Budgeting is not just a number-crunching exercise; it’s a fundamental component of strategic planning that ensures your business is on the path to success. By involving your team in creating a customer-focused sales plan, assessing staffing needs, and building a budget that reflects your company’s goals, you’ll set a strong foundation for the year ahead.

Call To Action

Don’t want to go it alone? Please don’t hesitate to reach out! At gray feather cfo, strategic planning is our business and we would love to help you build a budget that defines your goals and aligns your team behind that common goal.

Introduction

As a small business owner, one of the most critical elements of your company’s success is the alignment of your team with your goals for your company. If you’ve ever felt that (a) you lack employee buy-in on strategic initiatives or (b) that your employees are not acting like owners, you likely have an opportunity to improve your company’s performance by implementing or revising your incentive compensation plan(s).

Why Incentive Compensation Matters

Money talks. When you tie an incentive to a desired outcome, you can bet it will guide your employees’ behavior. When properly designed and implemented, a well-designed incentive compensation plan can improve alignment between employees and business owners and greatly accelerate your company’s progress toward strategic and profitability goals. When not designed properly, on the other hand, the outcomes can be less than ideal.

Common Pitfalls

To understand how to create a well-designed incentive plan, it is important to understand some of the common pitfalls:

Revenue-Centric Plans

If you have had frustrations about top-line growth not translating into profitable outcomes at your company, a sales-oriented mindset and incentive compensation plan could be at the root of the issue. In fact, the most common incentive plan pitfall in small businesses is an over-emphasis on sales.

In particular, it is quite common for salespeople to be incentivized based on sales without adequate consideration for how profitable those sales are. These types of incentives allow for gamesmanship and can reward the wrong behaviors (e.g. Prioritizing large sales volumes at lower gross profit margins).

To realign salespeople with broader company profitability, consider restructuring sales commissions around gross profit. This small shift can have seismic results by ensuring that your team’s sales efforts are properly aligned behind profitable sales.

Opposing Departmental Incentives

If you have conflict between departments, opposing or conflicting incentives could be at the root of the issue. Consider an example where a sales team is incentivized by project gross profit and the operational team in charge of completing the project is incentivized to maximize billable hours (i.E. Utilization). Such a design creates a natural point of friction and conflict, and you can expect the sales team to be at odds with their operational counterparts with regard to the number of hours billed to their projects in this type of environment.
To avoid such misalignment, ensure that your incentive compensation plans are not directly opposed in a way that creates conflict. It’s essential to create checks and balances in your incentive compensation design but not explicitly create incentives in opposition across the organization.

If interdepartmental friction is an issue, consider instead aligning your incentive plans behind common goals (i.e., the operational team is also incentivized by project gross profit [but counterbalanced by accountability for issues on the project]). Also, consider creating a quarterly or annual team or company-wide incentives that celebrate company achievements and encourage departments to work together cohesively.

Unreachable Incentives

If your incentive plan doesn’t seem to be producing the intended results, you may have an unreachable incentive. In many cases, if performance against an incentive metric is significantly underwater, employees determine that their incremental efforts will not result in additional rewards and that the incentive is no longer effective.
For example, suppose your company has realized a sizeable loss through the first six months of the year. In that case, an incentive that pays employees at a 5% operating profit margin is unlikely to motivate an employee to put in any extra effort.
Ensure that your incentive compensation plans are reasonably achievable to avoid such demotivation. It’s important to have stretch goals, but setting those stretch goals as the baseline for your incentive compensation plan can result in a loss of motivation to achieve what is seen as an unrealistic goal. If your budget is optimistic, make sure to calibrate your incentive so that some incentive is paid for improvement from the prior year (even if it doesn’t achieve optimistic budget levels).

Lack Of Control Incentives

Like unreachable incentives, employees may not be motivated by an incentive whose outcome they don’t substantially control. Company profitability metrics are an excellent example of this. While it is great to include company profitability as an aspect of your company’s incentive compensation plan, it is common that any employee does not meaningfully control the entire company’s profitability. For less intrinsically motivated and team-oriented individuals, there is likely insufficient control to motivate the employee to put in additional effort to achieve the desired incentive.

To avoid this issue, we recommend creating a two-pronged incentive compensation plan: (a) a monthly or quarterly incentive that is tied to a metric or metrics that is/are controllable by the employee and (b) a quarterly or annual incentive that is tied to company profitability. This structure creates an environment where the employee is motivated to drive improvement in their areas of control while simultaneously having a stake in the company’s overall success.

Linking Incentives To Strategic Planning

Integrating annual or quarterly incentives with the strategic goals identified during the budgeting and planning process is another opportunity to enhance alignment between your team and your company’s goals. For example, if expanding into new markets is a strategic goal for the year, tailoring incentives to provide additional rewards for performance metrics related to market penetration in that area of strategic focus could be a prudent strategy to ensure those goals are realized.

Conclusion

Incentive compensation is a strategic lever that small business owners can pull to align their team’s efforts with the company’s overarching goals. By integrating well-designed incentive compensation plan(s) into your strategic planning process, you can ensure that every employee is aware of and driven to achieve the company’s objectives. This alignment ensures that every team member is informed about where the company is headed and personally invested in the journey.

Call To Action

Think about how your current incentive structures drive business outcomes. Are they aligned with your strategic goals? If not, it might be time for a redesign. At gray feather CFO, strategic financial planning is our business, and incentive compensation is one significant aspect of that process. Please reach out if you need help aligning your compensation strategies with your business objectives. Let’s ensure your incentives are designed to motivate your employees to act like an owner.

Introduction

For many businesses, especially small to mid-sized enterprises, the path to financial clarity and strategic direction often necessitates expertise that may not always be available in-house. This is where the role of a fractional CFO becomes indispensable. Whether you’re navigating through a transition or scaling your operations, having access to experienced financial leadership without the full-time executive price tag can be a game changer.

Strategic Financial Planning

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Financial Forecasting & Modeling

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KPI & Trend Analysis

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Key Financial Person Transition

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Team Building & Coaching

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Month End Close Improvement

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Conclusion

The impact of a fractional CFO extends far beyond traditional bookkeeping and financial management. By integrating strategic financial leadership into your business, a fractional CFO aligns your financial operations with your broader business goals. This strategic alignment is essential for businesses looking to thrive in dynamic markets and complex financial landscapes.

Call To Action

Are your business’s financial strategies driving the desired outcomes? If not, it might be time to consider how a fractional CFO can bring transformative change to your financial management. Connect with us at gray feather CFO, where strategic financial planning meets execution. Let’s discuss how we can tailor our CFO services to your unique business needs and ensure your financial strategies are as ambitious and precise as your business goals.

Author: Roj

From Financial Crisis to Record Profitability

Challenge

Solution

1. Immediate Stabilization

2. Strategic Financial Initiatives

3. Cost Optimization

4. Financial Department Reorganization

Results

Key Takeaways

Creating Your Company’s Budget: A Step-by-Step Guide for Small Business Owners

Why Budgeting is Important

Conclusion

How to Get Buy-In For Your Strategic Financial Goals

Introduction

Conclusion

Creating Strategic Financial Leadership with a Fractional CFO

Introduction

Conclusion