Saturday, December 31, 2011

Juggling Cash (December 2011)

There is no surer symptom of an unhealthy business than one that is forced to juggle cash. Quite simply, this means they are running so tight on cash every day that they are making conscious decisions as to who does and does not get paid based upon daily cash receipts. This process is incredibly time consuming, prone to error, stressful for those working the process and adds absolutely no long term value to the business. That said, I see businesses who have allowed themselves to get into this position on a regular basis. For perspective, a healthy business pays approved invoices within terms because it has the resources to do so. The process is simple and quick.

The problem stems from a business that is undercapitalized due to either a lack of equity capital put into the business, too much money pulled out when times were good leaving little reserve capacity, or a history of sustained losses that have eroded the equity capital base and pushed up borrowing. Frequently, the company is now at its debt limits and is forced to “juggle cash” in order to make payroll and keep key vendors happy. This is otherwise known as robbing Peter to pay Paul or in more recent times, using Visa to pay MasterCard.

This process is incredibly expensive and takes a toll on the organization’s psyche. I have seen very capable controllers spend almost all of their time on this process while being forced to ignore cost savings opportunities and efficiency initiatives that would help in the longer term. They are moving cash between various accounts and entities, trying to collect from customer a few days sooner and stringing out vendors as long as possible. Costs mount in terms of late fees, credit card charges, interest, penalties and the like but these pale in comparison to the real cost which is staff time.

Vendors become less responsive and when they are healthy enough significantly tighten terms and even fire the company (refusing to do business with someone who is slow pay). Unhealthy vendors will continue to work with you “hoping” that things will turn around as they feel they need to keep recording revenue even when payments are late. Usually, this weakens their financial position, too. At times, you can have a vendor help you through this period but that requires transparency and honoring commitments when you make them. I’ve worked in businesses healthy enough to help a struggling customer and it can be a win-win. I have also fired customers who were high touch, slow pay and generally unprofitable. Frankly, it’s a great feeling to take that step.

If you find yourself juggling cash, I would encourage you to step back and try to understand the root causes. Look at your recent profitability and capitalization. But both of those must be honest assessments.

Looking at profitability requires a solid balance sheet review. Is your inventory correctly valued? Are all of your receivables collectable or is there a proper reserve for collection issues. Are all of your liabilities recorded? Does depreciation allow for capital replacement? Have you ignored maintenance issues so long that there is a “ticking time bomb” out there waiting to go off?

Your banker will welcome a conversation on your capital structure and the appropriate amount of leverage for a company of your size, life cycle, and industry.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Wednesday, November 30, 2011

Simplify (November 2011)

At one of my clients a number of items that we have been trying to simplify for some time have recently come together. The difference on the administrative side is amazing. We operate with very light staff levels yet we had someone clamoring for “more work”. How often do you hear that?

By simply changing our expense reporting, a task that used to take a full day is now being done in a few hours. What is the value of freeing six hours of time? Some might argue that it is zero because you can’t reduce a full time employee’s salary by six hours and put that money in the bank. Others might take the hourly rate for that employee plus employment taxes, fringe benefits, etc. and multiply by six and argue that is the value. I would look at it completely differently. Those six hours are extremely valuable because it is like rolling a log down a hill. Once you get it going there is a certain momentum that builds. We used (invested, if you will) those six hours in other process improvements.

Next we tackled our invoicing processes and with the help of others in the company, made big improvements. Monthly customer invoicing which used to get completed over several weeks is now 95% complete on the first work day of the month with some minor follow up needed to complete the process. Not only did we reduce the hours used to produce invoices, but because they are sent to customers sooner, we get paid sooner thereby accelerating company cash flow!

Those improvements along with others released enough hours that we were able to spend a few days resolving a customer issue. We used an administrative resource for a project that would have otherwise been completed by services delivery staff that were already over committed. While they couldn’t find a couple of days to fix the customer issue due to other priorities, they were thrilled to find a couple of hours to provide oversight and direction. The result was that we resolved an issue which was causing a delay in payments. The customer was delighted since the root cause was an error on their part and it was actually their responsibility to fix the issue. While they knew they should have fixed it, they just didn’t have the knowledge and time to get it done. They appreciated that we “stepped up” and did more than our fair share. They cut checks for the back payments within days of the matter being resolved. The amount of those checks was at least 20 times the hourly rate calculation mentioned above.

But, of course, it gets better. The hours that we were applying to that on-going problem were now available to deploy elsewhere. I personally moved two monthly tasks off my plate to someone else in the organization now that they weren’t as busy. While the tasks are necessary, the processes were well established and they no longer required someone at my level to complete them. I had been doing them only because there wasn’t time elsewhere in the organization. Anyone who knows me well knows that I hate doing anything routine more than a couple of times in order to perfect the process. This freed my time to work on more strategic issues with the CEO.

Whenever you have the opportunity to simplify a process or remove complexity in your organization, I recommend doing so. Not only will you capture the benefits you were anticipating but you are likely to find hidden benefits as well. The results just might surprise you.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Monday, October 31, 2011

What's Your Deadline? (October 2011)

What’s your deadline? That’s a question that comes up a lot and people may or may not give much thought to the answer. My wife asked me that question about a project that I was working on recently and it actually caught me by surprise. I had been working on the project as time allowed and hadn’t made it a real priority. Consequently, progress has been slow as projects with committed deadlines (almost all of them) consumed time and resources and got done first.

During the 60 Minutes interview of Walter Isaacson who wrote what will likely be the authoritative biography of Steve Jobs, Isaacson said the Jobs would put forward deadlines that everyone around him thought impossible and that it was through Jobs sheer force of will and insistence on meeting the deadline that the goal would actually be met. That’s a powerful thought. The action of choosing a deadline can be so motivating that it makes the seemingly impossible occur.

I remember my very first corporate job. There was a project list and in one of the columns was the word “Deadline”. In the very next column were the words “Revised Deadline”. How many times do you think the original deadline was met? Almost never. The powers that be had acknowledged that they expected the deadline to be missed by incorporating a revised deadline into the report. No one took the original deadline very seriously.

These are three diverse examples about the power of deadlines. Deadlines are more important than most people realize. When a deadline is set, it is an opportunity to send a message about the importance of the project and management’s expectations. That message can either be motivating or demotivating. Are deadlines an imperative in your organization and do people go to extraordinary measures to meet them? Or as the old joke goes, is it more like: “I love deadlines, especially the whooshing sound they make as they go flying by”?

The deadline culture can make a huge difference in your organization’s performance. I’ve worked in multiple places from those where deadlines were essentially ignored to those where they were considered an imperative and people worked extraordinarily hard in order to meet them. It is without question that an organization that respects deadline gets more done and performs at a higher standard than those that take a more relaxed approach.

None of this should be construed to say that a deadline should be arbitrary and capricious. Setting deadlines that don’t consider the magnitude of the work and the people responsible for doing it will most likely be ignored. That said, using aggressive deadlines that challenge people (even if they are initially thought to be unrealistic) will get more out of the organization than most thought possible. Moreover, it will leave everyone in the organization feeling good about themselves. They will recognize that they achieved something that they didn’t think possible and that their boundaries are far greater than they previously believed.

The next time you begin a project, ask: What’s your deadline?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Friday, September 30, 2011

A Clerical Error Causes Bankruptcy (September 2011)

About a month ago I read an article about a company that sought protection under Chapter 11 bankruptcy laws for a “clerical error”. As they say: “You just can’t make this stuff up.” The headline actually blamed it on tax bills which arose as a result of the clerical error. To suggest that either tax bills or clerical errors are the root cause of a company failure is foolish. Tax bills (in this case for employment taxes) aren’t a surprise. They are a cost of doing business. I assume this is a case of management and its lawyers trying to put some public spin on the problem. Of course, it could be the case that they actually believe this.

The root cause is some combination of not being able to make the business model work in the current economic environment or management being asleep at the wheel. Given the spurious comments from management and their counsel, I’m betting on the latter.

There is a relationship between net income and cash. The exact relationship depends on many factors For example, growth businesses can be net income positive but need cash to support investments in inventory, capital expenditures and expansion. For a business that is relatively stable with little capital investment requirement, the relationship between net income and the change in cash might be one for one. In other words, depreciation might roughly offset new capital investment. Receivables and payables might vary on a month to month basis, but over the course of several months or a year, don’t change very much. Alternatively, it might be a business where most customers pay by cash or credit card which means the business operates with virtually no accounts receivable. In any event, management should understand the relationship between net income and cash flow. To the extent the business is not behaving accordingly, that is a huge red flag.

Further, management should understand all the costs of running the business and know whether they are being recorded properly each month. Will there be accounting mistakes and clerical errors in a business? Yes. One of my companies records approximately 30,000 transactions every month. At 99.9% accuracy that would be 30 mistakes per month. At 99.99% accuracy, that would be 3 mistakes per month. Truthfully, we’re operating somewhere in the middle of that band and working on automation in order run virtually mistake free. That being said, none of the 10 or so errors among those 30,000 transactions are material. The very fact that we know about them says that we have a process which finds and fixes them (often before we close the books). Even if left unchecked, they wouldn’t have a material effect on the financial statements. If it was material (and something which could put a company into bankruptcy is no doubt material) the error would be found and fixed.

It is the responsibility of management to properly present the financial condition of the company through monthly financial reporting. For management to suggest that they didn’t understand the costs of running the business or the financial condition of the firm is simply an indication that they have abdicated their responsibilities. They should be replaced without hesitation.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Tuesday, August 30, 2011

Working With Your Banker (August 2011)

Believe it or not, your banker wants to lend you money and wants to see your business grow. That’s how they earn their money. They borrow from depositors and pay them a rate of interest and lend to businesses at a higher rate. At a deeper level, banking is obviously much more complicated but at some level it is very simple (like most businesses).

That said, in order for the bank to make a reasonable return, they have to manage their risk which means adhering to their underwriting guidelines and making reasonable judgments before lending. This is why banks have committees to approve loans.

Often, I find clients telling me that their bank won’t work with them. This usually means that they won’t increase their credit lines. This is usually followed by the comment that the banker “just doesn’t understand our business”. Well, that may or may not be true. The banker probably doesn’t understand your business as well as you. Nor should you expect him to, after all, they first and foremost understand banking. On the other hand, I have at times seen bankers demonstrate a better understanding of a business than the owner.

Generally, however, it is the job of management to help the banker understand the business. Typically, when I hear a complaint about the banker, I ask to see the “write-up” that is sent with the financial statements. Often, I get a blank stare (or silence if we are on a phone call). In addition, it is not uncommon for financial statements to be poorly presented (too much or too little detail, no logical order, poorly formatted, etc.) or simply incomplete (often missing the statement of cash flows or comparisons to year ago or budget). How can the banker represent the company at their lending committee meeting if management is not giving them the tools to do so?

When presenting financial information to your banker, it should be timely, well prepared, include all financial statements (income statement, balance sheet and statement of cash flows) and include comparisons to prior period, year ago, and/or budget as appropriate. It also needs to come with a “management discussion and analysis” which explains how the business is performing. This allows the banker to understand your business and represent you within the bank. It also allows them to do their job better because they can ask better questions about your business since most of the basics will be covered in the memo.

Banks have underwriting guidelines which change from time to time due to market conditions and issues internal to the bank. But guidelines are just that . . . they are not necessarily cast in stone. By providing an explanation of the financial statements management demonstrates that they understand the financial position of the business as well as the bank’s perspective. The better job that management can do of this the more likely that the bank will make an exception to its guidelines if and when it is necessary.

Banks lend to people and therefore the relationship between management and the bank is very important. The better that relationship, the better the bank can help the business. Ultimately, that is what you want from your banker and what your banker wants to provide you as a client.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Sunday, July 31, 2011

What AreYour Accounts Receivable Worth? (July 2011)

What are your accounts receivable worth? Almost every business has Accounts Receivable (AR) that are older than they would like. Managing them can be a difficult process. To start, management has to be honest with themselves about the value of their AR.

Too often, management allows old AR to sit on the books and ignores the problem. Often, they don’t want to take the write-down and absorb the loss into their financial statements. Obviously, it will lower current earnings as well as negatively affect their debt/equity ratio and they are concerned about the impact this might have when they show their financial statements to the bank. I’ve got news for companies that take this approach. The bank is making those adjustments in any event. They always wipe out old AR assuming they are uncollectable. Not only is management getting dinged for the old AR but at the same time they are also taking a subtle knock from their banker for not recognizing this on their own and taking an allowance for doubtful accounts.

At one of my clients we had two customers each with substantial AR balances (about $50,000). We treated them in the same way and the result with each is likely gong to end up being the exact opposite. In both cases, the balance built up over some time even though there were payments being made (sometimes lower than the monthly service and some months missed with a promise to make good “soon”). At some point, however, both customers got a “shut off notice”.

With the first customer, they made a substantial payment upon receiving the notice and made payments each month which covered current services and some amount against the past due. It took some time but today they only owe about $700 and that is all within terms. Ultimately, this scenario worked out well for all parties. We got paid in full and have a very loyal customer because we helped them work through a challenging time in their business.

The second customer story isn’t nearly as good. It starts out the same, but by the time we sent our “shut off notice” the IRS was taking action. As a general rule, the IRS is the 3,000 pound gorilla in the room and almost always wins. Now we’re part of a creditor group and there is no telling how much of the remaining balance we’ll recover from the dollars (if any) left after the IRS debt is settled. Ultimately, the customer is out of business. Had we moved sooner, our exposure would have likely been smaller and the customer probably would have failed sooner.

Recently, I had lunch with a great business attorney. Her advice was that every company should have a defined process taking a certain action at 30 days past due, 60, 90 and eventually turning the account over to an attorney or collection agency. Good advice.

All that being said, the message is that every business should realistically review its accounts receivable on a regular basis. No one is well served by leaving doubtful AR on the books and “hoping” they will some day turn good. I’ve never regretted calling a customer early about an outstanding balance . . . but there are certainly times that I’ve regretted waiting “just a little bit longer”. What are your accounts receivable really worth?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Thursday, June 30, 2011

Fun vs. Hard Work (June 2011)

Last month, I wrote about the importance of staying motivated. The other morning, I was training with a group military cadets and someone mentioned the word “fun”. More specifically, they had said that the morning workout wasn‘t much fun. For the record, few among us consider our morning workout fun. If you push yourself, it’s hard work. But the fun part is in the results.

The same goes with most business problems. Sure, there are days when business is fun, but most of the time it is just plain hard work. The fun part comes in seeing the results. Years ago I was working on an acquisition and the bookkeeper at the target company asked if I ever smiled at work and what made me happy? She had the accounting package open on her desktop and I pointed to all the negative numbers in red ink. I told her that I’m happy when red ink turns black. That’s when you know you have made an impact. It’s hard to smile when you’re awash in red ink.

I see businesses all the time that try to avoid the “hard work” part of running a business. They avoid the difficult decisions that incrementally improve a business. And make no mistake, most business improvement is incremental. It comes from doing countless small things better each day with an eye toward long term improvement. In almost all cases, people are looking for a silver bullet. They are looking for that one easy thing that will change their business from losing money to profitability overnight. That silver bullet almost never exists.

Left unattended, small problems get worse. Management avoids dealing with the lazy employee because it is easier to “let it slide”. . that employee infects another and now the company has two bad employees. They avoid dealing with a slow paying customer hoping that the situation will resolve itself . . . then payments stop altogether and the account is a total write-off. They don’t invest in better technology hoping to get by with what they have . . . then there is a system crash and the company is down for a day, or two, or more. They settle for inadequate financial reporting since it has gotten them this far . . . then the bank gets tired of it all and refuses to renew their line of credit. Problems don’t go away if left unattended. They get worse.

On the flip side, fixing one problem actually has the opposite effect. Getting rid of the lazy employee motivates others. Clamping down on a slow paying customer forces them to pay you (although they probably start slow paying someone else). Upgrading technology allows people to complete work sooner with less frustration. Better financial reporting allows for a higher level dialogue with the bank and true insight into business performance.

As problems are resolved, it is almost always the case that more opportunities to improve the business present themselves. Day by day, little by little, the business is transformed from a poor performing organization to one that is getting results.

As you head out on this July 4th weekend, try to have some fun so you’ll be ready for the hard work of improving the business when you get back to the office next week.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Monday, May 30, 2011

Stay Motivated (May 2011)

Motivating yourself and those in your company is one of the most important things that a leader can do. Unfortunately, staying motivated can be difficult and losing ones motivation is all too easy. Day to day problems can sap ones motivation and can distract one from longer term issues of greater importance.

There was recently a “Get Motivated” seminar in St. Louis. It was a day filled with some exceptional public speakers. Colin Powell, Laura Bush, and George Foreman among others. While I didn’t attend this year, I have attended in the past. The problem with this or any one day motivational event is how it plays out in the days and weeks after the event. Getting motivated is one thing . . . staying motivated is quite another.

It is a rare few who don’t struggle with motivation from time to time. But it is Memorial Day weekend and in St. Louis it looks like it might quit raining long enough that I can stop building my ark. That fact alone is helping my motivation level.

It important to have sources of motivation that one can tap from time to time. I have twice had the opportunity to visit the United States Military Academy at West Point to run as a civilian behind the teams participating in the Sandhurst Military Skills competition. Both times were exceptional experiences. There are few places on earth as motivated as our nation’s military academies. As spring turns to summer I have the opportunity to work out three mornings a week in the company of nearly two dozen highly motivated men and women who are training with the St. Louis Military Officer Support Foundation. Each of these young men and women are either presently in one of the academies, will be entering in the fall, or are recent graduates already serving our country and home on leave. It is an exceptional group to be among. It’s hard not to give your best when you are surrounded by others who are.

My point is simple, whatever your source of motivation it’s important to find a way to maintain your motivational levels and replenish them as needed.

As you head back to the office after the brief Memorial Day break, ask yourself if you are working with a motivated group of people? Are you leading by example and providing the motivational spark needed for yourself and those around you? What sources of motivation can you find that will bring a lasting effect?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Saturday, April 30, 2011

The Differentiator (April 2011)

Because of my fractional role, I have the opportunity to work with more management teams than most. I have consistently found that the one differentiator in the performance of a company is the quality and cohesiveness of the management team. The use of the word “team” is not by chance. While I could have used the term “members of management”, just having a number of senior managers around won’t get the job done. Management is a team sport made up of various disciplines (operations, sales, marketing, finance, research, development, human resources, etc). Without a well assembled team the operation won’t run smoothly and the performance and therefore profitability of the organization won’t be maximized.

I have seen cohesive, committed management teams that are underfunded, understaffed, facing daunting challenges not of their own making get the job done despite the odds being stacked against them. On the flip side, I have seen “members of management” with the wind at their back stumble and fail due to lack of communication, coordination and commitment. Groups like this can make trivial tasks difficult. The bottom line is that I’ll bet on the good management team any day of the week and view this as the single most important factor of success to any company.

When looking at a business problem, whether you are on the outside looking in or are in the middle of the issue, take a moment to step back and observe how the management team is behaving.

Are they communicating with each other? Does everyone know “real time” what is going on? Is there communication both amongst themselves and with outsiders as appropriate? It is amazing how much good a little communication can do to avoid making bad problems worse. In business, people hate surprises. Why? Because a surprise is almost never good -- it is much more likely to be bad news. Good news gets leaked early and the reality is usually not quite as good as the early indicators would suggest. Bad news tends to seemingly come out of the blue due to a lack of communication. Rarely should it have truly been a surprise.

Is the management team coordinating? Do they have a well thought out plan? Is everyone making sure that all of the bases are covered? In a day where we rely on email, text and cell phone communication, there is still no substitute for people sitting around the table, looking each other in the eye and being absolutely certain that there is a common understanding of the problem, a complete discussion of potential solutions, and a coordinated plan of attack that will bring about a solution.

Most importantly, is the team committed? I am writing this at 6:30 AM on a Saturday morning. One of my companies is a day behind achieving an operational milestone. I am absolutely certain that the management team is having their morning coffee, thinking about solutions to the problem and heading to the plant if they are not already there. Their weekend will begin when the problem is solved. These guys are a cohesive team and truly committed.

Do you have a “management team” or just “members of management”?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

The archive of these monthly newsletters is posted at
your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Thursday, March 31, 2011

Practical Spreadsheet Advice (March 2011)

Last month, I wrote about the pitfalls of being overly trusting of spreadsheets. As a follow-up, I felt compelled to offer some practical advice. Below are my top ten - it could easily be many more.

1. Know the answer before you start. That might sound impossible but it’s important to have a hypothesis before you start to build a spreadsheet. It gives one a chance to formulate a mental model before the spreadsheet model and to constantly ask which is right.

2. Use “check digits”. It’s amazing how many times spreadsheets don’t foot. Balance sheets may not balance and the sum of twelve months may not equal the annual total. Double check the math with a formula that adds all of the months and all of the years to be sure they balance. I always have a few rows and columns that should equal zero; it’s easy to spot if they don’t.

3. Calculate two ways. I often throw in an extra formula to calculate an answer in slightly different manner. There is often more than one way to get to the same answer and taking this extra step will ensure that your logic is sound.

4. Develop all three financial statements. There is a reason accounting relies on an income statement, balance sheet, and statement of cash flows. They all tie together. It’s easy to cheat and stop at EBITDA and I’ll admit to doing it myself from time to time, but each statement presents different information and allows for a greater chance of seeing a result that is illogical.

5. Color code. I often hi-light various rows and columns to draw my eye back to them. Sometimes my spreadsheets look like a rainbow but this is easily eliminated later.

6. Sumif. This is one of my favorite functions. It can eliminate formulas with long strings of adding individual cells which are prone to either missing a cell or capturing it twice.

7. Keep it simple. It’s easy to create exceedingly complex formulas but I’d much prefer a simple formula that yields a result of $10,500 than a complex one that yields the result of $10,479.52. For forecasting purposes one is no more accurate than the other and the simpler formula is easier to audit, trace back, edit and for others to understand.

8. 100 months! Almost all simple formulas are only valid within a relevant range. It takes seconds to run a spreadsheet out for 100 months or more. The model will start to break down logically and you can use these insights to determine if there are things you should be thinking about over a shorter, relevant horizon.

9. Set it aside. Whenever possible, set it aside for a few days or longer. I’m a firm believer that things need to percolate in the sub-conscious for a while.

10. Ask a trusted colleague who understands the business to review the results. Sometimes a fresh set of eyes will spot something that should have been obvious.

Does all of this guarantee that you won’t have an error in a cell? I wish that I could say that it did. Typos happen. Ultimately, however, the goal is neither perfection nor precision. It is accuracy of the significant digits and the soundness of business decisions made from the data.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza Copyright @ 2011 Homza Consulting, Inc.

Sunday, February 27, 2011

Ticonderoga No. 2 (February 2011)

Long before there was Visi-Calc, Multiplan, Lotus 1-2-3, and Microsoft Excel there was Ticonderoga No. 2. In some ways it is still the most powerful tool in existence for financial analysis. Why? Because it is the only one that absolutely ensures that the human brain is fully engaged in the financial analysis process. While spreadsheets have their power to perform calculations quickly and over multiple periods, they work without any “gut check” for reasonableness. While the calculations themselves are always “accurate”, programming errors are easy and all too common in today’s complex spreadsheets with thousands of calculations.

One can quickly “copy and paste” formulas over multiple periods without checking to see if the results yield a logical answer. It is easy to move one cell too far to the left, right, up or down and capture data that was not supposed to be part of the calculation. Or fail to capture a cell and leave data out of a calculation.

Whenever I get a spreadsheet from someone else I begin by looking for the most common errors and trying to understand how it was built. Ultimately, I’m trying to understand the thought process of the person who built the spreadsheet and their underlying understanding of the business. Do they understand the business and have they translated it into numbers?

At times, I am stumped by a spreadsheet. It seems to generate an answer that just isn’t what logic and good business judgment would dictate. When this happens, I pull out a blank sheet of paper and a pencil with an eraser. I work in nice round numbers – usually even millions – and see if I can get close to the answer that the spreadsheet generates. It might take minutes, or it might take hours, but I almost always find a formula error at the root of the problem or an assumption carried to the extreme.

Recently, I found a spreadsheet that added $5 million dollars of cash to a business by increasing accounts payable substantially every month . . . forever. The assumption that AP increased for a few months and even for an extended period was not unreasonable, but a lack of thought allowed the amount to grow to a ridiculous number for the size of the business.

Another time, I was sent a spreadsheet with a dizzying amount of detail on cost projections. As all projection models do, it showed nice profits three to five years out. There was one little problem, however, the total expense line failed to capture one of four sub-totals leaving out millions of dollars of cost. When this was fixed, the model showed on-going losses.

Why does this happen? In the interest of increasing accuracy, spreadsheets authors include a mind numbing amount of detail and complex calculations that are often useless. As assumptions become more complex, the person building the spreadsheet becomes lost in the detail and fails to see the big picture and mistakes happen. But they trust the spreadsheet which means they are ultimately trusting that every key stroke they made was perfect. That’s a scary thought.

The next time you’re building or reviewing a spreadsheet, make sure your brain is fully engaged in thinking about the bigger picture. Step away from the keyboard and think about what the answer should be. Test the spreadsheet with a piece of paper and a Ticonderoga No. 2!

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Monday, January 31, 2011

What's Your Right To Exist? (January 2011)

I believe every business must earn its “right to exist” in the marketplace – and, yes, I said, earn. No business has an inalienable right to exist. Rather, in a competitive marketplace, that right has to be earned day in and day out.

Every business must ask itself how it earns this right. More importantly, it should also ask its customers. What specific niche does it serve in the marketplace? What does it do better than any of its competitors? Does it compete solely on price (a valid strategy)? Ultimately, why do customers choose to spend their dollars with the company?

Another way of asking this question: What is the core competency of the business? What does it do better than anyone else?

Sometimes, a business is surrounded by competitors but delivers excellent service (they are among the best of the best). There may be room for many or few in the particular market but delivering outstanding service at a fair (not necessarily low) price is a proven strategy. Sometimes a business delivers such good service that they are able to dominate the marketplace.

Other times, price leadership may be the strategy. There is usually room for competitors that offer a good product or service (perhaps not the very best) but at a great price. Customers who are price sensitive or to whom “good enough” is satisfactory will frequent this business.

Another unique position in the marketplace might stem from geography. I frequent a drive through car wash and although they offer excellent service, they occupy a unique geographic advantage. Customers would only be willing to travel a certain distance to a competitor regardless of the price or service advantages they might offer.

When answering questions about market positions, right to exist and why competitors frequent a business, one should think broadly about the marketplace. Thinking broadly opens up a world of possibilities. Think about the differences between shopping at Nordstrom’s and Wal-Mart, for example. The differences are striking but both have a place in the market. Of course, you can make an argument that these two retailers are not competitors – clearly they are targeting very different segments of the marketplace. But at some level, they do compete – you can buy a pair of socks at both!

When a business asks itself tough, probing questions about its position in the marketplace, it can use the answers in the strategic planning process to help determine how it can and should profitably grow. Ultimately, this is the most important question business must answer and it is the primary responsibility of leadership.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2011 Homza Consulting, Inc.