I had lunch with an old friend recently. Matt has a family owned HVAC business – it is now in its second generation.
“You must be feeling good,” I said. “Pulling back from the day to day.”
“You might think that. My son Luke is a good operations guy. But the time I have now has tended to make me worry more. Maybe that’s just something that comes with not having to respond to every phone call and e-mail.”
“It sounds like something is bothering you,” I replied.
“Well, it’s partly just a style thing. We always lived frugally, even when the business was going well. But the kids are really a different generation. They spend more on things and of course, everything is more expensive. But I also feel business itself is riskier. An old friend went under last year. He lost almost everything,” explained Matt.
“When things turned down, the bank put him into its troubled accounts division and that was just one step from receivership. Fifteen months later, they had to liquidate. And now, I’m thinking the same thing could easily happen to me and Luke.”
“There are some things you could do about that,” I said. “There are credit-proofing techniques.”
“The first thing to do would be to shift your assets to a creditor-proof holding company. The second thing would be to have your holdco become a secured creditor of your operating company. You should also review your corporate structure. It might make sense for you to have one holdco and for Luke to have another of his own,” I explained.
“That sounds complicated,” said Matt.
“It’s a little complicated. But if your old friend had done things properly, he might still be in business today,” I countered.
“Well, that’s something to think about.”
“Also, there are tax issues relating to the shift of ownership to the next generation. You need to look at that.”
“I think we took care of that,” Matt said. “We have an agreement that lays out our plan.”
“Who did the agreement?” I asked.
“We have a pretty good bookkeeper who wrote down the details for us,” said Matt.
“Whoa. You have to do better than that Matt. You need a professional to set out the plan. You could be setting yourself up for a problem with CRA.”
Matt shook his head and smiled at me. “Patti, let’s have another cup of coffee. I think I need to revisit how I am doing things.”
“You might consider a part-time chief financial officer or CFO,” I suggested.
“What is a part-time CFO?”
“Optimally you would look for someone with some knowledge of what lawyers do, as well as someone with good relationships with skilled accountants. Both lawyers and accountants are important for business, but they both have a pretty narrow focus,” I explained. “The CFO would look at both the past and the future of a company, and use a wide lens. For example, they would look at your internal controls and ensure your cash flow management is sound. They would also work with your major vendors to get you the best payment terms. And they would want to make sure your credit policies for customers make sense and are being followed.”
“That sounds good,” said Matt.
“It’s a beginning. Also, the CFO would work on your budgeting along with making sure your major projects are not going to hit you with a cash flow surprise. And if something does come down the pike that looks like you need to extend yourself, the CFO would want to make sure your lenders are on board to avoid bad surprises when things happen. And I don’t have to tell you, things always happen,” I noted.
“True. I know.”
“The real issue is that when a problem arises, it is never alone. When companies run into trouble over one thing, they often also are experiencing cost overruns, maybe labour issues, slow paying customers and bank demands all at the same time. All of those things can happen when management is trying to grow the company, and they have to be faced when you are developing your plan for the future,” I said.
“And is that the looking ahead piece you spoke about?” asked Matt.
“That’s right. Planning for growth is very important, especially when a new generation takes over. But the problems of growth have to be dealt with very carefully. Lawyers and accountants are very important when it comes to implementation – but to implement anything you need a plan. And for that you need a planner in house. But most small or medium size companies don’t need a CFO full time to provide those services. That’s why a part-time CFO works out so well for a family owned business.”
Matt grinned at me as he stood up. “Well, this has been a more interesting lunch than I expected. I’m going to give the CFO option some thought. It certainly seems to make sense for our business at this point in its life. Thank you Patti.”
“Thanks, Matt. It’s been nice catching up with you.”
Patti Lowes, CPA, CMA, is a chief financial officer with 20 years experience in mid-sized Canadian companies specializing in the service and construction industry. Lowes can be reached at firstname.lastname@example.org.