training in all departments

Training the Next Generation Part 1

By Larry Chester
Cash Management , Financial Statements , Management , Reporting and Metrics , Staffing 0 comment Like

How do family businesses prepare the next generation to take over? Early in my career, I worked at a publicly held gas pipeline company. Management identified newly hired “stars,” and they would be put on a fast track, spending each of the next 4 years switching from one department to another, allowing them to learn all about the company, from the view of each operating department, from marketing to HR, from business operations to accounting. Though they didn’t become experts in any of these areas, they learned the impact of each department on the company overall.

If you are an entrepreneur looking to pass your business to the next generation, you should put a plan together to prepare them for their eventual role. You should introduce your successor to each critical area of the company. Teaching them about the products you sell comes naturally to you, because that’s what you’ve lived with every day since you started leading your business. But what about the financial side of the business?

Traditionally, the CFO is responsible for the following functional areas: Accounting, Finance, IT, Human Resources, Legal, and Risk Management (Insurance). But in addition to those skills, your successor should have familiarity with or – better yet – special skills in one or more of the following areas: sales and marketing, project management, and product development. But for the purposes of these blogs, we’re going to concentrate on the details of the CFO related role in a business.

  • Accounting – This encompasses the day to day money operations of the business. Cash in and cash out. These are the transactions that record the operations of the company. Sales, cash receipts, payroll, paying bills and reconciling the bank statement and credit card accounts. There isn’t a need to become a CPA to know the important things about Accounting.
  • Learn the basics of double entry bookkeeping. Debits and credits, bank reconciliations, payroll, sales invoices and month end processing.
  • Understand the basics and discipline of Cash Collections. Learning how to make those calls to collect what’s owed to you goes a long way to solving cash flow problems. Learn those lessons early.
  • Learn not just the “book learning” but the practical application of these items in your business. Every company is different. If you don’t have one, write a procedure manual. Make sure that the “chosen one” learns how the business operates and understands it.
  • Finance – This includes the principles of the movement of funds within the company’s accounting system. Loans, customer and vendor deposits, accruals and prepaids, and financial reports.
  • There are three basic financial statements – Balance Sheet, Income Statement and Statement of Cash Flows. They should learn what those numbers tell you about how the company is doing, not just today, but compared to last year, and compared to budget.
  • Learn how to budget. What is the plan for next year? Not just for sales, but for each expense category. Assembling a budget teaches a lot about how the company operates.
  • Understand the importance of Trend Analysis. This is an often-missed analysis tool.
  • There are specific financial and operational KPIs that you use to measure your business’ progress. Make sure there’s an understanding of the why’s of each KPI. They are the key to continuous improvement.
  • Understand the critical importance of your banking relationship, what the credit line means to daily operations, and what measurements or covenants they have on your performance.
  • Understand the difference between Cash Flow and Profitability, and how your business is doing in each area.

In our next installment, we’ll cover the topics of IT, Human Resources, Legal, and Risk Management (Insurance). Remember, you didn’t need to become an expert in all of these areas, and you don’t need your successors to become experts either. But if they don’t understand how and why each of these areas are important, if they don’t know the right questions to ask, they run the risk of having problems crop up that could have been solved with a little preemptive action, rather than a panicked response caused by failure to act when things were easy.

As I tell my clients and my family, when you are faced with problems, it’s easier to address them early. You can always resolve them, but the longer you wait, the more difficult and expensive the solution becomes, and the fewer options there are. Knowledge and experience give you a head start in anything that you might face.

Larry Chester

Founder and President at CFO Simplified, LLC
Larry Chester served as a corporate CFO for 25 years before starting CFO Simplified in 2007.Having worked in manufacturing and service companies of all sizes, he now leads a team of part time CFOs serving small to mid-sized companies throughout the Midwest.They serve the needs of business owners, providing them with Cash Flow Forecasting, Profitability Improvement and Financial Statement Clarity.Since the company’s inception, they have implemented changes that have improved operations, cash flow and profitability to their many clients.
Larry Chester

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