1.      Gain an understanding of your new accounting staff.  As the saying goes, “You go to war with the Army you have, not the Army you wish you had.”  Therefore, one of the first tasks for any incoming interim CFO would be to meet with as many people in the Accounting department as possible.  The objective of each meeting would be three-fold: (1) to put people at ease; (2) to gain an understanding of their backgrounds and skills; and (3) to instill or reinforce the proper ethical “tone from the top.” 

 

2.      Gain an understanding of the payroll process.  Payroll is the number one mission critical process in any company. It has to be 100 percent correct, 100 percent on time, 100 percent of the time.  The new interim CFO should go into the Payroll department and get a hands-on understanding of how it works, sitting with the Payroll Manager and clerks and mapping out the process, especially how Payroll is funded and what the CFO’s role is in making it happen each pay period. 

 

3.      Determine where cash is coming from.  Keeping funds flowing is key to keeping a company afloat in any troubled situation.  To gain an understanding of the cash inflows, the new interim CFO should obtain a list of all customers sorted in descending revenue order as well as an Aged Accounts Receivable Trial Balance. Meeting with the sales group, get a handle on customer retention probabilities (for forecast purposes) and payment terms.  Not all customers pay on a monthly or 30-day basis.  For example, some licensing agreements call for payments each quarter. In another example, it is common for certain industries (e.g., not for profits) to string vendor payments out to 60-90 days.  In addition to understanding cash inflows from customers, the new interim CFO will need to understand where the company stands on its availability to tap into credit lines when necessary.  That information should be obtainable from the Accounting Manager or Controller. 

 

4.      Determine where cash is going to.  The other side of the coin is to understand where cash goes.  The new interim CFO should start by looking at an Aged Accounts Payable Trial Balance.  Speak with the Purchasing people.  Find out which vendors are key suppliers.  During difficult economic times, those key suppliers might be more flexible in negotiating longer payment terms rather than loosing a key customer.  Determine who has the relationships with those vendors and have them open up discussions to obtain more flexible payment terms. 

 

5.      Identify outstanding tax issues.  Tax issues are usually lurking in any troubled company situation.  Most likely they will pertain to audits or unpaid operating taxes, including sales tax and payroll taxes.  Unwinding these issues can take significant amount of time and may result in settlement payments that drain company resources.  Nevertheless, it is something an interim CFO will need to identify and begin to address early on.  By the way, debt forgiveness may give rise to a taxable event.  Something the interim CFO should be aware of.

 

6.      Gain an understanding of the accounting software environment.  The interim CFO will need to gain an understanding of the Accounting software environment early on.  The interim CFO may not actually produce special reports, but will need to know what is available in the system and how to ask someone to get it out for special analysis purposes.  Of course, if the interim CFO is hands-on capable of doing that, all the better.  This task will enable the interim CFO to better perform the action steps 8 and 9 below.

 

7.      Strengthen internal controls.  Coming in as an interim CFO provides a good opportunity to look at the existing internal control systems with a fresh perspective toward strengthening the controls during the interim tenure.  Consider that during distressed economic times, there is more impetus for theft and fraud.  The interim CFO needs to be especially diligent that none of that occurs on his or her watch. 

 

8.      Analyze the balance sheet accounts.  The single most important part of turning a troubled company around is to get a true financial picture of the situation.  Prior to an interim CFO’s entrée, management may have been hiding losses and those losses might be hidden in obscure Balance Sheet accrual accounts.  The risk of this occurring may be higher in private companies and those with a regional business unit structure with local accounting groups.  Unwinding hidden losses is completely necessary for the Board to come to grips with reality.  Therefore, Balance Sheet account analysis becomes a high priority early on – not just for the year-end audit. 

 

9.      Reforecast the financial picture going forward.  While the Balance Sheet account analysis will provide a better picture of the current financial position, it will also be necessary to reforecast the P&L going forward based on realistic assumptions.  In our experience, while going into a recession, management usually prepares forecasts with an optimistic disbelief that the recession will be long or deep.  Therefore, it will be entirely necessary for the interim CFO to prepare a financial reforecast that uses realistic assumptions – and it usually takes an outsider with a fresh perspective to do that.  At this point, it will also be necessary to prepare a Cash Requirements Forecast.  For guidance on doing that, see Our Thought Leadership article, “When Cash Is King.” 

 

10. Reach out to bankers and sources of capital.  Once the interim CFO has obtained a clear picture of the situation from steps 1 through 9 above, then and only then should contact be attempted with bankers and other sources of capital.  It is important for the interim CFO to establish credibility with these financial stakeholders and that is why the initial contact should be delayed until he or she has a better picture of the financial situation.  Furthermore, at that point better knowledge of the situation will dictate the discussion of additional capital fund raising requirements or covenant compliance waivers with these financial stakeholders. 

 

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