Lawrence Chester | Managing Cash Flows and Excess Costs and How to Predict Future Company Performance

John Corcoran 0:41
And this episode, before we get to our great guest, we got Larry Chester, I’m going to introduce in a second of CFO Simplified. This episode is brought to you by Rise25, our company where we help b2b businesses to get clients, referrals and strategic partnerships with done for you podcasts and content marketing. You are listening to a podcast right now or maybe you’re watching it live. And if you ever thought, should I start a podcast? Well, I’ve been saying yes for 10 years, because it’s such a privilege to get the smart talk to smart people like Larry, who we have here today an expert in numbers, which is something that we could all use help both we want to learn more, go to or email us at [email protected]

And before I get to today’s guest, I want to give a big shout out to ProVisors which Jeremy is very active in and Larry’s very active in and they connected through that Lisa Meredith in particular, who runs ProVisors, and Adam’s a phenomenal tax attorney and pbb expert. I want to give him a shout out as well for all the great work that he does. But I’m excited because our guest is Larry Chester. Larry has served as CFO for 25 years for companies including Colovos Company, Republic Windows and Doors, I can handle that one, United Service Companies, I can handle that one, and High Sierra Sport Company, I can handle that one too, helping them eliminate losses and improve financial operations and reporting. In these times of COVID, this is more important than ever. And he realized that he enjoys the challenges of helping companies that are working their way through a crisis like COVID. And so he joined his bankruptcy trustee for several years, which I did when I was practicing law not being a bankruptcy trustee, but worked with trustees, so I know that’s not an easy job for sure, analyzing financial conditions of client companies through that role and managing them through these difficult times. So that’s a tremendous background. And we are really privileged to have you here today, Larry, with us. But let me start with just asking you about the name CFO Simplified, how did you decide to name your company CFO Simplified? What does it mean to you? Why choose that name?

Lawrence Chester 2:44
Well, I think the interesting thing is that a lot of business owners become entrepreneurs, because they are interested in either a passion for a product that they have, or a customer base that they want to serve. Nobody ever starts a company because they got an MBA and they say, Hey, I can read a financial statement, let’s start a company. So my comment is that what we want to do is help businesses really understand their financials. And so as a CFO, we make their financials simple, make it easier for them to understand so that they can make decisions today that affect profitability tomorrow,

Jeremy Weisz 3:19
Larry, when clients come to you, what are they saying their biggest pain points are

Lawrence Chester 3:26
really, it’s two things primarily, one is they don’t have enough cash to operate their business. So the cash constrained, and that’s one of the things that a lot of companies are facing right now. And the second thing is that they’re not getting the information, they need to be able to make the hard decisions to understand what their full costs are to understand what their overhead costs are, to understand how much money they’re wasting or spending on things that they shouldn’t spend money on. And so it’s a matter of getting prompt financial reporting, and understanding what those financial reports are telling them. And that’s one of those things that we do for our clients.

Jeremy Weisz 3:57
What do you tell a company, you know, they feel like maybe they’re growing, and they’re making a gut feel on when they should hire people? What, you know, you would probably tell them, You need to base it also on the numbers, I imagine. What do you tell them to look at? Or what do you do to help them come to that decision in more of an objective fashion instead of a gut feeling?

Lawrence Chester 4:20
You know, that’s a very difficult question, because there are a lot of companies that have had grand views of where their company was growing, have followed that trend line going up like a hockey stick and have spent money and bought facilities and hired staff far beyond what they need over the near future. I think it’s important to hire people and to put facilities in place based on a need for scalability. And the issue is that you really want to try to be scalable, at least three months before you actually have that need. Because if you wait until you really have the need. What you’re going to do is you’re going to be scrambling and not be able to service the clients that you have. But as you make those plans and as you implement those, you really need to be prudent in terms of the steps that you take to be able to put those in place. You don’t want to suddenly hire all the staff that you’re going to need for next year, based on what your sales are going to be in your projections all today, you want to hire a couple people this month, a couple people in two months, you know, and stage going forward, so that you have control over that. And you’re not really taking huge risks at it.

John Corcoran 5:32
So interesting that you have a background as a bankruptcy trustee. For those who don’t know what that role is, what you do. Can you explain that?

Lawrence Chester 5:40
Yes, well, a bankruptcy trustee works as works for the US trustee, in managing companies that have declared bankruptcy and managing those companies and putting a plan together with them to either help them work out of bankruptcy, or to liquidate their assets. And then the money that’s collected is then given to the creditors that they have.

John Corcoran 6:03
It’s such an interesting background and role for the challenges that companies are experiencing right now going through COVID, cash flow problems, that sort of thing. Because the trustee is essentially taking over a company, and as you said, determining either liquidation, so just selling off all the assets winding up the business, or in the case of chapter 13. Correct me if I’m wrong, helping them to navigate through this crisis and emerge, as you know, many large American iconic companies have done. So how does that background that experience? How does that affect the work that you do now helping companies through this crisis? The code crisis?

Lawrence Chester 6:42
Well, I like to say when I was working for the bankruptcy trustee, I did two things. One, I took companies and separated the assets and sold them individually, or I took assets, put them together to create a company and sold it as a going concern. And so I think the issue is understanding truly what a company needs to operate and be profitable, and be able to operate skinny. Okay, how much staff do you really need to be able to operate? How much cash Do you really need to be able to operate, and the issue of being able to put together an effective cash flow forecast, understanding how much cash you need, not just today, but how much cash you’re going to need 60 days from now, 90 days from now, to be able to pay the bills, to be able to buy inventory to be able to service your customers, you don’t want to be in a position where you suddenly face what one of my clients faced once, where I had been chasing him for three months. And he finally called me one day. And he said, you know, Larry, he called me on a Tuesday. So Larry, you need to come to work for me tomorrow. I said, Okay, so Wednesday morning, I arrived at his plant. And he assured me into his office to close his door. And he said, I’m so grateful to have you here. Now that I’ve got a CFO, your first job is going to be to figure out how we’re going to cover payroll on Friday.

John Corcoran 7:57

Lawrence Chester 7:58
I mean, the issue is he should have been planning, you know, at least 30 days in advance to know that he was going to be short on cash, then there’s all different things you can do to be able to collect cash and put things together so that you have that ability. I’ll say, interestingly enough, I wasn’t able to get his money together to be able to cover payroll on Friday, but it will be easy.

John Corcoran 8:17
Well, hopefully, He then worked with you a little bit more proactively going forward after that.

Jeremy Weisz 8:25
drop that in your lap. So what was the first thing you did or thought about when he said that to you? We need payroll. But

Lawrence Chester 8:34
I think my first comment was, You gotta be kidding, really. Um, but the issue is trying to understand where you’re going to be able to get money from. And companies get money in a number of different ways. They get money by not spending money and keeping the money that they have, they borrow it, or they borrow it from different people, or they literally have their owners put cash back into the business. In this particular case, the bank had topped out and they weren’t giving us any more money. And so what I did was I went to their customers and said we need to buy inventory to be able to deliver your goods, will you give us a deposit against the order that we have pending, to be able to buy the inventory? So we use that money to buy inventory and also pay payroll and to deliver that product the following week?

Jeremy Weisz 9:19
Hmm, I love that. There. There was also an example scenario with an Internet reseller. You want to tell us about that?

Lawrence Chester 9:28
Yeah, I mean, some of this gets into the issue of financial reporting. You know, I, I like to say that we help companies with what I call financial statement visibility. And that means when you look at your financial statements, do you see information that allows you to make changes today that affect profitability tomorrow? Well, the big issue is are your financial statements telling you what’s really happening in your business? So there’s two basic ways of looking at financials. One is on a cash basis, the other is on an accrual basis. And the issue is that on a cash basis, it’s based on Money coming in and out of the business. And a lot of companies work with taxes, paying their taxes on a cash basis. But that’s not a good way of running your company financially. Because if you’re collecting money today, and you don’t pay any bills, then you’ve got a huge profit. If you pay your bills today, but you don’t have any money coming in, well, then you’ve got a huge loss. So this company was an internet reseller, they were getting their money from credit card sales, and so all their cash was coming in within 48, within 48 hours, and they were paying their bills on a net 60 day basis. So the money that they collected today, they weren’t going to have to pay for the inventory for 60 days. So they had months where they made huge amounts of money, and months where they had huge losses that absolutely no idea what the profitability was.

John Corcoran 10:47
So in that case, was it as simple as switching over to accrual. And that solved the problem, were there other things that you needed to do in order for them to be able to monitor their cash flow situation better?

Lawrence Chester 10:58
Well, the issue really was, as you said, to move over to an accrual basis that they understood what their profitability was, the problem was that that uncovered a lot of things, for instance, they weren’t profitable. So that meant that we need to look at their cost structure and their pricing structure, and figure out how they were determining what their selling prices were, so that they could then sell them at a price that would allow them to make money on the product they were selling

John Corcoran 11:21
on it got to end. And you know, one of the criticisms you hear about financial statements is that they’re backwards looking. And they are a reflection of what’s happened to the business up until that point. So how do you help clients to look at their numbers in a way that projects what’s going to be happening in the future so that they catch problems before they occur, and not as in the case of your manufacturing client on a Tuesday, and the SH T is hitting the fan on Friday? Well,

Lawrence Chester 11:52
you know, there’s that old commercial where they talk about investing in the stock market. And they say past performance is no predictor of future results. Well, the reality is that if you don’t change what you’ve been doing the past, you will get the same results in the future. So if you’ve been losing money, and you don’t make changes to your business, you’re going to face the same problems going forward. But what you need to do is take a look at your financial statements in a manner that allows you to see from a granular basis, the detail of what’s happening behind the scenes. So there are many tools you can use to take a look at that, we like to take a look at trend analysis and ratios, to be able to understand how the business is operating. So if you’re taking a look at a trend analysis and take a look at your profitability, for instance, on a particular product line, and you see that it’s been slowly decreasing over a period of months, well, I can guarantee you that next month is not going to suddenly peak and get better. The other thing is taking a look at cash flow forecasts are an important way of understanding how your business is functioning, and how much cash you’re going to have, you can predict how much money you’re going to spend going down the road because you have control over that. And you have a historical experience with customers that you have to know when they’re going to be paying their bills. And if you match those two things up, you can get a pretty good understanding of how much cash you can expect to have over the next few weeks over the next few months. But it needs you to take the time to be able to sit down and do that kind of report in that kind of an analysis. And that’s, I think, one place where a CFO comes in, because that’s something that we do on a regular basis for our clients.

Jeremy Weisz 13:29
You were mentioning Larry about cash flow, and then I love how you solve that issue, which is let’s ask our customers to actually pay for the goods that they should be paying for or will pay for in the future. I’m wondering, what are the big mistakes? Maybe you’ve seen manufacturers? Make? And also, not only that, but you know, what type of billing do? Is there a best practice of you know, because I know there’s like a net 30 or 60 or you know, all the manufacturers probably have different policies as far as what they show they Bill and I imagine you come in and maybe help them clean that up. So I’m wondering what are your, you know, the mistakes you see them making? And then we could talk about best practices?

Lawrence Chester 14:14
Now, Jeremy, that’s a really good question. And I think the issue is that for manufacturing companies, there are two things that we really see that are issues. One is quality control and damaged goods. In other words, things that you’re not able to sell because the manufacturing process has, you know, has destroyed the product or not produced a product that’s acceptable for sale. Another thing is really understanding inventory and knowing what your inventory turns are. I love it when somebody says Well, we really don’t have any cash to operate because they’ve been spending all their money, buying inventory and putting it on the shelf in anticipation of sales. Well, that’s all great, but why do you have $750,000 worth of inventory on the shelf if you’re only selling $250,000 worth of inventory on a monthly basis, I mean, that’s just taking a half a million dollars and putting it under your mattress and saying, I’m never gonna use this. Never be able to use it. Yeah. So that’s, that’s really something is control of inventory and understanding what your actual manufacturing costs are. So one of the things that happens is companies take a look at their overhead costs. And sometimes they put that on the side and say, well, we don’t need to worry about that, because that’s an overhead expense. But really, it’s part of what your ongoing expenses are in manufacturing, too. So being able to properly allocate that is, is an important thing.

Jeremy Weisz 15:36
I imagine that’s tough in the CPG. Industry, too, is even if someone grows a lot, right, because if they have a spike in sales, and they’re like, well, we got to produce what we sell on then next month, they sell even more they got to produce, they have to keep up with that.

Lawrence Chester 15:52
Right? That’s one of those interesting problems is that companies that have drops and decreases in sales generally end up being short on cash. But there’s nothing that will shrink cash availability in a company more than exponential growth, right? Because it’s part of that cash cycle and the cash gap. And the situation is that you’re paying for your, for your, your raw product and producing your inventory. Long before you collect the money from the people that you’re invoicing. So being able to have working capital, and being able to have the cash that you need to be able to do that production is a problem that I think entrepreneurs don’t really think they’re going to face. They figure Well, if my sales are going through the roof, it’d be absolutely golden. Well, no, not necessarily. You can still be sure of cash.

Jeremy Weisz 16:41
Yeah, it’s a balancing act. Yeah,

Lawrence Chester 16:43
it really is a balancing act. No question about it.

Jeremy Weisz 16:45
Um, I’m wondering, just in general, because you come in, you’ve seen everything under the sun over the past couple of decades, right? What are the biggest mistakes, some of the biggest mistakes that stick out to you that the companies haven’t been making or make when you come in?

Lawrence Chester 17:03
I think the biggest mistakes fall around not understanding what your true costs of manufacturing, or your true costs of production are. We were talking about inventory before and I was talking to a restaurant tour who we were, who we were working with. And he said, you know, the thing that you don’t understand is, as a restaurant tour, he said, my inventory disappears in 48 hours, if I don’t get rid of it, if I don’t sell it, within two days, it’s rotten, I’ve got to throw it away. And I told him that we work with service companies whose inventory is even more tenuous than that. Because their inventory or the hours that their staff has to work with their clients. So their inventory is not just, you know, perishable

Jeremy Weisz 17:46
disappears by the minute,

Lawrence Chester 17:47
it’s volatile. If somebody didn’t do any productive work for this hour, it’s literally inventory lost. So understanding what your costs are, and really, truly understanding what you need to sell it for to be able to make money on it. That’s really a big issue for any company. Hmm.

John Corcoran 18:08
I want to ask you, you mentioned manufacturing, you gave the example a moment ago about a manufacturing example, where they have a lot of extra supply inventory on the shelf. What about in the professional services? realm? Is there an analog or comparison to ways in which professional services firms do something similar where they have excess costs on the front end that they need to manage better?

Lawrence Chester 18:36
Well, there’s a couple of things. One is when you get into software development, you know, the question is how many programmers Do you need to produce a particular piece of software, and there is a tendency to just load yourself up with a lot of programmers, because first of all, they’re so hard to find. And second of all, there’s a big skill differential from one person to another and very specific in one particular area of programming. But the other side of it is if you’re providing professional services to people, the issue is how many people do you really need to be able to service that stream of business you have coming in? And part of that is also not just that, but as people come in? Are you looking at a steady flow of business? So for instance, if you have, let’s say, two days a week that you’re really busy, and you have twice the number of people coming through your door that you have on other days during the week, do you really want to staff up for those two days? Other people have those people just sitting around doing nothing during the other three days when you don’t have that much business? That balancing act is really a difficulty for service businesses. And it really is an issue of managing inventory, just as for a manufacturer, but the inventory that you’re managing is really ours available to service clients.

Jeremy Weisz 19:53
John, I have one last question. So I don’t know if you have one left one, but Now before we do I want to just tell people they can go to And check out Larry’s website and what they’re doing. They have an amazing team there. So check it out at Check out other episodes of both and And check out My last question, John, I don’t know if you don’t know if he’ll be at the top of this question. So maybe you want to go first. But

John Corcoran 20:26
my challenge are we throwing down the gauntlet here? See what your question is.

Jeremy Weisz 20:32
Um, so my last question is your favorite story memory from University of Wisconsin.

John Corcoran 20:44
I could crash that and get Larry down in tears, make him cry like Oprah style.

Lawrence Chester 20:55
You know, I love being at the University of Wisconsin. I think the most interesting memory I have of this just one of these weird quirks is that in the rathskeller in the Student Union down in the basement, the ceiling is at a perfect hemisphere. And so you could sit at one end of it of the rathskeller in a table and listen to the people talking all over on the other end, because the acoustics there Poohsticks, a geometric pattern of the room allowed you to hear everything they were saying even though they were whispering

Jeremy Weisz 21:30
that’s quite a no that actually

John Corcoran 21:31
Yeah, you got to be careful. Very dangerous. Yeah, exactly. Larry, I also want to mention, if you go to LinkedIn and connect with Larry, Larry or Lawrence Chester, he’s Congratulations, you hit 20,000 subscribers on your LinkedIn newsletter, CEO Business Insights so they can go check that out as well. We’ll put a link in the show notes, put a link in the LinkedIn live for those who are watching live. And Larry, such a pleasure. Thanks so much for taking the time to talk to us.

Lawrence Chester 21:58
I really enjoyed talking to both of you, John and Jeremy, thanks very much for your time.