Written by Dan Seitam and Kelley Lynch.
One the most appealing aspects of an early-stage or small-to-medium-sized business is the opportunity provided to all employees to learn and grow as individuals. There are never enough people to perform all of the tasks required, so everyone ends up ‘wearing a lot of hats.’
However, there’s one role in every company that needs to ‘hit the ground running’ with minimum on-the-job training.
That role is the CFO.
I already have an accountant. Do I really need a CFO?
Accountants and bookkeepers are crucial in a business of any size. They’re responsible for all things compliance – tax returns, financial statements, payroll, day-to-day accounting activities. These functions are crucial to the effectiveness of every business.
But when does a company need a CFO?
A CFO’s role is different from an accountant’s or a bookkeeper’s. An effective CFO is a member of the senior management team who contributes to a company’s strategy and tactics as viewed through a financial lens. She formulates financing strategy, forecasts the business’s cash flow performance, has cross-functional knowledge, interacts with the company’s board of directors and can represent a business externally with banks, vendors, customers and investors.
Here’s a sports analogy (sorry):
Accountants keep score. CFOs call the plays (financial plays, that is).
So, a better question is, “Do I need a full-time CFO?”
If an early-stage business or an established business with less than $20M in revenue asks that question, generally the answer is no. There are always exceptions of course; for example, businesses that manufacture products internally have more complex requirements and may require a full-time CFO. But the majority of the time, a company with a strong accounting function can benefit greatly from a part-time CFO without breaking their piggy bank.
Ok. I get it. But what would a part-time CFO do for me?
Well, it depends on the stage and size of your company.
CFO for early-stage companies…
Let’s say an early-stage company has bootstrapped its initial product and is now ready to raise its first round of outside equity. An experienced CFO will help the company present the business in a way that resonates with investors and will ensure that the due diligence can be navigated successfully.
Every early stage investor will tell you that they expect a 10-fold return on their investment. Think about that:
If you raise $200K in angel funding, your investors expect 2 million dollars to be returned to them.
The common, prevailing logic right now is that since it is so difficult to forecast revenue and net income for start-ups, it’s a waste of time to try. The entrepreneurs at C-leveled disagree with this common, prevailing logic (not the first time that’s ever happened).
It’s true that every forecast for a young business is mostly, maybe completely, wrong. It’s also true that the thinking required to grind through the forecasting process results in very real benefits. Modeling is a learning process; and when it’s augmented with experimentation in the real world, founders start to understand the real financial dynamics that dominate their business.
A financial model is the medium to quantify those learnings and their potential impact on a business. Use of funds, burn rate, exit potential, hiring plans, revenue drivers – this is the language that CFOs speak.
CFO for mature companies…
At the other end of the spectrum are mature, revenue- and profit-generating companies that predictably deliver $15M to $20M in revenue, year in and out. It is very common in companies like this for the CFO position to be staffed with an individual that ‘came up through the ranks.’ Many times, the incumbent is too insulated from a broader business perspective. They simply do not possess the skills to truly add value as a CFO.
One way to expand perspective is to compare a company to its peers. There are several good quant benchmarking tools available now for companies in this revenue range. A CFO can interpret the data and distill it down to corrective actions that will result in a stronger, industry-leading business.
Also, a CFO can help prepare the company for growth resulting from new products, new markets (international), and acquisitions. She can help to assure that processes are scalable, that the company is still measuring the correct performance drivers, and that the company’s capital structure can support the forecasted growth.
Providing the company’s current CFO with outside, experienced ‘clinical’ assistance can increase the value of their contribution without subjecting the business to the pain (which can be fatal) required to learn the role and to participate as an integral member of the management team. Only a few hours per week with an experienced CFO can have a transformative impact on an individual who desires to make the step up, while also having a significant positive impact on the business.
Margin analysis, inventory turns, DSO, line of credit, process improvement – this is also the language that CFOs speak.
So there you have it. CFOs aren’t just for gigantic, publicly traded companies. Every business can benefit from senior guidance from an experienced CFO. And it doesn’t have to kill your checking account to ratchet up your business effectiveness. Just pay for what you need. Any good CFO worth her salt would tell you that.