When to hire a CFO

Matthew Murphy for StartUpSmart writes:  Business owners start their business being a jack-of-all-trades, generally because they are undercapitalised and cannot afford the resources to effectively and efficiently run the business. Owners that have some financial acumen will even take on the role of bookkeeper. This decision is often driven from a cost perspective and at other times it’s due to the owner being a control freak.

Once the business starts to grow (usually organically), it moves on from this phase and commences employing appropriate people for the roles required. The first people employed are either support staff or people to actually do the work. From there, salespeople are employed, at which time some semblance of an organisational structure is created.

When a business grows, what typically happens is that the finances are left in the hands of accounting support people like bookkeepers. The business owner will attempt to stretch these people into performing tasks that are actually more the skill set of a management accountant.

So what roles and responsibilities should exist in the finance department of a business? The best structure to put in place is to have:

• A bookkeeper/accounting support
• Management accountant and
• CFO

So when does a start-up engage each function and employ each person?

We often think about employing people in a sequential order based on expertise. As such, a business would initially employ a bookkeeper, then a management accountant and finally a CFO.

I agree the bookkeeper will be the first person to be employed in the finance department of a small company; however, the employment of the management accountant or the CFO will depend on the financial acumen of the business owners and senior executives.

The second person to be employed is the CFO, as they will substantiate and bring to life the vision and the financial strategy through numbers and financial metrics. The third person to be employed will be a management accountant, as part of the CFO role is to oversee and direct them.

So what does a CFO actually do? A CFO assists and performs the following:

1. Matches commercial plans and objectives to financial performance

If a business owner is not financially-minded, then they may not be good at setting the strategy and perhaps the activities that they will pursue to execute that strategy. What won’t come naturally is knowing how to track the business’ performance along the way, to be able to make real-time adjustments.

A lot of business owners see accounting as an after-the-fact activity. Unfortunately, there are a lot of accountants that also focus their energies purely on compliance and historical financial reporting as well.

The real power comes from having the right financial management tools and systems to use them in a manner that supports decision-making. A CFO has the analytical skills to be able to calculate and model the potential scenarios in advance, to assist with the decision-making process.

Once a decision is made, a CFO will be able to monitor and track the outcomes and provide interpretation of what they are seeing. This allows for adjustments along the way to improve the results.

2. Designs and implements financial controls

If the business is considering expanding or diversifying the business through selling multiple products/services or through multiple channels or geographic locations, financial management and reporting needs could become more complex. Setting budgets, forecasting cash flow projections and monitoring cash positions are important to every business, but can become more complex if there are multiple products, divisions or markets. A CFO has the capability to control complex financial management scenarios, understand and explain them.

They can also provide systems and stronger financial control measures. This is important if activities or increased sales volume means there are more people involved in handling transactions, entering sales order data, managing stock and supplier purchases or anything that involves cash coming into and going out of the business.

3. Handle finance and funding requirements

A CFO can manage the funding requirements of a business. Negotiating, meeting ongoing bank reporting requirements and ensuring all repayments are made might be straight forward enough to manage, but some businesses need more complex or multiple finance arrangements that need more oversight.

Apart from debt, there might be other funding sources a business pursues. Business grants, bringing on investors or pursuing other capital raising opportunities often requires a deeper level of specific financial and management presentation and reporting. These types of funding arrangements need a strong grasp and ability to analyse and interpret financials, but also the ability to manage corporate governance issues to meet ASIC, board and shareholder requirements.

4. Shares the load

A CFO can help share the load in terms of having another senior analytical mind. I say share the load, because a business owner has oversight and ultimate responsibility. However, a CFO is someone to share responsibility for monitoring the performance, as well as controlling the financial management aspects of the business. Every business owner worries about cash, and if they’re not financially-minded they probably have the added nervousness of not knowing what they don’t know.

Bringing in the skills and expertise to compensate for that is good business and will help the business owner relax a little more. It will also allow them to focus on running the other areas of the business that match their strengths and interests.

The smart and successful business owners are the ones that understand their limitations and employ people to do what they can’t do, or that they don’t have time for. Experience indicates that business owners need this expertise in the early stages of business, as soon as the above tasks are beyond their capability and that of the senior executives in the organisation.

So how do businesses do this when there are limited financial resources in the business?

Business owners that are unable to employ each of these three roles on a full time basis, due to size and financial constraints, will make do with what they can get. However, they aren’t aware that they can employ the resource on a part time basis or outsource it. This becomes a cost-effective way to gain the expertise the business needs without breaking the budget. It also means the business owner can have all the information needed to successfully manage the business.