The CFO is responsible for effective and efficient financial operations including accounting, financial reporting, cash management, budgeting, maintaining controls and issues such as capital structure, investor relations, and financing. The CFO is also involved with strategic planning and financial analysis related to mergers, acquisitions, and divestitures, as well as providing expert financial and operational guidance to business owners to maximize cash flow, minimize business risk, and increase the value of the enterprise.
This differs from the services traditionally provided by the external CPA who focuses on audits, reviews, taxes, and compliance work. Although valuable and very necessary, this work is more “backward-looking” in nature ensuring that past events are correctly reported and accounted for. The CFO however, is more focused on the “forward-looking” aspects of the finances, to help chart the course and ultimately navigate the business to success.
Many small and mid-sized organizations employ a bookkeeper or controller who maintains the financial system and records transactions in an accurate and timely manner. The CPA produces the tax returns and some basic performance analysis quarterly and at year-end. However, this leaves a significant gap in terms of the information and management reporting available. Business owners and entrepreneurs may lack the critical financial information needed for informed decision-making; and for external purposes such as presentations to lenders or investors.
Bridging the Gap with a Qualified CFO
The answer is to bring in a qualified CFO to work closely with the CEO or business owner. The CFO must embrace the vision, but also translate this into the operational and financial framework to achieve success. Dealing effectively with stakeholders is another key function. This includes managing expectations, presenting financial information, and understanding the varied and legitimate interests of owners, creditors, and lenders.
A full-time CFO may be a luxury few small businesses can justify. A feasible and recommended alternative to a full-time resource is a fractional CFO. This has the advantage of bringing a senior-level financial expert to the table but at a fraction the cost of a full-time resource. A fractional arrangement can work well indefinitely, and right up until a full-time CFO is needed.
Key Benefits of hiring a Fractional CFO:
1. Enhanced Decision Making
By basing key business decisions on relevant and accurate financial information, the business owner can avoid costly mistakes and reduce the risk of loss. Key decisions include those about financing the business, expansion or downsizing, whether to enter a new market or produce a new product; make or buy decisions, and capital investments, to name a few.
2. Better Financial Information
Includes producing accurate and timely financial statements, management reports and projections, forecasts, budgets, and cost models that are all based in economic reality. Such tools enhance management insight and promote proactive management. By identifying the levers that drive performance they can be calibrated to maximize efficiency, lower costs and optimize profit and cash flow.
3. Improved Internal Controls
Appropriate financial controls can provide many benefits including accurate financial statements, improved control of company assets and the reduced risk of fraud.
4. Tailored Flexibility
By utilizing a fractional CFO, support levels can be varied and customized to the evolving needs of the organization with the CFO’s work schedule tailored as such. Increased support can be provided at critical times reverting to a more consistent level when appropriate.
5. Cost-Effective Expertise
A fractional CFO can bring substantially all the benefits in terms of skills and knowledge of a full- time resource, at significantly less cost.
6. On-Site Support
Services are provided on-site which is convenient for meetings and to perform critical work. The CFO becomes embedded and acts as part of the management team. When not on-site, the CFO can be ‘virtually’ available via modern communication tools.
7. Specialist Skillset
A properly qualified CFO is a business professional with relevant experience within various commercial environments. This important distinction between a career CFO and the CPA is key. The CFO can solve many financial and business problems in short order, due to having had experience in such matters and the ability to quickly identify and address issues and employ best practices and techniques.
8. Increased Productivity
Hiring a CFO to perform the financial and administrative functions of the business, frees up the business owner so they can focus on other value-enhancing aspects of the business. In addition to bringing financial and accounting expertise – a CFO can deal with most administrative areas such as human resources, facilities, insurance, legal and compliance, as well as stakeholder relations.
9. Greater Perspective to Empower Entrepreneurship
A CFO can improve the decision-making process by bringing facts, and solid numbers, and asking the right questions. Another benefit to the business owner is the fresh perspective and insights brought by the CFO. This can have the added effect of making life a little less lonely for the entrepreneur. The CFO can be a sounding board and trusted advisor for new ideas and initiatives.
10. Stakeholder Confidence
Stakeholders such as investors, lenders, and creditors react positively to the knowledge that a professional CFO has been retained. This takes on an added degree of importance when looking for outside investment, debt financing, or positioning the company for sale.
Maximizing Business Value
To summarize, a fractional CFO brings all the benefits of a full-time resource, but at a fraction the cost. They work for an agreed-upon amount of time and on an ongoing basis. The benefits are myriad, and range from improved reporting and decision-making, clearer insight into the business for planning and forecasting, and stronger financial management and controls. Perhaps the biggest benefit, however, is how the CEO can transfer the financial and administrative burden to the CFO, and thus free themselves to work on other critical aspects of the business.
Martin Cobb is an Area President for FocusCFO based out of Ann Arbor, MI.