Uncategorized

What does a CFO do?

Wikipedia:  The chief financial officer (CFO) is the officer of a company that has primary responsibility for managing the company’s finances, including financial planning, management of financial risks, record-keeping, and financial reporting. In some sectors, the CFO is also responsible for analysis of data. Some CFOs have the title CFOO for chief financial and operating officer. The CFO typically reports to the chief executive officer (CEO) and the board of directors and may additionally have a seat on the board. The CFO supervises the finance unit and is the chief financial spokesperson for the organization. The CFO directly assists the chief operating officer (COO) on all strategic and tactical matters relating to budget management, cost–benefit analysis, forecasting needs, and securing of new funding.

In smaller organizations the CFO is often responsible for Information Technology, Human Resources, and Operations of the company and acts as a Chief Operating Officer in addition to CFO.

The CFO is a partner with the Chief Executive Officer (CEO) in developing the company’s vision and strategy and implements that strategy throughout the company.

Why do you need one in your business?

For a lot of start-ups and small businesses, the business owner acts as the CFO, making all decisions for the company and overseeing all aspects of the operations, including financial.  As a company grows, or plans for growth, the insight of a top-level financial professional can influence the outcome by providing expertise in forecasting and funding.

Even on a day to day basis, business owners often become so involved in running the operational aspects of the business that the financial side slips into disarray, often leaving the owner with no clear picture of the financial status of the company.

A CFO can develop processes and match resources with each company’s financial needs to ensure that the business owner is always aware of the financial status of the company – successful or otherwise.  And the CFO can develop a plan to ensure that the business doesn’t find itself in a cash flow mess.

How can you afford one?

Hiring a CFO is expensive!  Depending on the region of the country, the size of the company, and the industry a CFO is likely going to earn a minimum annual salary of $150,000 and the number climbs from there.

What about a Fractional CFO? 

A Fractional (or Outsourced) CFO works for your company less than full time – a fraction of the time.  What fraction of time the professional works for you will depend on your needs.  It can range from a few hours a month to a few hours a week.  The Fractional CFO is not only a fraction of the time, but also a fraction of the cost – you only pay for what you need. 

What are the Benefits of Fractional CFO?

The primary benefit is that your company saves money by only paying for what you consume – the hours that the CFO works with you.  Fractional CFO services are generally provided by independent contractors, so you also don’t have to provide any benefits, office space or equipment.

Beyond the cost savings you can tap into a very high level of expertise to get exactly what you need – and maybe more than you expected.  A Fractional CFO brings broad experience from a wide range of industries, allowing you to take advantage of the professional’s extensive experience.  The CFO likely also has business associates that can provide other services that you may need as your company grows – connections to investors, bankers, and organizational consultants that can provide additional support to your growing business.

Hiring a fractional CFO can ensure that the financial management of your company is being handled accurately and effectively, including cash flow forecasting and budgeting – so you don’t have any unpleasant cash flow surprises.  While the CFO is managing the financial side of your business, you have more time to focus on your core business, developing new ideas and new customers.  As you grow and develop, your CFO can act as a sounding board to help you fully develop your ideas – including the potential financial impact of your ideas.  Your CFO can help you understand where you make money in your business and where you don’t by analyzing the profit of each of your products or services.  You can make changes in your offerings and pricing to maximize your profits.

There are many other benefits that you can gain from engaging with a CFO, these are some of the more obvious ones.  The CFO can become a strong business advisor in many areas of your business.

What credentials to look for?

Look for experience first – where has the CFO worked and how have they spent their career?  Look for broad experience in various sizes of companies.  If you have a very small or start-up company, make sure that the person you are considering has expertise with a small organization.  In addition to company size, consider industry experience.  Broad experience in several industries may be the best background.  There are some fundamental aspects of the financial side of all businesses that are very similar – your product or service may be very unique, but how the money flows through is not unique.  An experienced CFO can handle any industry.

In addition to experience, look for education.  The range can be broad, and after years of work experience, education is less critical than in the early stages of a career.  Look for undergraduate degrees in Accounting, Finance, or Business Administration or a Master of Business Administration.

Other certifications may also support the experience and education of a CFO.  These certifications are many, the most common is a Certified Public Accountant (CPA).  Other possibilities are Certified Management Accountant (CMA) or Certified Financial Analyst (CFA).

Experience is the most critical – you may not want your business to be the testing ground for someone who would like to become a CFO.  You want to take advantage of what the CFO has learned in many years of working with a variety of businesses.

How do you find a fractional CFO?

The best way to find a fractional CFO is to get a personal referral from someone you know and trust. Talk with your banker, lawyer, or tax accountant (often a CPA) to see if they know of anyone.  Ask other business associates and organizations.  If you are a member of your local Chamber of Commerce or Economic Development group, ask other members as well as the leaders of those organizations.  You can also do an online search – there are many companies that provide this service.

Once you identify one or more potential resources, take time to meet with them, preferably in person, to discuss your needs and see what assistance they can offer to you.  Ask them questions about their approach and availability to support you.  The CFO should be able to provide examples of other companies they have worked with that are similar to yours and how they were able to help them.

Ask about the contract that you will be signing with the CFO.  Any agreement must meet your needs and be very flexible.  Don’t jump into long term commitments with set fees until you are completely confident that you have a strong match with your CFO. 

Get references from the CFO and make some phone calls.  The CFO will know all the details of your business including the confidential financial workings, so you need to be very sure that the person you are engaging with is reputable and dependable.  Referrals from trusted sources are the best way to line up a resource.  Your trusted advisors are unlikely to provide a name that they are not willing to back.

What are you waiting for?

Many small businesses can see immediate benefits from working with an experienced and focused financial professional in the role of CFO.  Don’t wait until your business experiences financial challenges, start working with a CFO right away to set your business up for success and growth.

You’ve spent years building your business to be financially successful and personally fulfilling.  Now that you have achieved that, what happens next?  How long do you plan to continue to work?  Who will take over your business when you no longer want to be involved every day?

If you don’t have answers to these questions, it’s time to engage your thought process and your best and most trusted advisors to develop the answers.

None of us will work in our business forever – we’ll exit either by closing the doors and walking away, by selling or transitioning to a new owner, or because we pass away.  Choose your preferred method of being done with your business and plan accordingly.

It can be okay to just close the doors and walk away – maybe your business plan has been just to provide yourself with a job – that’s legitimate.  You should still consider what may happen to your customers and employees should you exit “unexpectedly.”

Most business owners have a vague thought that they will eventually sell their business – maybe for enough to fund a decent retirement – maybe to a family member or key employee.  All of these are good ideas, but ideas are not the same as plans.  Talk your ideas through with a trusted advisor like your CPA or lawyer.  If your idea involves family members or key employees, talk it through with them to be sure their vision is lined up with yours.

As your ideas progress into plans, document your plan to be very clear about what you intend to do, and when.

According to Wikipedia:

• An exit strategy is a means of leaving one’s current situation, either after a predetermined objective has been achieved, or as a strategy to mitigate failure. An organization or individual without an exit strategy may be in a quagmire. At worst, an exit strategy will save face; at best, an exit strategy will peg a withdrawal to the achievement of an objective worth more than the cost of continued involvement
• In business, an exit strategy is a way to transition one’s ownership of a company or the operation of some part of the company. Entrepreneurs and investors devise ways of recouping the capital they have invested in a company. The most common strategy is the sale of equity to someone else.

The key word is “PLAN.”  To accomplish your goals, you need to make things happen, not just let things happen.  Up to 35 % of business owners say they will never sell their business.  That’s fine, but it’s still important to plan for your customers, partners, and employees to be prepared for the eventual outcome. 

The other 65 % of business owners do think they will sell their businesses.  If you are in this majority, there are several things that you should consider as you develop your plan.  These include:

• Your future role in the business – do you want a phased exit?
• Your liquidity needs – when do you need the cash and how much?
• Your company’s future potential – a strong business can easily outlast the founder
• Current market conditions that may impact timing and value – consider exiting when your industry is “hot”

Keep in mind that it can easily take five years to prepare a business for sale – to get the price that you want to get.  Don’t put your business on the market until you have reason to believe that the price tag will meet your needs – do your homework and get the advice of a professional as you go through this process.  Business owners can take actions while they are running the business that will result in a higher value on the sale date.  Start early to maximize this value.

Planning your exit well includes many steps – the initial focus is on understanding when and why you want to exit your business.  The plan culminates in a multi-year (preferably) plan to achieve your goals.

Introduction to Your Exit Plan

• Purpose & Objective
• Timing

Post Exit Goals

• Personal – what will you do with your time?
• Financial – how much money do you need to support your lifestyle?
• What is your value gap?

Readiness

• Financial
• Mental

Options

• Understanding of the options that you have for an exit
• Business valuation for your desired options – they are not created equal
• What you get vs what you keep – know what each option will mean for you
• Alignment with your goals

Define Your Strategy

• Determine which options best match your goals
• Understand where you are compared to where you want to be
• Set specific value-building steps to achieve your goals

Implement Your Strategy

• Follow the steps you have set for yourself to prepare your business for a successful exit
• Create your team, legal, tax, estate planning, financial planning, accomplishing a “deal.”
• Identify a deal maker (when deal time approaches)
• Legal agreements
• Personal financial planning