Are you a busy business owner struggling to balance finances and keeping your business afloat? Are you unsure if hiring a chief financial officer (CFO) is the best option? In this article, we will cover the benefits of hiring a CFO and when it’s the right time to do so. Small business owners often take charge of their own finances and bookkeeping for different reasons. The three most common reasons include:
- Not wanting to give out sensitive financial information.
- Staying in control of everything.
- Keeping employee payroll costs low.
It’s understandable and valid that small business owners consider these reasons and handle their own finances. But, as the business grows and expands in the market, management becomes even harder and more comprehensive. Consequently, the person responsible for looking after multiple business aspects, while handling finances and bookkeeping at the same time, becomes impractical. Consequently, it’s impractical for the same person who manages the day-to-day of the business to also handle finances and bookkeeping.
In order to alleviate the pressure, some small business owners delegate their financial management to another employee or family member. This usually doesn’t work out as the delegated person might not have the expertise to manage the bookkeeping expertly. In fact, 60 percent of small-business owners believe they aren’t knowledgeable about finance and accounting. The smart entrepreneur anticipates this and understands that the business needs a financial expert.
A chief financial officer is a dedicated resource businesses employ to bring structure and professional expertise to their financial management needs. They attend four years of college and then train to be able to create structurally sound strategies to maintain financial success. CFOs take charge of the business’s finances and ensure that the company and the stakeholders benefit financially.
Benefits of Having a CFO
A CFO has the expertise, training, and understanding of a wide range of business models. As well as how it makes and spends money. With that knowledge and their own experience, a CFO takes over the financial management of a business.
While a bookkeeper or accountant manages financial statements and day-to-day cash flows, a CFO can do more. Along with creating and preparing detailed financial and management statements, a CFO is responsible for forecasting and budgeting. Modern CFO responsibilities have evolved to include using financial data to influence operational decisions and collaborating closely with the CEO, making them integral to the company’s overall strategy and value creation.
Financial planning is a critical component of the CFO’s role, aiding in forecasting and planning for future business growth.
Since they have an overarching understanding of internal and external economic factors, they consider taxation, government policies, industrial factors, and various social issues impacting the business’s growth. With this insight, a CFO is able to guide the company’s leaders to make better and more well-informed decisions.
Small businesses in the growth and expansion phase can immensely benefit from having an outsourced CFO on the team. They understand the impact of the incoming changes and can make accurate forecasts and assumptions about the company’s future performance. This information becomes critical if the small business is considering a merger, acquisition, or seeking funding.
What Kind of CFO
Regardless of whether a company is a small business or a multinational conglomerate, CFOs add a lot of value to a company’s overall performance. However, the level of skill a company requires is different for all companies. CFO qualifications encompass a combination of educational background and professional skills, highlighting the importance of an advanced business degree like an MBA alongside expertise in accounting, finance, and leadership. The company’s current financial state, and where it expects to be in the future, dictates the type of CFO a business needs. Besides that, the public or private nature of the company, the internal policies, and industrial benchmarks impact the kind of CFO a company needs.
The CFO role now extends beyond traditional financial reporting to include strategic planning, decision-making support, and collaboration across various departments within the organization.
Regardless of the specific details, a CFO performs the following sets of responsibilities:
- Have a leading role in providing financial plans and forecasts, including analyzing the capital structure. This allows them to study the prospects of growth and future business trajectory.
- Creation and management of the company’s financial statements, making sure revenue is collected, the budgeting is on track, and financial goals are being met.
- Relieve the CEO of the task of seeking and maintaining relationships with investors and stakeholders.
- Provide key financial insights to support management decisions.
- CFOs are also critical contributors when it comes to mitigating financial risks that might implicate the business in one way or another.
- Steering the company through acquisitions, mergers, liquidation, and changes in the operational and management structures.
- Managing cash flow to balance incoming revenues and outgoing payments, ensuring financial stability and compliance.
These duties are umbrella terms for very comprehensive processes. There are small details that go into making sure the company’s finances are accurate. CFOs are a dedicated human resource that takes a meticulous approach to ensure there is no unbalance. Also, they are responsible for advocating sound financial practices throughout the organization and streamlining operations.
In short, businesses rely on the CFO’s leadership, forecasting, management, and supervision of financial matters. They work alongside other chief management such as the CEO (Chief Executive Officer), CTO (Chief Technology Officer), COO (Chief Operations Officer), etc., to keep the company running smoothly and on a positive growth trajectory.
When Does a Company Need a CFO
When assessing exactly when a business needs to hire a CFO, there are different situations. As we mentioned before, the decision depends on the organization’s financial health and what it wants to achieve in the near future. To aid this assessment, here are some instances when a small business might be in need of a CFO:
A CFO also plays a crucial role in providing strategic direction to the company, advising on long-term business strategies, and integrating financial planning with the overall business strategy.
Create a Financial Planning Model
A financial model is one of the most essential parts of the overall business model. Without a proper structure for the money that comes and goes out of the company, the management would be clueless about their company’s financial standing and whether they are making substantial profits or not. This can seriously implicate decision-making and increase the risk of financial loss and uncertainty.
A CFO will understand the overall strategy the small business owner wants to integrate into the business model. They will create a financial model that supports various goals across business functions. They will use their insights into the industry benchmarks to align processes such as budgeting, long-term financial goals, analysis, and forecasting with the business’s mission.
Remove Ambiguity for Underperforming Profitability
Unfortunately, businesses sometimes experience phases where their financial performance and profitability are not at the desired level. While some businesses can identify the cause of the performance dip, some might find it a bit difficult. The ambiguity makes it hard for the management to find effective corrective solutions.
A CFO can help identify the problem area and then suggest the right way to improve it. Improved visibility into the company’s profitability will allow the company to make better decisions. The financial reporting and statements made by the CFO will provide the CEO with detailed information and insight into the net income, revenue, cost expenditure, and sales. Armed with these details, the CFO will be able to reassess the financial situation and control costs to improve productivity.
Managing Finances During Rapid Growth
While rapid growth is a welcome change for all businesses, it also warrants the need for a CFO. Rapid growth means rapid changes in the company’s finances, business expansion, automation, and a need for additional funding and capital.
A CFO is trained to handle periods of rapid growth and deal with the complexity that comes with increasing revenues, complicated cash flows, and financial investments. They have the relevant knowledge to help interpret various trends and patterns. Also, they have a strong understanding and are able to find ways to acquire more capital to facilitate their growth.
If a small business owner handles the company’s finances themselves, rapid growth can bring changes that can be overwhelming. A CFO can take over financial responsibilities and alleviate some of that pressure. Additionally, they also have the expertise to navigate through frequent disruptions and dramatic changes in the business.
Guide the Company through Mergers and Acquisitions
Businesses often undergo mergers and/or acquisitions. These can be hard to navigate as they require detailed planning and forecasts of the potential impact the merger or acquisition might have.
A CFO will do their due diligence during this process and perform the financial, regulatory, and risk management duties as required. They will study, analyze, and interpret financial and performance reports of the parties involved and create sensible reports for the CEO. This aids the company in tailoring the terms and details in its favor. Besides that, a CFO will be better equipped to answer anticipated questions. This will allow them to shorten the process and make the transition period much more efficient.
Develop Strategies for Expansion
Introducing new products or extending product lines to a new market is a way companies stay relevant, meet consumer demands, and sustain their position on the competition. These strategies are also unavoidable as changing markets, technological advancement, and new industrial benchmarks warrant that change. But catering to this demand can be a bit tricky to implement.
A CFO can change that as they specialize in handling change. They help the company leverage its positive aspects to capitalize on opportunities and maximize returns. They do their research and then communicate the potential areas of growth to the management. This includes working with other members of the management and finding possible options for expansion in new markets and the impact it will have on the company’s revenue and earning potential. Additionally, CFOs play a crucial role in human capital management, advising on strategic areas and using data for effective organizational planning to ensure the company’s financial health and employee satisfaction.
Lacking Financial Data
Regardless of the company’s size and type, all decision-making relies on detailed financial statements and reports. Without financial information to back-up possible solutions, the decisions are mainly based on gut intuition and risk-taking. There is no denying there are times when gut decisions actually turn out positive, but the risk is extremely high. Besides, the increasingly aggressive competition makes it necessary for businesses to take calculated steps.
It can be difficult to make forecasts if a business lacks accurate financial information on cash flows and working capital. A CFO is able to not only generate financial reports required by investors and banks but also ensure these reports comply with generally accepted accounting principles (GAAP). They are aware of changing economic and industrial landscapes. With that information in tow, the CFO and other members of the management can make the right decision.
Sorting Out Tax Planning
Fulfilling and upholding tax obligations is one of the most important tasks all businesses have to complete. If a business fails to do so, they’re bound to face legal repercussions against them that can brandish their image. If a business finds they’re unable to plan and fulfill their tax obligations, it’s an indication they need a CFO.
A CFO acts as an advisor and has the expert-level knowledge to interpret changes in laws and regulations, analyze the tax benefits the business can obtain, and provide guidance. This includes ensuring compliance with the Financial Accounting Standards Board (FASB) guidelines, which is crucial for producing accurate and non fraudulent financial statements. This allows the company to fulfill their legal tax obligations. Also, this allows the leadership of the company to improve their current tax position and build and preserve assets in the future.
Better Understanding of the Cash Flows and Margins
Margins have an organization-wide impact and can change the entire financial statement situation at the end of the year. The CEO and management of the company might not realize how pricing strategies and similar changes impact the overall margins. If they have a CFO and finance team as advisors, they have a point of reference for consultation for future pricing decisions. Bringing discipline to margins is essential, as a lack of discipline can cause serious damage.
Similarly, the business must have control over its cash flow. If the business has no clue of how their money is flowing and what they can expect in the future, they can derail from their goal. A CFO and finance team can create accurate forecast reports and determine the proper strategy that brings discipline to the company’s finances.
From all that is said above, it is clear what situations might warrant the need for a CFO. However, the CEO is responsible for finalizing and implementing any strategy. The CFO is the right hand to the CEO, playing an important role in the planning of the process. Without the CFO’s input and recommendations, the CEO won’t be able to make effective decisions.
Since finance is their area of expertise, the CFO has more grounds on various financial processes, risk mitigation, and implementation of strategies in the organization. CFO Advisory services offer professional expertise to the company by directing the execution of strategies and closing the gap between the business’s day-to-day activities and financial direction.
We have compiled a guide that can educate you on when and why you need a CFO. You can find the guide here for free.
