Determining when your Business needs to hire a CFO

Small business owners often take charge of their own finances and bookkeeping for various different reasons. Out of these reasons, the three most common ones include not wanting to give out sensitive financial information, keeping control, and keeping employee payroll costs low. Are you a business owner who is unsure if you need to hire a CFO or not? Well great news… Keep reading to learn the ins and outs of deciding when it is best to hire a CFO for your business.

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, one person who’s responsible for looking after multiple business aspects also handling the finances and bookkeeping becomes impractical.

Some small business owners then, in order to alleviate the pressure, delegate their financial management to another employee or a family member. This usually doesn’t work out as the delegated person might not have the expertise to manage the bookkeeping expertly. 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 its financial management needs. They attend 4 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 and training that enabled them to understand a wide range of business models and 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 simply manage financial statements and day-to-day cash flows, a CFO can do much more. Along with creating and preparing detailed financial and management statements, a CFO is responsible for forecasting, budgeting, and much more.

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 phase of growth and expansion can benefit immensely from having a CFO on the team. They understand the impact of the incoming changes and then 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. The financial state the company currently boasts and the position they expect to be in the near future dictates the type of CFO a business needs. Besides that, the nature public or private nature of the company, the internal policies, and industrial benchmarks will also impact the kind of CFO a company needs.

Regardless of the specific details, a CFO performs the following sets of activities:

  • Have a leading role in providing financial plans and forecasts 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.

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, streamlining operations.

In short, businesses rely on 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), and COO (Chief Operations Officer) etc. to keep the company running smoothly and on a positive growth trajectory.

When does a Company Need a CFO

Now when it comes to assessing exactly when a business needs to hire a CFO, there are different situations. As we mentioned before, the decision depends on the state of the company 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:

Create a Financial 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 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 go through phases where their financial performance and profitability is not at the desired level. While some businesses can identify the cause of the performance dip, there are some that might find it a bit difficult to do. The ambiguity makes it hard for the management to find corrective solutions that work effectively.

A CFO can help identify the problem area and then suggest the right way to improve it. Improved visibility to into the company’s profitability will allow the company to make better decisions. The financial statements and reports made by the CFO will provide the CEO detailed information and insight into the net income, revenue, cost expenditure, and sales. Armed with these details, the CFO will 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 and complicated cash flows. 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 the frequent disruptions and dramatic changes in the business.

Guide the Company through Mergers and Acquisitions

Businesses often undergo through 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 and regulatory 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 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 their 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.

Lacking Financial Data

Regardless of the size and type of the company, all decision-making is reliant 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.

If a business lacks accurate financial information on cash flows and working capital, it can be difficult to make forecasts. A CFO is able to not only generate financial reports required by investors and banks but they are also aware of changing economic and industrial landscapes. With that information in tow, the CFO and other members of the management can take 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 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 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 situation of financial statements 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 as an advisor, 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, it is important that the business has control over their 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 can create accurate forecast reposts 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. CFOs add value 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.

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