A Chief Financial Officer is a C level executive responsible for managing all of the financial functions of a company or organization. You might be wondering if it’s time for your business to hire a CFO. In this guide, we’ll dive into what a CFO is, why and when you might need one, and how they can help impact your bottom line as a business.
For a small business to leave a mark in the corporate world, it is imperative that it develops a structure and sustainable financial recordings. This is where a CFO comes in handy. In addition to building a sound foundation for activities in the future, a CFO uses financial expertise and strategic leadership to bring bottom-line success for the company and its stakeholders.
To answer your question regarding the significance of a CFO, we have decided to divide this blog post into three parts. Each part of the blog post will help you in understanding the significance of a CFO for a growing business.
1. What Does a CFO Do?
CFOs, just like other financial positions, perform several essential tasks. Chief Financial Officers are responsible for many duties including controller duties, treasury duties, forecasting, and budgeting. The core duties of the CFO are summarized in the paragraph below.
Most people are aware of this part of a CFOs job. Controllership duties make the CFO accountable for presenting and reporting accurate and timely historical financial information
The data that the CFO and the Finance team records is presented to all stakeholders, including shareholders, analysts, creditors, employees, and other members of the top management. Given the sensitivity of the information and the fact that the success of future decisions depends on these numbers, the CFO must present accurate data.
This is where the fundamental difference between a bookkeeper and a CFO lies. A bookkeeper is responsible for just recording the financial transactions of a business, whereas the CFO is also liable for the business’s financial health.
The CFO decides how to make invests on behalf of the business while keeping its risk and liquidity in mind. Additionally, the CFO oversees the capital structure of the company, determining the right mix of debt, equity, and internal financing. Looking after issues surrounding the capital structure and ways to generate revenue are some of the most essential duties carried out by a CFO.
Economic Strategy and Forecasting
A company’s past and present status is not the only thing that a CFO is responsible for; they play an integral role in shaping and securing the financial future of a company. A CFO should have the ability to interpret current data while identifying areas where the company is most efficient and the segments where the company needs improvement.
The analysis of the current performance and subsequent forecasting of outcomes involves the use of economic forecasting and modeling. Using the two can help the company predict policies and decisions which will ensure the well-being of a business with regards to the struggling factions it has.
In addition to the above roles, a CFO has to tend to other crucial responsibilities as well. The CFOs are the right hand of business; they advise the business while looking at things from a wider perspective. The broad view and the close attention to financial details help decision-makers form a more comprehensive picture regarding the current state of the business.
A CFO oversees the process of raising the capital needed for growing the business. From weighing options, like equity and debt, to the timely collection of revenue, a CFO ensures that a business has the funds for financing its growth.
A CFO must have command over all essential drivers and levers in both the business and the industry that you operate in. Companies today are more data-driven than they ever were; this means that the CFOs should have the quality to consume all the data.
Being aware of all the vital data means that a business can use the numbers and the figures to gain insights needed in a competitive industry.
They strengthen and deepen the relationships with the source of capital, relieving you of the burden of managing relationships with your investors, lenders, and critical partners, etc. This allows you to focus on building your business.
The following key chart will help you in understanding a CFO’s roles better.
2. Why Do You Need One?
You may be wondering, why do I need a CFO? Many smaller businesses often underestimate the significance of a CFO. These businesses consider the title to be a ceremonious one, used by multinational corporations to gain attention.
The truth is, CFO’s help scale and track your numbers during times of rapid growth and company expansion. They also help make key financial decisions based off of these numbers to accurately guide the organization towards its goals. In the next section, we will dive into when it makes sense to hire a CFO based on the size and needs of your business.
Small and Medium-Sized Business
Taking your business to the next level of growth is a unique challenge. Studying entrepreneurship or discussing it with people currently running businesses will make you learn how difficult it is for a small business to succeed.
The chances of having a successful business are so slim that, according to experts, only 10% of businesses survive past the first few years of their launch. Therefore, to ensure that your business survives its initial flight and goes on to become a success story, make the right decisions at the right time.
Although we will discuss the right time for hiring a CFO, the decision to hire one is never a wrong one, especially if your business is a young one willing to take on the world.
The challenge of taking an SME business to the next level is a challenge that only a well-equipped person or team can take on. Managing the growing turnover, as well as the accounting and finance functions of a business, require the unique skill set of a CFO.
If you observe that a team member has the potential for taking tough decisions and assessing financial situations, you should extend the offer to them.
As your operations tend to grow, you will notice that the situation gets more and more complex to look after. The services of a CFO will help you in taking care of other vital issues while ensuring that the business is doing well financially.
The Business Situation
The significance of hiring a CFO stems from a business’s set goals and targets. While it is imperative to stay self-sufficient, a company not realizing the need for an asset will never be able to adjust to the challenges it faces.
A business not achieving its goals and not realizing the reasons for the failure in doing so needs to revamp the way it looks at things. A CFO will help decision-makers recognize the ways a business can achieve its financial goals. Moreover, the CFO will also identify the areas that need improvement to achieve the set goals.
Determining the type of CFO needed and the level of skill they should possess depends on the state your company is in. A fledgling business will require a CFO at times when it is experiencing rapid growth; during this time, a business needs to make dramatic changes to the way it allocates resources.
After tackling the WHY, let us look at the WHEN.
3. When Do You Need a CFO?
A key to determining the need for a CFO is the state in which a business operates and where it expects itself to be in times to come.
The CFO then forecasts and sets future goals for the business while providing leadership in assembling funds necessary for achieving the set goals.
Here are some other scenarios that may prompt a business to hire a CFO:
Developing New Products
With the rapid advancement in technology and changes in trends, current markets are unpredictable. Disruptive technology and shifting market dynamics mean that the new leadership models require change and ability to adapt.
The CFO can understand and anticipate the need for change, making the position crucial for the business to capitalize and plan for future growth. A CFO will ensure that the objective to launch a product or to expand doesn’t fall flat by asking all the right questions.
Planning for Taxes
As a business grows its operations, it becomes exposed to further complexities. Taxes are one of them; an increase in the size of a business means that it needs to uphold its tax obligations at a much larger scale now.
Companies that are facing increasing returns and profits often face complex tax rules and regulations. A CFO helps the business by interpreting and analyzing the changes in the law. Once the difference is accounted for, the CFO provides guidance on improving current tax situations as well as building and preserving assets.
To Execute Strategy and Provide Leadership
As the owner of a business, you get to decide its future and lay the foundation for the targets that need to be met. It is the job of the CFO to inform you of the feasibility of each of your targets.
While ensuring that the financial constraints of the set target are not too risky, the CFO provides financial leadership so that these targets can be achieved. While achieving those targets, the CFO will share vital information with all the concerned stakeholders and decision making. The CFO, therefore, takes over the strategic planning discussion if the execution is complex.
The Need to Understand Margins
If you feel that your inadequate knowledge of business margins is affecting your pricing strategy, then it is high time to hire a CFO. It is quite natural for business owners to be unaware of the cumulative impact thousands of pricing decisions make daily.
This lack of awareness can affect business decisions, resulting in a poorly defined pricing strategy. A poor pricing strategy then results in a significant drop in profits.
Lack of Detailed Financial Detail
Another thing that is necessary for ensuring the well-being of a business is the presence of detailed financial data.
As the owner of a small business, you can make decisions based on your knowledge of the market. However, as the business grows, the evaluation criteria require changes too. You can no longer make decisions based on your gut feel, a slight error in decision making can prove to be fatal for the business.
A CFO has access to data about the cash flow and working capital as well as a forecast of liquidity. Additionally, the CFO is also aware of the economic, regulatory, and industry changes that can affect your business.
When you feel the need for making calculated decisions that take into account the performance of the business and its set targets, then it is high time to call in a CFO.
CFOs are in a perfect position to help the CEO establish a financially strong company and create wealth for its owners.
Conclusion – What is a CFO and Why Do I Need One?
CFO is an executive that helps with all types of financial functions. We covered what a CFO is, when you need one and why you need one. The benefits are undeniable, as your business will be properly positioned for growth. Regardless of their skill and talent, entrepreneurs have a bit of a love-hate relationship with finance. This is where a CFO can help improve your bottom line.
While an entrepreneur may love higher revenue and profits, recording them after the end of each day may be a bit of a hassle. As time goes on and a business increases in size and numbers, the challenge of recording entries becomes almost impossible to champion.
The numerous deals and activities to look after and the burden of making decisions with each passing hour calls for someone who can tend to the financial needs of the business. In the modern world where entrepreneurship dwells on a competitive landscape, it is imperative to have a solid grasp of numbers.
However, this is a complicated thing to do. Recording transactions and assessing the numbers may be easy when a business is small but this changes when the business starts to grow.
If you have more questions about CFO functions or are interested in outsourcing your CFO, contact Fully Accountable at 1-877-330-9401.