As you contemplate your finance and accounting needs, there are numerous considerations, from the right ERP system to the right personnel. And as your growth accelerates, or as you near a critical inflection point with financing your business, you may find yourself wondering, “Do I need a CFO?” With oversight of your finance and accounting (F&A) department as a given, here are seven additional reasons you do, or will, need a CFO.
1. You Need a Trusted Advisor With an Insider’s View
I’ve made this #1 for a reason. Most business owners/CEOs can relate to the old adage, “It’s lonely at the top.” At some point, you will want and need additional insight, clarity and wisdom on the business coming from a trusted voice in the F&A department. Family, friends, industry peers, CPA’s, and attorneys, are the first group to whom many a CEO will have turned. These influencers have most likely been an integral part of your support system in growing your business from fledgling start-up to where it is today. However, to successfully reach the next level with your business, having the voice of someone who sees your business from the inside and out, top to bottom, and who has meaningful, actionable input to give based on that knowledge and years of experience, can be invaluable.
Someone who is qualified to be a CFO, or Chief Financial Officer, most likely has a resume that includes an educational background with at least a bachelor’s degree, and often a master’s degree, in business, finance, or accounting. In addition, many will hold other certification credentials such as CPA, CMA, or CFA. Work experience will often include time at public accounting firms doing tax or audit work, coming up through the ranks on corporate finance teams, consulting work, investment banking or private equity. Most will have been Controllers, Treasurers, VP’s of Finance, or leaders in corporate or advisory M&A groups. The experience, education and certifications don’t necessarily make a good CFO, but the majority of good CFO’s have those kinds of backgrounds.
All of that background means more rigor, discipline and intellectual horsepower that can be focused on helping your business and providing the meaningful input mentioned above. In addition, good CFO’s will effectively oversee and lead the F&A function in your business, creating cohesion in reporting, efficiencies in processing time, and answers to the difficult questions. Assuming there is a baseline of ability in background, as well as a match in industry experience, the compelling questions become 1) is the personality a good fit for you and your employees; 2) is there a feeling of mutual trust with this person? The answers are purely up to you and will be very subjective in nature, but are extremely important. Ultimately, there is no financial wizardry or analytical horsepower that can overcome mistrust or dislike – at least not in the long term.
2. You Need a Budget, Forecast and/or Additional Analysis
Most experienced bookkeepers and accountants are proficient enough with Excel to build basic spreadsheets and run basic analytics. However, when it comes to serious forecasting, budgeting, and financial analysis, another level of knowledge and skill is necessary. Building a three-statement, financial forecast model with multiple inputs and a balance sheet that balances isn’t rocket science, but it’s also not Accounting 101. Similarly, leading the annual budgeting process with input from multiple department heads and bringing the various components together in one, robust model requires not only an analytical skillset but also the management gravitas to ensure it happens. Perhaps most importantly, having the experience and mindset to drill down into the numbers at what is actually driving cost and variances, and not accepting the answer until the root cause is identified, is critical.
To be clear, many Controller and Accounting Manager-level professionals have these skills; however, more often than not in lower-middle market businesses, they either do not have these skills or are so focused on the work of producing historical financial statements that forecasts, budgets, and other “FP&A” work takes a back seat. Good CFO’s have the skills to produce and manage, or appropriately delegate, the FP&A side of the business, as well as financial reporting and treasury. They can dig into model assumptions, analyze variances, and create the appropriate KPI dashboards to ensure that the key drivers of the business are adequately understood and reflected. To learn more on what to expect from your F&A team as it pertains to these things, read my two articles that expound on the topic, here and here.
3. You Need to Raise New Financing
Most lower-middle market businesses will at some point seek additional or new financing, either through an equity raise or a credit facility with a lender. The initial conversations with investors and lenders are critical. A proven, successful approach is to make a two-pronged attack: the CEO/owner tells the business story – the sizzle – and the CFO backs up the story with the numbers – the steak. If done right, this is a winning one-two punch that engenders confidence and enthusiasm from the parties sitting across the table. And of course, the numbers need to truly back up the story. You want someone in your CFO who can speak with clarity and confidence, answer questions succinctly, and convey the intangible executive presence investors and lenders will be looking for.
Putting the numbers together for a new financing, along with coordinating the entire presentation slide deck, is a task most CFO’s worth their weight in gold will relish. In fact, it is the opportunity that actually makes their job so compelling, if not satisfying. A strong CFO will know how to build a story around the numbers, much of it focused on the three-statement financial forecast, that effectively communicates the business opportunity. Consider this as mission-critical for securing new financing, and then ask whether you have that skillset yourself or elsewhere on your team. If the answer is no, you need a CFO.
4. Your Growth Strategy Includes Acquiring Other Businesses
You will definitely want a CFO by your side if your growth plan includes a “buy-and-build” approach. As companies mature, M&A activity is often overseen by a VP of Business Development who reports directly to the CFO. But for lower-middle market businesses without the resources of much larger corporations, M&A work will almost always fall directly within the CFO’s job responsibilities. CFO’s will help you identify potential candidates and can run as much of the acquisition process as their experience and ability, and your comfort, will allow.
This closely mirrors the prior point concerning raising new financing – if you are seeking an acquisition, you almost certainly will need acquisition funding, including an acquisition debt facility. CFO’s will model the post-acquisition capital structure against future results, present various debt and equity financing scenarios with their recommendation, and help negotiate terms with lenders and/or equity investors. They will also help negotiate the price and terms with the seller, run the diligence process, and oversee the always-complex post-close integration activities.
5. You Are Contemplating An Exit From Your Business
This is very similar to reason #4 above. At some point, you will want/need to exit your business in some way, shape or form. The CFO can, as your advisor, help you think objectively about your options and facilitate conversations with M&A professionals. In most cases, an exit will require working with an M&A intermediary, often a boutique investment bank or business broker, to develop the pitch book, market the business, identify qualified buyers, facilitate in-person visits/meetings, receive offers, negotiate price, and manage the diligence period with the chosen buyer.
The CFO becomes crucial during that entire process as he/she discreetly coordinates the preparation of due diligence materials and upload to the intermediary’s data site; presents the proverbial “steak” (numbers) during the sale presentations; and, answers financial/accounting questions for potential buyers. The ultimate buyer may require an audit and/or a “Quality of Earnings” (QOE) report as part of their diligence, both of which need the full cooperation and interaction of the CFO. Post-close, there will be work to facilitate the buyer’s integration of the F&A group, and the CFO will be needed to play a supporting leadership role in the transition period.
6. You Want to Consolidate Oversight of Administrative Departments
If you find HR and IT needing additional oversight and you’d rather have that fall under one umbrella, then a CFO can be the right answer for leading multiple departments considered to be corporate overhead. Leading the F&A department is a given, but many CFO’s have also had prior experience leading HR in particular, and have, for example, helped develop employee handbooks, oversee payroll and benefits, and create bonus structures for management. In addition, CFO’s have often been on the front lines of ERP conversions, early decision-making on IT hardware and software spend, and decisions regarding how much of IT to outsource. In short, CFO’s are often well-rounded enough to oversee multiple administrative departments in a business.
7. You Have Equity Partners
Depending on the size of your business and financial wherewithal to absorb the cost, if you have partners, you should strongly consider adding a CFO to your management team. A CFO brings clarity to the finance and accounting of the business and will give all equity holders a much stronger sense of propriety and comfort when it comes to evaluating the results of the business and their return on investment.
Having said all that, when does it NOT make sense to bring on a CFO? It can be problematic to use formulaic, “one-size-fits-all” pre-qualifiers to determine whether or not you should consider adding a CFO – every business is different and every owner has a unique set of circumstances; however, I will provide the following as very general guidelines:
If you are a one-location, “mom-n-pop” or family-run business with less than approximately USD $5 million in revenue, and
you have a trusted bookkeeper/accountant generating timely financial statements, and
you have no plans to expand locations, grow the business significantly, or add additional equity financing (i.e. new partners) …
then in most cases you probably do NOT need a full-time CFO nor should you try to afford one – your current resources, including your local CPA, are likely adequate. The exception to that is if you have special projects or want an occasional, independent overseer of your F&A function (i.e. one day per month), then you might consider the services of an outsourced CFO. In fact, (bias alert!) for many lower-middle market companies that have outgrown the above general guidelines, outsourced CFO’s can be a fantastic resource and a good alternative to the traditional, full-time employee model. I talk more about that here.
To summarize, a good CFO can be an incredibly vital piece of your management team. He or she will bring clarity to the numbers side of the business, will be the only person with the specific skillset to take on key projects and roles in the business at various inflection points, and can become your most trusted internal advisor.