One of the biggest challenges to face small and medium enterprises (SMEs), especially those growing quickly, is knowing when to hire expert help. As business owners we're told both to manage costs, and to get help rather than trying to be an expert in all things - two seemingly contradictory bits of advice!
One area of expertise often overlooked by SMEs is in the area of strategic financial management. As small businesses grow, their needs tend to outgrow what their accountant or bookkeeper can offer, and their success and on-going growth will likely be constrained by not having access to the right level of financial advice.
The problem is, the business will often only realise that tipping point has been reached long after the event. This Forbes interview suggests the tipping point might be when the information needed to support decision-making in the business is not available. But really, it may well depend on a number of other factors, including size, growth and complexity of the business.
A CFO is a Chief Financial Officer. Typically in larger corporates, she will sit at the top of the finance and administration hierarchy, and report directly to the CEO. In many cases the CFO will absorb responsibility for HR and IT, particularly if the company is not large enough to appoint executives in those functions - though this is less typical if the business is heavily dependent on its IT systems or its people.
When to hire a CFO
Companies are usually advised to appoint a CFO for the first time when they are experiencing rapid growth. Usually with rapid growth comes complexity and risk, and an experienced CFO will ensure the company successfully navigates its way through strong growth. However the problem with this view is that, many SMEs will never get to experience what rapid growth looks like, because they are stuck in their way of seeing the world: a particular market they're in, a particular solution or product they are selling, a particular category of client they serve. Without the insights of a CFO, they may not identify the lost opportunities associated with maintaining unprofitable customers, processes or products.
Here's an interesting blog from Janine Popick (CEO of VerticalReponse), which offers some useful insights from a SME owner as to what you get from a CFO, and how with hindsight she might have done things differently.
One solution a lot of SMEs are turning to is the outsourced CFO. This outsourcing trend is of course not unique to corporate financial management. Outsourcing sites abound, some of the better known ones include guru.com, odesk.com, freelancer. com, fiverr.com, expert360.com. These are establishing a new lean model of running a business, with business owners coming to realise the value of trusted, expert help that's easily accessible and well-priced - and with no long-term commitment.
While the outsourced CFO is certainly going to cost more per hour than the typical freelancer, it's important to view this as an investment in the business rather than a cost. Indeed, some consultants will accept to be paid on a contingency basis, meaning you only pay them an agreed proportion of any increase in revenue or profit.
Given the financial outlay though, some consideration needs to be given by the business owner to how best to leverage this resource.
SMEs can gain on-going access to the experience and expertise of a CFO for as little as $1,000 per month, or even engage a CFO to work on a particular project, for example to advise on an investment opportunity, or to help prepare the business for a sale when the owners are retiring.
What does a CFO do?
First it's important not to confuse a CFO, an accountant and a bookkeeper.
A bookkeeper (which incidentally is the only word in the English language with three consecutive double letters - fact of the day!) is the traditional 'beancounter' who processes paperwork and entries in the general ledger, using an accounting system software. In smaller businesses, they often report to the business owner, and will usually prepare information for the outsourced tax accountant to use.
As the business grows, it is not unusual for it to hire an accountant (though this role can be outsourced to a firm). An accountant should typically be qualified, which means they have passed an accounting qualification and are registered with a body like CPA or CA in Australia. This is important as it provides you with some indication that they are properly qualified and professional, and are bound by a code of ethics - after all, you will be trusting them with your money. The accountant will typically oversee the bookkeeper. They will be responsible for preparing financial reports, both for external compliance (statutory reporting), and for internal use by the business' management (management information). They may also deal with tax.
While the accountant focuses on ensuring you remain compliant with accounting standards and tax obligations, the CFO goes one step further. They will often prove pivotal in the following areas:
Establishing policies, controls and systems, in order to manage risk and ensure the business grows is sustainably.
Thinking outside the box and more commercially than an accountant might. For example, they won't just ensure you're paying your tax as it's due, but they will ensure all options have been explored to minimise tax. Rather than simply ensuring your accounts receivable are collected promptly, they will identify your most and least profitable customers and ensure the business' resources are appropriately focussed.
Advising on productivity, efficiency, process improvement and business improvement.
Readying a business for sale or investment.
Providing strategic advice and ensuring proper alignment between strategy, controls, measurement tools and management reporting.
Ensuring are you using the most appropriate form of finance for your business (debtor finance, bank debt, operating cashflow, angel investment, VC, etc).
Supporting decision-making, by ensuring systems exist that provide the key decision-makers (directors) with timely and accurate information - enabling them to make the right decisions for the business. In SMEs, and even it's fair to say in most of the larger companies I've worked with, the design of what management information is required is often driven by the existing systems and processes (and so constrained by what is available), rather than the other way around as it should be. Systems are most often implemented with a focus on the automation of a particular operational task (issuing a packing slip, tracking inventory, sending out a customer notification, etc), but very little thought is given to the reporting requirements. This means system consultants will often need to be brought in at a later date to develop data analytics and reporting solutions.
So really, while the focus of the accountant is to keep things ticking along, the CFO is more akin to a business partner, who will question how things are currently working across the business and ensure you are being provided with appropriate decision-making information and support. With some outsourced CFOs offering to work on a contingency basis, where they only get paid if they actually improve the bottom line, you should really be thinking carefully about whether your business can afford not to engage one!