Do You Really Need a CFO?

Image by Oliver Menyhart from Pixabay

“Maybe it’s time for you to get a Controller.”

I have said that to entrepreneurs more than once over the past few months.  In every case, all of these companies had already brought in a person designated as CFO (Chief Financial Officer) to lead the financial aspects of their company.  And in every case, that was the wrong type of person to hire for the specific needs of these companies.

What Should be Your First Hire?

Entrepreneurs who experience significant growth in their business may eventually hear this advice, be it from their CPA, their banker, or other entrepreneurs. Financial management in a growing business can become strained.  Eventually, the time will come when the entrepreneur needs to upgradecertain members of the team.

The first instinct of most entrepreneurs seems to be to hire a CFO.  In some cases this may be the right choice, but in many situations a controller or even a senior level bookkeeper might be what is really needed.

Let’s assume what you need to get done is the following:

– Keeps accurate records of financial transactions and also creates basic financial statements (Income Statement and Balance Sheet) using accounting software.

– Performs basic accounts payable management — makes sure bills get paid and records these entries into the accounting system.

– Performs basic accounts receivable management — if the business has to send invoices to customers to receive payment, sends out invoices monthly.

If this is the list of functions that need to be taken care of, you really need a senior level bookkeeper. These are the functions that would be in the job description of an experienced bookkeeper.

What Comes Next?

As a company grows and becomes more financially complicated, a controller adds more horsepower to the financial management team. Depending on the nature of the company, this often happens when the business grows to about $1 million to $3 million in revenues.  (Although, I have seen companies much larger than that get by with a solid bookkeeper and a hands-on outside CPA).

A controller does the following tasks:

– Performs all of the functions of a bookkeeper or supervises the staff that does.

– Creates customized daily, weekly and monthly financial reports to meet the specific needs of a specific business.

– Chooses and maintains financial software.

– Provides basic cash flow management of the business. Major cash flow decisions should still be made by the entrepreneur, however.

Good controllers can pay for their salaries in a growing company.  They do this by helping to create needed financial systems, by keeping costs under control, and by helping to manage cash flow more effectively.

When Do You Need a CFO?

One situation that may require a CFO is if a business must raise a significant amount of outside funding to get off the ground.  This is particularly true if the CEO/founder does not have a strong financial background.

Some businesses may grow to the point that they need a CFO, but this is not true for every business. Many very large organizations don’t have CFOs. If the capital needed for growth must come from complex debt instruments, private equity, or venture capital, a CFO is likely to be an important addition to the leadership team.

A CFO does the following tasks:

– Performs all functions of a Controller or supervises a staff that does these tasks.

– Structures and negotiates complex financing — including both debt and equity.

– Creates complex financial projections to aid in strategic decision making and is an active player in the strategic management of the business.

– Manages banker and other financial relationships for the business.

The Risks of Adding the Wrong Position

One risk of hiring the wrong person is that you end up overpaying for what you really need done.  The typical salary of a controller can often be at least twice as much as the salary of a senior bookkeeper and an experienced CFO earns easily twice as much as a controller.

If a CFO does not have enough work to do in the financial management of the firm, idle hands can become the devil’s workshop.  I have seen CFOs who become overly involved in the strategic decision making that should be the domain of the founders, sometimes creating unnecessary descent and conflict.

The titles “bookkeeper”, “controller” and “CFO” often get tossed around rather loosely. Many entrepreneurs give the title of CFO to people who are not qualified to be one.  They may do this to help bolster the external perception of the company, or simply to offer a nominal reward to someone in place of higher salary. However, to bankers and investors, titles within the financial management of a business have specific meaning.  If you give the title of CFO to someone with the knowledge and qualifications to be a senior bookkeeper, you may destroy the credibility of your business with bankers and investors.

Finding the Right Person

Use your advisors, CPA firm, your banker, and your network of experienced entrepreneurs to determine what type of financial professional your business actually needs.  Once your needs are clearly established, these same people can also help you find a pool of candidates to interview.