I have recently been talking to business owners and executives who want to build more resilience into their business. They are considering adding a part-time Chief Financial Officer (CFO) to their team. During these discussions, two questions usually come up. “How do I know if my business needs a CFO?” and “what does a CFO do that my Accountant can’t?”. I would like to share some thoughts on these questions.
The primary responsibility of a CFO is to optimize the financial performance of a company. This includes its reporting and accountability, liquidity, return on investment and long-term value creation.
A CFO has a forward-looking perspective. They look at interactions of the business with outsiders, acting as a diplomat and negotiator with third parties. Often the strategies put in place by a CFO are not short-term fixes. Some may take months or years to be fully realised.
How do I know when my business needs a CFO?
As to the question of when a business needs a CFO, the following indicators may be helpful.
- Internal – When information that helps in making important decisions is not timely or reliable.
- External – When improved respect must be gained outside the business. eg from investors, customers, suppliers, labour markets, regulators etc.
- Rapid Growth – Growth requires an expansion of systems, and usually additional capital to finance the growth.
- Exit – When a business is preparing for a merger, acquisition, or business sale.
So, when the business is at the stage of increased external engagement and growth, a CFO can add significant value.
What does a CFO do that my Accountant can’t?
A CFO always works closely with the external Accountant. Having an accounting background, the CFO is well placed to understand the role of the external Accountant. The external Accountant’s role is mostly concerned with compliance and transactional advice. They work from their own offices and will normally attend the client’s business premises periodically. External Accountants often have the skill sets to provide additional services. However, they are usually not involved closely enough in the running of the business to make this a sensible use of their time.
Functions such as the below will either fall to the CFO or some other suitably qualified resource will need to be allocated:
- Budgeting and forecasting
- Cash flow management
- Financial reporting
- Scenario planning
- Internal controls
- Bench-marking and key performance indicators
- Incentive schemes
- Management of key suppliers
- Accounting policies
If the business doesn’t have a CFO, the CEO or one of the Directors have to take ownership of these functions. This means they are taken away from other important leadership and governance roles. They also may not have the depth of experience in the technicalities of financial transactions to handle these things well.
Some of the common misconceptions about a CFO
There are some common misconceptions about a CFO that are worth discussing.
The first misconception is that a CFO may have an excessive focus on short-term financial results ie this year’s profit. Financial success of the business is undoubtedly the objective of any CFO. This, however, does not mean sacrificing long-term value creation for short-term results. A CFO is interested in the success of all business stakeholders. This includes owners, employees, customers, suppliers, financiers etc. All stakeholders must be rewarded to ensure the long-term health of the business.
CFOs are therefore, likely to be just as interested in the business strategy as they are in the profit and loss statement. In addition, culture, reputation, governance, and risk management will be on their radar. A good CFO recognises that sustainable financial success is only achieved when all aspects of a business are working well.
Another commonly held misconception is that CFOs think in “black and white”. That therefore, they may not be comfortable with the various shades of grey that business and life deal up. Whilst that may be true for some aspects of a CFO’s decision-making, good CFOs will look closely at the underlying issue. For example, CFOs are often involved in analysing the performance of a business or even individuals. In understanding performance, a CFO will often consider a range of underlying factors. This can include; roles and responsibilities, resources, delegated authorities, remuneration and incentive systems, behavioural assessments, management approach, and organisational structure and culture. CFOs are first and foremost experienced corporate managers. They understand that people are usually the most critical resource in businesses. From experience, most CFOs are skilled at dealing with people issues sensitively.
If you’d like a confidential discussion about whether a part-time CFO could be right for your business, please contact us.
Allan Robb, CFO at the CFO Centre