Transcript #168 Why You Need a CFO

Intro:

Good day to you! This episode of Arise2Live Podcast, episode 168 is “Why you need a Chief Financial Officer.”

Business owners these days are so busy that they assume that bookkeepers and tax CPAs have it all covered. They don’t.

Let’s gain some perspective on how hiring a CFO can help your business.

Scott Weaver: 

At a certain point in a business life, there is need for the expertise of a Chief Financial Offer, CFO, for short. Today’s episode covers a broad picture of the CFO role and why it is so important. Included are the dangers of not having a CFO, roles of a bookkeeper and tax CPA, the 3 types of CFOs, and the starting-line to hire a CFO.

Hello everyone, I am Scott Weaver, the Arise2Live business coach and this episode is something near and dear to me. You see, I do part-time CFO work for clients and know firsthand the dangers of not having a CFO and the benefits of a CFO to improve cashflow and operations efficiency. Let me know if you’d like to talk over some CFO stuff by scheduling a call on the Arise2Live.com website.

Regarding the Arise2Live.com podcast, there has been some expansion going on in the last 6 or so months. One is the YouTube channel called Arise2Live where you can listen to the podcast episodes. I will admit there’s room for feature improvements on the YouTube channel and it would be so helpful if you would let me know in the Show Notes comments section of what features you’d like to see on the YouTube channel.

I’m also excited to share that there’s work behind the scenes on creating a new member site for this podcast and we are looking to get a soft-launch in October. The name will be BusinessOwner GPS and we are trying to target it reasonably priced with extra content to help your business and to help you grow. I’m still deciding on the best content and value to put in, so please let me know what content and features you’d like to see by writing in the comments section of the Show Notes. Your inputs and feedback would be so helpful.

On to today’s episodes.      2:47

Not knowing the company’s financial numbers is a leading cause of failure and businesses ending.  If not at that horrible level, not knowing compounds the stress of uncertainty and the guessing in an owner. The purpose of the CFO role is not only to tell you the numbers, but also what to do about them.

Let me give you an example from my personal experiences dealing with multiple clients, and these demonstrate the reasons why a CFO is so valuable and why you should consider hiring one, whether part time or full time (We’ll talk more about this full time, part time later on).

Let say a certain company passes the $1 million mark in yearly revenues and the owner sees a huge red flag: The company operations is making money, but the bank account is shrinking. The owner double checks the P&L statement. Yep, making money. A woman business owner once asked me with a loud voice, “This makes no sense?! How can I both be making money and losing money at the same time!”

Well, sorry to say, her business was actually losing money, a slow cash burn that wasn’t caught soon enough. If you are seeing something similar and don’t know why, it’s time to bring the financial expertise to figure out what’s going on and do it soon because once that company gets low on cash or out of cash, well, that is the definition of bankruptcy. If you are in this position or close to this position and you’re just uncertain, please set up a call with me or find somebody who can help out. Do this, like right now.

At the 100,000 foot level, often when bank accounts are out of sync with operations, it is during a period of company growth and there has been some kind of financial crossover, maybe, say a million or low million dollar revenues, or maybe 20 to 25 million. Many small businesses owners, especially when they’re small, try to keep track of the money at the same time running the company. However, as the company grows, it becomes harder and harder to keep it all together without help.

Here’s where I get some pushback and people will say, “But wait, Scott, I already have help. I have a bookkeeper and I have a tax CPA. Isn’t that enough?”

No, it’s not. Here’s three reasons why you need more than just bookkeepers and tax CPAs:

First, the bookkeeping role is to accurately record financial transactions and maintain accurate records, send out invoices, pay bills, keep track of accounts receivable, provide reports to the owner and the tax CPA, etc. Actually, they do a lot. They work down in the weeds making sure every expense is recorded in the right place in the financials. It takes a certain personality to work at this level of detail. And doing so, bookkeepers mainly focus on the operations accounting in the P&L statement, especially the revenues and expenses.

Now, there’s another thing about how bookkeepers record things, and this is very important. They record the past. Bookkeepers track what has already happened and don’t look to the future very often.

Their work in keeping track of everything is very important, and it has to be done and has to be done right. But they don’t look to the future or the whole picture like a CFO does.

Second, a Tax CPA’s main purpose is to minimize taxes paid. Okay, let me rephrase that. A good tax CPA’s purpose is to keep the business owner legit and out of jail, then minimize taxes paid to the government.

In my first year of running my own company, I hired a new tax CPA, and it wasn’t a couple of weeks into it, I was raked over the coals for not having good enough books and that I had miscategorized an expense hoping to take advantage of a tax benefit. On my own, I would have ended up paying penalties or worse. I’ll never forget getting chewed out by someone I just hired. A good thing she was right, and guess what? She still is my tax CPA after 10 years.

So tax CPAs are very important. They work very hard to minimize revenues and maximize expenses of the tax returns. I mean, that’s how you pay the lowest amount of taxes. But doing so, the resulting tax returns are the very opposite thing you want to show a banker or a loan officer.

Let me go on a tangent here. The inability for business owners to get loans is one reason why business owners get rich. They have to figure out how to be their own banker and then reap the long-term benefits for it. So there’s a negative for not being able to get loans, but there’s also a positive in the long run. Just hang in there.

Okay, tax CPAs tweak the books so you can pay less taxes. However, a CFO will present the books to reveal the true financial condition of the company. I’m talking more than some numbers at the bottom of a spreadsheet. Good CFOs go beyond the numbers to see how the company is doing in all areas of operations, capital expenses, investor paybacks, loans, etc.

The third reason why you need a CFO is because you are running the company. That’s what business owners do. They run the company each day. You solve problems by dealing with employees, customers, and make sure things go smoothly or maybe I should say fire-fighting. On top of that, there’s hundreds of more tasks that need to be done. At one time, when the company was small enough, you could keep track of the financials yourself, maybe doing it on a Saturday morning or waking up at 4 in the morning two days a week to get it done (those are actually examples of clients of mine).

Trust me, when a company size is starting to hit $1 million a year, and you’re still trying to track finances and run the company, it’s way too hard. It just gets you. You just can’t keep up. It is way too easy to assume that the bookkeeper and the tax CPA got you covered. They do in their area of expertise, but there are large holes that impact cashflow and profits.

Now, we have talked about bookkeepers focusing on taking care of the numerous details to record the financial transactions. The tax CPA looking to modify the books for tax reasons, and you, the business owner, are too busy running the company.

So what happens in this case? Nobody is watching the total company finances. It’s like a boat with nobody at the wheel or the rudder, drifting to who-knows where and praying to God that ain’t a rocky shore that’s making the noise in the distance. It’s scary.

So how does a CFO watch the boat?     10:36

 At the highest level, they are responsible for the total profits of the company. I’m not just talking about operations profits, but everything that impacts the total free cash flow and profits. Sometimes this is called the overall financial performance of the company.

CFOs watch all three of the financial sheets: Business Sheet statement for assets, liabilities, and equity. The P&L statement for revenues, COGS, overhead expenses, etc. The Cash Flow statement to see where the cash is being spent: cash flow from operations, the cash flow for investments in equipment, and financial activities.  If that’s not enough for a CFO, they attempt to forecast the future performance of the company including hiring impacts, and impacts of purchasing new equipment, even trying to figure out what an economic downturn would do. It’s a tough job.

It’s no wonder that the business owner at a certain point can’t keep up with it all. There’s just so much going on to insure a successful company.

So a good owner-CFO relationship is a divide and conquer approach. The CFO watches the financial performance of the company, and the owner takes care of the operations and creating value for the customer. Together they can do more than either can do alone.

There are three basic types of CFO roles and which one to pick or use depends on the maturity of the company and what’s going on inside your company.

• Accounting CFO – They are sometimes called “controllers”, usually has a CPA license. They make sure that the money goes where the budget says, and they handle taxes and audits. Usually, their temperament is conservative. They like stability and go to great lengths to protect income and the company margins. This type of CFO, the accounting type, is usually best for mature, stable companies.
• Financier CFO – Their main focus is the investing and financing. They make the deals. They raise money from outsiders. They help grow by buying other businesses. They are very helpful to start-ups and in very fast growth stages. Their temperament is often on the aggressive side and I met a few of them that could see opportunities under every rock and every bush. If you’re working with one of them, expect to hear a great deal of mathematics as they figure out the ROI, IRR, and NPV.
• Advising CFO- They combine the finances with operations to help build a better performing business. They look beyond the numbers and can do the math like financier CFO, but instead of outward looking, they are looking inside the company to see how to improve cash flow and profits. They’re best for the break-out maturity stage or when finances and operations are out of sync.

Please note that often the first two types of CFOs are “delegated” roles, the Accountant and Financier types. They usually work mostly independently with your goals and vision. The Advising CFO, however, works very closely with the owner, like the CEO’s right-hand.

Which type of CFO to hire depends on the maturity stage of your company and the business needs. The largest companies will actually have people in each of these three roles. The very large corporations have whole teams for each one of these roles.

Sometimes the financier CFO is needed in a start-up seeking venture capital money or an accountant CFO for a stable manufacturing company looking to improve cash flow with exact accounting and oversight. An advising CFO is often for fast growing companies or when the finances are out of sync with operations, which is actually surprisingly easy to do in a growth phase.

Regardless of the business stage your company is in, hiring a CFO is a big jump for business owners and founders. After all, a CFO doesn’t create the customer products. However, not knowing your company numbers is a leading cause of company failures and the CFO’s purpose is to not only tell you the numbers, but what to do about them.

Smaller companies don’t need a full time CFO and can hire a part-time, or fractional CFOs. That’s a way to keep the costs down and to get the needed expertise. If you go with the part-time route, watch out for full-time CFOs in-between full-time jobs as they may not stay for long because they’re looking for a temporary job as they’re looking for a full time job and you don’t want to be in that position. .

A general rule-of-thumb is that a part-time CFO becomes very helpful when a company is starting to hit the $1 million a year in revenue depending on the complexity of the company, sometimes it’s 5 million. Somewhere on that low range, it is time to seriously think about getting a CFO. Of course, start-up companies may need a financier CFO very early on.

Full-time CFO has come into to play around $20 mil or so. Less complicated companies might be able to wait to $50 mil or so. It all depends on the complexity and what you’re trying to do.

Conclusion     16:35

In this episode, we covered why you need to hire a CFO and the reason is that you need somebody to be watching out for the total picture of the company finances. We talked about how the bookkeeper is deep in the weeds, the tax CPA is focused on minimizing taxes by minimizing revenue and maximizing expenses, and the business owner, you are just busy running the company.  I highly recommend not letting your finances drift unsupervised onto some unknown rocky shore.

We also covered three main CFO roles: the Accountant, the Financier, and the Advisor. Which role to hire depends on the maturity of your company and/or if your finances are out of sync with operations.

We also covered when to hire full-time or part-time CFO based on the needs of your company.

Here are some starting action questions to get you going.

What are your annual revenues? If you’re a couple of thousand dollars, you probably don’t need it. Yeah, above 20, definitely be seriously looking. If you’re in between, look at part time CFOs to get the expertize so that you can continue running a successful company.

What is the maturity stage of your company? I usually break it down to tart-up, break-out, growth, mature, the wall.

Do you have time to look over the 3 financial statements on a weekly basis, or at least monthly?

Which of the 3 types of CFOs would be a best fit to where your company is today? The accountant, the financier, or the advisor.

The answers to these questions determine whether to start a CFO search or not. So answering these questions, I think will help you know where you are and steps forward that you can take to help the financial part of your company. Just want you to be successful here.

Having a CFO who is watching the total finances of the company is a very important role to keep your cash flow and profits on track. CFOs are well worth the cost because when your company’s finances are in sync with your operations, you will Arise2Live.

Sponsor:  Today’s sponsor is Arise2Live Business Coaching. A professional and structured system to get business owners to grow and gain freedom from the chaos of running a business. Scott uses a proprietary four step system to get you the results you need. Start running a thriving business, not a self-created job.

Schedule a call today on the Arise2Live.com website.