Even if you’re a financial whiz, chances are a time will come when you need to call in the big guns. That means hiring a CFO. “At some point in the growth of a company, the financial responsibilities often exceed the capabilities of its owner,” says Kenneth Yager II, principal and chief marketing officer for MorrisAnderson, a Chicago-based turnaround firm.
A good CFO can do anything from identify weaknesses in your business model to creating financial processes to help your company grow. What’s more, the CFO of a struggling business can pinpoint financial areas for improvement and turn the company around.
Hiring a CFO is also a costly proposition. What’s more, the wrong choice can inflict a lot of damage. Yager points to a consumer goods manufacturing company that hired a CFO four years ago. As the company grew from 25 to 75 employees, so did its complexity—and the finance executive wasn’t up to the job.
“The CEO consistently was given the wrong information about how much cash he had,” says Yager. “It was a chronic disaster.” Finally, the CEO brought in a replacement with more expertise in financial controls and cash flow management; the situation turned around.
Here’s what you need to know to make the right decision:
Master the basics: the difference between a bookkeeper, accountant and CFO.
“A CFO is part of a progression of financial professionals companies need,” says Yager. At the most basic level, there are bookkeepers, who do basic cash accounting and also pay the bills and close the books. While accountants also do what Mairtini Dhomhnaill, Senior Vice President of management consulting firm Accretive Solutions, calls “blocking and tackling”, they take care of much more. For example, they design an accounting system with which you can pinpoint the cost of specific products or helping financial statements for budgeting.
On the other hand, a CFO plays a considerably more strategic role. “A CFO takes ownership of the company’s profitability,” says Ken Gaebler, a small-business expert and head of Gaebler Ventures in Chicago. That not only includes ensuring compliance with regulations and tax strategies, but also addressing more complex financing, banking and insurance issues. They also see that your business has the systems it needs to grow. “A good CFO will look at your business model, identify the weaknesses, and whip the company into financial shape,” says Gaebler.
Learn the signs for when you need a CFO.
The bigger the company, the more complex its financial needs are. For that reason, when a business reaches a certain size—probably $5 million to $10 million in revenue—it may be time to bring in a CFO.
Another important sign is headcount. If a company has 50 employees or is heading in that direction, you probably need a CFO. “Once you hit 50 employees, certain legal and compliance rules start to kick in,” says Dhomhnaill. Another signal: fast growth—say, 20-25 percent a year.
Companies with outside investors should have a CFO from the get-go. “If you have money from VCs or wealthy angels, you need to be able to show the board where all the money is going,” says Dhomhnaill.
Consider starting with a part-timer.
You don’t necessarily have to invest in a full-time CFO right away. At first, someone who comes in one or two days a week might suffice. But, according to Dhomhnaill, once the individual starts working three days a week or more, it’s probably more cost-effective to make it a full-time job. Also, if you start signing more international contracts or complex deals, a part-time CFO won’t cut it.
Whether you start with a part or full-timer, it’s best to find a CFO who has experience with your particular business model. “You can’t take a former CFO of a manufacturing company, put them in a professional services firm, and expect them to hit the ground running,” says Gaebler.