How Do I Know When I Need A CFO?

In Guest Blog Post by Lawrence Chester

You’re a small business owner, and you’re concerned about your business’ future.  Large corporations have a CFO, but you don’t need one.  Are you sure?  A Chief Financial Officer is a strategic financial advisor.  When business owners want to look beyond a simple financial report containing revenues, expenses, and income, a CFO can provide them with the underlying detail.

If your small business has just one product that you sell, you’re right.  You don’t need a CFO.  But as you add complexity to your business, a CFO should be in your future.

  • You have multiple products or services that you sell. It’s important that your revenues and costs are aligned so you can identify exactly what your profit is for each product.
  • You have a lot of inventory and want to make sure that your inventory dollars are generating sales. Calculating your inventory turns will tell you which products are selling the fastest, and where your inventory dollars will make you the most money.
  • You want to introduce a new product line. The costs are different than the costs you’ve had historically.  You need to calculate all of the start-up costs, how big your pipeline should be for upcoming sales.  You need to strategically plan the timing of tooling, prototype testing and quality control.
  • Your business is growing, and you want to expand into a new market. That city in a nearby state looks promising.  There are two companies that are interested in selling because the owners are retiring.  You need to decide if it’s worthwhile to buy one of those companies, or if you’re better off building a new facility from scratch.
  • You’ve had a couple of difficult years and your bank is telling you it’s time to go. You need someone who can create the reports that will show a prospective lender the financial story, the profitability and cash flows that they want to see.
  • Your company is a service company – medical, engineering, advertising, insurance – so it’s not easy to determine what the profit margin is on each hour that you bill. Idle time needs to be factored in.  Those calculations and the cost of benefits are confusing.  But to establish the proper pricing for your services, and be profitable, you need to understand what your costs are.
  • You’ve been at the top of your credit line for the past 6 months. It looks like your biggest customer is having problems, because their purchasing has fallen off.  That’s not good news.  You need to put a plan together that will convince your bank to give you more money while you improve sales, cash flow and profitability.
  • You used to have plenty of money in the bank, but lately it seems that everyone is paying you slower, and your cash is getting short. You didn’t realize how bad it was till you looked at your bank balance.  You need a new way of looking at your company’s performance, both cash and profitability, so that when you can plan while you still have time to react.

It’s important that you be able to manage your business before small problems become real difficulties.  Whether it is inventory management, cash collections, cash flow planning or expansion of a product line, the numbers tell you what will work and what won’t.  They allow you to execute a plan on paper before you commit the dollars.  Everything that happens in a company flows down to the financials.

No matter the size of your company, you need an advisor that is used to working with numbers so that you can make the decisions that you need to make with confidence.  There is a big difference between Tax Accounting and Operational Finance.  If you don’t know the numbers, you should find someone that can help you.  And you don’t need to hire them full time.  Maybe someone working just one day a month could provide those answers, and give you not only a sense of confidence, but help you identify problems before they happen.  This is important, because if you know the answers, you can make decisions today that will affect your profitability tomorrow.