Why a CFO?

A bookkeeper is often restricted to data entry and producing trial balance financial statements, and an accountant has the skills to interpret them. A CFO, however, focuses on more complex financial analysis and reporting, creating financial tools and systems, providing financial advice to your firm's principals, managing risk and participating as a member of the strategic planning team. This kind of expertise comes at a price. Therefore, it's important to get it right, in terms of both timing and the person you choose. Here is a checklist of signs that your business is ready—or even overdue—for a CFO:

Escalating Costs

When the cost of using external CPAs becomes greater than the cost of having it done internally by one person, then it is time to hire. An in-house CFO would perform or co-ordinate such things as planning tax strategy, managing banking relationships, hedging currency, doing financial projections and variance analysis, monitoring treasury functions and addressing the financial side of legal and HR.

Complex Communication Management

The more consultants you use, the more unmanageable the communication among these external parties becomes. If each is unaware of what the others are doing, their decisions can have adverse consequences. A CFO would consult with the external stakeholders prior to the implementation of the new strategy and determine any potential adverse financial reporting consequences.

Breaching Covenants

Many companies require significant bank financing to facilitate growth. With those loans come many obligations beyond simply paying the interest and principal, such as the condition of providing financial information on a quarterly or even monthly basis. Breach of these obligations can result in the loan being called, which would have catastrophic consequences for your business. A CFO keeps track of these obligations to ensure timely reporting. Recognize that your word is your bond. A CFO will know how long it will take to gather the requested documentation. He will set realistic deadlines and meet them, no matter what. Lenders appreciate promptness but over-promising and under-delivering will kill your credibility and we all know that “shopping for banks” is an expensive undertaking.

Managing Financial Surety

When your business gets to a certain level of complexity, many of your third-party relationships (such as the bank) require review engagement or audited financial statements. This means that there will be greater scrutiny of the financial aspects of the business at year-end.

Tax Compliance

Growth generally means more employees and a larger number of transactions with customers and suppliers, which also means more tax compliance for GST and source deductions for income taxes, EI and CPP. Failure either to remit amounts within prescribed time limits or to file appropriate returns can lead to penalties and interest costs, and increase the risk of an audit by the revenue authorities. The directors of your company can be held personally liable if your firm fails to pay certain taxes.

Risk Management

You know you need a CFO when something goes wrong, but you really don't understand how or why. Preparing for "what if" scenarios and conducting sensitivity analysis on expected results becomes more crucial. What if profit margins deteriorate beyond what was expected? What if the profit contribution of various product mixes falls below expectations? Having response strategies enables you to take action quickly. A CFO can drive and monitor the progress of these plans and provide timely responses. If you are relying on your external CPAs for red flags, they may not signal trouble until too late. A CFO will add strategy from a position of intimate knowledge that an external advisor just doesn't have.

Due Diligence for Shareholders and Investors

Investors, shareholders or an outside buyer will review everything from financial systems and information reports to the corporate minute books for risk assessment. A CFO will ensure that your business can meet their close scrutiny.

At a certain level of complexity, a company in massive growth mode needs to have a CFO to draw the road map to success and helps everyone stay the course. Otherwise, the potential success, or even survival, of your company will be at risk.

© 2013 Mowbrey and Associates