In the early part of a successful company's life cycle, entrepreneurs are so busy growing the business they often ignore the administrative side of things. After all, it's hard to allocate scarce resources to any function that doesn't add directly to the bottom line.
But as your company grows and becomes more complex, ignoring financial administration could put your business at risk. Hiring a chief financial officer (CFO) can mitigate these risks and even help your company get to the next level.
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. So, it's important to get it right, in terms of both timing and the person you choose. Here's a checklist of signs that your business is ready—or even overdue—for a CFO:
When the cost of using external auditors or part-time consultants becomes greater than the cost of having it done internally by one person, then it's time to hire. An in-house CFO could 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. Let's say, for example, that one of your consultants proposes an aggressive new tax strategy so your company can claim certain deductions against income. At year-end, your external auditors, who weren't consulted about the decision, suggest that you adjust the tax expense to record a tax charge to accord with the applicable accounting standards. Unfortunately, this makes your bankers unhappy because you had initially issued management-prepared statements without disclosing a tax charge. A CFO would have consulted the external auditors prior to the implementation of the new strategy and determined its potential adverse financial reporting consequences.
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 covenant of providing financial information on a quarterly or even monthly basis. Breach of these covenants 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.
When your business gets to a certain level of complexity, many of your third-party relationships (such as the bank) require audited financial statements. An audit means that there will be greater scrutiny of the financial aspects of the business at year-end. For example, part of the audit process is a review of internal financial controls. A CFO can set up and monitor the accounting systems and internal controls to ensure your business is properly prepared when the auditors arrive at year-end, which will also save you money on the overall cost of the audit.
Growth generally means more employees and a larger number of transactions with customers and suppliers, which also means more tax compliance for HST 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.
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 outside advisors for red flags, they may not signal trouble until it's too late. A CFO will add strategy from a position of intimate knowledge that an external advisor just doesn't have.
Due diligence for investors:
Investors or an outside buyer will review everything from financial systems and information reports to the corporate minute books for risk assessment. An in-house 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 ensure it maintains and builds on the trajectory. Otherwise, the potential success, or even survival, of your company will be at risk.