Growth, Legal, Managing people, Matt Murphy

When to hire a CFO

Matt Murphy /

Business owners start their business being a jack-of-all-trades, generally because they are undercapitalised and cannot afford the resources to effectively and efficiently run the business. Owners that have some financial acumen will even take on the role of bookkeeper. This decision is often driven from a cost perspective and at other times it’s due to the owner being a control freak.

 

Once the business starts to grow (usually organically), it moves on from this phase and commences employing appropriate people for the roles required. The first people employed are either support staff or people to actually do the work. From there, salespeople are employed, at which time some semblance of an organisational structure is created.

 

When a business grows, what typically happens is that the finances are left in the hands of accounting support people like bookkeepers. The business owner will attempt to stretch these people into performing tasks that are actually more the skill set of a management accountant.

 

So what roles and responsibilities should exist in the finance department of a business? The best structure to put in place is to have:

 

  • A bookkeeper/accounting support
  • Management accountant and
  • CFO

 

So when does a start-up engage each function and employ each person?

 

We often think about employing people in a sequential order based on expertise. As such, a business would initially employ a bookkeeper, then a management accountant and finally a CFO.

 

I agree the bookkeeper will be the first person to be employed in the finance department of a small company; however, the employment of the management accountant or the CFO will depend on the financial acumen of the business owners and senior executives.

 

The second person to be employed is the CFO, as they will substantiate and bring to life the vision and the financial strategy through numbers and financial metrics. The third person to be employed will be a management accountant, as part of the CFO role is to oversee and direct them.

 

So what does a CFO actually do? A CFO assists and performs the following:

 

1. Matches commercial plans and objectives to financial performance

 

If a business owner is not financially-minded, then they may not be good at setting the strategy and perhaps the activities that they will pursue to execute that strategy. What won’t come naturally is knowing how to track the business’ performance along the way, to be able to make real-time adjustments.

 

A lot of business owners see accounting as an after-the-fact activity. Unfortunately, there are a lot of accountants that also focus their energies purely on compliance and historical financial reporting as well.

 

The real power comes from having the right financial management tools and systems to use them in a manner that supports decision-making. A CFO has the analytical skills to be able to calculate and model the potential scenarios in advance, to assist with the decision-making process.

 

Once a decision is made, a CFO will be able to monitor and track the outcomes and provide interpretation of what they are seeing. This allows for adjustments along the way to improve the results.

 

2. Designs and implements financial controls

 

If the business is considering expanding or diversifying the business through selling multiple products/services or through multiple channels or geographic locations, financial management and reporting needs could become more complex. Setting budgets, forecasting cash flow projections and monitoring cash positions are important to every business, but can become more complex if there are multiple products, divisions or markets. A CFO has the capability to control complex financial management scenarios, understand and explain them.

 

They can also provide systems and stronger financial control measures. This is important if activities or increased sales volume means there are more people involved in handling transactions, entering sales order data, managing stock and supplier purchases or anything that involves cash coming into and going out of the business.

 

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