Guidelines for determining how and when to upgrade a company's internal financial staff.
Don't try to convince Robert Falconi that growth businesses can thrive while they're skimping on financial-management expertise. "It's astounding how often I have encountered massive problems that were due solely to the fact that financial staffers were unqualified to handle their responsibilities at a fast-growing company," says the chief financial officer of Planning Systems, a $30-million research-and-development firm in McLean, Va.
Case in point: when Falconi was hired, two years ago -- just after Planning Systems had hired a new CEO -- he discovered the company had failed to bill its chief customer, the U.S. Navy, for as much as $300,000 in legitimate expenses. "The confusion over our financial records was unbelievable," he recalls. "We were also in the middle of an audit by the government, and our own staffers believed we owed the navy $200,000. Then my investigations of our records proved that the government owed us nearly $1 million."
It's tough to isolate success factors, but since Falconi and the company's new CEO arrived, Planning Systems has gone from 1991's $31,000 loss to a profit last year of $1.2 million.
Falconi, who has spent his career working at growing companies, believes profit margins are eroded frequently by staff incompetence and occasionally by fraud. "When I was hired by one company, I found that no one had done a bank-statement reconciliation for the previous six months, during which time some employees had worked out a scam to be paid twice by cashing their direct-deposit stubs. The cost to the company, which we were able to recover, was nearly $10,000."
Falconi offers the following guide for entrepreneurs who are confused about how and when to upgrade their internal financial staff:
Start-up phase. "Even during the initial stages of operation, you've got to have someone with qualifications beyond those of a bookkeeper. I'd suggest bringing in a financial person on a part-time basis, someone who's got expertise in your industry, maybe even a retired executive. Then make certain you've hired someone internally who can handle the nitty-gritty jobs like accurate invoicing."
Fast growth/limited profitability. "When you're growing fast but haven't yet turned a profit, there's a strong temptation to save money in your financial department and spend it instead on marketing because you think that's where you'll make money. But qualified financial people bring in cash, which is essential to your survival. You need a full-time controller who is qualified to supervise all your day-to-day financial operations, as well as part-time staffers who can handle receivables and payables."
Mature growth/profitability. "This is the stage where the CEO needs a CFO to work as a partner on management issues. That CFO should have at least seven or eight years of financial experience and needs to be capable of understanding the corporation's larger picture, which will include its banking relationships, possible financing requirements, expansion goals, and so on. The CFO should also be concerned with building the right financial team, which would include a full-time controller and full-time accountants."
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Whether you're hiring a CFO or a controller, look for someone who understands the constraints of life at a growing company. Falconi has developed a bootstrapping approach to finding highly qualified but affordable financial staffers: "I hire graduate students who are specializing in accounting or finance. They're eager for real-life experience and often will stay with us for several years.