Business 101

When should you bring in a CFO? If growth is in your plans, you'll need to time your hire right

At first glance, it looks as if Matthew de Ganon, the vice-chairman and president of K2 Design Inc., in New York City, has little to complain about financially. De Ganon's $4.4-million company, founded in 1993 as a graphic-design firm, began to grow rapidly once it became a Web-site developer. The company attracted attention from venture capitalists and other prospective investors, but K2's founders rejected those investors' restrictive terms. Instead, in July 1996, K2 raised $5.5 million in an initial public offering of stock.

What's to regret? "I should have hired a chief financial officer at least a quarter and a half before the IPO happened," de Ganon admits. "Finance isn't my background. I know my company intimately, but I effectively had to take a crash course in financial matters before I was ready to go through the whole process, road show and all--which is not exactly the best way to handle an IPO."

Since the company was without experienced financial management, the preparation for the IPO "wound up stretching management way too thin," de Ganon recalls. Worse yet, persistent collection problems gave the company cash-flow troubles right up to the moment of its public offering. "A good portion of our outstanding receivables were older than 90 days. We knew we'd eventually get paid, because most of our clients were Fortune 500 companies, but that situation kept us dodging a lot of bullets," he explains. "It's clear now that we needed more financial expertise than our bookkeeper and controller could give us."

K2 has finally found its CFO--to its president's relief. De Ganon sorted through about 300 rÉsumÉs and took nearly six months before finding the perfect fit: an experienced finance officer who could explain the company's prospects to the investment community. "He wasn't cheap, and we certainly had to give him stock options to get him on board, but it was well worth it," de Ganon says. "Just in these first few months, he's set up cost-regulating procedures and tightened our systems in ways that have made marked improvements in our overhead."

When a company is growing quickly, it's often difficult to pinpoint the best time to bring on a new level of management. But waiting too long to hire a CFO can create problems, because growth strategies can be handicapped if a company fails to track its numbers adequately or impress prospective bankers and investors.

Unfortunately, there's no one-size-fits-all guideline that can tell entrepreneurs when it's time to improve their companies' in-house capabilities. "Whether or not you need a full-time CFO depends on a lot of different factors, including the financial expertise of the founder and his or her existing management team," observes Mark Sawicki, a vice-president at Virtual Growth Inc., an accounting firm based in New York City. "It also depends on how big your company is and how big you intend it to be and whether or not you expect to raise money from professional investors or the public markets."

Then there's that sticky issue of how much a growth company can afford to pay. (For some benchmarks showing what you can expect to pay for key financial staffers, see "What You'll Pay," below.) "Some companies are so small, and will always be so small, that they're basically shoe-box operations that will never need a CFO," says Sawicki. "Others need one early in order to achieve their growth goals, and if they're too small or too financially strapped to hire one through traditional means, they need to find one through a more flexible arrangement."

Clark Hubbard, the chief executive of $10-million CSI Data Systems, a value-added computer reseller based in Norcross, Ga., is a good example of a business owner who desperately needed a CFO's aid before his company could quite afford it. Back in 1995, Hubbard's company--then at about $4 million in sales--experienced a six-figure drop in inventory one month, causing Hubbard to suspect internal fraud. "I needed somebody to come in from the outside and examine all our financial operations in order to figure out what was happening and how to stop it quickly," he recalls.

Hubbard had the perfect candidate in mind: a friend who had worked for years as the CFO of a multinational corporation, only to lose his job after a merger. "He was extremely overqualified and way too expensive for us, but I trusted him completely. And he needed some work," Hubbard explains. "I told him, 'I sure as hell can't afford you, but if you'll accept the salary I can pay and give us top priority, I'll let you take on additional clients and meet with them at our offices."

The friend accepted the arrangement--and then revamped CSI's financial system, upgraded its accounting software, and solved the "shrinkage problem." "He set up a cash-management system for us so that extra funds get swept into an investment account each night," says Hubbard. "He also helped us establish a line of bank credit, which we'd never had before. Those two changes alone accomplished wonders on the cash-flow front and really helped us double our business in just a year." The CEO acknowledges he would have "probably never even thought about making the hire if the inventory crisis hadn't happened." However, when that first CFO left for a better-paying job, Hubbard promptly hired a replacement.

In an ideal world, of course, business owners would hire CFOs before their companies reached some sort of financial crisis. Seth Godin, president and founder of Yoyodyne Entertainment, based in Irvington, N.Y., a creator of Internet promotions, did hire early. "Nearly two years ago it was clear that we wanted to switch from being a bootstrapped company to one with a broader capital base raised from professional investors," Godin says. "When those kinds of prospective investors ask to see your books, you can't exactly hand them a shoe box and a few postcards."

As a short-term measure, Yoyodyne hired a part-time CFO to spend a half day each week at the company's offices. Then the company spent three months working with an executive-search firm to find the right CFO. "There are two kinds of accountants--one is ambitious and has career initiative, and I'm not really sure if that person should or shouldn't be a CFO," Godin says. "The other kind has the financial skills and also the flair and spark and marketing savvy to go out there and sell your company to the financial community. That's what we knew we needed."

Godin found his CFO--and, with the new hire's help, Yoyodyne raised $4 million from a venture-capital group. The company intends to raise more money in the future, probably through an IPO. Godin's conclusion? "The right CFO is the perfect addition to your entrepreneurial team."

Jill Andresky Fraser is Inc. 's finance editor.

Options: The Right Staff

It's often difficult for business owners who lack specialized financial training to determine what type of expertise their companies require. Here's a quick checklist to help you analyze your company's needs:

Bookkeeper: A bookkeeper makes sense for a company that's quite young, quite small, or quite strapped for cash. Expect a bookkeeper to keep accurate if basic financial records--certainly detailed enough to help an outside accounting firm prepare taxes and, if needed, to do audited year-end financial statements. A bookkeeper should also be able to handle your accounts payable and receivable; recruit for a "full-charge" bookkeeper to get the highest level of expertise available at this level.

Controller: If significant growth is in your plans, you should hire a controller as quickly as you can afford to. That's because every growing company, even a young one, requires the skills a controller possesses, and it will grow faster with them. A good controller can do everything a bookkeeper does but also much more--mainly because he or she is trained to have a larger perspective beyond day-to-day numbers. Count on your controller to choose and maintain the right accounting software for your company, to generate timely weekly and monthly financial reports, and, of course, to keep cash flow on track with a well-run payables and receivables operation.

Chief Financial Officer: There's no hard-and-fast rule that will tell you when to upgrade from a controller to a chief financial officer. "If all you need is a relatively small credit line from a local bank, hiring a CFO is probably unnecessary," explains Brian Benz, a chief financial officer with 12 years of experience at entrepreneurial companies. He's currently the CFO at Yoyodyne Entertainment. "But if you're going to be looking for a multilayered financing arrangement or dealing with professional investors or the public markets, or if you envision ongoing, complex financing deals like a long-term factoring relationship, then a well-qualified CFO will probably help." Expect your CFO to know how to navigate the various capital markets; the best candidates will have raised capital for at least one company before yours. A qualified CFO will be able to prepare a comprehensive business plan, complete with the kinds of financial and market projections investors look for. A competent CFO also knows how to handle in-person interviews with bankers and prospective investors. That will allow you to concentrate on what you do best: growing your company.

What You'll Pay
Although salaries vary by region, here are some useful national benchmarks from Robert Half International Inc.
Job Category 1997 Base Salary % Change (from 1996)
CFO (at companies with less than $50 million in revenues) $62,000 to $88,000 +3.4%
Controller (corporate level, at companies with $10 million to $50 million in revenues) $54,000 to $71,250 +2.7%
Controller (corporate level, at companies with less than $10 million in revenues) $47,000 to $61,750 +2.6%
Bookkeeper (full-charge, at companies with up to $15 million in revenues) $28,000 to $36,000 +1.6%

Source: 1997 Robert Half and Accountemps Salary Guide, Robert Half International, Menlo Park, Calif.

Now What? CFO Search

So you've decided it's time to hire a CFO? Now comes the hard part: finding the person with the right training and experience plus a temperament that suits your sometimes-crazy growing company. Here's how to begin your search:

Network with everybody. That includes other people in your industry, your banker, your lawyer, and other advisers. Ideally, you're looking for someone with prior experience at an entrepreneurial company.

Track downsizings. As Clark Hubbard of CSI Data Systems discovered, the hiring market for CFOs is full of opportunities because a lot of good people lost jobs during the most recent cycle of downsizings, especially at larger companies. By contacting organizations that specialize in helping displaced financial staffers or executives, you might be able to hire top talent for less than top dollar.

Be flexible. If the people you're interviewing want higher salaries than you can pay, consider the type of part-time or outsourced arrangement that Yoyodyne used. (That can often be a good interim solution for growth companies whose staffing needs exceed their cash realities.) Ask your advisers and local industry associations to recommend CFO-outsourcing organizations with good track records.

Hire an executive recruiter. This is the costliest option, since you'll probably have to pay a hefty fee (typically a large percentage of the first year's salary). However, if you can afford a recruiter, you will probably be able to fine-tune your search to fit your needs.