Scaling a company comes with decisions that may feel beyond the your scope of expertise, and for many entrepreneurs they are. You're an expert at many things, but certainly not all things.

That's why you'll want to surround yourself with a Dream Team: mentors, coaches, professional advisors, and  class A talent. Two people you absolutely don't want to live without? A smart business/contract law attorney and a savvy financial advisor. In fact, you'd be wise to make your next hire a CFO.

Onboard a CFO? Really, who can afford that? Matthew Bud, Managing Partner of The Financial Executives Consulting Group (The FECG), which provides senior level financial talent to middle market companies, says you can't afford not to. Bud is also the chairman of The Financial Executives Networking Group (The FENG), an international organization of CFOs, Controllers, & Treasurers.

In my recent discussion with Bud I got the scoop on the why, when, who, and how around this pivotal move. Here you go!

Q: Why do business owners neglect to bring on such a critical addition to the team?

Matthew Bud: Beyond simply not knowing that they need a CFO, they don't want to spend the money. What many entrepreneurs don't realize is that they're already spending that money in lost profits and misspending.

They're not seeing the dynamics of the business from an educated financial point of view. You can't always go with your gut in making financial decisions, which is what a lot of entrepreneurs try to do.

What does it cost a business when the owners avoid bringing on a CFO?

The lack of a CFO's direction leads to many lost opportunities to price your products and services properly, to manage your inventories better, and to separate good customers from bad customers.

There are many hidden costs in doing business, such as the cost of maintaining a demanding client. Its margin on variable costs may be the same but because of the additional management time and hand holding it's different.

It's hard to see without actually running the numbers, which many people don't really know how to do.

Is there a revenue mark or headcount that determines when a business owner should look for a CFO?

Bring on your CFO when you need to do critical forward planning--when your business is up and running with many spinning plates, but you're not sure where to take it next.

At this point you need someone to make sense of the financials. The only person who truly understands the economics of a business--what actually makes it work--is a chief financial officer.

You have data, you know who you're serving and what they are buying, but your CFO will help you understand your business and the overall dynamics better than you ever thought you would. 

What else will a CFO do for the company? 

He or she will peel back the onion, at which point you'll most likely find that you're not making money in one or more areas of your business. It's not unusual for a company to be losing money and have no idea where it's going.

A CFO will take a magnifying glass to your numbers and look at staffing and other expenses vs. revenue. When they examine things like manufacturing costs and sales cycles for products, it gives you the information you need to calculate an accurate ROI.

A CFO is also in charge of the financial future of a company while maintaining the past.  The bills have to go out, invoices collected, cash managed, payroll paid, and new business ideas have to be vetted. A good CFO will analyze a new structure and how to model it.

The accuracy of the model is key. Calculating the revenue alone won't give you accurate information. You must know the exact costs of doing business so that when you take on new business categories they can be designed make a profit.  

Why can't an accountant or bookkeeper do the job? 

Most firms start out with a tax return person. A classic accountant who is in charge of the rear view mirror. The only period of time being examined by an accountant is the past year, which is a bit late for decision making.

The accounting firm has only your tax return in mind and classically assigns expenses to categories that are only appropriate for your tax return and not for running a business. Now, this is something you must do and a good firm will give you sage advice on managing your money and changing your process. But still, it's generally not actionable data because it comes too late. 

Next, a small business generally graduates from an annual compilation to having a bookkeeper who records all transactions and perhaps even helps with sending invoices and collecting money.  While the bookkeeper handles payroll and helps file tax findings, you're not getting actionable information. 

Aren't most CFO's overqualified for my business? How can I afford one?

The opportunity in this country with so many baby boomers who want to remain in the workforce is enormous and includes a large community of talented chief financial officers.

You can't let yourself get caught up in the idea that they are working beneath their dignity. To work on a project where they see measurable results is a real pleasure and as long as they are being paid it can really work.

In the past, they may have earned a huge salary with a large company and their efforts most likely had a huge result because of the size of the company. At a smaller company it's more difficult to create that huge economic effect and they may not get paid as much, but the CFO sees the importance and impact of their work every day--it's very gratifying.

Also, these CFO's may work for several companies, rather than one, since it's keeps them intellectually challenged and entertained.

Do I need to give them equity? What incentives can I offer if I can't afford the salary?

Truthfully, equity in a small company isn't worth much. The company may never be sold, so what's the point? Bonus money is good--middle market companies should come up with measurable metrics for bonus monies. You can also pay by the hour or a project-based fee. 

Published on: Jun 27, 2016