Let’s Talk Chief Financial Officers
The role of a chief financial officer (CFO) can be ambiguous, especially since they have long been overshadowed in the limelight by the CEOs of the world. Exhibit A: What company comes to mind when I say the name Brian Olsavsky? Well, it’s the very same company if I had asked you about Jeff Bezos. The answer is the almighty Amazon. CFOs may be shrouded in more mystery than their celebrity counterparts, but we think they deserve more credit for the strategic value they bring to an organization! Which is why today we’re highlighting five ways a CFO can impact your financial strategy and ultimately your growth trajectory.
What is the Role of a CFO?
Most people imagine the CFO to be a behind the scenes expert crunching numbers and keeping the books straight, but in reality they are so much more than financiers and accountants. The modern day CFO’s job is multifaceted and complex, taking on a variety of responsibilities depending on a company’s needs and growth stage. Essentially they’re accountable for anything that has a financial impact on a company from legal agreements to financial agreements.
Why Hire a CFO?
In the past, a CFO has been driven by month end accounting routines and reporting requirements, but with the booming startup scene many top cities are cultivating, including Denver and Boulder, the modern CFO role has taken on a much more nuanced strategic function that has led to far-reaching and growth-oriented implications for startup companies. So, while there may not be exactly one right answer to the question, “What is a CFO?” there are many ways to answer the question, “Why hire a CFO?”
If Google was hiring a CFO, the financial expert they bring in would be able to help them take over the world through acquisition and the collection of data on every component of your life!
We’re fairly certain Google isn’t reading our blog for advice! It is much more likely that you are a startup company. If you have those high growth aspirations and are under ~$20 million in annual revenue, this roundup is a great place to begin to figure out how a CFO can help you reach your company growth goals.
5 Ways a CFO Can Improve Your Financial Strategy
Of course, a CFO will be completing a lot of foundational financial planning for your company, but where they really shine is in the five areas of analyzing data & giving insight, inter-departmental collaboration, process optimization, risk reduction and prioritizing expansion opportunities.
#1: Analyzing Data & Giving Insight
If you’ve read any of our other blogs, you know we’re big on using data to guide our vision and make informed decisions and this is a skill CFO’s excel at. They’re really great at reading the data, drawing conclusions from it and translating that into a vision or path for a business.
C-suite professionals like CEOs are visionaries, idea people. They bring crazy, big exciting ideas to the table and then the various departments are tasked with turning these visions into an end result. The value of a CFO is in their ability to articulate in numbers the ideas the company has for its future. They coordinate the ideas, present them in a numerical format, and prepare insights based on those findings. Depending on a company’s core needs, their CFO will have a knowledgeable business understanding to be able to pick apart your data and identify the core areas to improve the business from a financial perspective.
For example in an outsourced CFO capacity, we worked with an American company that manufactured their products out East and leased, rather than sold, their products to the US Market. The company was struggling with a long cash conversion cycle (the time to convert its investments in inventory into cash flows from sales). The situation was as follows.
The company paid its supplier a 50% deposit on ordering its equipment and 50% on delivery. There were additional costs to ship it to a US warehouse where it waited for a sale all before receiving any cash from the lease of their product. Assuming a 5 year lease, it wasn’t until about year 2 or 3 before the company was able to be cash flow positive for each unit, which resulted in a HUGE drain on cash that was ultimately not necessary. Therefore there was a real opportunity to improve the company’s cash conversion cycle. In our role as outsourced CFO, two improvements were implemented:
- First, on the back end, vendor financing was instituted, so that instead of $100K going out the door straight away, the company financed production and stemmed cash outflow.
- Second, on the front end, the sales process was improved so that even though machinery was still being leased to the end user (something the company wanted to continue offering), a behind the scenes intermediary investor would purchase the lease contracts, bringing significant cash flow back into the business allowing it to increase inventory orders and invest more heavily in its sales teams thereby growing the company at a faster rate with less investment capital.
A CFO’s duties are to step into a company, look at the data, and ask the question, “How do we change the business model to improve cash flow?” These two improvements resulted in bringing the ~2 year cash conversion cycle down to 2 months (that is BIG).
#2: Inter-Departmental Collaboration
A good CFO understands that they are the window into a company’s finances for all other departments, they are the numbers storyteller! It is this transparency that helps them implement keyed in processes that benefit the success of the entire company and inspire strategic company decisions. A great example of how much of an impact a CFO can have through sincere inter-departmental collaboration is the story of a startup company we worked with a few years back.
This Boulder startup relied on a sales team to sell products and often found that they paid their sales team a high commission immediately following a sale, but there was no recourse if the client did not stick around after a month or for the full term of an annual contract.
Our outsourced CFO was able to identify opportunities to realign sales team incentives with the company’s business model to ensure the sales team was properly compensated for their work, but not in a way that negatively impacted company performance. Because a CFO can see where in a business’s story the cash outflow and inflow veer off course, they’re able to adjust the business model to account for these discrepancies ultimately creating a stronger business.
#3: Process Optimization
Similar to the keen eye a chief financial officer brings to the business model, they also know how to identify opportunities to tweak processes to create greater business efficiency, keeping cash in the business and laying the groundwork for better growth
Let’s say you’re a Consumer Packaged Goods (CPG) company that is co-packing, or outsourcing your packaging, there may come a point in time where it would make more financial sense to bring packaging in house. A good CFO can pinpoint when this moment will occur and will be able to consider the hard variables, like the management of production team labor, and soft variables, like time spent, to help that CPG company make the appropriate shift.
In addition, a CFO would help this high growth company understand whether buying or leasing equipment to package their products is the right decision, based on the unique circumstances of the business. Because they can account for things like how a lease impacts cash flow differently than a purchase over the next 5 to 10 years. These considerations can mean the difference between creating the opportunity for growth or leveraging too much debt while still trying to build profitability, something only a CFO could determine from the business’s numbers.
#4: Risk Reduction
The operation of a high growth business can be inherently risky, and when the owner or founder of a company is focused on leading the team and managing daily operations, they may not have time to manage the all important “I” dotting and “T” crossing. A CFO can improve a company’s financial strategy by mitigating risk in a number of areas from compliance, to leverage and, of course, liquidity, and making sure there are no costly surprises in their financial future. The three core areas you can expect a CFO to cover are:
- Compliance Risk: There is a real threat to a company’s financial, organizational and reputational standing from violations of laws, regulations, codes of conduct or standards of practice. All startup companies have regulatory reporting requirements and many startup companies use investors to fund their business ventures. Therefore, providing timely (and accurate) regulatory reporting to all governmental agencies and financial reporting to all shareholders / investing parties is a crucial business function and falls under the realm of the CFO.
- Leverage Risk: A CFO will keep a pulse on your company’s leverage (the relationship of debt to equity in your company) and weighted average cost of capital (or WACC), helping you to balance the amount of debt and equity your business needs to fuel its growth.
- Liquidity Risk: One of the primary reasons that U.S. businesses fail is cash flow issues. A CFO will continually examine a company’s cash position and build cash forecasts to prevent any nasty surprises.
Essentially, a CFO is like the best buddy of a business founder, they have your back and make sure you’re covered where it most counts!
#5: Prioritizing Expansion Opportunities
There are many ways a CFO can help a business expand and grow. A not so good CFO will bring 18 ideas to the table and let the table choose, but a great CFO will bring 18 ideas to the table and then prioritize the top 3 opportunities that will have the greatest impact on the business in the short term. They can do this because they have a good sense of the company’s:
- Strengths. Because of a CFO’s business acumen they know your strengths and know how to help you leverage them for the biggest return on investment (ROI).
- Weaknesses. Similarly, CFO services can identify weaknesses and eliminate them through their objective understanding of your business’s numbers. CFO’s know where more resources are needed or if a quick pivot is required.
- Market. Alongside in-depth operational knowledge is a depth of industry experience, which allows a CFO to lead a company’s strategy based on their understanding of the overarching marketplace helping to leverage market opportunities.
CFO or Modern Storyteller?
A CFO has significant input into how a company manages incoming and outgoing cash and a company’s overall success, especially in the sustainability of their financial and business model in the long run. But they’re so much more than that! They’re the numerical storytellers behind the company bringing cohesion and data to a company’s vision and turning it into a feasible path to high growth.
For a company looking for ways to expand their business, a CFO is a great hire potentially making the difference between that wow factor HIGH GROWTH you’re looking for and boring, normal growth. If you’re looking for ways to help your company change the world (as it should), by hiring a fractional CFO, here is a cost breakdown of outsourcing a CFO versus hiring a CFO in house.
While you’re considering the decision, Simple Startup can help you understand what an outsourced CFO can bring to the story of your business. Book a call with us for better insight into your business’s growth strategy.