In Praise of CFO’s

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I have been in and out of many companies in my day, big and small but mainly small. The ones that stand out are those with good sets of books. What do I mean by “good”? I mean ones that generate financial statements every month, maybe even comparing actual results to last year or to the current year budget. Ones whose owners have a good understanding of what those financials statements mean in the finest of details like what is in those Prepaid Expenses. You’d better know because soon they are going to hit your Income Statement. How are your Accounts Receivable trending in relation to Sales and your Inventory to Cost of Goods Sold? Are you really sure you understand what those and other financial statement terms mean?

Company owners who know this stuff do so because they usually have a good chief financial person on staff. That person can be called many things like Controller, or Chief Financial Officer or Treasurer or Chief Accountant. But whatever the person is called, companies who have them are generally so much better off than those that don’t.

What are the advantages of having one of these folks? Let me name just a few: conference-call-man.jpg

  • Are you ever going to borrow money from a bank? Count on this. If you have a good set of books and you can demonstrate an understanding of them, your chances of getting a loan rise multi-fold!
  • Are you ever going to sell your company? Better have three years of good books and you better understand fully what they say. If you have a CFO and you do not understand what the statements say? Time to have a heart-to-heart with your CFO. His or her job is to make sure you understand.
  • Do you have instant access to good analytics? Sales by customer? Sales by product or service? Profit by product and by customer? You can believe that companies with good CFO’s have this information at their fingertips.
  • You don’t have to manufacture products to have a need to know what a unit of work costs. It is necessary for services too. This form of management accounting is called cost accounting. To me, it is the most valuable piece of the accounting profession. To be able to figure what a unit of product or service costs is so important. It is the basis of inventory valuation which also determines Cost of Goods sold. Many companies don’t have it. Manufacturing Costs include labor, material and manufacturing overhead. What exactly is manufacturing overhead? How do I get it down to the unit level? Where does Freight-In go on the financials? How about Freight-Out?   Bookkeepers are very important but it is the CFO who has the education and the experience to get you to that degree of granularity.
  • I believe every good CEO needs a CFO at his or her elbow. What will the financial affect be of the operational decision I’m about to make? How do I financially justify an expensive piece of machinery I’m about to purchase? What’s the rate of return on my investment? Shall I buy or lease it? CFO’s know how to analyze thee things.
How big do you have to be to justify the hiring of a CFO? I don’t know the answer to this one exactly. I think at $3 million in revenue you should begin to consider it and that if you reach $5 million without one, you’ll find it will be much harder getting to $10 million. It will be well worth the investment.