By SVenkat
When an enterprise is in its infancy, the finance function revolves around accounting, invoicing, payment processing, banking, compliance and, to a degree, raising and managing debt funding. As it scales up, the enterprise feels the need for more evolved tasks like month closing, management reporting, budgeting and forecasting, ERP implementations, implementing Delegation of authority, drafting SOPs, running board meetings efficiently etc. Enterprises that start to feel the need for these evolved tasks should consider appointing a professional CFO.
The ‘Why’?
Owner managers who appoint CFOs are clear about one of these two things
- They recognise that finance is not their forte and that it is best for an expert to deal with this area.
- They recognise that the time they are personally investing in managing the finance function themselves, can be better utilized to win more revenue for the company or to carry out more important and critical tasks like organization building.
Owner managers who are looking to scale up their enterprise valuation in a sustainable manner will require a CFO.
Readiness to ‘let go’
CFO is a finance professional who has (and should have) independence of thought, the skill sets, the experience and the personality to not just manage the finance function but to actively partner with the business (sales, production, purchases, supply chain) to improve revenue, profits and cash flow. A CFO, while being open-minded, will expect to have a say in the business and have the freedom to run the finance function in his style. Owner managers need to be mentally ready to ‘let go’, willing to delegate, willing to trust a professional, and most importantly manage the CFO based on outcomes and not on activities or tasks.
Readiness to invest
Owner managers need to recognise that the investment in the CFO is not just on the CFO’s remuneration but also in the costs of the team that the CFO will want to build, new systems and new processes. Owner managers should be prepared to view these costs as investments on which they can expect an ROI from the CFO. Willingness and ability to invest in the finance function, and see it from a ‘value’ prism and not a ‘cost’ prism is a key parameter for owner managers to consider before hiring the CFO.
Readiness to Scale
CFO appointments work best for owner managers who are clear about their strategic vision and intent to scale. A CFO is an invaluable partner in cashflow management, working capital optimization, cost reduction initiatives, measuring business productivity metrics and most importantly in making capital allocation decisions. Owner managers who have defined a path for themselves and their company to multiply enterprise valuation in an accelerated timeline are ready to get a CFO on board. For instance, a company that is readying for a private equity round or an IPO will require a CFO.
Readiness to involve
Owner managers who are mentally ready to get their CFOs involved in all critical decisions are best placed to get full value from the CFO function. A good CFO will proactively want to measure everything that can be measured in the business. This includes metrics that are not directly finance or accounting-related. Examples on the sales side are customer concentration risk, channel level profitability, market spend effectiveness, cost of business acquisition, pricing decisions.
In production and purchases, a CFO will want to measure input output norms, product costing, labour efficiency, capacity utilization, vendor share of wallet etc. Virtually all key decisions in the business will have some impact on profitability and cash flow. Owner managers who feel the need for a strategic partner who can connect the dots between different functions in the company, who can ‘put it all together’ on a common measurement framework, who can proactively drive each of the functions to be more efficient and productive, are ready for a CFO.
The current scale of revenue or profit is not necessarily a parameter to decide whether a CFO is required or not. The owner manager’s vision of the future scale and shape of the enterprise and his/ her mindset to create a successful partnership with a finance professional are the most critical factors. Owner managers who intuitively think ‘win-win’ and are personally focused on making sure that the CFO is successful in his/ her role, are most likely to get full value from the CFO.
SVenkat is the founder of performance improvement consulting firm Practus. Views expressed are the author’s own.