I was asked last week to explain the value of a CFO to a young entrepreneur who had started from scratch with a great idea, and built a pretty solid business before hitting the glass ceiling (no, not that one) where the financial infrastructure he had in place just could not support his continued growth. Margins were suffering and the reasons were unclear. Financial reports were clearly inaccurate and delivered way too late and too basic for meaningful analysis. His business advisor sent him to us to explore upgrading his financial team (which consisted of a couple of internal clerks and the bookkeeping department of his local CPA firm. I told him there are three pillars of business finance that every company needs to have in place, and he had none of them, in part because his bookkeeping team was built mainly to be as low cost as possible while still being able to file tax returns. So, for your consideration, here are those three pillars that every financial department must master to be effective:
- Financial Reporting – producing a monthly set of financial reports that are ARTistic, that is, Accurate, Relevant and Timely.
- Accuracy is self-explanatory – it means getting the right numbers into the right bucket so that the reports actually show what happened during the period. Careless bookkeeping produces unreliable reports. You get what you pay for.
- Relevant simply means in a format that is meaningful to the business so that its leaders can understand what they’re seeing. A manufacturing business needs solid details of their production costs. A distributor must know profit margins by customer and by product, reports that are not automatic in any standard accounting software.
- Timely delivery means simply getting to the company leaders soon enough that they can use the information to make better decisions sooner rather than later.
- Financial Analysis – the job of studying the data presented in those reports to help understand what went right and what went wrong, and why, so it can be repeated or stopped, as appropriate. The business owner who looks only at the top and bottom lines of their income statement will fail, sooner or later. All the talk of analytics that we see in the press today is simply the extreme realization of the reality that data must be analyzed to get the value that it’s intended to provide.
- Financial Strategy – Given good reporting and effective analysis, company leaders need strong guidance in using that information to formulate and execute the financial strategies that will enable the company to meet its goals, both short term and long term. How to re-capture gross margins after major price increases from suppliers, the benefit of buying vs. leasing a new building, the best approach to negotiating with competing financing sources, how to understand the company’s future options when planning an exit, and more. All business strategy is impacted by finance, and all strategy should be supported by solid financial information. If it isn’t, save your money. You’ll need it.
That’s why we’re in business.
We are Your CFO for Rent.