When to Hire a CFO?
Many clients and colleagues have asked me if their companies are too small to have a CFO? The typical answer is “it depends", however, there is probably an opportunity to add more color to that response. I decided to take a different approach and develop a criteria in a form of a self-assessment that owners can use as a guideline for when is the right time to hire a CFO.
The concepts that I believe are relevant to make a decision on when to hire a CFO are:
1. The complexity of the business: does the company have a single product (e.g. consultants) or multiple product (e.g. distributor)?; is there a single location or multiple locations?; are there significant compliance or tax issues (e.g. healthcare)?
2. Volume: does the company have less than 100 transactions, customers or vendors a month? Choose the item with the highest volume to answer this criteria. For example, a company that refurbishes airplane engines may only have a few customers and a few transactions a month, but they may need 1000’s of parts to refurbish an engine. In this example, the volume criteria should be scored as “High”.
3. Stage: where is the company in terms of life cycle? Start-up – Growth – Maturity – Decline. Typically a growth stage requires the experience of a senior financial person.
4. Funding: CFO’s can certainly help the company raise money, after all it is one of their key functions.
5. Competition: Is the company facing a lot of competitors or not? Are the competitors taking market share? Do they have a better, cheaper, more innovative product?
6. Revenues: Size does matter, a company with $1.0 million probably can get away without the services of an experienced CFO. On the other hand, a $10 million company probably cannot.
7. Risk: credit risk, foreign exchange, operational risks need to be mitigated or they will start eating profitability. To the extent that these risks are relevant to the organization, a CFO is the best person to address these potential issues.
8. Current Challenges: we can’t ignore what is happening in the business today. If today we are not getting monthly financial statements or KPI's or if today the company is facing an IRS audit or customers are complaining, the company needs to address these issues right away. Perhaps the owner needs the help of an experienced right hand person to solve these issues so he/she can continue to dedicate his/her time in finder activities.
9. Organization: this relates to how well the system of people, process and technology is working throughout the company. Does the company have a clear understanding of the customer delivery process? Is the company executing on its priorities?
This self-assessment is based on evaluating the company on each criteria by giving a point on whether the criteria ranks low, medium or high. The points are then added and weighted. The total Low points are then multiplied by 1, the Medium total points are multiplied by 3 and the total High points are multiplied by 6. The totals are added and you have a total score.
If the score is less than 18, you probably don’t need a CFO yet. If the total is between 18 and 38, you may need to hire a CFO within the next 12 to 18 months or consider a CFO services firm.
If your total is higher than 38, you have enough risks or challenges that you can certainly benefit from hiring a CFO today.
Example Imagine a $6m wholesale distributor that has been around for 5 years with 10,000 sku’s into Latin America. The company sells in local currency and provides credit to its customers. The company is well funded, but the owners do not have a good sense of the finances of the company. The owners feel that they have a good organization where people are generally happy. However, there are a dozen competitors in this space and margins are thin. The total score for this example is 42. Accordingly, I would recommend the company to hire a CFO.
Summary Hiring a full time CFO is not the only option, for those companies that have a middle score between 18 and 38, a CFO services firm is certainly a viable option and there are several firms from which to choose. This is a good way to have an affordable resource that can be leveraged and adjusted as the company grows.
Ricardo Lowe, B2B CFO Partner (954) 632 3939 ricardolowe@B2BCFO.com
About B2B CFO Founded in 1987, B2B CFO is the largest CFO and Exit Transition Services company in the nation. We have a nationwide presence with more than 225 CFO and Transition experts that serve privately-held companies. Contact Ricardo Lowe for a complimentary Discovery Analysis at (954) 632 3939 or via email at: ricardolowe@B2BCFO.com