When should a small business owner hire a CFO? While there is no right answer, there are certain indicators. I spoke with Marc P. Palker, CMA, about this topic. Marc is Director of CFO Consulting Partners, LLC – a firm that provides interim and part-time CFO services to small and midsized public and private companies – and a member of the IMA (Institute of Management Accountants) Board of Directors.
This interview has been edited and condensed.
Jeff Thomson: What are some internal indicators that a small business owner should hire a CFO?
Marc Palker: An important internal tipping point is when information that helps the business make timely and important decisions is not being prepared. Business owners make decisions at the pace of the business and must be able to rely on the accurate and timely information provided by CFOs. It‘s never too late to make a change.
In many small- to medium-sized companies, the CFO is responsible for the interpretation of the results, cost control measures, capital acquisition, and forward-thinking due to economic, industry, tax, government regulation and social issues. In some cases, the CFO can also be the OFO, or Only Financial Officer, and must rely on bookkeepers for accurate processing of financial information. The CFO must also be critical of the banking relationship – there can be no slip-ups.
JT: Should a business owner hire a CFO when the company hits a certain revenue figure?
MP: It will largely depend on the business and/or industry. A company generating $10 million in revenue might be ready for a CFO while a company generating $20 million may not be. One client could sell its product for $1.5 million each but only sells five units in one year, while another client might need 28,571 transactions to reach $10 million with an average transaction of $350. The complexity of the transactions can also determine the need for a higher level of experience or knowledge.
JT: What external indicators should small business owners look for?
MP: The critical external point is when respect must be gained outside the company. That could be from customers, suppliers, banks, shareholders or government regulators.
Rapid growth is another important indicator. Growth requires an expansion of automated systems to handle the growth, and additional capital and/or financing to finance the growth. A CFO is best suited to handle rapidly increasing growth due to the complexity involved. He or she must be able to interpret the investment and technology, and the terms of acquiring capital.
One final indicator is when a business is preparing for a merger or acquisition. In this situation, the CFO must be able to choose the correct team to evaluate a target acquisition. In many cases, that will result in outsourcing to a firm to perform the financial and regulatory due diligence. The CFO is the best person to interpret the report issued by the due diligence team so the terms can be tailored to the findings. A very important skill required of CFOs is the ability to feed a potential investor or lender. Preparing the information and anticipating their questions will shorten the process and eliminate further digging.
JT: What specific responsibilities should the CFO of a small business have?
MP: A CFO in a growth-oriented small business must be hands-on. Being in the weeds is critical to controlling growth and communicating results to those with money at stake. That could be the owners or shareholders, banks, insurance companies and – let’s not forget – the employees. As growth occurs, the company and its key customers, suppliers and employees will face new risks. Managing risk involves not only having insurance, but the CFO must also protect the company from regulatory, environmental and human capital risks.
This column offers CFOs and their teams insights and ideas related to challenges of the position, in light of market demands and global economic conditions. Jeff Thomson, CMA, is president and CEO of IMA (Institute of Management Accountants), one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Follow IMA on Twitter and visit IMA’s YouTube channel.