Entrepreneurs focus on identifying problems to solve, building solutions to those problems, and selling those solutions. Most entrepreneurs don’t want to be bothered by distractions from this core focus. There are plenty of necessary distractions in business, such as bookkeeping, taxes, and HR paperwork. Part of the CFO’s job is to make sure the details are handled so you, the entrepreneur, can focus on what you do best. But how do you know if your CFO is doing his job? Here are six things your CFO should do for you:
1. Keep you out of trouble
Your CFO might not be able to keep you out of trouble in every way, but she should at least keep you in favor with governments. Government regulations include tax filings, HR paperwork, business licenses and permits, environmental, and industry-specific regulations. Penalties can be severe, and governments usually aren’t very forgiving of mistakes.
The CFO should make sure all tax filings are done accurately and on time. Tax filings include payroll tax, sales tax, income tax, property tax, and other industry- and location-specific taxes. Most filings are routine and can be done by clerical staff, but the CFO should set up and monitor the systems that make sure it gets done.
Make sure your CFO doesn’t use late tax payments as a cash flow strategy. This is never a good idea. The IRS or your country’s tax agency will destroy you. I once helped a company that had been using late payroll tax payments to help cash flow. It took over a year to clean up the mess, and the penalties, interest, and liens almost took down the company.
2. Give you clean monthly financials
You must have accurate and complete financials to make good decisions, and you need them soon after month end. Your CFO probably doesn’t do the bookkeeping, but he should design and oversee business processes that allow for immediate recording of transactions followed by an efficient month-end close process.
3. Identify, monitor, and interpret key metrics
Your CFO should provide you with monthly financials, but the financials don’t usually provide all the information you need to make good decisions. Plus, monthly is not often enough for some metrics.
Soon after joining one company, I identified manufacturing labor cost as the single most important cost to focus on. All other expenses were fixed or varied within a small range, but labor cost could vary wildly day to day due to the manual nature of the process. We set up a system to report estimated cost daily and exact cost each pay period. We found that our labor cost was double the industry benchmark. Using this data we made adjustments that cut labor cost in half.
The most important variables for a retailer I work with are daily sales revenue and gross margin. Our accounting system automatically emails a report each evening to the CEO that shows each item sold that day and the average selling price. That, combined with a more detailed monthly review of average margins by product line, allows the CEO to make adjustments quickly if the metrics get out of line.
4. Match your business to the right technology
In many businesses the CFO is responsible for technology. At a minimum, she should be tech-savvy enough to choose and use the best accounting systems for your business.
Many businesses use Quickbooks because it’s cheap, easy, and familiar. However, there are many drawbacks to using Quickbooks, such as keeping track of and backing up a data file, difficult remote access, and poor inventory management (and therefore poor gross margin tracking). Quickbooks may be right for you, but your CFO should be familiar with other options. I recommend Xero or Netsuite for many businesses because they are easy to use and are hosted online. (Read my Netsuite and Xero reviews on TrustRadius).
The primary reason I landed one client was my experience with software. They wanted to implement a sales management software system, integrate it with the accounting system, and train people to use the software. Rather than pay for a specialized consultant to run this project, I was able to take on this project in addition to regular CFO roles. Not only did this save the company money, but they also had someone in-house who was familiar with the software and how it fits into the accounting processes.
5. Help you make good decisions
A CFO should be more than just a bean counter. She should be a strategic partner that helps you make good decisions. She should combine her deep understanding of the numbers with a deep understanding of the business, the industry, and the economic environment it operates in. The CFO should be involved in and be a valuable contributor to all major decisions.
I helped the CEO of a commodity product manufacturer evaluate their business model. By reviewing the data we realized they didn’t have the scale or differentiation to compete against much larger competitors. Rather than expanding manufacturing as planned, they added product lines from other manufacturers to their distribution channels, which had led to rapid growth.
6. Prepare for growth
As an entrepreneur, your motivation is probably to make an impact on the world while getting a good return on the time and money you put into the business. Having the greatest possible impact and the greatest possible return usually means growing the business as fast as possible. Most startups are chaotic, which is okay as they build their product, feel out the market, and make adjustments.
But when they start seeing traction, they need to be prepared for growth. The entrepreneur usually drives the growth, but the CFO can make growth possible by putting efficient processes and procedures in place. Timing is critical, and it takes an experienced CFO to get this timing right. You don’t want to add unnecessary cost and complexity before the business needs it, but you need to be prepared for growth.
You must have a good CFO at your right hand if you want to build a successful business. A good CFO can free you from the details and help you make good decisions. A bad CFO can destroy your business by getting you in trouble or giving you bad information for making decisions. Given the importance of the CFO role, it’s important that you understand what your CFO should be doing for you.
Question: Are there important CFO roles I am missing?
See my other CFO-related posts here.