What s right for your business?

Transcription

1 What s right for your business? CFO Edge, LLC Enterprise-Class Financial & Operational Performance Solutions

2 Introduction White Paper Overview Business leaders at growing and entrepreneurial companies inevitably face two questions: Is it time to hire a full-time leader for our financial team? Should we hire a chief financial officer or a controller? This CFO Edge white paper explores the decision-making process by way of the following sections: 1. Decision-Making Drivers 2. Comparing Roles: CFO and Controller 3. The CFO in Action: Sample Scenarios 4. An Alternative: Hiring an Outsourced CFO Services Provider The right decision will hinge on many different factors and will vary from one company to the next. As Los Angeles and Southern California business owners and entrepreneurs watch their companies grow and evolve, they often see the need to periodically assess the leadership roles in their financial team. In particular, they need to decide whether it s time to hire a full-time chief financial officer (CFO), a full-time controller, or continue without either and simply rely on their staff accountants and CPA. Or, should they consider a non-traditional alternative to these options? The CFO and controller are both critical, high-level financial positions in any business. Therefore, it is important to make the right decisions about financial team leadership roles as your company reaches new levels of growth. The fact is, hiring a full-time controller or CFO before your company has the volume of work and/or the resources to support the position can end up being a very costly proposition. Not only will it be a waste of money and a drag on the bottom line, but the controller or CFO will likely become bored quickly and probably leave the company, which can be very disruptive to everyone. Conversely, trying to get by with a controller or with staff accountants when there are high-level objectives and challenges can be just as problematic. Assuming that a controller must precede a CFO can also be a big mistake, because it may bypass non-traditional alternatives that are both efficient and cost effective. Common Size Thresholds for Hiring High-Level Financial Expertise The decision to hire a high-level financial professional hinges on many different factors and varies from one company to the next there is no one-size-fits-all answer. In general, though, companies need to reach certain size thresholds before it s financially feasible to hire a full-time CFO or controller. Both positions will likely command a six-figure salary and attractive benefits package, so you need to have the financial resources to accommodate this. According to published CFO and controller salary reports, the typical ranges for total compensation packages for these high-level financial professionals are as follows: Chief Financial Officer: $225,000 to $275,000 Controller: $90,000 to $175,000 It s worth noting that base and total compensation vary widely based on adjustments for private or public company, company size, metropolitan area and industry. However, the salaries of CFOs in metropolitan Los Angeles are the second highest in the nation, behind San Francisco and ahead of New York and Miami. While this will differ based on factors like those noted above, it often doesn t make sense for companies to hire a full-time CFO until they are generating annual revenue of $50 million or more. Meanwhile, the size threshold for hiring a full-time controller is often between $10 million and $20 million in annual revenue. page 2

3 1. Decision-making drivers A number of different drivers often prompt executives at small and mid-sized companies to assess the leadership roles on their financial teams, and how the drivers are resolved determines the solution model implemented. A. They are missing high-level financial expertise. There are three different scenarios that typically prompt an assessment of financial team leadership. These involve one of the following perceived gaps between where they are now and where they want to be. A size gap Such a company is growing and management keeps hearing that it s time for them to hire a full-time CFO. A vision gap Such a company is doing well, but management knows there is potential for improvement and thinks a full-time CFO can help them reach this potential. A challenge gap Such a company believes it should be doing better than it is and that a full-time CFO will help improve financial performance. For example, revenue may be up, but profits are down. B. They are uncertain about the right solution model. A perceived need for higher-level financial expertise has driven a search for the right skill set. But there is uncertainty with regard to whether the company needs to hire a CFO or a controller (or both) to fill this need. There are two common scenarios and solution models for this driver. Scenario 1 Scenario 2 Hire a FT CFO Controller + No CFO Hire a FT CFO No CFO or Controller Hire a FT Controller page 3

4 1. DEcision-making drivers (continued) C. They believe they are covered when it comes to senior financial leadership in the company. With this driver, an owner, president, or CEO is acting as the senior financial executive himself or herself. The business leader is working directly with staff accountants and an outside CPA firm, and thus believes the need for high-level financial expertise is covered. No CFO or Controller President/Owner/CEO (No CFO) (No Controller) Staff Accountants D. They aren t convinced the need to hire high-level financial leadership is urgent, or they see a hire as an expense rather than an investment. This is simply a matter of priorities and expected return on investment. The owner, president, or CEO knows that the company should hire a full-time CFO or controller, but other things are higher priorities right now. Or, the owner, president, or CEO is not convinced of the value and ROI of hiring this level of leadership on a full-time basis. He or she may see the hire as an expense, instead of an investment, and be unwilling to make a decision until there is a pressing need or strong conviction that the action will deliver adequate ROI. The primary objective of working through these drivers is to determine whether or not the company should hire high-level financial team leadership on a full-time basis. If so, the company must hire the right type of financial resource whether a CFO, controller, or non-traditional alternative who will successfully close the size, vision, or challenge gap in the most efficient and cost-effective manner possible. page 4

5 2. Comparing roles: cfo and controller Hiring a full-time CFO is obviously more expensive than hiring a controller, but this level of finance professional will bring an advanced set of analytical and strategic skills to the position that goes beyond just number crunching. For example, a CFO will: Participate at the C-level in overall executive management, providing strategic financial direction for the company by serving as the right-hand to the CEO. Oversee strategic planning, finance, accounting, and often IT and HR as well. Provide performance measurement reporting that helps the CEO run the business more effectively. Look at the business holistically in order to help the CEO improve planning, modeling, risk management and forecasting and, thus, make better business decisions and manage resources better. Focus on guiding the business to improved growth and profitability and increased efficiencies and productivity. Maintain and develop critical relationships with existing and prospective investors and lenders. While possessing a lower level of skills and expertise, a controller generally brings a much higher skill set than a bookkeeper. The controller is primarily responsible for managing the day-to-day financial affairs of the business, which usually include: Maintaining the books and general ledger. Preparing the financial statements in accordance with GAAP. Managing the day-to-day banking relationship. Reporting historical data for the CEO s analysis and interpretation. Maintaining compliance with controls and processes for accounting functions. However, a controller generally has no experience in the financial markets, and may have minimal experience with cash management and forecasting. So, in addition to not having the time available to provide CFO expertise because of his or her daily duties, a controller frequently does not have either the training or experience to provide it. A simple example helps explain the differences between the roles of a CFO and a controller. Suppose a controller provides financial statements showing a 5% decline in gross profit. The controller would pass this information on to the CFO, who would evaluate and interpret the data by looking beyond the numbers to see the root causes for the decline and recommend corrective action. Following is a comparative look at roles and responsibilities for both CFOs and controllers. Note the CFO addresses essentially all responsibilities in Executive & Strategic Management and in Finance. Regarding Accounting areas, the CFO primarily focuses on planning, implementing, and overseeing initiatives that require higher-level skill sets. By contrast, controller participation is characterized by preparing reports, maintaining processes, and following up on initiatives implemented by the CFO. Executive & Strategic Management CFO Controller Accounting CFO Controller Member of Executive Management Team Plan & Implement Growth Strategy Plan & Implement IPO & Acquisitions Plan & Implement Profitability Strategy Participate in Corporate Governance Oversee Major Business Unit Purchases Oversee IT Function Oversee HR Function Oversee Outsourced Legal Function Finance CFO Controller Analyze Financial Data Formulate Financial Strategy Formulate Tax Strategy Formulate Risk Management Strategy Raise Capital Communicate with Stakeholders Negotiate Financial Covenants Maintain Covenant Compliance Plan & Oversee Annual Audit Prepare Financial Statements Develop Management Reports Prepare Management Reports Develop Policies & Procedures Maintain Policies & Procedures Develop Budgets & Financial Plans Prepare Budgets & Financial Plans Develop Cash Flow Assumptions Prepare Cash Flow Projections Develop Capital Expenditure Requests Process Capital Expenditure Requests Develop Performance Measures Maintain Performance Measures Develop Internal Controls Maintain Internal Controls Develop Record Retention Policies Maintain Record Retention Policies Recommend & Implement Software Maintain Software page 5

6 3. The cfo in action: sample scenarios Aligned with the three primary areas of comparison discussed on the previous page, the following are CFO-in-action scenarios in which successful resolution required the higher-level expertise and skill sets that experienced CFOs bring to the table. Executive & Strategic Management Growth Strategy & Acquisitions IPO or Liquidity Event Profitability Strategy IT Function HR Function Sample Scenarios Three-day solution: resolve why 400% revenue increase only generated breakeven results. Tax-effective reorganization of structure to position company for sale. Resolving data corruption/systems failure and creating a plan to profitability. Configuring accounting software to generate a report in minutes that previously took two hours. Analyzing reverse merger to show that costs exceeded benefits and advised client against proceeding. Finance Financial Strategy Tax Strategy Risk Management Strategy Capital Financial Covenants Sample Scenarios Funding acquisitions after CEO has entered into deals. Solving high-cost, high-exposure coverage issue for critical infrastructure while reducing costs. Performing insure vs. self-insure analysis. Automating timely Board reporting. Restructuring loan agreements. Accounting Financial Statements Management Reports Budgets & Financial Plans Cash Flow Internal Controls Credit & Collections Sample Scenarios Creating 18-month rolling forecast to navigate through seasonal rough patches. Creating and maintaining 13-week rolling cash forecasts to insure adequate cash flow. Correcting revenue recognition practices. Discovering embezzlement and facilitating loss recovery. Training controller while educating management. Drafting detailed policies and procedures manual. Implementing best practices to reduce workforce in accounts payable by 20%. 4. an alternative: hiring an outsourced cfo services provider If you re not sure your company is ready to hire a full-time CFO or controller, a non-traditional alternative is to hire an outsourced CFO services provider who can work with your existing financial staff on a part-time basis. For example, an outsourced CFO can provide: Oversight of the accounting function. Evaluation and initiation of internal controls. Risk management guidance and strategic expertise. One of the benefits of this approach is that you will gain the expertise of a seated CFO including his or her high-level, strategic financial and operational expertise without having to pay a CFO s high full-time salary, benefits and other overhead. You also avoid the costs and headaches of employees while having the depth of back up the outsourced service provides. An outsourced CFO can work in the same capacity with your controller if you decide that you are ready to hire a controller, but not a full-time CFO. This can be a very cost-effective solution in the right circumstances. Or, another alternative below a certain size is to have an outsourced CFO services provider work with your accounting staff or even provide your entire accounting department, bringing outsourced bookkeeping and controller expertise in addition to CFO skills. Part-Time CFO & Controller President/Owner/CEO CFO (PT) Controller Staff Accountants Part-Time CFO & Accounting Staff President/Owner/CEO CFO (PT) (No Controller) Staff Accountants page 6

7 5. the benefits of hiring an outsourced cfo services provider An outsourced CFO can add tremendous value to your company by delivering financial consulting on costs, profits, capital structure, and other high-level strategic financial analysis, as well as guidance to help drive growth, profitability and shareholder value. He or she can partner with the CEO to tackle forward-looking strategic issues and help execute the company s vision, while also communicating effectively with investors, lenders and other external stakeholders. This approach can offer you the best of both worlds: You retain your controller without burdening him or her to perform duties he or she isn t qualified for and is getting burned out trying to accomplish. You receive high-level oversight of your controller or accounting department. Acting as a mentor, the outsourced CFO can help prepare the controller to become the full-time CFO if a decision is made to hire one. You gain the expertise of an experienced CFO on an as-needed basis, which is much more cost-effective than hiring a CFO on a full-time basis. Your internal management reporting is improved, which will help grow your profits. You acquire a strategic, on-call partner who can advise and collaborate with you on future decisions about running, funding and growing the business. By offloading financial responsibilities, your CEO can focus on higher-value activities. The capital you realize from savings can be invested in other higher-roi areas of your business. Parting Words As they watch their companies grow and evolve, business owners and entrepreneurs often see the need to periodically assess the leadership roles on their financial team. In particular, they need to decide whether it s time to hire a full-time CFO, a full-time controller, or continue without either and simply rely on their staff accountants and CPA. Considering a non-traditional alternative is also an option. This decision will hinge on many different factors and will vary from one company to the next. Hiring a full-time controller or CFO before your company has the volume of work and/ or the resources to support the position can end up being a very costly proposition and a significant drag on the bottom line. A highly efficient alternative is to hire an outsourced CFO services provider who can work with your existing financial staff on a part-time basis. With this approach, you will gain the expertise of an experienced CFO without having to pay a full-time CFO s costs. An outsourced CFO can add tremendous value to your company by delivering financial consulting on costs, profits, capital structure, and other high-level strategic financial analysis, as well as guidance to help drive growth, profitability, and shareholder value. page 7

8 CFO Edge, LLC 225 South Lake Avenue, Suite 300 Pasadena, CA Direct: Toll free: Ext Website: Blog: blog.cfoedge.com About CFO Edge CFO Edge, LLC delivers enterprise-class financial and operational performance solutions to executives throughout Southern California. Based in Los Angeles, our formerly-seated chief financial officers engage on demand as part-time CFOs, single-project CFOs, and interim CFOs to help business leaders successfully resolve pressing challenges and realize their financial and operational goals. At CFO Edge, we are passionate about helping our clients create, grow and sustain value. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. CFO Edge, LLC, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication CFO Edge, LLC