A seasoned financial executive plays a pivotal role in enhancing profitability, growth, and market value.
"Does my firm need a chief financial officer?” This is a question we hear a lot. While it’s a valid question, it may not be the right one. A CFO, typically a seasoned financial executive, plays a pivotal role in enhancing profitability, growth, and market value – and who doesn’t need that? So, the better question is, “How can I afford a CFO?”
The math is straightforward: If hiring a competent CFO costs $150,000 per year, then their financial contributions must surpass that amount in value. But most firms usually have a controller, so how is a CFO different?
Controller vs. CFO: A strategic difference. In general, a controller focuses on operational financial tasks, such as maintaining accurate financial records, ensuring compliance, and producing timely reports. The CFO, on the other hand, operates at a strategic level, shaping the financial direction of the organization. Their responsibilities include developing financial strategies, analyzing business performance, advising on mergers and acquisitions, and maximizing return on investment. A CFO often leads or significantly contributes to strategic initiatives, making their role indispensable for long-term success.
Here are five typical areas where a CFO adds value beyond the typical controller role:
- Return on investment analysis. ROI is the cornerstone of sound financial decision-making. It involves evaluating the cost of an action or investment against the expected financial benefits and a simple way to evaluate diverse initiatives competing for the same funds. Whether it’s adopting new software, expanding office space, or hiring talent, understanding ROI ensures informed decisions and helps uncover hidden costs that could impact profitability.
- Budgeting and forecasting. CFOs leverage their expertise to create accurate revenue, expense, and cash flow forecasts. This financial modeling supports executive decisions on issues such as debt management, ownership transitions, office expansions, staff size, etc. Proactive forecasting allows firms to address potential issues before they become a problem and stay ahead of market trends.
- Effective reporting. A CFO delivers actionable reports that focus managers’ attention on the most impactful tasks. They also provide executive leadership with key performance indicators and benchmarks that drive company growth and performance.
- Strategic planning. CFOs play a central role in strategic planning, as financial performance underpins most business goals. By breaking down initiatives into financial comparisons, they guide the organization on where to invest for the best likelihood of achieving its vision.
- Internal analysis. CFOs also add value by refining internal systems and operations. For example, a company facing high recruitment costs might benefit from analyzing its employee turnover rate. Investing in retention programs could be a more cost-effective solution. Optimizing internal processes is a vital aspect of the CFO’s role, especially in the architecture and engineering industry, where profitability can range to 35 percent or more and is dependent upon a variety of factors.
Assessing the value of a CFO. Quantifying the exact value of the specific skills and benefits provided by a CFO can be complex, but it can be simplified into three primary areas to develop a general understanding:
- Profit. By optimizing the five skills listed above, a CFO can significantly boost a firm’s profitability. A firm can start by estimating a target increase in profit as a baseline for evaluating value added by a CFO.
- Growth. A CFO enhances a firm’s scalability and a 10 percent growth in revenue translates directly to a 10 percent increase in profit dollars.
- Market value. Eventually, all owners exit their firms, either through internal or external sales. The sale value is tied to earnings and heavily influenced by scalability and sound financial processes. A 10 percent increase in both profit and growth translates to a 21 percent increase in market value, that could result in millions of dollars. Experienced financial management optimizes a firm’s sale position, maximizes its value, and streamlines options, enabling the executive team to make confident, informed decisions.
A simple formula for assessing potential value: Potential Value = CFO expense x 1.25 (This assumes a 25 percent ROI on the CFO investment. All investments should have an ROI.)
Fractional CFOs: A cost-effective solution for smaller firms. Smaller firms, especially those under $5 million in revenue, may find it challenging to justify a full-time CFO, since their profit dollars are less and their smaller operations may only require a fraction of a CFO’s time. However, they can still benefit from financial expertise by hiring a fractional CFO. Fractional CFOs work 10 to 80 hours per month, costing $5,000 to $10,000 monthly, without the need for fringe benefits. While fractional executives are cost-effective up to about 80 hours per month, firms requiring more time should begin to consider a full-time hire.
Conclusion. Regardless of firm size, leveraging the skills and expertise of a financial expert is a valuable investment. A firm needs to weigh the potential benefits of profit, growth, and market value to determine the appropriate investment in financial leadership. Relying on outdated methods or the philosophy “it’s the way we’ve always done it” can hinder growth and performance.
Steve McAdams, PE is a mergers and acquisitions advisor at Zweig Group. Contact him at smcadams@zweiggroup.com.
