Previously we spoke about how the CFO drives growth, and three main areas the CFO adds value: historical financial and vendor analysis, current working capital and cash management, and future budgeting and investment analysis, including acquisitions. One area in particular that we did not discuss, however, was the benefit the CFO brings to the table as an outside strategist and leader responsible for setting and implementing strategy in conjunction with other senior managers within the company. As the primary individual responsible analyzing past and current financial data, as well as budgeting for future growth, the CFO has a unique perspective on the operations of the company.
Checks and Balances and Growth
Public companies are required to have an independent board to review the operational performance of top management. The purpose of the board is to ensure that management runs the company in the best interests of shareholders (i.e. the owners of the company) rather than in their own self-interest. The separation of the board from senior management acts as a “checks and balance” on corporate governance. It is a similar concept to the idea of “checks and balance” in government, whereas major actions require board approval in a similar way that the President must sign into law any act that Congress passes (apologies to my non-US readers for the US centric description of checks and balances. Prime Minister and Parliament are equally applicable in this example).
In both public and privately held companies, there are also checks and balances below the board at the executive level designed to create good corporate governance. While logistically it is good business sense to have executives responsible for operations, finance, marketing, etc. and led by a chief executive, it also makes good business sense to ensure that the CEO or founder is not required to make decisions in isolation.
Often the role of the CFO morphs into key strategist and advisor to the CEO; perhaps this explains why in the plurality of Fortune 1000 corporations, the CEO was a former CFO. The role of the founder or CEO is often focused on managing the day to day challenges of the business, sometimes to the peril of longer term planning. In the collision industry, the CEO tends to be focused relentlessly on day to day operations, client management, new client acquisition, employee retention, recruitment and KPI management. Because the CFO tends to be once removed from the brouhaha of day to day operations, the CFO has the luxury to provide a unique service as a de facto outside advisor to the company, but one with intimate understanding of day to day challenges.
Yet despite these benefits, the CFO has traditionally been a role overlooked. However, the CFO is a role that is becoming increasingly necessary due to the increasing complexity of the industry. But for many companies the biggest concern is cost. Full time, dedicated CFOs can often cost upwards of $250,000 annually, plus benefits and bonus. For many companies this is often cost prohibitive.
Alternatives to a Full Time CFO
Hiring a full time dedicated financial specialist to manage the financial side of your business is expensive. However, there are a number of alternatives available that allow a business owner to leverage the expertise of others for a fraction of the cost of a full time expert. Below are four common alternatives to hiring a full time dedicated CFO.
Lean on your vendors
Your vendors have a vested interest in your success. The more successful you are as a company, the more goods and services your company will purchase through them. Vendors are a great resource for industry information as well as general business know how, especially if you purchase from a company that is substantially larger than your own firm. Many of these vendors sponsor so called “twenty groups” that bring together numerous noncompeting businesses in the same industry to share financial and operational best practices. These twenty groups can often provide an outside perspective to senior managers and business owners. While these forums often offer valuable, informed feedback, they also require a substantial commitment of time away from the business for quarterly or semiannual meetings.
Establish banking relationships
An affordable way to get an outside financial perspective is to establish a relationship with a commercial banker. Commercial bankers often have years of experience working with business and can offer a wealth of insight into how other businesses manage their financials. Often you can get years of financial insight over quarterly lunch meetings and the best part about it is the bankers will often pick up the tab. Many commercial banks provide the resources of senior bankers as a no or low cost value added resource to incentivize customers to establish or expand existing banking relationships. Commercial bankers provide “plain vanilla” banking services such as business checking, cash management, treasury services, lines of credit and business loans. They are unique from investment bankers who provide higher level mergers and acquisition advisory, valuations, or capital market services discussed below.
A relatively new innovation in financial services is the idea of the fractional CFO. Cloud computing is the main driver behind the growth of fractional CFO services. Many accounting platforms now are now cloud hosted, enabling easy, secure, encrypted and traceable sharing of financial data with a unique username and password. For those whose financial data still resides locally, secure cloud based data rooms and document sharing sites enable users to share password protected documents, limit the distribution and printing of documents by unauthorized users and generally control access to sensitive documents.
A fractional CFO is a dedicated CFO that a company hires to manage the financial side of the business at a fraction of the cost of a full time CFO. Fractional CFOs split their time providing their services to a number of clients. The benefit to the company is that it receives a dedicated CFO at a fraction of the cost. As many companies in the industry are not of sufficient size to justify the expense of a full time CFO this can be an attractive opportunity for a growth oriented company that may not be able to afford the full time services of someone to manage the financial risks of growth. A significant challenge for many companies is finding a fractional CFO that also has specific industry experience to be a value added resource from day one. (It is also part of the reason we now offer these services. Contact me if you would like to discuss further.)
Investment Bankers and Private Equity
Companies that have reached a certain size (normally $50 million in revenues or more) can utilize the services of investment bankers and in some cases private equity to provide CFO level services. Investment banks can provide some short term financial advisory services as a company prepares for growth, raising equity through private placement or public offerings, private equity transactions, or debt offerings. Investment banks often provide short term financial advisory services as part of their overall transaction offerings. These financial advisory services are normally included at no cost as part of the overall scope of work the bank provides. These services are often short term in nature and designed to get a company prepared for a specific transition which the bank was hired to complete.
In the cases where a company already has a private equity sponsor, in some cases the private equity group will act as an outsourced corporate finance department, reviewing historical performance, planning and executing M&A and managing the financial side of growth. Senior management, however, is still responsible for executing and delivering on day to day operational and financial performance. There is no free lunch when working with private equity – expect to pay for these services. Private equity firms often charge management fees to their portfolio companies for these types of services.
There are a lot of ways to manage the financial side of your business without hiring a full time senior financial expert. Reach out to your existing vendor and banking relationships. If you feel you need more specific services, consider the use of a fraction al CFO with industry experience to manage the financial side of the house. Finally, if you are a business of a certain size, in some situations utilizing the resources provided by investment banking partners or a private equity sponsor may be appropriate. Each solution has tradeoffs and there is no one size fits all approach.
Feel free to reach out to me directly to discuss these different options. You can reach me directly at any time via my contact page. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
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