I talk a lot about finance. After all, I have a Master’s in Business Administration (MBA) with a specialization in finance and M&A. I think telling the story of a business through numbers and being able to interpret a business through financial reporting is pretty neat.
But more than just being neat, it is incredibly important and valuable. It is so important that in some Fortune 500 companies the CFO is as valuable as the CEO (in fact, a common way to become a CEO is by first becoming CFO). Sitting in on Wall Street earnings calls, often it is the CFO doing most the talking while the CEO can take a bit of a back seat. The large consolidators actively recruit seasoned CFOs that have experience in consolidating industries.
But this is less the case in the rest of the collision industry. Part of the reason finance, specifically corporate finance, is overlooked in the industry as a strategic driver of growth. There is often some confusion over terminology and understanding exactly how finance drives growth. I previously wrote about how finance can drive systematic growth. But it is important to also understand the difference between finance and accounting, and who ought to be responsible for what in a business in order to drive such growth.
Finance vs. Accounting
Finance is very strategic and forward looking. At the most general level, the role of corporate finance is to maximize the value of a business while minimizing risk. Finance deals with projections and risk adjusted returns in order to determine the best course of action for a business. The Finance team deals with questions such as capitalization and debt structure. In collision repair, the Finance team would analyze the terms and structure of a paint contract, or project how to best finance an acquisition of a additional locations through debt, equity and existing cash flows.
Accounting on the other hand is focused on reporting what has already happened. Accounting allows a business to accurately reflect upon where it has been and how successful it has been in executing a specific strategy. Accounting is the score board of the business, whereas finance is the play book.
Because accounting and finance are often confused, there is also confusion over the roles required inside an organization to drive growth. There are three common positions to review: the CFO, the bookkeeper, and the controller.
A bookkeeper is a clerical position focused on data entry. A bookkeeper will post invoices and expenses to an accounting system, track labor expenses and other overhead expenses, and generally ensure that the business keeps timely business records. It is generally a position that does not require a specialized background in accounting or finance. Most businesses I interact with have some sort of bookkeeper, whether that be a dedicated bookkeeper or an office manager who is responsible for all bookkeeping operations.
A controller is a management level position responsible for overseeing the quality of accounting data and financial reporting. A controller is responsible for ensuring that the data and records the bookkeeper keeps are accurate and timely. A controller also often monitors accounts receivable (AR), accounts payable (AP), and cash balances. This position often requires an accounting background to ensure that revenues and expenses are properly accounted and categorized. They also are responsible for internal audit and control, ensuring data integrity while minimizing the chance of financial fraud from either within or outside of the organization. Some small businesses outsource controller responsibilities to a CPA firm once a year as part of tax prep and planning. While a good CPA is an invaluable resource, it is difficult for a firm with whom you interact at best a handful of times a year to provide the level of service required for a firm that is building a financial core competency.
The CFO, or Chief Financial Officer, is the individual responsible for managing the financial risks of a corporation and is both an advisor to the CEO and the provider of analytical critiques of key initiatives. The role is more analytical in nature than a bookkeeper or controller. The CFO is intimately involved in developing financial and operational strategy in a way that minimizes the risk of any investment while maximizing return. It is the responsibility of the CFO to develop a forward looking budget to model what prospective growth looks like. A CFO can model what the financial and operational impact is of a major new client. A CFO will also model the impact of an acquisition, and how acquiring another firm may impact a company’s balance sheet and cash reserves. A CFO analyzes past performance through data provided by accounting to determine the appropriateness of previous strategies. In large organizations CFOs often have an advanced degree as well as deep industry or professional experience. In organizations of all sizes, recently it has become increasingly common for CFOs to have other, non-financial departments report to them, such as IT and HR.
A full time CFO can be a significant but wise investment for companies that have reached a certain threshold of revenues. For smaller organizations that are pursuing a growth strategy, often the resources of a fractional CFO can be used to manage growth. Fractional CFOs can be brought in on a project-by-project or part-time basis thus avoiding the high overhead of a full time employee.
In the collision repair industry, it is less common to see professional non industry CFOs compared to other industries. And in businesses with less than $20 million in sales the CFO role is rare to say the least. Even in larger organizations, many CFOs rise through the ranks of a specific company rather than recruited from outside the industry. There are many examples of large operators that function in the industry with little more than a bookkeeper, a full-time controller and an outside CPA firm for tax and financial statement preparation. This will likely change, however, as the industry continues to consolidate, additional investment capital is attracted to the industry and the large players become even larger.
While some duties may be shared and many businesses in the collision industry may not necessarily require individual CFOs, bookkeepers, and controllers, it is nonetheless essential that these responsibilities are clearly delineated to key team members. In order to develop a core competency in financial management, it is important that roles and responsibilities are clearly defined within an organization to ensure success. Defining roles and responsibilities starts with an accurate understanding of how individual job duties add value to the firm.
I’m eager to hear from you. If you would like to discuss how to implement any of the above positions, please shoot me an email via my contact page to discuss further. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
If you found this article useful, please sign up for email updates at www.supp-co.com. On the top right side of the page you can enter your email address. Get notifications of new posts sent to your email. I never spam. I keep your information confidential and secure. You can always unsubscribe from notifications at any time.