Preface: If you’re hiring your first CFO, for your fast developing entrepreneurial momentum, this blogs is to help you appreciate the skills a CFO can and should bring to your business.
Skills Every Chief Financial Officer Needs – Part II
Capital and Cash Management. A CFO should understand cash management and budgeting. Planning for capital expenditures, debt repayment, working capital requirements, strategic acquisitions, investments in R&D and, and alternative investments of profits all weave into capital and cash management. A CFO should have experience in forecasting cash sources and uses to help facilitate tight financial controls. Maybe your CFO can prepare a rolling forecast with updated data to improve financial decision making; and track free cash flow (operating cash flow less capital expenditures and other funding, i.e. R&D).
Well developed and managed cash flow models build a foundation for monitoring key financial performance and improve cash flow planning. Cash flow models should give the most attention to receivables, inventory and payables to lead to the greatest effectiveness. Armed with this knowledge your CFO can manage receivable for timeliness, assess and optimize peak to trough inventory levels, monitoring duration of cash conversion cycles, while developing key metrics and analytics for monitoring and managing cash flow and financial performance precisely. This gives your team greater accuracy and confidence in financial decision making, for short or long-term goals, e.g. what should be this quarters, or years, incentive plan for the sales team?
Financing. A CFO must establish and maintain quality relationships with lending sources, i.e. banks, for existing and future credit facilities. A bank will be increasingly more likely to extend credit, at least with better terms for the umbrella, when the sun is shining. When you negotiate with your lender, your CFO should request the largest line of credit the bank will extend so you’re covered beyond just seasonal inventory demands and receivable summits.
If your strategy includes acquiring business with I) bolt-on acquisitions, i.e. a competitor or say a vendor/subcontractor, or ii) platform acquisitions, i.e. new business sector such as a residential framer acquiring a commercial contractor, or iii) transformation investments, i.e. venturing into new idea’s, e.g. auto dealership investing in an internet consumer-to-consumer auto financing, you will want a CFO that has experience with intrinsic values, due diligence, and business planning. Many small business entrepreneurs can defer to their CPA firm when these opportunities are on the table.
Accounting and Internal Control. This is commonly what most entrepreneurs think of when discussing the role of a CFO. Yet, financial reporting and monthly reporting is only one of the many roles a CFO can provide to your business. A CFO will monitor internal processes including, segregation of duties, expertise and assignments of the accounting personnel, independence of board members, and entrepreneurial style of the management team. Segregation of duties will minimize fraud. Experienced accounting personnel will lead greater accuracy and timeliness of financial reporting. A CFO does manage the accounting process and provide oversight to financial reporting, but the real value of a CFO is working on making your successful business, even more successful; far beyond monthly reporting and period ending statements.
Organizational Management and Leadership. Many larger businesses will have a controller who reports to the CFO. Yet for financial reasons some business have all accounting staff, i.e. accounts payable department, and accounts receivable department, inventory manager, report to the CFO. The CFO should develop a plan for financial personnel development, hiring, systematic chart of accounts, financial systems and software,(i.e. inventory modules, methods), financial management, third party professionals, e.g. payroll firm, CPA firm, management or sales consultants. If you have a developing business, the ability to hire a CFO who can develop future accounting staff is well advised. Like Jack Welch said “Business is about people… at the end of the day it’s only the people that matter.” A well trained and competent accounting department begins at the top, and as said earlier, the real role of a CFO is to make good businesses even better. That includes making good people even better too.
Summary: A CFO should have skills in strategic thinking, business risk planning, capital and cash management, financing, accounting and internal controls, and organizational management and leadership. This takes years of experience and years of development; easier said than hired. Continually challenge your chief financial officer to work toward developing these areas of expertise.