CFOs are high-level, strategic experts who optimize financial resources in a company while using those resources to achieve company goals more efficiently and effectively.
Unlike bookkeepers, controllers, and accountants whose primary functions are rear-facing, tracking and reporting on month-to-month financial performance, a CFO’s value is in forward-facing strategic finance. CFOs look to the short- and long-term future to make course adjustments that maximize company performance and value.
At Preferred CFO, we tell our clients that a CFO is an investment. How, then, does a CFO provide tangible ROI?
How CFOs Add Value
While lower-level financial experts such as bookkeepers and accountants work along the same lines to achieve the same goal (GAAP recordkeeping), CFOs can be much different in the strategies they use to drive value. However, all of these strategies are aimed toward a similar goal of optimizing company performance and profitability, maximizing existing and potential resources, and increasing the efficiency and efficacy with which a company achieves its goals.
Driving Financial Strategy
The biggest value a CFO offers is elevating a company’s financial strategy.
We know that finances are the lifeblood of a business, but too often, they are a subconscious reflex (like breathing) in a company as opposed to a consciously harnessed asset. Some companies without CFOs also make the mistake of seeing finances in a binary way (e.g., “Need more money? Sell more widgets.”).
A CFO takes critical, conscientious control of a company’s finances to transform them into a more effective asset for the company. Because of their financial and operational expertise, a CFO can offer nuanced strategies that reduce COGS, improve profit margins, maximize funding/lending programs and opportunities, optimize cash flow, and more.
Creating Financial Forecasting
Forecasting is one of the most influential tools in a CFO’s arsenal and, arguably, brings the most value to a company. A financial forecast is a detailed short- or long-term plan based on educated historical performance and industry trends that advises the month-by-month financial decisions that will lead a company from where it is now to where it wants to go.
Having a financial forecast is like having a blueprint to build a house instead of trying to build the house with an idea of how you want it to look in the end but no specific instructions about how to get there. A financial forecast can reduce wasted spend, accelerate progress, and maximize the possibility for success.
Establishing Financial Visibility
A CFO will also help your company establish better financial visibility. This includes improving processes for better, more accurate recordkeeping. The value of this financial visibility is having cleaner, more attractive books for capital raises or transactions that require due diligence, having a more straightforward path for achieving your goals, and having a clearer view of your financial performance to better inform strategic decisions.
Improving Cash Flow
Your CFO will take control of your cash flow to optimize your current assets and reduce unnecessary spending. This includes creating a cash flow forecast that will tell you where to expect cash to come or go—and when. It will also help your CFO analyze where money is being spent and to make adjustments to reduce unnecessary expenses.
Increasing Profit Margin
Another way a CFO adds value to a company is by increasing profit margins wherever possible. This means analyzing inventory strategy, reducing expenses, renegotiating contracts with vendors, adjusting pricing, and providing informed decision-making regarding sales or special offers. These tools, as well as industry knowledge and competitive analysis, give your CFO the opportunity to help increase profits without having to necessarily sell more.
Product Line Optimization
A CFO can also provide product line analysis and optimization. From the Pareto principle, we know that 80% of sales tend to come from 20% of your products. You probably know which of your products or services generate the most revenue, but do you know where the rest stand? A CFO will help analyze whether any products or services are less-profitable—or worse, have a negative profit—and determine next steps to resolve the issue or minimize negative impact to help your company run more efficiently.
CFOs can also provide capital by assisting in and executing capital raises. We know it generally takes money to make money, but the amount of money you raise and the mix of debt and equity financing can make a difference to your long-term success. For instance, too much equity financing can dilute shareholder value, and too much debt financing can create unnecessary debt and interest burdens.It is some founders’ instinct to raise as much capital as possible when they are strapped for funds. However, a CFO will use financial forecasting and modeling to ensure the decisions for how much and from where are as informed as possible.
In addition, a CFO can help create a more positive financing experience by having the necessary documents in place for any due diligence, reviewing and negotiating terms, and providing financial expertise to founders, lenders, and/or investors.
Preparing for a Successful Exit
Finally, CFOs can also bring value to a company by strengthening their end game. Most founders have a goal of eventually exiting their companies, whether that’s through a strategic succession plan, a sale, or a merger. CFOs discuss this goal with stakeholders and help to devise a financial strategy to best help achieve it.
A CFO will also help in providing necessary financial documents and reports, analyzing offers, overseeing due diligence, attending shareholder meetings, and negotiating contracts.
The value a CFO provides a company ultimately depends on his/her experience and background. Finding a CFO with significant c-suite/operational expertise conducive to your industry, stage of growth, and company goals can maximize the value you receive from your CFO.