The Value of a Fractional CFO
By Dave Costello, TCV Growth Partner -
If you are an entrepreneur with a small business that is growing, how much time do you spend on the accounting data provided by your controller or your outsourced bookkeeping firm? Chances are, if your business is growing you only have time to spend on satisfying customer requirements and responding to new business opportunities, and wish you had more time to spend on those matters!
I’m not saying those tasks aren’t important, but as an entrepreneur you need to spend some time working “ON” the business rather than “IN” the business. And, if you have investors or bankers, you better have a good handle on the finances.
When I have talked with entrepreneurs who don’t have time to talk, I’ll ask about the last time they looked at their outstanding receivables, the last time they looked at their profit and loss statement, or the last time they looked at their actual vs. budget results, that is, if they even have a budget. Generally, they will admit that it’s been a while since they have looked at that information. And, if they have looked at it, do they really understand the story the numbers are telling them?
You may say that you have a controller, and that person takes care of all of that “stuff” for you. It’s true that some controllers are very, very good and make sure that all the debits and credits get into the right spot on the balance sheet or profit and loss statement, and that’s a great start! Yes,a business needs accurate accounting information on which to base financial and strategic decisions. But, my experience has found that controllers typically don’t go beyond getting the numbers in the right spot. They will be able to tell you that cash balances are reconciled to the bank statement, and the profit and loss numbers are right, but they do not have the skills of a true CFO. For example, they don’t often understand the relationship between your accounts receivable and your cash position, or they can’t design a process to review the aging of accounts receivable to speed up collections, or they don’t fully understand the trend of sales or earnings and its strategic impact on the company.
These are some of the easy tasks that a fractional CFO can help the entrepreneur with. An experienced CFO can quickly assess issues that may be putting some financial stress on a company. For example, do you have some outstanding accounts receivable that are approaching or beyond 90 days past due? Have you or someone on your staff been in touch with these customers to ascertain:
· Did they received the invoice?
· Do they agree the product or servicewas delivered satisfactorily?
· Have they approved the invoice for payment?
· When will they make the payment?
By allowing customers to extend payment of your invoice to them they are putting stress on your cash flow that you use to pay employees, pay other vendors, or pay yourself! An experienced fractional CFO can help you identify this stress point, help design a process for timely follow up with your customers, and help determine what kind of collection time frame is reasonable vs. unreasonable.
Another related matter could be continuing to perform current services or delivering products for customers who have stretched payment to you because they can’t afford to pay! It’s better to identify this BEFORE you do any more work for them rather than after. A process for following up on outstanding accounts receivable should begin at 30 days past due and definitely should not wait until the invoice gets to 90 days past due.
Related to the billing and collection of accounts receivable is forecasting cash flow for the company to ensure the company has sufficient cash to cover its obligations. This becomes more important if you have a bank line of credit to help provide cash during certain times. Some banks require a clean-up period in the line of credit meaning that there can’t be any borrowings during that time, although this is becoming less common. Still, the clean-up period demonstrates to the bank that your company is not totally debt financed and your ability to generate cash flow in your business is adequate. An experienced fractional CFO can easily build a cash flow forecast for you to show your bank that your company operations do generate adequate cash flow. This also allows the entrepreneur to sleep soundly at night!
Have you assessed whether your billing rates are enough to cover your costs and provide a profit? This is a pretty important element of running a successful business and is often referred to as a “fully loaded” rate. An experienced fractional CFO can help make this assessment quickly by looking at your profit and loss statement and getting an understanding of your business and billing practices. They can look at your gross margin and help determine if that’s reasonable for your industry. Lots of people who analyze the business of others, like bankers and potential investors, will focus in on the gross margin and try to understand what is happening, what the trend is and what opportunities to improve may exist. As the owner or entrepreneur who is looking for bank credit or to bring investors into the business, you are expected to know what’s going on and be able to adequately explain it to them. A fractional CFO would certainly be of assistance in this type of analysis.
An experienced fractional CFO can also help the entrepreneur put together a profit and loss budget that is based on experience, contains reasonable assumptions for growth both in revenues and staffing levels, and generates a reasonable return to the entrepreneur based on the type of industry. The budget is typically developed for the next fiscal year and provides a roadmap for the entrepreneur and staff of the company. Most entrepreneurs are optimistic about the future for their company and so will always believe that “next” year we’ll do even better! An experienced fractional CFO can push back on assumptions used in preparing the budget that may be too optimistic so that the final budget is deemed reasonable and reflects future results that are attainable with some effort.
Carrying through with the budget the experienced fractional CFO can sit down with the entrepreneur on a monthly or quarterly basis and look at the actual results of the company in that period compared to the budget and discuss the reasons for any variances. In my opinion, these discussions are critical to allow the entrepreneur to adjust operations immediately to address issues that had previously not been identified. Most issues will come to light in the discussion of the variances between actual results for the period and what was anticipated in the budget. For that reason, I always suggest a monthly review is better than a quarterly review since it identifies earlier the issues that need attention.
An experienced fractional CFO can also review the company’s balance sheet with the entrepreneur on a periodic basis. Unless the company is a capital-intensive business or is manufacturing a product, the balance sheet structure will be simple. The most important accounts to monitor for a service company will be cash and accounts receivable.
There are several other reasons for an entrepreneur to engage an experienced fractional CFO. For example a fractional CFO can:
Provide independent and objective feedback, advice, and recommendations to the entrepreneur. The CFOs reputation depends on it and they only want the entrepreneur to succeed!
Assist with other financial or accounting related projects such as assisting in obtaining bank financing, designing a board package for board of directors or investors meetings, monitoring debt covenants in existing bank credit arrangements.
Mentor and coach young accounting talent in the company that does not yet have the knowledge or experience to be the financial partner to the entrepreneur.
Provide due diligence assistance and financial forecasting for an acquisition.
Assist in putting together a Strategic Plan to help guide your company over the next several years.
Think you could benefit by engaging an experienced fractional CFO but don’t know where to turn? TCV Growth Partners (www.techcomventures.com) would be delighted to have a conversation with you to see if our experienced CFOs might be a good fit for your business and your needs. Feel free to email me at dave@techcomventures.com to start the discussion!