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The Benefits (and Pitfalls) of Hiring a Fractional CFO: Part 1

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Every business needs financial leadership. The real question is what kind of financial leadership does YOUR business need? The answer lies in the business’ capital structure and the operating environment of the organization.

But first let’s quickly define the key players that are usually providing financial leadership in organizations: Chief Financial Officer (CFO), Controller, and Accounting Manager.

These titles are so commonly misused in small and private businesses, it’s easy to get confused about what they really mean. I’ve met office managers with the title of CFO and bookkeepers called controllers. We’ve all seen titles given to undeserving or inexperienced folks, but a rose by any other name will still smell as sweet, and calling an office manager a CFO does not make it so.

I typically define these rolls by their perspectives on the business. Accountants and Controllers are generally historians; they are focused on processing transactions that have already happened and generating financial reports based on that data, i.e. income statements and balance sheets.

Conversely, CFO’s are focused on the present operations of the business and future transactions that will impact the organization. A CFO sets policy and designs systems for the processing of revenue and expense transactions. Mind you, both of these functions are critically important. A CFO cannot perform his function without relying on financial reports from the Controller.

Jeff Jordon of Andreessen Horowitz wrote a great article about what CFO’s do. He says a CFO generally oversees:

  • Accounts receivables, i.e. extensions of credit to customers
  • Treasury and Accounts payable, i.e. cash management
  • Tax issues
  • Borrowing
  • Investors and capital

With all that defined, do you need a Controller, or a CFO, or both? In my opinion, this depends on the complexity of business and the stability of the capital structure of the business.

For example, if the organization is a family-owned business, the ownership of the company is stable, the long-term debt is settled as permanent financing, and there are no acquisitions planned…in other words, the owners simply plan to operate the business without any changes, then it’s likely this business could be best served by a competent, experienced Controller leading an accounting function.

On the other hand, if the business plans to raise capital from investors or banks or both, if the business has a complex and changing operating environment (technology, media, publishing, hospitality, real estate, etc.), if the business plans to expand by acquisition… then it’s likely this organization needs both a Controller and a CFO.

For more thoughts on figuring out what your business needs, check out the following articles:

Come back next week for Part 2 of The Benefits (and Pitfalls) of Hiring a Fractional CFO. And as usual, for more reading recommendations, or to discuss other entrepreneurial tips and tools, contact Harvard Grace Corporation at [email protected].

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