Business owners often look at the basic numbers to know how they’re doing. How are sales? What are our operating expenses? How much money did we make last month? But they don’t use these numbers as a tool to grow sales, improve profitability, strategically plan for the future, and grow the bottom line. That is the key role of the CFO. But what happens when company management recognizes the need for a CFO, but cannot afford to hire someone in that role on a full-time basis? This is where a fractional CFO can be a lifesaver. Smaller companies that have a limited budget can get the same utility from a part-time CFO but at a significantly lower cost than hiring one as a full-time employee.
There are three primary ways that a CFO helps guide companies in their day-to-day operations:
- Cash Flow Management: How much money will the business have tomorrow?
- Profitability Improvement: Understanding and reducing costs
- Financial Statement Visibility: Information that allows the organization to make changes
As a CFO with over 25 years of experience, I’ve seen the gamut of problems that organizations can face. Here are a few real-life stories of how using a fractional CFO for company operation problems resulted in success. None of these clients could afford to hire a full-time CFO, so they elected to hire one that worked for them on a part-time basis.
Cash Flow Management
The problem: An owner called Tuesday afternoon and said that he needed some help and asked if I could start work the next day. I arrived at his plant Wednesday morning and he ushered me into his office and closed the door. He breathed a visible sigh of relief and said, “I’m so happy that you’re here. I really need a CFO. Your first job is to figure out how we’re going to cover payroll on Friday.”
The solution: With the help of a fractional CFO, the company was able to put a halt to any further expenditures and found cash available through AR collections and deposits from customers for new orders placed with the company. Payroll was covered and a cash-flow forecast was put in place to manage the cash used in the company going forward. This ended the cash crunch, panicked deadlines, and managing the use of money going forward.
The problem: A printing company was in its second generation and the son of the founder was now in charge. He struggled to maintain the profitability his father had achieved. The company had just lost $125,000 in his third year of leadership when he called for help.
The solution: A weekly profitability analysis was created for each completed production run. This uncovered a 35 percent variance from the production estimate to the actual production costs. The staff didn’t understand their costing structure and how standard costs were calculated. Looking at each job, the direct causes of the problems were identified, from slow press run times to set-up issues, to “third shift” inefficiency. Identifying those issues to plant operations prompted changes in quoting and production, increasing accuracy and eliminating production problems and waste. This reduced variances to less than five percent, improving profitability in the next 12 months to $410,000.
Financial Statement Visibility
The problem: An Internet retailer was having significant growth of 50 percent annually, but their financial statements showed huge swings from great profitability in one month to huge losses in the next. The owners knew that they had money in the bank but didn’t know if they were profitable.
The solution: The company was producing financial statements on a cash basis, not an accrual basis. This means that they were looking at how money flowed through the bank, not the profitability of what they sold. So, if they didn’t spend any money (pay their bills), they showed a large profit. If they paid all their bills, they lost money. Revenues and matching costs should be reported in the same period. Changing their reporting approach identified that the company wasn’t profitable. After some research, it was discovered that their pricing algorithm was wrong. Fixing the pricing model changed the profitability of the company and allowed them to continue their significant growth–profitably.
Fractional CFOs and the Bottom Line
Companies need someone who is strategic instead of tactical. They need someone who focuses on how to affect the bottom line, not to just report it. It doesn’t matter if the company is doing $2 million in sales or $2 billion. But not every company, no matter how much they need that advice, can afford to pay $250,000-$350,000 a year for a C-suite executive totally dedicated to finance. Many middle-market companies have steered clear of hiring full-time general counsels, chief marketing officers, or VPs of sales or HR in favor of hiring skilled executive staff on a fractional basis.
If companies don’t need a graphic artist full time, they hire an outsourced designer. For the same reason, they don’t have a full C-Suite of executives in every discipline. They can hire them on a fractional, part-time basis to provide the knowledge and business experience they need when they need it. Business leaders make decisions in many disciplines, and finance is one that gets left out more often than not.
It’s important for every business leader to know what the numbers are telling them. That way, they have the information that they need to change operations to drive profitability. That’s the key to success and growth for any company, which is why many organizations should consider hiring a fractional CFO.