There are many rule-of-thumb recommendations for timing a CFO hire, (for example, when the company has 30 employees or more, when audits are required, or when a company transaction is anticipated).
From our perspective, it’s time to get a CFO involved when the company needs to grow, and needs external funding to fund the growth. Whether the company uses bank, mezzanine, or equity financing, it’s critical to find a CFO who is experienced with using all methods, assuming the CEO or business owner does not have a finance background.
We are frequently asked, “Why do I need a CFO when I have a full-time Controller?” It’s a great question since there is confusion about the differences between a Controller and a CFO. Typically, a Controller is looking at the accounting and financial data from a historical perspective – how did the company perform last month and how does that performance compare to last year, and so on.
A CFO who has received proper training should be the company’s strategic financial resource. A strategic outlook assumes a forward looking and holistic for advising the business owner of the best course of action from a financial perspective. These professionals know how to build a variety of financial plans to help guide the business owner on various financing options and their impact.
A strategic CFO knows what questions to ask the business owner to determine the best financing route for the company. Companies without a strategic CFO will be happy to just get the funds from any source, at any cost. A strategic CFO knows the pitfalls of each type of financing based upon real life experiences of raising the capital and then servicing the debt or providing investor ROI.
They will know what questions to ask the banks and the VC’s to determine if they are the best funding source. What is the bank’s appetite for risk? What are the underwriting requirements? What will trigger a demand notice from the bank? Do they have a long track record of issuing a demand when finances get tight? What about VC’s: do they have a short-term (3-5 years) or longer term view (5-7+ years) before they are willing to receive a return on their investment?
Additionally, the CFO will know what documentation is needed to obtain the funding, and how to negotiate the lowest interest rate. Usually, a company’s ROI in a CFO is returned by the interest saved by savvy negotiating. After the financing is in place, the CFO will assist in designing a reporting system that reassures the bank or VC that the company is managing their risk, complying with lending guidelines, servicing the debt or the investment, and most importantly, has a strategic plan in place to pay back the loan, or sell, divest, or go public in order to pay back the VC.
The good news is that if a company has a strong Controller, part-time or interim CFO services may be all that is required to get the company from Point A to Point B, saving the company a lot of money. The most effective consultants were former CFO’s or senior leaders who have previous guided their companies through stages of company evolution that involved a variety of financing mechanisms.