When Should an Entrepreneur Hire a CFO?

When Should an Entrepreneur Hire a CFO?
December 9, 2011
By Kimberly Danek
From Entrepreneurweek.com

Not every small business or company requires the services for a Chief Finance Officer or CFO, and as such, it is important that an entrepreneur knows the right time to hire one. To hire or not to hire a full-time CFO is dependent on many factors.

In general, entrepreneurs in a startup company outsource accounting services from other companies. These companies provide services often limited to taxes, and if a small business has employees, they also do payroll as well. However, as a small business grows, its financial reporting needs become more complicated. When this happens, an entrepreneur may decide to hire a full-time employee to handle the company’s finances i.e. bank accounts and accounting ledgers. Often, the decision to hire a chief finance officer goes beyond accounting and taxes and is usually based on a company’s need for a financial strategy such as conducting market analysis, obtaining credit and sourcing capital.

Typical responsibilities of a CFO involve financial analysis, budgeting and accounting. A CFO may also perform duties associated with handling insurance, real estate, receivables, banking and legal issues. One of the telltale signs that a company is in need of a financial chief is when the Chief Executive Officer or CEO is unable to focus on important activities that generate revenues because he is handling the financial aspect of the business. A competent CFO can give a significant amount of support in organizing finances and tracking performance. He can also prevent a startup company from facing problems associated with growth. He has strategic involvement on matters such as debt and equity, and on how to sustain the company’s present and future growth.

When a Company has Enough Revenue to Justify Salary Expense of a CFO

Regardless of the size, any company can benefit from the services of a CFO; it is just a matter of having the funds to pay for a CFO’s six-figure salary. A CFO’s salary is affordable to companies who earn higher revenues. This is one of the reasons the necessity to hire a CFO does not usually happen until a business starts earning $10 to $20 million in revenue. Companies who do not have enough money to pay a full-time CFO can consider hiring a consultant part time.

When Dealing with Investors is a Necessity

Small businesses in the threshold of growth have to eventually decide to seek investors to bring in capital. These companies need the assistance of a CFO to liaise with the investors and keep them up-to-date with the financial standing of the company. CFOs are often viewed by equity firms as the go-to person for information on how the business is performing. As such, he has to have an excellent understanding of the business operations, and he should be able to communicate information excellently, both in words and in writing.

Part of a CFO’s function is in forecasting performance, which is critical for companies who plan on pursuing IPO or initial public offering as a means to raise funds. Before a company goes public, it is critical that the control systems and reporting will meet the standards. Another function of a CFO is to establish relationships with investment analysts and bankers.

When Planning on an Acquisition or on Being Acquired

A finance officer is valuable to companies who are planning to engage in an acquisition. A CFO is often tasked to evaluate the market for potential acquisitions or acquirers and to see to it that the company’s financial records are ready to go through a due diligence process. He is also critical in administering the acquisition process, and seeing it through from the beginning to the end, from dealing with the CFO of the other company to interacting with the mergers and acquisitions team.

Kimberly is a researcher, writer, business woman, and contributor at entrepreneurweek.com blog network.  She may be reached at eweekcomauthor@gmail.com