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What to Expect from a Part-Time CFO

A recent article called “What to Expect from a Part-Time CFO” in Entrepreneur magazine provided a useful summary of why a small business or startup may want to consider a part-time CFO or a virtual CFO.

For any small business or startup to grow successfully and profitable into a mid-sized company and beyond, the right talent and leadership needs to be in place to help the business owner or CEO manage the increasingly complex enterprise.

A CFO is clearly needed to help the CEO or business owner balance how to grow sales, reduce costs, and increase cash flow. However, many small businesses and startups are below the size where they need (or can afford) a full-time CFO. A growing number of small companies are realizing that a part-time CFO can really help to accelerate profitable growth:

“Companies with under $10 million in annual revenue can seldom justify a full-time chief financial officer (CFO). This doesn’t mean they don’t have growth goals to take them to the next level, or problems and issues requiring the attention of a senior financial executive. It’s just that they don’t have a need for top-level talent every day. That is precisely why more companies are engaging with part-time CFOs.”

Most business owners and startup CEOs are consumed with an overwhelming number of daily operational issues. An outside, part-time CFO can provide a powerful impact helping to shine a spotlight on the key, strategic and operational financial drivers of the business.

The article highlights 4 key areas of what to expect from a part-time CFO:

“1. Get to know you and your business.”

Trust is a crucial success factor that must exist between a business owner / CEO and a CFO. The financial data can help tell a CFO what the results are in a business as well as potential causes of the results. However, without trust between the business owner / CEO and CFO, effective improvement of the business will be difficult. Long-lasting improvement in any area like sales, expenses, labor, marketing, profits, or cash flow will be very difficult without a this strong foundation.

“2. Understand your break even point”

One of the first things a good CFO will focus on is what the breakeven point is for a business. This is especially important for a struggling business or a new business or startup.

“The amount of units -- products or hours of service -- you have to sell to cover your expenses is your break even point. Although breakeven points are central to a business plan, not many company owners pay attention to it. They don’t understand the formula to calculate at what point they have enough sales to cover their expenses, after which their sales becomes profit.”

This powerful, basic business concept is often lost in the rush to grow sales at any cost. This dangerous phenomenon is particularly true here in the San Francisco Bay Area (and especially in Silicon Valley) as there is an emotional premium placed on a “growth at all costs” mentality.

“3. Narrow the gap between receivables and payables.”

Another key area that a good CFO will focus on is trying to improvement Working Capital. For many businesses, the key drivers of Working Capital are based on how long it takes for the business to get paid by its customers (i.e., Accounts Receivable) and how long it takes to pay its vendors (i.e., Accounts Payable).

“If a business is collecting receivables in 70 days and paying vendors in 30, that’s a wide gap. The part-time CFO will take action by encouraging the company to follow up on and bring down receivable accounts to 45 days, while stretching their vendors to perhaps 40+ days.”

This kind of analysis and improvement is often lost in the daily hustle and bustle of running a small business. However, the positive impact on cash flow can be significant and game-changing.

“4. Improve your margins”

Many business owners / CEOs have an imprecise definition of what their margins are. For example, there is a significant difference between Gross Margin and Operating Margins. In addition, it’s crucial to understand how Variable Costs move in comparison to Fixed Costs based on a certain level of sales. A good CFO can really help a CEO determine and prioritize. on where to focus on in terms of improving profit margins.

“Understanding the implications of your profit margins is grossly underestimated in companies. Only an experienced “financial guy” can calculate and help you understand the significance of the numbers. For example, assume that you have $10 million in annual sales and you can improve your margin by 1 percent. That one percent is worth $100,000. So by improving the margin by as little as 1 percent, you can add $100,000 to your bottom-line income.

“Managing your profits is undertaken by the part-time CFO. They watch your margins, manage them and educate other top level executives on what it means. The surplus amount can then either be used for the business needs or invested elsewhere if not needed.”

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