At a recent breakfast meeting, my tablemate posed an interesting question. He asked, “When is the right time to hire a CFO?” He was told that when you reach a certain revenue level, say $5M, it’s time to get a CFO.
It made me think.
When exactly is the right time for a CFO? And is revenue the right trigger point?
My experience has taught me that revenue size is just one factor. The need for a seasoned CFO is actually a function of two variables: business complexity and financial implications. Think of it as a two-axis chart, business complexity on the x, financial implications on the y. The higher your business complexity and the higher the financial implications the more valuable and necessary financial guidance becomes. If you are in the upper right quadrant, you need a CFO, let’s call this the CFO Zone. See the below chart.
Signs that your business is growing in complexity
How can you tell when you’ve reached a high enough level of complexity to warrant help? The symptom I most encounter is cash flow shortages. You make business decisions based on how much cash is in the bank, which works, for a while. Then, payroll or a vendor payment is at risk, the cash is coming, but the timing is off. Or, an investment is made when cash reserves were high, only to discover that an alternative investment was better, but it’s too late. Quite often this is a result of a short planning horizon. Your business has grown to the point that planning three to six-months in the future is inadequate. Your business needs a long-term view, but there is no system in place. As the business grows, so does the number of constituents. The need to provide forwarding looking financials and a correlating strategy are even more important. Perhaps you’ve added investors, banks, employees, vendors or a Board of Directors. An increased network of dependents warrants better visibility, accountability and reporting.
Signs that the financial implications are high
Even though the business grows in complexity, the dollars may still be small. When are the dollars big enough to warrant help? Contrary to the thesis presented by my breakfast companion there is no one size fits all number. In this situation, I actually do think it makes sense to look at the bank accounts. If the financial implications of the decisions are more than one to two months of the average monthly bank balance, the stakes are getting high. I also think a “gut” check makes sense. Ask yourself, are these decisions causing anxiety, among the owners or the employees, if the answer is “yes”, then it’s probably getting big enough. In accounting, the term “materiality” is used to define the cut level of financial importance. Determine your materiality level, and once you cross it, it’s time for a CFO.
If both these measures are reasonably high, you’re in the CFO zone. Don’t fall into the trap of believing a CFO is too great an investment or that you have to hire a full time CFO to get the benefits. At my firm, for example, I tailor my practice to the needs and budgets of small businesses. After taking the time to get to know you and your business, I will customize the most effective suite of services to address your keys areas. With my partnership, clients are provided a level of mastery that is rare and invaluable, making them proficient leaders and more competitive in their industry. If you think you are in the zone, or will be soon, let’s take the first step towards building a relationship.