Who wears the CFO hat in your business?
CFO stands for Chief Financial Officer. It’s a term used mainly in larger businesses, but is just as relevant to smaller business, in that someone has to do it irrespective of their job title.
For some the business owner or a family member may also be the CFO, but likely by default, not necessarily because that’s what they want to do, or are best skilled at.
We would recommend this is not a job for someone unless they are truly skilled at the numbers side of a business. It needs a numbers person, whether full-time or part-time.
What does a CFO do?
In a nutshell they ensure the financial management in a business runs smoothly. They ensure all aspects of the business are contributing towards the best possible financial result i.e. profit, cash flow and business value.
It begins with strategic planning including:
- Business Planning – to keep things on the right track and keep everyone focused on what needs to be done to achieve desired outcomes.
- Business Growth Strategy – including Budgets and Cash Flow Projections. Budgets help to ensure sales, costs and overheads stay on track to ensure planned profits. Cash Flow Projections help to ensure the business has enough cash to meet its commitments to avoid cash flow squeeze. This is particularly important if a business is growing, as this can cause cash squeeze if not properly planned.
- To see why, watch our video on the Cash Flow Cycle at www.youtube.com/watch?v=i6FP95_FMMA
- KPIs (Key Performance Indicators) – Setting targets for individuals or teams within a business, to ensure targets are met. These are generally called ‘Leading KPIs’ i.e. they are the measures that create the financial results.
For example to achieve a sales target, you need to calculate the activities needed to achieve the outcome… here’s an example:
- Website impressions 100,000
- Click Through Rate at .016 1,600
- Enquiry conversion rate at 20% 320
- Sales appointment rate at 30% 100
- Sales conversion rate at 30% 30
This level of activity, if achieved, would result in 30 new clients each month. It’s valuable to understand this and set these targets to ensure actions are being performed to achieve them.
- Finance sourcing – a growing business may need to borrow funds from a bank or other lender. To support finance applications lenders will want to see financial information including a Business Plan, Financial Reports, Budget, Cash Flow, plus business owner’s financial information. The more accurate and well presented this information is, the better chance the business has of securing finance. It pays for whoever is handling the application to have a good understanding of the way financiers look at things e.g. what they look for in the financial information to determine if the business is a good risk for them.
- Break-even Analysis – this is a calculation of the amount of sales required to cover overheads e.g. If your overheads are, say $30,000 per month. To work out break-even sales – take overheads of $30,000 divided by gross margin of say 60%, which gives a figure of $50,000. This is your monthly break-even sales. If your average product sale is $100, divide the total sales break-even figure of $50,000 by your average sale of $100 to come up with a figure of 500 units to breakeven. In simple language this means you have to sell 500 units per month at $100 to break-even. It’s important to know this so you can set targets to avoid losses and achieve better profit.
A business owner needs to know at least every month how the business is performing against its Budget. This includes sales, costs and overheads and profit. The problem with leaving it until the end of the financial year is that you’ve wasted the opportunity of up to 12 months to fix issues affecting profit.
- The Balance Sheet needs to be managed regularly i.e. this is where you see items such as:
- Accounts Receivable – how much is owed by customers on terms.
- Accounts Payable – how much you owe suppliers.
- Inventory held
- Work in Progress – jobs in progress not yet invoiced
- Current liabilities such as lease payments due
- Taxes due
Managing the Balance Sheet is just as vital as the Profit and Loss, because it’s common to make a profit, but run out of cash, due to issues relating to the points above.
- Inventory management reports
- How much is being held versus what’s needed for sales. There could be obsolete items that can be disposed of to create cash to purchase better selling lines.
- How profitable are each of your products, categories, customers, divisions etc.
- Job Management reports
- Where are jobs up to in terms of completion.
- How profitable was each job.
- How did the ‘actual’ compare to the ‘budget’ on each job.
- Where was there wastage on jobs to learn and avoid issue next time.
- Productivity or Labour Utilisation Rate – i.e. how many hours are you selling compared to those you’re paying for. You want service people to be working on billable activities as much as possible to achieve profit.
- KPI Reports – as per the KPIs mentioned above, they need to be reported on to ensure actions are taken to achieve targets.
- Operational efficiencies – finding ways to do things more efficiently to avoid wastage and save time and money.
- Feasibility studies – ensuring that new initiatives will deliver an improvement to the bottom line. For example new systems investment – before signing up for a new piece of equipment it pays to work out what sales can be achieved and how productive it needs to be to pay it’s way.
- Bookkeeper – recruitment, training and supervision to ensure information is being handled correctly and information is accurate, timely and can be relied upon.
The above is a general idea of what needs to be considered in the ‘big picture’ financial management of a business to ensure it’s success. If a business wants to grow it must have this side of things covered one way or another. Hope won’t ensure business success – it’s all about setting targets, managing activities and reporting regularly to ensure you’re moving in the right direction and taking corrective action quickly if not.