When to Hire a CFO (#346)
/At what stage does a business need both a controller and a CFO, as opposed to just a controller? This is not a small issue, because chief financial officers are expensive, which keeps lots of smaller businesses from hiring one. Instead, they prefer to stick with just a controller for as long as they can.
The Hiring Continuum
A good way to look at the issue is to view this as a continuum, where you have a bookkeeper on one end and a CFO on the other. The continuum is mostly driven by the sales volume of the business. A small business starts with a bookkeeper, and as the business gets more complex, its owners find that they need a controller. That’s someone who can set up and run accounting systems. So the point at which you need a controller is when the level of system complexity gets beyond what your bookkeeper can handle. Maybe that’s at a couple of million dollars of sales. So, let’s say the business keeps getting bigger, but the underlying systems are pretty much adequate for what you need. In that case, only the transaction volume has changed. That means the controller might hire one or two assistant controllers, and keeps adding accounting clerks to handle the load. There isn’t really a need for a CFO.
So, what about a more advanced level of planning, like detailed budgeting, or cash flow forecasting? And, maybe there’s a need for capital budgeting, or some advanced tax planning. These are common requirements when a business gets a little bit bigger, maybe in the range of five or ten million in sales. Well, lots of controllers handle these activities. It’s something that could end up in the job description of a controller or a CFO.
Let’s keep moving along that continuum. At some point, the business will be large enough to have hired a few hundred employees, in which case there’s going to be a human resources department. If this department is just one person, then the function probably stays within the accounting department and reports to the controller. But if the department gets a little bigger, then there starts to be a question about whether this is beyond the scope of the controller’s job. So there’s one factor driving the hiring of a CFO.
Another department that might crop up when the company gets a bit bigger is a treasury function. It might start off with cash concentration and investing activities, and maybe it takes over bank relations – especially if the organization is now dealing with several banks.
The CFO routinely oversees the treasury function, while this is usually considered out-of-bounds for the controller.
And another function is risk management. Sure, the controller could manage the company’s insurance policies, but if it becomes critical to manage risks at a more detailed level, then you’re going to need a separate risk management department – which is something that the CFO oversees. Now, there is no risk management group in lots of industries. But some industries are inherently dangerous, like mining or oil and gas drilling, so for them, risk management is a big deal. And this falls outside of the controller’s traditional area of responsibility.
So you can see where further sales growth, or the type of industry, will result in more departments that a CFO should be managing.
The Need for a CFO on the Management Team
As the company gets bigger, its organizational structure starts to firm up. You’re going to see some formal vice president positions being set up, and maybe a chief operating officer. And these folks are going to be meeting as a management team. This presents a problem for the controller, who’s usually considered to be somewhat below the level of a vice president. Initially, the company president might try to get by with the controller on the management team, but the title is just too junior, so the controller is going to be on the losing side of a lot of arguments. This is a good reason to bring in a CFO, but by itself, it’s not enough to justify the cost.
The CFO and Funding
The area that usually triggers a CFO hiring, though, is when the business has grown to the point where it needs a lot of outside funding. A controller could handle the minor stuff, like a line of credit or a modest term loan, but setting up a bond arrangement or the sale of major amounts of stock is well beyond what a controller should handle. And if the owners want to do an initial public offering, then you can bet that investors are going to demand a CFO. In the public markets, not having a CFO means you’re just not organized in a professional manner.
But the interesting thing about funding is that even a very small business might need a lot of cash – in which case it needs a CFO right away, even if it has no sales at all. For example, consider a startup pharmaceuticals company. It has a promising drug, but it’s going to take years and hundreds of millions of dollars to get the drug approved. In this case, there is no controller-to-CFO continuum. Instead, having a CFO is an accepted part of the business. In short, if you need a lot of funding, then you need a CFO.
Look at it from the perspective of investors. If they’re going to invest a pile of cash with your company, they want a point of contact who understands how the company is doing, both operationally and financially. They want someone they can meet with to discuss the capitalization of the business, and dividend payments, and going public, and the cash forecast. None of these things are what a controller is good at. Instead, the controller needs to be operating in the background, running the accounting system, producing financial reports, and feeding information to the CFO, who’s better at representing the company with the investment community.
How to Make the Hiring Decision
So, what do we have here? Your hiring decision for a CFO could simply be that the company has reached a certain triggering sales level, but that’s not really good enough. The decision is more nuanced than that. Ideally, the CFO hiring comes after the company has added some departments that traditionally report to a CFO, not the controller. The hiring may need to take place when the controller is on the management team, but doesn’t have enough seniority to get support for his or her decisions. But the big one is that you need a CFO when there’s an ongoing need to obtain debt or equity for the business.
This is still not a black-and-white decision. Lots of businesses operate in a gray area where several of these conditions are present. If there’s no CFO yet, then the controller is stretched too thin, and is so swamped that work isn’t getting done. So a reasonable way to make the CFO hiring decision is to just watch your controller. If the person is competent, but completely buried with work, then make inquiries. Will hiring more accounting staff fix the problem, or are the underlying conditions the ones that I’ve already mentioned? If the latter is the case, then hire a CFO.