Financial Clarity for Entrepreneurs: How a Fractional CFO Can Help

This is a really common scenario in a growing business. However, it’s actually very rare that these business decisions need to be a leap of faith. Sure, you never really know if that new hire is going to work out. But their salary, that’s just numbers on a page, and they can be forecasted. 

If you were to sum up the value of a Chief Financial Officer (CFO) in any business using just one word, that word would be ‘clarity’. 

How do CFOs Bring Financial Clarity? 

As we’ve mentioned many times before, the key difference business owners see when they start working with a CFO is the shift of the burden of financial strategy. It’s the same if you bring in a CTO or CMO. When you do, you hand over the responsibility for the tech stack strategy and implementation or the marketing strategy. A good CFO will take the financial strategy right off your hands. 

I’m sure most business owners will breathe a sigh of relief at this point. However, the key question is how do they go about it. After all, it’s only a good thing if the strategy your CFO comes up with is financially sound, right? 

There’s actually a long list of the methods that are likely to be utilized by a CFO. These range from cash flow management to detailed financial forecasts and metrics. However, for the purposes of this article, we’re going to focus on only the three most important: 

1. Budgeting and Forecasting

These are the forward-looking tools of the functional CFO and the most useful to business owners. You can’t expect to improve sales, profit and cash flow without a plan to get there. 

Budgeting allows businesses to know that they are always operating within their means, and when they are produced by a CFO, the business owners can rest assured that they are based on solid foundations. In turn, this also makes it far easier for other managers in the business to operate their departments effectively and efficiently, as they have very clear spending boundaries they have to operate within. 

Most business owners get excited about forecasting. Most have done it at some point, but it takes a long time and the data used is not always correct.  It’s also not complete. Forecasting a profit & loss statement is relatively straightforward but forecasting a balance sheet to determine your future cash balance is much more complex.

A professionally produced forecast based on a clear and comprehensive analysis of the overall business allows businesses to spend ahead of the curve. This speeds up growth and helps quantify the actions within the business beyond what this month’s income has been. 

2. Comprehensive Financial Reporting

Most business owners will do some form of financial reporting. However, this may only be quarterly or, in most cases, annually. Though this does meet the minimum requirement, it’s not much use as a functional tool in the business. 

Regular, accurate, and timely reporting give the CFO and business owners the key information they need to always know the business's financial position. While this includes the three financial statements, it should also include other financial data.  For example, sales trends over time or a listing of your top 10 expenses is useful to detect patterns over time. 

Financial reports should be produced at least monthly.  When they are done more regularly, they alert everyone to relevant changes in financial status or emerging trends so that they can take more timely action rather than waiting for the year-end. 

3. Cash Flow Management

Cash flow forecasting and management are among the most common tools in the CFO's toolkit. These reports help the CFO understand and communicate the business's cash flow at any given time. Aside from helping to ensure that the business can always meet its obligations, they also help maintain liquidity and investment planning and, most importantly, give the business owners peace of mind over the stability of the business. 

As we mentioned, this is a very slimmed-down list. Still, hopefully, you can already see the value of a professional CFO’s toolkit relative to what most businesses have in place. We haven’t even begun to talk about technology and automation.  

What Strategies Do CFOs Use?  

We’ve already delved into some of the tools that CFOs use. However, as with any skilled practitioner, the value comes from how they mobilize those tools, which strategies do they use and, most importantly, what is the value of these strategies to your business. 

As with the tools, if we were to discuss all the strategies we typically employ in our role as CFO this article would be more like a book. The full range starts at the level of financial forecasting and customized reporting and extends all the way through to workshops, seminars and the delivery of financial literacy programs.

As we have done above, we’ll just focus on some of the most common and ‘needle moving’ strategies we typically use to help business in our capacity as Fractional CFO.  

1. Leverage Data for Decision Making

Most businesses we work with will already have most of the data they need to make the decisions they need to make. However, it’s usually hidden, inaccurate or inaccessible. 

Our first job is to use the tools mentioned earlier to collect comprehensive data from within the business. This doesn’t just mean financial data. We’ll be looking at everything from sales and marketing right through to operations and customer feedback. 

Once we’ve gathered all of this information, it’s time to analyze it. As with any data, in its raw format, it can mask much of the detail that is truly valuable to a business. By looking at more advanced analytics, we are able to extract far more meaningful insights. 

Next, and this is the part most accountants miss, we need to communicate the insights simply and effectively This will usually involve a mix of dashboards and other purpose-built reporting tools, and we’ll use these to communicate the key insights and any scenarios, forecasts or trends that we are seeing. 

Benefits 

The main benefits of utilizing this data-focused strategy are improved decision-making, proactive management and streamlined operational efficiency across the business. 

2. Focus on Value Creation

In the previous section, we made the point that a CFO must look beyond the financial data in the business. In order to give strategic financial advice, a CFO needs to be able to identify and scale the areas of the business that create the most value. 

The challenge is that to identify these value centers the non-financial data (e.g. customer satisfaction) needs to be attributed to tangible financial outcomes. It’s often challenging, but a skilled  Fractional CFO will be able to bind operational data to financial performance, to demonstrate to the business owners where to focus their efforts to grow the business.

Benefits 

Focusing on value creation usually leads to increased profitability, improved competitive advantage, and more sustainable business growth. 

3. Risk Management and Mitigation

Though it’s perhaps not as forward-thinking or exciting as the potential benefits of increasing profitability or spending power, risk mitigation has incredible value for almost all businesses. Of course, we’d all rather focus on creating more good things, rather than on avoiding bad things from happening, but the truth is that any business needs both in order to thrive. 

Though the main tangible outcome of any risk management strategy is successfully avoiding anything that will significantly harm the business, its true value is also in the peace of mind that it can give the business owners and all major stakeholders. 

When operating in our Fractional CFO role, we will employ several proactive risk management strategies. In simple terms, these will incorporate risk identification, assessment, and mitigation planning into one ongoing, repeatable process. 

Benefits 

The main benefits of proactively monitoring and managing the key risks in the business are improved stability in the business, preparedness for unexpected events and increased confidence across the board, not just with the business owners and key stakeholders, but with your employees and customers too. 

Conclusion

Though it has only been a narrow glimpse into the benefits of having increased financial clarity in your business and the value of a CFO, we hope this has illustrated the scope of the value that can be gleaned from a more strategic approach to your business finances. 

As with any strategic-level input into your business, simply applying some structured thought, processes, and expert oversight to your business data can yield truly transformational results that are likely to impact your business for years to come. 

If you are interested in dipping your toe into the world of strategic financial advice, why not consider our advanced financial reporting service; FinSight?