What is the Value of a CFO to a Founder?

The number of business tools, financial products, regulations, and obligations has increased immeasurably. Though the core principles of business have remained largely unchanged, executing these principles is far from straightforward. 

What this means for business owners is that not only has the need for a CFO changed, but so has the role of that CFO. 

In this article, we’ll examine the role that the modern CFO should play in your business and how they add value to you. 

The Evolving Role of the CFO

CFOs have evolved from great accountants to strategic leaders, using the financial function to power growth. You could argue that their title should have changed - but that’s a topic for another article. 

Traditionally, the CFO would manage all aspects of financial management within a company, including tasks such as bookkeeping and compliance. If they were brought into strategic conversations around finance within the company, this was usually at the request of the business owners and led by them rather than the CFO. 

Now, the company's CFO would only be involved in bookkeeping if that person was unavailable - assuming that a person was not replaced with an automated solution. 

Now, the role of the CFO is much more strategic. They spend more time on financial planning &  analysis, risk management, operational efficiency, and advising management on improving the company’s valuation. Perhaps more significant is the CFO's responsibility in a modern business. Over the years, the responsibility for all financial matters has moved from being with the founders and senior leadership team to the CFO. This means that the CFO will have key input into big financial decisions within the business and will feature centrally in all board-level conversations. 

Areas of CFO Value

For a modern business, the value gained through utilizing a good CFO (Fractional, Virtual, or In-House) will depend mainly on the nature, phase, and industry of that business. For example, a 10-year-old SaaS business preparing for a sale will have very different requirements from a multi-generational family law firm that wants to expand into five new cities over the next three years. 

However, what we do see is that there are four main areas of value that almost all businesses will rely on: 

1. Strategic Planning

Strategic planning and forecasting are arguably the greatest short-term value a CFO can bring to a business. The reason for this is the leverage that expert knowledge can give in this area. 

In its simplest form, financial forecasting, analysis, and modeling is about pattern recognition. In so many cases, there is a key pattern that business owners and even senior accountants have missed but which a CFO can identify and optimize. 

For example, sales may increase, but profitability may not.  A CFO would dig deeper into the data and may uncover that new customers were not generating enough lifetime value to justify their cost of acquisition.  This is a structural issue that would have to be corrected with higher pricing, better marketing, or more efficient product delivery.  Only a CFO would have the data to “connect the dots.” They would know your business well enough to recommend a course of action and advise you on the tradoffs of each one.

A CFO will bring more advanced skill sets and knowledge to these types of problems, which will allow them to uncover these opportunities more quickly and easily. When you are choosing your CFO, make sure you look for advanced data analysis skills, experience in more advanced data analytics software, and expertise using generative and analytical artificial intelligence.

2. Financial Reporting 

All businesses will have some form of financial reporting in place. However, the true value of it only comes when it is accurate, focuses on the right things, and is timely. This last point is the most critical and undervalued element. 

In our experience, even when businesses incorporate the correct level of reporting, they typically receive and analyze those reports too late. In so many cases, a shorter reporting cycle would have allowed businesses to spot trends earlier and make data-informed decisions with enough time to take action, which would help avert losses or facilitate faster and greater growth. 

A good example of this would be an analysis to determine whether a business was ready to make a hire. Most businesses would operate on ‘after the fact’ reporting that might tell them they made enough profit in Q1 and Q2 to hire a business development person halfway through Q3. 

However, a proper forecast at the end of Q4 of the previous year would have forecasted the profit and given the business the confidence to hire that person in Q1, giving a whole six months of additional business development capacity and the associated growth. 

The final important point related to financial reporting is that, when done well, it creates a culture of trust and pragmatism at the board level, which allows for much better strategic conversations. Over time, the business value of this can be huge. 

3. Risk Management

This is an area where CFO-level input is essential and one in which CFOs didn’t get involved a few decades ago. Now, the CFO is the front line of defense in identifying and mitigating risks within the business. Not only does this allow you to have greater control and peace of mind, but it also makes dealing with these risks when they present themselves much less costly. 

The most significant benefit of a robust financial risk management resource is that it allows business continuity. Continuity has significant benefits for cash flow, but the greater benefit is when a business comes to be sold. If you can show a prospective buyer that you successfully identified and managed risks, this is likely to add to your valuation when you come to sell. 

4. Operational Efficiencies

This is where businesses see the most tangible benefit of having a CFO. It is also the area that has changed most in the CFO role over the last few decades. 

The modern CFO will have a wide array of tools and advanced data analytics techniques to help them find these critical inefficiencies and model for the efficiencies that can be gained if they are fixed. 

The benefits this can have on an organization, even after just a few months of working with a CFO, can be very significant.  

Quantifying CFO Value

As with any other area of the business where we discuss value, it needs to be quantified. When assessing the value of a CFO, you face problems similar to those of other departments (marketing, for example) in that some areas of value are easier to quantify than others. 

In a similar vein, assessing CFO value involves determining the correct KPIs to measure and monitor. If you focus solely on the quantitative, you risk neglecting some of the most important areas in which CFOs can add value (confidence, for example). Conversely, if you focus too strongly on qualitative metrics, you risk missing out on benefits to your bottom-line revenue. 

So, what should you be measuring? 

Quantitative Metrics

The Key Three objectives for any business owner are increased sales, profit, and cash. Beyond this, there may be metrics specific to the business's particular goals. For example, has the CFO recently helped position the business so that the valuation has increased? If so, by how much? 

Qualitative Metrics

Qualitative metrics are much harder to measure than quantitative. This gets to the style of the CFO. For example, does the CFO present tradeoffs of different recommendations they make? Do they consider your vision for the company and the emotional impact a decision may have on you? 

Beyond this, it’s important to get an accurate gauge of the value they deliver throughout the organization. Speak with others in your organization and outside (bankers, investors) for feedback on your CFO. Ask specifically for areas where they felt your CFO added value. 

Monitoring 

How often should you evaluate your CFO’s value? There is no set process you can follow.  Your business's particular nature, goals, and industry will significantly impact how and how often you measure the value your CFO brings to the organization. 

It typically takes a quarter or two for the new CFO to make an impact and for the organization to settle into its new financial rhythm.  In almost all cases, the first quarter will be all about them getting to know the inner workings of your business, including the people. This won’t just be them looking at the books but looking at how the business functions on a day-to-day basis. 

Give them the time and space to complete this important phase before you start setting financial metrics for them to hit. Of course, have a clear brief to align your expectations, but make sure that brief gives them space to take the time they need to evaluate your business properly before they start making changes.

Conclusion

Hopefully, this article has begun to introduce the many areas in which a CFO can deliver value and how that value can be measured. This is only an introduction, and every business situation will vary (particularly based on industry, business goals, and size).  Ultimately it will allow you to move forward with any CFO engagement with greater confidence and knowledge.