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Welcome Steve Hollis
Welcome to Focus CFO
Steve is an Area President at FocusCFO and has more than 25 years of experience. He has extensive experience as a banker, and he has extensive experience working with entrepreneurs, and was one himself! His experience includes finance, product development, manufacturing, marketing and strategy. Steve, his wife and two sons live in Pittsburgh, PA.
The CFO is responsible for effective and efficient financial operations including accounting, financial reporting, cash management, budgeting, maintaining controls and issues such as capital structure, investor relations, and financing. The CFO is also involved with strategic planning and financial analysis related to mergers, acquisitions, and divestitures, as well as providing expert financial and operational guidance to business owners to maximize cash flow, minimize business risk, and increase the value of the enterprise.
This differs from the services traditionally provided by the external CPA who focuses on audits, reviews, taxes, and compliance work. Although valuable and very necessary, this work is more “backward-looking” in nature ensuring that past events are correctly reported and accounted for. The CFO however, is more focused on the “forward-looking” aspects of the finances, to help chart the course and ultimately navigate the business to success.
Many small and mid-sized organizations employ a bookkeeper or controller who maintains the financial system and records transactions in an accurately and timely manner. The CPA produces the tax returns and some basic performance analysis quarterly and at year-end. However, this leaves a significant gap in terms of the information and management reporting available. Business owners and entrepreneurs may lack the critical financial information needed for informed decision making; and for external purposes such as presentations to lenders or investors.
The answer is to bring in a qualified CFO to work closely with the CEO or business owner. The CFO must embrace the vision, but also translate this into the operational and financial framework to achieve success. Dealing effectively with stakeholders is another key function. This includes managing expectations, presenting financial information, and understanding the varied and legitimate interests of owners, creditors, and lenders.
A full-time CFO may be a luxury few small businesses can justify. A feasible and recommended alternative to a full-time resource is a fractional CFO. This has the advantage of bringing a senior-level financial expert to the table but at a fraction the cost of a full-time resource. A fractional arrangement can work well indefinitely, and right up until a full-time CFO is needed.
Key advantages of hiring a fractional CFO include:
1. Improved Decision Making
By basing key business decisions on relevant and accurate financial information, the business owner can avoid costly mistakes and reduce the risk of loss. Key decisions include those about financing the business, expansion or downsizing, whether to enter a new market or produce a new product; make or buy decisions and capital investments, to name a few.
2. Better Financial Information
Includes producing accurate and timely financial statements, management reports and projections, forecasts, budgets and cost models that are all based in economic reality. Such tools enhance management insight and promote proactive management. By identifying the levers that drive performance they can be calibrated to maximize efficiency, lower costs and optimize profit and cash flow.
3. Improved Internal Controls
Appropriate financial controls can provide many benefits including accurate financial statements, improved control of company assets and the reduced risk of fraud.
By utilizing a fractional CFO, support levels can be varied and customized to the evolving needs of the organization with the CFO’s work schedule tailored as such. Increased support can be provided at critical times reverting to a more consistent level when appropriate.
A fractional CFO can bring substantially all the benefits in terms of skills and knowledge of a full- time resource, at significantly less cost.
6. On-Site Support
Services are provided on-site which is convenient for meetings and to perform critical work. The CFO becomes embedded and acts as part of the management team. When not on-site, the CFO can be ‘virtually’ available via modern communication tools.
7. Specialist Skillset
A properly qualified CFO is a business professional with relevant experience within various commercial environments. This important distinction between a career CFO and the CPA is key. The CFO can solve many financial and business problems in short order, due to having had experience in such matters and the ability to quickly identify and address issues and employ best practices and techniques.
8. Increased Productivity
Hiring a CFO to perform the financial and administrative functions of the business, frees up the business owner so they can focus on other value-enhancing aspects of the business. In addition to bringing financial and accounting expertise – a CFO can deal with most administrative areas such as human resources, facilities, insurances, legal and compliance, as well as stakeholder relations.
9. Greater Perspective
A CFO can improve the decision-making process by bringing facts, solid numbers, and asking the right questions. Another benefit to the business owner is the fresh perspective and insights brought by the CFO. This can have the added effect of making life a little less lonely for the entrepreneur. The CFO can be a sounding board and trusted advisor for new ideas and initiatives.
10. Stakeholder Confidence
Stakeholders such as investors, lenders and creditors react positively to the knowledge that a professional CFO has been retained. This takes on an added degree of importance when looking for outside investment, debt financing or positioning the company for sale.
To summarize, a fractional CFO brings all the benefits of a full-time resource, but at a fraction the cost. They work an agreed upon amount of time, and on an ongoing basis. The benefits are myriad, and range from improved reporting and decision-making, clearer insight into the business for planning and forecasting, and stronger financial management and controls. Perhaps the biggest benefit however, is how the CEO can transfer the financial and administrative burden to the CFO, and thus free themselves to work on other critical aspects of the business.
Martin Cobb is an Area President for FocusCFO based out of Ann Arbor, MI.
Business owners, CEOs and management need accurate and relevant financial and operating information to make informed decisions that are based on facts and economic reality. Decisions abound concerning the allocation of capital and other scarce resources, for optimum return and to create value. Information is required for most management decisions to evaluate opportunities and quantify risk.
• Capital allocation
• Capital investment ranking
• Make or buy decisions
• Adding or dropping products/lines
• Purchasing decisions
• Performance measurement
• Strategic planning
• Expansion or divestiture
The Right Data
Management Accounting is distinct from financial accounting in that financial accounting is primarily done for external users such as stockholders, banks and the IRS. Financial accounting follows a set of rules called GAAP and is often prepared on a monthly, quarterly or annual basis. It tends to be more backward looking in nature, ensuring that transactions are accurately and that financial statements are complete and presented fairly.
Management accounting is used to provide internal management with information that can be leveraged for decision making and to better manage the business. Information is derived from financial system and operating systems and then analyzed, (often reformatted) and presented. Management accounting gives more weight to economics, statistics and behavioral aspects of the business – being part art and part science. It benefits from knowledge and insight about the specific business, and can also utilize quantitative and analytical techniques. Management reports may be prepared on a regular basis or as needed for decision support.
It is important to identify and utilize the most relevant information in any decision-making activity. Financial information from the accounting system is often used as a starting point. Although such information may be useful information, it is not always suitable in its original form. Only relevant revenue and cost information should be included and these often differ between alternate decision scenarios. If the same under all scenarios, they should be excluded for decision making. Sometimes these relevant costs are referred to as incremental revenues and costs, meaning that they vary based on the decision paths under consideration.
Allocated amounts found in financial records must always be scrutinized carefully. Overheads and other expenses are often allocated on an arbitrary basis using revenue, machine hours, or labor hours as the basis for allocation. A better method of allocating expenses utilizes an activity-based approach, in an attempt to more accurately allocate expenses based upon the activities that actually drive them.
Other items that are often found in financial information that may not be relevant for decision making include retroactive accounting adjustments, one time or non-recurring expenses, expenses to support growth, sunk costs, depreciation expense, and allocated fixed costs. These must be removed or adjusted for, before the analysis takes place, as they distort the view of economic reality that is essential for sound decision making.
Run The Numbers
Once the relevant information is obtained there are many techniques and approaches available. Breakeven analysis, activity-based costing, capital investment appraisal techniques, discounted cash flow, flexible budgeting, contribution margin analysis – to name a few. It is important that the right technique be used in the appropriate circumstances. Sometimes more than one technique is applied.
Models are often used to simulate and aid in the quest to accurately model reality. A sound decision model reflects the economics of the organization and maps the relationships between key variables and drivers of the business. Inputs include market forces, prices, customers, revenue, operating expenses and capital expenditures, risk and strategy. For any given construct of inputs, the output generated should be reliable enough for an informed decision to follow.
Perfect accuracy is not the goal here. More important is to validate the relationships between the variables and not to inadvertently omit a key component. The purpose of modeling and other analytical techniques is to make a sound and informed decision. This is a situation where being approximately right is always preferable to being precisely wrong.
Ultimately, the goal is to identify and isolate the most accurate and relevant information for the decision under consideration. Information must be put into context as critical decisions have a long-term impact to the business. Uninformed decisions and those based on inaccurate or incomplete information, will ultimately lead to lost opportunity, increased risk and lower cash flow and profits. A CFO or other professional, properly versed in decision support analysis techniques can be of immense help. Poor decisions can make the difference between success and failure, of projects, ventures, and sometimes even entire organizations.