Risk is inherent in every business. Some risks are worth taking. Some must be guarded against at all costs.
But as a business owner, how do you know the difference? Do you understand what your business can withstand when it comes to risk and, more importantly, what it can’t?
If the answer to any of these questions is a reluctant “no,” take solace in the fact that you are not alone. Many business owners, particularly those who lead small to midsize businesses, rely on gut instinct to inform their approach to risk management. After all, those instincts have very often led your business to where it is today.
At a certain point, however, the growth and success of your business requires more than instinct. You need data, experts, and insights to understand the risks inherent in your business and design a strategic plan to either seize them or mitigate them. Often, adding a chief financial officer (either fractional or full-time) to your team can guide you through the risk management process and arm you with the information, perspective, and data-based guidance to navigate the challenges and opportunities your business may face.
To understand the value a CFO can add to your risk management process, consider the 6 questions below. If you can’t answer them, rest assured that a CFO most certainly can!
The first step in solving any problem is understanding what, exactly, the problem is. The same is true when it comes to financial risk. And this is one of many areas in which CFOs can play a powerful role in your business.
A strong CFO will take all necessary steps to understand both the details and the big picture of your company’s financials. They will learn how the business functions and where its strengths and weaknesses lie. They will analyze the current and future market conditions to understand the potential for future opportunities and concerns. All this will arm them with an in-depth understanding of your business and its financial risks. Then, they can begin the process of designing a strategic roadmap that manages that risk efficiently and effectively.
Many small to midsize business owners rely on an accountant or a controller to manage their financial records, trusting that the experts they’ve hired have their best interests at heart. And most of the time, they do. However, these professionals are not always focused on the big picture, and they may not understand the larger impact of having records that don’t abide by the highest standards of transparency and accuracy.
A good CFO, however, will understand the value of superior record keeping, both for the future of the business and to safeguard against any potential legal or regulatory action. Transparent, accurate records are a form of protection, and a CFO will prioritize a process that affords you the highest level of confidence and security.
For businesses, understanding your risk tolerance level is essential for effective decision-making. If you know what your business can bear – and more importantly, what it can’t – you can structure your decision-making process accordingly and ensure you make choices that strengthen and protect your company over the long-term.
The problem is, understanding a company’s risk tolerance level is not straightforward. While you may be able to easily understand revenues and losses, risk tolerance is based on a variety of metrics, about which a strong CFO will have in-depth and valuable knowledge. They can help you understand what your business can tolerate, and they can help you adjust your strategic planning to accommodate that.
When businesses take loans, they expect to make the necessary payments with the requisite amount of interest. But oftentimes, lenders require other commitments, such as providing financial updates, meeting certain financial obligations, or avoiding certain actions, such as taking on additional debt or adding capital investments. These terms and conditions are commonly referred to as covenants, and breaking them comes with significant risk, potentially resulting in default, financial penalties, or forced early repayment.
Covenants are important, but they can also be complicated. A CFO makes it their job to understand not only the status of a company’s debt but also the commitments that come with it. They will ensure you are staying within the guardrails of your loan agreement, that you submit any required reporting on time and with superior accuracy, and that you avoid taking actions that could land you and your organization on the wrong side of your lender.
As an owner, you want to protect your business from risk, but you also want to ensure you don’t over-invest on insurance policies and protections you don’t need. A good insurance broker can quickly convince you that more is always better, but that maxim isn’t always true.
A CFO, however, is not incentivized to sell you anything. Instead, their goal is the same as yours: to help your business grow. To that end, they can help you analyze your business, as well as any local, state, and federal legal requirements, to understand what type of insurance and how much you need to cover your business in the event of property damage, cyberattacks, liability claims, or other issues.
A contingency is a situation or set of circumstances that may result in a gain or loss for a company and that is dependent on a future event. There are both gain and loss contingencies – the former creating an inflow of funds and the latter resulting in a charge or expense. Given that these contingencies are dependent on events that have not yet occurred, it can be challenging to understand what a company is required to report – and how it should prepare for an uncertain future.
A CFO is trained to understand the reporting requirements and becomes so well-versed in your business, that they can design a plan to ensure both losses and gains will be well-managed, should either come to pass. CFOs cannot predict the future, but they can ensure you’re prepared for both the best and the worst to come.
At the end of the day, CFOs understand that the world of business changes fast – not just on a large-scale, economic level, but in the day-to-day operations of small to midsize businesses. And they have the financial skills and expertise to help businesses navigate these changes, giving them a stronger chance at financial stability and success over the long term.
At FocusCFO, we built our business to provide small to midsize businesses with the financial expertise and guidance they need at a fraction of the cost of a full-time CFO. Schedule a consult today to find how we can support your business.