The ROI on a CFO

When I was in business school, I thought companies were efficient, profit maximizing machines. Post-MBA +5 years, when I joined the family manufacturing business, I saw reality was quite different, and my journey began. Over the years, with the support of our owners, smart leadership and dedicated management, we grew sales and profitability considerably, leading to a well-timed exit. A key ingredient to our success, but not the only ingredient, was strong financial management which supported good decisions over several years.

As CFO, I learned and lived that cash is the number one priority (this is a not new idea), but I also always made sure the business got a good return on their investment (ROI) in me. Higher profit, better investment decisions and good asset management is one part, but the other is setting the business on a course toward long-term sustainable profitability. I learned first-hand that the little strategic nudges made today, over the long-term, can be incredibly beneficial. I use the example of a ship on the ocean, course correcting one degree, and over thousands of miles, ending up in an entirely different, and better, port!

Below are a few areas I like to focus on. While my background is in lower middle-market manufacturing, I would expect these MUST DO’s can be applied to your company too. As you will see, when done right, they are the reasons why businesses invest in a seasoned CFO.

1. Stronger Financial Reporting and Metrics for Better Decision-Making

Financial data is a tool for strategic decision-making, and it starts with an accurate and timely financial package, with analysis. This work not only becomes the “story” as told by the numbers, but it also reveals opportunities for improvement. One way to find opportunities is to include and monitor metrics which provide a quick look at areas that are important to the business and may need attention. Other ways are listed below. Once you get fast an accurate results, a CFO should be able to present everything in a meaningful and understandable way, to facilitate discussion about where we are headed and what needs to happen next. Regurgitating the past is important, but looking ahead is critical.

2. Enhanced Financial Forecasting and Analysis for Growth

A good CFO can provide detailed financial models, in-depth analysis, and projections for various scenarios, including an outlook for the rest of the year. This work will enable you to make better-informed decisions about expansion, hiring, and investments. Mostly this work will be ad hoc models for a particular task, but it can include a rigorous capital expenditure process to ensure a strong return on PP&E. Other examples of modeling I’ve found to be critical to improving margins and cash are deep-dive analyses related to customer profitability, product costing, product line profitability, overhead absorption and inventory management. The outcomes for every one of these projects are new opportunities to be stronger. These are not one-and-done projects but should be updated with some regularity since almost nothing stays the same. Lastly, when ready, your CFO can help implement a budget process to connect with strategic planning (another MUST DO). [Aside: I know budgets take work, and many small businesses who have a good gut sense of costs while driving sales, may take a pass on it. This is a good topic for another article, but there are intangibles to a budget process, like engaging management in results. So I am a fan.]

3. Improved Profitability through Cost Management

As your business grows, so do your expenses. It’s easy to lose focus on inefficiencies, or said another way, stop looking at all the details, especially when you’re busy keeping the day-to-day operations running (If you have ever ended a day having not started the first thing on your list, you know what I mean - I call this the “tyranny of the urgent” which is more common than just “putting out fires”). A good CFO understands the difference between the necessity of working “in” the business and the value of working “on” the business. Treating expenditures like it was their own money, a CFO can identify areas to reduce costs without compromising quality or service. This might include utilizing technology, renegotiating supplier contracts, optimizing your workforce, or streamlining processes. Small savings can have a large impact on value. For example, a 3% reduction in costs on $35 million sales generates over $1 million additional profit. More importantly, if your EBITDA margin was 6%, that +3% turned it into 9%, which is a 50% increase. Said another way, you’ve just increased the value of your business by 50%! That’s an amazing ROI on CFO work. It does happen.

4. Risk Mitigation

Your CFO can be your most important resource for protecting an owner’s largest investment: the business. For starters, ensuring income, payroll and business taxes are paid and all regulations are followed is a given, along with protecting the business from loss with a handful of insurance policies. But what can be overlooked are the less obvious risks. For many businesses, employee turnover is a knowledge-loss risk, so practicing key process documentation and cross-training is essential. Also, a CFO can ensure the company has good cash controls, from approval to payment, strong policy to issuing credit. I have avoided several near-miss fraud disasters thanks to following good policy. Finally, the CFO can be your first line for reading (and editing) agreements with customers, suppliers, and contractors. In short, a seasoned professional who can look farther ahead to see what can go wrong, can help you avoid future headaches and cost.

5. Exit Strategy and Business Valuation

For business owners thinking about selling their company or bringing in investors, a CFO can play a crucial role in preparing the business. A CFO can ensure your financials are in order, your books are clean, and your business valuation makes sense. Personally, I find a lot of value in a rigorous closing process which can help auditor questions at year-end, and consultant questions years later for a quality of earnings report or due diligence in a sale. Further, the CFO can help build your pitch books and management presentations, with the story to make your business more attractive to investors. Even if you aren’t thinking about a sale, a CFO can help position your business for long-term value growth, giving you options down the road.

The Bottom Line on CFO ROI

From reading this, I hope you’ll see the return on investment from hiring a CFO is not just measured in cost out and margins. It’s about the strategic guidance, financial clarity, and peace of mind that come with having a trusted financial expert on your leadership team. I put a big emphasis on TRUST. The right CFO can be the difference between staying stuck in the tyranny of the urgent or proactively driving growth and profitability. For smaller businesses where resources are tight, you may find the value of hiring a part-time CFO to work alongside your accounting team and owners. Either way, investing in the right CFO, part-time or full-time, might be one of the most impactful decisions a business can make.

Thank you for reading this article. If you have questions, suggestions, or fixes to anything on this page, please tell me about it!

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