“the event that really triggered our decision to bring in an outside CFO was a situation involving a serious fraud incident”
Most family business accounting functions are initially run by an accounting manager, then a controller, and eventually a chief financial officer. Over time, the accounting department gradually evolves into more of a financial department. As your family business grows in size and complexity there is an increasing need to go beyond just reporting the numbers, and the need to analyze the financial results in a manner to be acted on.
Some signs you might need an outside CFO:
- Professionalizing the business – outgrowing smaller less formal organizational structure of the company
- Upgrade financial reporting and controls – growing complexity of business requires more sophisticated financial analysis
- Faster Growth – Increasing need to obtain outside financial resources to fund faster growth
- Changing bank lending environment-from personal to more business centered relationships. Banks often prefer to work with a CFO because they speak the same language and are more objective about the state of the business
Often it is a financial situation that makes the hiring decision more immediate
Our firm operated for almost twenty years with a controller heading up the financial function. We hired our first CFO when we decided to accelerate the growth of the company. As our business became more complex with different locations and diversifying into new markets, financial reporting became more important. It also required us to tap into outside equity to fund the growth. But the event that really triggered the decision to bring in an outside CFO was a situation involving a serious fraud incident. The fraud involving a manager made us realize we had taken our eye off the ball and had outgrown the financial controls in the business.
Choosing Your First (and Second) CFO
Our first CFO came from a large publicly-held business within the industry. Looking back our first hire may have been an overreaction to the lack of a more formal financial structure.
We soon realized that although the previous industry experience was valuable, the larger company experience began to burden us with financial systems and controls which were designed for larger companies and were too unwieldy for our size business. Our reporting systems were equal to larger publicly held businesses. The reporting systems were excellent, but they took so much time to collect the data there was little time or resources to analyze the information and respond.
Later we replaced this CFO with one of our outside accounting firm advisors. Our tax audits were performed by a Big Eight accounting firm. We had worked closely with our lead person at the firm and the relationship just developed naturally towards offering him a position as our CFO. He knew our business well and we had a strong feeling of trust with him. Although he lacked industry experience, it was more than offset by his experience with our firm and the many other firms he worked with, and as an auditor the ability to quickly grasp and understand new business concepts.
- Waiting too long to hire a CFO can invite a financial crisis
- Hiring too qualified an individual can cause unneeded complexity and hurt responsiveness
- Larger company experience is critical – but not too large to be stifling. The idea is to have someone who has been there, done that. Someone who can anticipate the issues and obstacles that lay ahead in the growth of your business.
- Industry experience is overrated – You already provide the industry experience. More important is a varied experience across several types of businesses to introduce new thinking and ideas.
- Trust – they may be your first non-family hire and even serve as a sounding board for key decisions
Hiring an outside CFO helps to professionalize your family business, provide financial comfort that operations are running smoothly, and financial opportunities are being recognized and acted on. Ideally you will benefit from having the best of both; the large company financial discipline while retaining small business responsiveness.