How to Know When to Hire a CFO
Get the working capital your business needs–learn more about Entrepreneur Lending, powered by CAN Capital »
A: You could probably invoke all sorts of business-school metrics to answer this one, although a better measure might be your chronic insomnia.
Plenty of entrepreneurs battle anxiety, says Ken Kaufman, founder and CEO of Utah-based CFOwise, which provides part-time CFOs to small and midsize businesses. It's a common symptom among business owners who don't have a solid grasp of their firm's financial picture. "Anxiety turns into fear, which causes lots of bad decisions to be made," Kaufman says. If you're not sleeping well, he believes a CFO might be just what you need to help bring order to your firm's finances--and to help you get some shut-eye.
Beyond sleep patterns, however, Kaufman uses some metrics of his own. In most cases, he says an entrepreneur should hire a CFO when the business reaches $25 million to $50 million in annual revenue. But revenue is not the only factor. To help entrepreneurs decide whether they need a CFO, Kaufman considers three factors: a company's complexity, its size and the pace of its financial trajectory.
Complexity: If your business produces a single product from a single site for just a handful of nearby clients, your financial picture should be fairly simple to navigate. But if you're making scores of products for hundreds of clients across the globe, you're obviously looking at a more complex operation--one more likely to require the services of a finance executive.
Size: Even if your company is not overly complex, its sheer size could make it difficult for you to stay on top of revenue streams, payrolls and tax implications without a CFO.
Trajectory: Whether you find your business rapidly spiraling downward or growing at breakneck speed, a CFO might be needed to help you respond to a quickly changing financial landscape.
"If it's a real steady, stable business--a million a year, every year--it gets pretty easy to understand what's happening," Kaufman says. "When you're moving really fast in either direction, it gets really convoluted and hard to predict."
The need for a CFO is likely to change as a business evolves. When you start a business, Kaufman says, you generally know your customers and suppliers personally and can gauge your company's performance by a regular dialogue with them. But as the business grows, Kaufman says, the owner can no longer rely solely on those discussions--which helps explain why Kaufman considers hiring a CFO a watershed event.
"It marks the point in that organization's life, as well as in that entrepreneur's life, where they are going to be transitioning to running the business on quantitative information rather than using just qualitative information," he says.
An in-house CFO can also bring intangible benefits. "With a CFO in place, CEOs feel empowered, because they have a financial executive who knows how to solve problems and run the business financially," Kaufman says. "They can delegate that responsibility, which they weren't managing."
And thus ensure, finally, a good night's sleep.