Ask an entrepreneurial CEO where they feel they have under invested in their company to get it to its goals. Many will readily point to “above the line” areas of the company as those they wish they could afford to invest more in: product development, marketing, branding or advertising. One area you tend not to hear mentioned is the finance function, specifically the CFO. Based on my many years as a CEO of global consumer goods companies, I believe that this can be a mistake: optimizing the financial group may be the most overlooked step to value creation in entrepreneurial companies.
Invest in Your Financial Group
Most CEOs in fact know all or most of the text book approaches to building the value of their company. None will dispute how critical strategy, planning and execution are to improving the valuation of their business. Most will focus hard on these areas—toward the goal of revenue and profit growth.
At the same time, however, many CEOs fail to see the value of a timely investment in the capabilities of their financial group. Most small companies don’t start out with a CFO. As they grow and the business becomes more far flung and complex, they fail to upgrade the finance function as quickly as they should: from a bookkeeper to a controller to a CFO and from there to a top flight CFO. By the time many entrepreneurial companies have seen the need to invest in their financial personnel it may well be “too little, too late.”
If you read the most common analyses of why smaller and middle market companies fail, it becomes clear that having the right skills in the financial group to manage the financing of growth at each stage of the company’s development is a major factor in avoiding pitfalls and driving value.
Do You Have a CFO?
A trait of most successful companies is that the CEO focuses on what they do best. But they can’t do it alone. As revenue and headcount grows, and the business and organization become more complex, a good (and maybe even a great) CFO is needed to understand the financial function of the company—and how each aspect of operations impacts it. The CFO is essential to understanding and improving funding and capital structures, identifying business risks, analyzing situations and solutions, budgeting and forecasting.
A strong CFO will oversee development of the accounting controls that are essential to safeguarding the firm’s assets. CFO responsibilites include:
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Developing the company’s ability to forecast its working capital accurately and estimating how much capital the company needs to finance its growth trajectory.
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Helping the CEO understand how to optimize cash flow from operations.
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Being able to propose well defined options to the CEO and help define the key tradeoffs.
The presence of a strong CFO will enhance the confidence that a prospective buyer or merger partner has in the accuracy and integrity of the company’s numbers. The right person heading the finance group will also oversee many additional issues that the CEO will not or should not focus their time on, such as IT, HR, Operations and Legal. This frees the CEO to focus on what he or she does best.
Most CEOs wait too long to invest in their financial group, believing that it will “take care of itself” until the company is substantially larger. In fact, the finance function and ultimately a strong CFO are analogous to the tires of a car. They might seem to be a mundane investment, but in fact are critical to keeping the car running safely and at a high level of performance. Investment in the finance group, done right, can be counted on to contribute to the long-term success of a middle market company.
Elliott has 18 years of experience as CEO of global and entrepreneurial consumer products companies. In these roles he has driven profitable revenue growth organically and through M&A. Learn more or contact Elliott here.
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