Business management,  Entrepreneur,  Financial Management,  Financial Productivity,  Small business,  Thought Leadership

When is the right time to hire a CFO

A CFO and a Pandora’s box

Music and life go hand in hand. It is intricate, yet omnipresent. It evokes emotions and memories that we long to remember.  Although music is an integral part of our lives, no two people have the same taste in music. Pandora believes so too and manages its radio streaming using their proprietary Music Genome Project. Despite revolutionizing the way individuals perceived music, they were having a tough time making money.

Ever since it went public, the revenue it generated was lower than that of the expenses it incurred. That is when Pandora, decided to rope in Michael Herring as their Chief Financial Officer (CFO). This was around the same time Pandora’s ten year CEO, Joe Kennedy resigned.

On joining the team, Herring had to handle a lot more than anticipated. He identified the points which were bleeding cash and introduced improvements that brought in revenue. Before his hiring, Pandora was making $22 for every thousand streams and paying $21 out in costs. After introducing changes in pricing and monetization, Pandora started to generate $44 per thousand streams, paying $22 out in costs.

As a CFO, Herring had to identify the reasons behind Pandora’s economic downfall. He made relevant changes to the existing pricing model and added caps to their Freemium model.
He leveraged the steady flow of advertisers and also laid the pipeline on how to utilize generated revenue. In short, he assessed past numbers, laid out a growth strategy, and decided how the curve should look in the future.

CFOs and their responsibilities

A Chief Financial Officer (CFO) is one who helps take the burden off the shoulders of business owners. They become the point of contact for all things finance.  Assigning a dedicated job description for them, is quite complicated; as restricting them to a single function is impossible.

They do the job of both a controller and a decision maker. They are best friends with the CEO and also play a strategic role in the growth of the company. Traditionally, they were involved in cost control, where they had to ensure that money was spent on the right things. However, their number-crunching days slowly declining. Now, they have to be business planners. An increasing number of CFOs enjoy this shift of role. The graph is indicative of the fact.


Courtesy: The Wall Street Journal

They are the captain of the ship, forever stationed at the helm. They need to know the financial status of the company, just like the captain who knows the seas. Based on their expertise, they can decide the course of the future. Alongside, they need to ensure that processes and systems are running well.

Given that they handle the finance department, they become the point of contact for the stakeholders. CFOs are required to keep investors and stakeholders in the loop through effective communication. Additionally, they are required to understand the expectations of investors and tactfully maneuver through the same.
Most often, they handle mergers and acquisitions in a company. For this, they need to access the market with a hawk’s eye, looking for potential acquirers or acquisitions. They are required to always stay on their feet, providing the right data at the right time.

Most importantly, they play a crucial role in breaking down the silos in an organization. They ensure that all departments work in tandem to achieve the company goals.

In conversation with a CFO

To understand the responsibilities and contributions of a CFO, we got in touch with Sridhar Subramanian, our in house CFO. Sridhar has played a strategic role in the growth of companies such as Capillary Technologies, Coca-Cola India, and Adecco. He also provides CFO services for early-stage startups who are yet to metamorphosize.

Why should you hire a CFO?

Business owners have a lot on their plates. They have to ensure they are providing an excellent service to their customers. At the same time, they have to be up-to-date on the latest industry demands and look for new ways to generate revenue.  Amidst this chaos, they also need to be on top of expenses, identify where they are spending the most, and rectify those issues. This can get overwhelming after a certain stage.

This is where the CFO enters.

“They significantly reduce the burden for business owners. They take complete responsibility of the finance department and become a partner to the business owner. With their accounting knowledge and experience, they can bring radical changes to the way businesses function  and can also suggest ways to make it better,”

says Sridhar.

They can identify the pain points of the financial team and can implement technological and policy changes to make the finance team efficient. They bring all departments together and work towards achieving the company’s goal. Additionally, their understanding of the governmental rules and regulations will help in the smooth running of the company.

“Since most of the CFOs are Certified Accountants (CA) or an MBA, they are also familiar with governmental rules and regulations involved in running a business,”

adds Sridhar.

When is the right time to hire a CFO?

The answer is simple; hire a CFO when you can afford one. According to The New York Times, it depends on the revenue a company generates. The sweet spot is usually when it hits $10-$20 million. At this stage, companies can afford to hire a full-time CFO to take the burden off the CEO’s shoulders.

“Affordability and size of the company are the two factors you must consider while hiring a CFO. When your company starts earning steadily and has occupied a good portion of the market, a CFO can contribute effectively towards the growth of the company,”

says Sridhar

Usually, companies hire a CFO when they are looking for a person invested in the growth of the company. As mentioned earlier, they act as partners to the CEO. When business owners spend a major part of their time fretting about finance and profits, it becomes a telltale sign to hire a CFO. By doing so, they can turn their focus to other aspects of running the business.

It doesn’t make sense to hire a CFO as soon as you start your business, mainly because CFOs are expensive. Even if you were to hire a CFO, you would not use their skills to the fullest. When your company has matured enough, is when the CFO’s insights, start to make a difference.

Aspects one must consider while hiring a CFO

CFOs have huge responsibilities on their shoulders. Therefore, it is paramount that you choose your CFO well.

Here are a couple of things you must keep in mind while hiring a CFO:

Ideally, CFOs should hold an MBA degree in finance and business, or should have been an accountant with considerable experience. These days, new-age companies overlook the educational qualification. It only matters that they have the skills and acumen to make sound financial decisions. Apart from educational qualifications, industrial experience is another deciding factor.

“If you are hiring a CFO for your startup, it is necessary to hire someone who has the experience of working in a fast paced environment,”

adds Sridhar.

Therefore, it is necessary that you hire someone familiar with your company’s pace and industry.

Accounting Expertise
A CFO should know their numbers well. It is their responsibility to maintain financial statements like P&L statement, Cash Flow, Sales Forecast, etc., They are also required to break it down to the auditors, investors, banks, and other stakeholders. Lastly, they need to ensure that the company uses the right technology and the right people to handle the numbers.

Business planning Acumen
CFOs have a knack for business planning. This plays a keen role in the making or breaking of a company. As a prerequisite, they need to have the foresight that can help you achieve your company goals. Additionally, they should be able to draw a sustainable long term plan for your business.

Culture fit
Since CFOs are the face of your company, it is imperative that you choose somebody who conveys the ethics and values of the company. Stakeholders are interested not just in your profits, but also in the way you run your business. Hence, select someone who aligns well with your company culture.

Soft skills
CFOs are responsible for breaking down the silos in your organization. They play a key role in integrating the marketing and sales team with finance. In the process of doing so, they are required to be persuasive and come across as team players. Since they also closely associated with investors, they need to have impeccable negotiation skills. Lastly, they need to exuberate confidence and positivity.

In short, they should be leaders who help take your business to new heights.

What happens when you do not have a CFO on board?

The insights that CFOs bring to the table are indispensable. Given that they are growth partners, their contribution to the company is quite immeasurable. However, many a time, companies find it challenging to afford a full-time CFO. This makes it particularly difficult, in the long run.

“Most companies do not need a CFO on a daily basis. But, they might need their assistance on a weekly or monthly basis. As an alternative, you can go for virtual CFOs,”

says Sridhar.

A virtual CFO is a service provider who handles the critical financial management for a business. They are not as expensive as a full-time CFO but perform all the functions expected of a full-time CFO. Since the advent of cloud technology, it has become easier for businesses to acquire and benefit from such services.

Ideally, the functions of a virtual CFO include:

  • Deconstruction of  financial reports
  • Effectively handle the finance department
  • Advise business owners and help them make informed decisions
  • Manage financial planning and analysis
  • Handle budget and sales forecast,
  • Ensure compliance with the governmental policies

Identify potential risks and suggest methods to handle them

The Bottom Line

Having an updated financial statement can help drive growth and scale, at your organization. This plays a particularly crucial role for startups who are looking to raise funds. It becomes challenging for organizations to raise funding in cases of partial or completely un-updated financial statements. Although business owners are looking to grow, they are unsure about how to achieve it. A CFO can be of great help in this aspect.  They will also ensure that all your papers are in place. The advice and changes that they suggest can take your company to great heights.

However, do not fret if your company cannot afford to hire a CFO full-time. Virtual CFO services are just as effective. They provide all the services that a regular CFO delivers, at a lower price. It is vital that you have a capable person in place to maintain the financial health of your organization.

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