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3 Common Mistakes by Management – through the Eyes of a CFO

1. More revenue is always better

When I announced the launch of Hemera Financial Solutions, my peers frequently volunteered the same advice – “sales drive business.” While it’s certainly true, chasing revenue can cripple a business. During a recent business pitch, a prospective client raved about a new contract that paid $50,000 per month. I simply asked, “What’s the profit margin?” He had no idea.

He factored in the cost of the materials to complete the engagement, but never considered the cost of his employees’ time. After a rough calculation of the salaried staff hours required by the contract, I estimated that the prospective client lost $30,000 per month on that engagement. This job also tied up the availability of resources for other projects which suffered as less seasoned workers were forced into roles for which they weren’t adequately suited.

What should have been done?

  • A company should anticipate the costs for each project based on historical (internal) data and leverage off personnel, including the CFO and/or Controller, who are familiar with the figures that drive financial performance. This information can help management determine the minimum that could be charged per project to reach the targeted profit margin.
  • If a client requests lower fees, get creative in making up the difference in profits. Consider asking for a longer term contract commitment and for the inclusion of incentive provisions. Ask for at least three referrals to grow the client pipeline and open doors for more profitable opportunities.

2. The back office is a necessary evil

This is where many companies cut corners. Understandably, management should commit a healthy percentage of finances for revenue-producing resources (i.e., sales persons, analysts, and financial modeling software). However, companies should not overlook the value of top notch CFOs and Controllers. Beyond implementing effective internal controls and producing accurate historical data to aid in decision making, CFOs and Controllers are now asked to contribute in other ways, which includes strategizing with upper management to develop tactics for managing the growth of companies.

So HOW exactly do CFOs and Controllers help?

  • CFOs and Controllers are generally risk averse. Because companies are typically run by people who rose through the ranks as sales persons or analysts (i.e., rewarded monetarily for taking risk), these individuals may lean towards aggressive tactics. It helps to have managers with complementary skills to point out the different angles and potential pitfalls of various scenarios. One constant theme among my most successful clients? Management consists of executives who frequently engage in intense debates, but these professionals respect and welcome different perspectives because they understand that this exchange of information increases the odds of better decision-making.

3. I’m good with numbers…I don’t see the value of paying a CFO.

I hear this most often from inexperienced entrepreneurs and start-ups who believe it’s wasteful to pay CFOs in the early stages of development. Actually, this is exactly when help is needed! Why play roulette with precious capital? Instead of proceeding by trial and error, wasting resources and ceding market share to the competition, work smarter not harder. There is no substitute for experience.

So HOW exactly do CFOs help?

  • The majority of companies fail because they never take the time to clearly define their ultimate goals or exit strategy. How can a company plan for the long road ahead if they don’t know exactly what they’re trying to achieve? A quality CFO can improve a company’s odds for success by helping to construct a roadmap that establishes milestones worth targeting, which then develops expectations for capital raises, expansion opportunities, and future hires. If a company is concerned that it cannot afford a full-time CFO, it should consider a part-time or contract solution. Under this arrangement, the company can turn to the CFO “as needed.” This provides the company access to valuable experience and knowledge without the long-term commitment that could tie up capital and compromise liquidity.

Written by Ray Petrino, founder of Hemera Financial Solutions, LLC, provider of part-time, interim, and contract CFOs, Controllers, and Directors to businesses of various sizes across diverse industries.