Many smaller companies hold fire on hiring a CFO because they consider themselves too small to need one. But that could be a mistake. Ruth Snell, Partner in Eton Bridge Partners’ Finance Practice – explains four key reasons why taking the plunge early on could reap dividends later.

Bringing a CFO on board accelerates growth

A CFO can be a wise investment for a company that has its sights set on growth. A business run by a founder or lone MD/ CEO can do well, but there is a limit on how much one person can do. A CFO will have a laser-guided focus on maximising growth and will have the time and resource to take a deep dive into the financials, pinpointing where the best growth potential lies and unpicking any problem areas. This work gives the company vastly superior insight to guide strategic investment towards pockets of high growth and protect against pitfalls. Once a long-term growth plan has been developed, the CFO can measure progress against it and hold the company to account.

Alongside this organic growth uplift, a CFO appointment can help facilitate acquisitive growth through an enhanced ability to find and analyse potential bolt-on opportunities. There is a clear distinction from the role of accountant; the CFO looks forward and helps drive growth through financial planning whereas an accountant prepares historic reports.

The rationale of hiring a CFO is – in a nutshell – why wait until you are big enough for a CFO when hiring a CFO sooner can help you get there quicker?

A CFO will protect the company’s value

There are several different approaches to valuing a company – multiples of earnings, a discounted cash flow model (DCF) or the company’s asset base. A CFO will be familiar with all of these and will ensure that value is protected and enhanced where possible on all measures. A keen eye on the financials will help minimise costs, improve terms of payment, manage inventory better and maximise profit margins.

The CFO will also bring a stronger focus on cash management as opposed to just revenue and profit. Healthy cashflow is crucial, both in terms of the valuation placed on the company by outsiders and its long-term survival. According to research by CB Insights, the number one reason new businesses fail is running out of cash. Having a CFO onboard to help smooth out bumps in cashflow minimises the risk of the business foundering.

There are other benefits too; the appointment of a CFO adds structure and leadership to the finance team and ensures financial data is well managed, potentially also helping the company to upscale its use of technology to maintain data accuracy and integrity. Through benchmarking the company’s performance against industry peers, the CFO can target any areas where the company may be underachieving and set targets based on best-in-class performance.

A CFO helps to maximise exit valuation

For those CEOs/ founders who are looking for an exit, simply having a CFO on the team can boost the attractiveness of the business to potential buyers. A small company that is reliant upon one CEO/ MD can be viewed as a riskier proposition than a company with a broader leadership base. ‘All else being equal, the market is more apt to assign a higher value to a company possessing a more complete management team,’ according to private equity firm MCM Capital.

On a practical level, the CFO will help guide the company through the sale process, working with advisors, managing tax issues and ensuring compliance with regulators. In the run-up to the sale, the CFO will have put in place measures to grow the metrics used by purchasers to value the business such as EBITDA (earnings before interest, tax, depreciation and amortisation) and free cash flow.

The CFO will also have conducted due diligence on any potential risks and be in a position to reassure potential buyers. This puts the company in the best possible shape for sale. When it comes to placing a price tag on the company, the CFO can provide a trusted voice on how the deal price stacks up against multiples achieved by similar companies in the market.

A CFO can save on consultancy fees

Last but not least, bringing a CFO into the company can save on fees paid to third-party providers.

The value of having a finance leader who knows the business inside out far exceeds that of an off-the-shelf approach associated with buying in help sporadically. An in-house CFO is also more flexible and can adapt to business needs rather than being contracted for a certain number of hours.

A good in-house CFO is an investment, but this should pay off many times over in increased profit and cashflow, improved long-term strategic insight and a higher external valuation of the company.

Please do get in touch with Ruth if you would like to discuss how a CFO could add value to your business.