Should a small business, particularly a startup, hire a full-time CFO or outsource the position?
Kerri Thurston has insights from both sides of the equation. In 2015, Thurston became CFO of C2FO, a Kansas City, Missouri, startup that provides a digital working capital platform for companies to extend or accelerate payments to their suppliers, and extend or accelerate receivables from their customers.
We talked with Thurston about the advantages of a full-time CFO, the importance of managing cash flow and the power of a good mentor.
At what point should a startup or small business hire a CFO?
It’s key to first understand the business goals of the owner and management team. Depending on the objectives, some organizations might need to bring on a CFO sooner than others. A few questions management teams should ask themselves to help determine whether it’s time to hire a CFO include: Should I hire a CFO or a controller? Instead of hiring a CFO, should I outsource? Will the addition of a CFO help drive efficiency? If so, how? Do our strategic growth initiatives point to the need for increasing financial expertise?
Controllers and CFOs have very different functions. A CFO is hired to act as strategic counsel and an advisor to the CEO. A controller focuses on ensuring accounting is done correctly and effective internal controls exist. Business owners should consider which functions are the key areas of focus.
If a company chooses to take the route of outsourcing a CFO, one potential value add is the opportunity to identify someone who specializes in a specific industry or understands the nuances of a particular business model—whether this is a manufacturing specialty, international expertise or any number of other areas. This knowledge base can be incredibly beneficial and a great path forward for a small business that may not be ready to hire a CFO full time.
Overall, it is important to step back and take stock of what the business objectives are—disciplined spending and controls, pushing toward profitability or long-term strategic growth. If the goal is a trusted advisor focused on making investment decisions, analyzing funding requirements and strategic planning, then hiring a full-time CFO will provide return on the investment.
What are the biggest concerns on the minds of CFOs right now?
Looking at the current environment, I would say that the primary concern for most CFOs is financial planning and cash flow forecasting. After a year of significant volatility on the global economic front, businesses are facing many tough questions on consumer spending, international trade, interest rates, tax rates and more. These factors taken together make it more challenging to forecast and plan.
Ensuring adequate liquidity should also be a top priority for CFOs—particularly in light of this past year. To that end, businesses should take control of their cash flow now to maintain appropriate levels of working capital for 2021 and beyond. Some methods, outside of traditional lenders, that will help entrepreneurs generate more liquidity for their businesses include utilizing financial instruments like asset-based lending, short-term business loans and early payment of receivables to address cash flow gaps. Safeguarding cash flow and taking control can help position companies for growth, addressing this top-of-mind concern for many CFOs.
In addition, many CFOs at small and mid-sized businesses serve in a hybrid role leading both finance and human resources. Given that human capital is the most important asset of businesses, CFOs need to look at productivity and engagement. This is especially important as CFOs and management teams begin to think through the return to in-office work. CFOs should be focused on finding the right balance for employees. It is critically important, and it’s not a one-size-fits-all solution.
How have you handled remote work at C2FO?
To streamline the transition between home and office working for our C2FO employees, we felt it was important to continue the fun and social activities that promoted our working culture—while keeping things virtual or, on occasion, small and socially distanced. Continuing activities like shared meals at a food truck or outdoor yoga helped in maintaining the shared sense of values that helped drive collaboration and productivity before the pandemic. We also provided stipends to our employees to help make their home working environment as conducive to their wellbeing as possible. Finally, recognizing that the blurring of the boundaries between work and home could be stressful, we implemented a policy of minimum time off, giving our teams the confidence and the means to step back from their work and recharge.
You touched on liquidity concerns. Can you outline the benefits of raising capital through equity versus debt in the current economic environment for small businesses?
There isn’t an overarching rule that can be applied—both options have pros and cons for business owners. Currently, raising capital through equity or debt can both be cost-effective options for businesses given the low interest rate environment and strong valuations. While it’s a good time for businesses to access affordable capital, finding the right blend of debt and equity is critically important and often overlooked by small businesses.
Many small businesses attempt to avoid adding debt to their balance sheets, but this can be a mistake as the cost of debt can be justified by a strong return on investment via accelerated revenue growth or improved profitability to fund the debt. This can be a psychological struggle for small business owners but can allow for maximum control.
While raising capital via equity can be a good option, it will dilute ownership and reduce the control of the owner or management team. Yet, it does not result in future interest payments or the need to manage debt repayment schedules in the future.
It isn’t always an obvious choice.
In my work with small business leaders, I often recommend finding a trusted mentor that is a few steps ahead of where their business is in its life cycle. This allows them to gain insights and can help avoid missteps that otherwise might occur without this mentorship.
Particularly when structuring these deals and looking at the benefits of raising capital through debt or equity, a mentor would have the ability to ensure these deals are being structured in a way that allows the founder to make sound strategic financial decisions while maintaining an optimal level of control.