Q. I’ve been running my business using a part-time bookkeeper and an external financial advisor who also does my taxes. At what stage should I hire a full-time CFO?
A. In our experience, accounting functions in businesses that start up as a one or two person operation and grow to midsize progress through several steps. We’ve outlined the steps below and explained how you will know it is time to transition.
Step 1 – Part-Time or External Service – When a business is first started, most often, it can’t support a full-time finance person. Nevertheless, you need to keep accurate accounting records from day one. Therefore, if you don’t have the skills to set up and run an accounting system, it is often best to utilize a part-time person and/or an outside service. You’ll need to accomplish three distinct tasks:
Setting up and overseeing your accounting system – Many new businesses use QuickBooks, but other accounting packages are available. You’ll need to get your company setup. This includes things such as establishing a chart of accounts and determining the format of financial reports. Often, as you operate your business, you will run into things that you hadn’t thought about when the books were initially established. You’ll probably want to review the setup periodically to make needed adjustments.
Bookkeeping – This is the day-to-day entering of transactions into your accounting system, writing checks, sending invoices, etc. Often, a person with more modest skills than the one who set up the accounting system can do this at a lower cost. This may be something you take on yourself, or you could employ a part-time person or an external service to do this job.
One tip is to make sure that you run all transactions through the checking account or a company credit card. This will give you a record of every transaction. Another tip is to make sure that you review money that leaves the company (e.g., checks, credit card charges, payroll, etc.). Unfortunately, fraud in small businesses is rampant. These periodic checks will protect your business and remove temptation from your employees.
Tax preparation – You will also need a person to do tax preparation. This skill set is different than the two described above, although the person who set up your accounting system may also have the skills to prepare your taxes. Depending on your business, you may need to pay sales taxes, quarterly estimated taxes, payroll taxes, etc. It’s complex. Consult an expert.
Step 2 – Full-Time Bookkeeper with Part-Time CFO – As the company grows, bookkeeping tasks will take more and more time. Eventually, your part-time bookkeeper will become full-time or it will make economic sense to hire a full-time employee rather than continue to outsource the bookkeeping. However, your bookkeeper will need to have access to a person with a skill set that is broader and deeper—an external, part-time or fractional CFO.
The CFO should review the bookkeeper’s work and be available to answer questions. He or she will also work with the owner to interpret financial statements and internal metrics, develop financing strategies (e.g., with banks and investors), do tax planning, establish internal controls, develop forecasts budgets, and, depending on the industry, handle compliance issues.
Step 3 – Full-Time CFO – The final step in the progression is that it becomes cost effective to hire a full-time CFO. This occurs when the cost of your external CFO service equals what you would have to pay a full-time employee or when your part-time CFO is working 40+ hours a week to keep up with the work. At this point, you will likely have augmented your internal accounting staff. For example, you may have one person handling general ledger and payroll, while another does accounts payable and accounts receivable.
Accurate books are essential to running any small business effectively. Unfortunately, it is an often overlooked task. Progressing through the steps outlined above will help keep your business on track.