A chief financial officer may be one of the most important variables for a company's sustainability.


By Ken Wentworth

According to Harvard Business Review, 85-90 percent of companies that drop into a financial free-fall will never pull out of it. Among the fortunate minority that do, about half will need to fundamentally redefine at least part of their core business in order to save themselves.

Those are certainly sobering statistics to consider for any business owner. The question is, how can a business swerve around a free fall situation? Oftentimes, a rapid decline can hit suddenly, without warning and from an angle never previously suspected.

The NY Times stated that seven of the top 10 reasons small businesses fail are due to lack of financial leadership. Those shortfalls include:

Unprofitable business model Poor financial management Lack of adequate cash reserves Operational mediocrity Wasteful/inefficient spending Undisciplined expansion Dysfunctional management

Let's examine each of these challenges.

Unprofitable business model
Do you know the fully-loaded cost of each of your products/services? If not, how do you know you're pricing each profitably? You could actually be losing money for each widget produced. Meanwhile, you are feverishly selling those unprofitable products, thereby hastening your company's demise.

Poor financial management
If you are making decisions based on less-than-accurate numbers or, worse yet, no numbers, you are essentially flying blind. Wait, your accounting firm that does your taxes will do that for you, right? Think again. They are focused on filing your taxes-and that's all. That naïve, head-in-the-sand thinking spells doom. This is precisely the job of a chief financial officer (CFO). Do you have the experience and expertise to fill that role? Do you have the time to fill that role in addition to the myriad of other hats you already wear?

Lack of adequate cash reserves
Do you know how much cash your business spends and, on the flip side, brings in the door each month? If sales suddenly dropped by 30 percent or a recession hits and customers take longer to pay you, will you still be able pay all of your bills and maintain payroll? If so, for how long? If you do not readily know the answers to these questions, you very well may have a cash flow problem. Or, do you? Without answers, you have no idea when your business could quickly fall into a tailspin. And, let's face it-the economy is historically cyclical so, unfortunately, a downturn is inevitable. The question is, will you be prepared to weather the storm?

Operational mediocrity
Does your company operate efficiently? Trick question–everyone thinks they do. We know not all businesses operate efficiently, but how do you know if yours does not? When is the last time you reviewed efficiency?

Wasteful, inefficient spending
Are you paying too much for labor (including the ever-growing cost of medical benefits), raw materials, rent or utilities? Do you have any idea what you should be paying for those items? When is the last time you re-negotiated with key suppliers?

Undisciplined expansion
How do you know when is the right time to expand? How much should you expand if it is? Keep in mind, "expansion" comes in many forms. It could be as simple as hiring incremental resources or growing product offerings, to being as complex as opening additional locations, building new production lines or acquiring a competitor.

Dysfunctional management
Are you so bogged down in day-to-day details that there just are not enough hours to regularly provide visionary leadership and impactful strategic planning? Do you have anyone on your team that is armed with substantial business experience and is not a "yes man"–someone that always agrees? Would she/he push back on your ideas and decisions or, even better yet, suggest other possible business ideas?

At this point, you likely realize the importance of having the appropriate level of financial leadership at your company to help avoid a collapse. You might be saying, "OK –I get it now–a strong financial business partner would be invaluable in helping me clear these hurdles. Sounds great, but aren't resources like that quite expensive?"

Unfortunately, yes, they are. A top notch CFO with 20+ years of experience in a mid-cost location, like Ohio, can easily make upwards of $300-400 thousand in total compensation. However, an alternative solution to consider is hiring a CFO with the same credentials but on a part-time basis. All of their experience and expertise can be utilized, but for a fraction of the cost.

Ken Wentworth is the President of Wentworth Financial Partners, a firm that partners with small and medium size businesses to help them increase profitability and operate more efficiently.