What Does a CFO Add Beyond the Financial Statements?

Good accounting tells you what happened in the business. Financial leadership should help you understand what is driving those results and what you may want to do differently.

Tom Cunningham, CPA, CGA, has spent more than 30 years in accounting, finance and senior business leadership. His career has included public accounting, working with small and medium-sized businesses, and nearly two decades in automotive manufacturing, including serving as President of a Tier 1 automotive supplier.

Tom joined Part Time CFO Services in 2018 and has since worked with organizations on a fractional basis. I sat down with him to talk about what an experienced CFO can bring to an owner-managed business, and how financial information becomes more useful when it connects back to how the business actually operates.

Kyle: When you go into a business as a CFO, what are you trying to understand beyond whether the accounting is being done properly?

Tom: Well, you need the accounting to be right first. If the information isn’t reliable, it’s difficult to do much with it.

But after that, I’m trying to understand the business. How does it make money? Where are the costs? What is management looking at when they make decisions?

You can look at an income statement and see that a margin changed, but that doesn’t necessarily tell you why. You have to get into what’s happening in the operation and talk to the people who are running it.

That’s where the numbers become more useful.

Kyle: So the role is really more about helping management use the information than simply producing it.

Tom: I think so.

The financial statements are important, but they’re only part of the picture.

You want to understand what’s driving the results, what is changing and what management is trying to accomplish.

Then you can ask better questions and help management think through the implications of different decisions.

Kyle: You spent a lot of your career inside an operating business rather than purely on the accounting side. Does that change how you approach those conversations?

Tom: I think it does.

When you’ve worked inside a business, you know there are always other considerations.

You can’t just look at a spreadsheet and say, “Well, this is the answer.”

You’ve got customers. You’ve got employees. You’ve got suppliers. There may be production issues or something changing in the market.

Finance is one part of the decision. The job is to understand the financial side well enough to help management make the overall decision.

Kyle: And you were in automotive manufacturing through the 2008 downturn. I would imagine that changes what you pay attention to as well.

Tom: Yeah, it was a difficult period.

You had to really understand what was going on in the business. Costs were important. Cash was important. Efficiency was important.

You had to look at what you could change and what you couldn’t.

One thing you learn from going through a period like that is that the earlier you understand what’s happening, the more options you generally have.

If you wait until you’ve got a serious cash problem, obviously your choices start getting a lot narrower.

Kyle: Which probably argues for doing this kind of work when the business is healthy too, rather than thinking a CFO is someone you call when something has gone wrong.

Tom: I would agree with that.

If the business is doing well, that’s a good time to understand it better.

Where are you making money? Are the margins where you think they are? Can the business support the growth you’re planning? What is cash going to look like six months from now?

You have more flexibility when you’re not dealing with an urgent problem.

Kyle: You had another client where the business model was membership-based. How did you look at that one differently?

Tom: Yeah, that was different.

With a membership organization, obviously you’re still looking at the financial statements, but membership itself is a big driver of the organization.

So we started looking more closely at what was happening there.

Are members staying? Are you bringing in new members? Is the total membership growing?

You can have a situation where the total number doesn’t look too bad, but you’re losing existing members at one tier and replacing them with new ones who may be at a lower tier, which can lead to future cash flow challenges. That’s different from having strong retention and adding new members on top of that.

That was information management needed to understand.

Kyle: Which gets into something I think is important with management reporting. You can’t just give every company the same financial package and assume it tells them what they need to know.

Tom: No, I don’t think so.

It depends on the business.

For that organization, membership and retention were important. Somewhere else it might be inventory. It might be margin by product or customer. It might be utilization.

You don’t need 25 different measures just because you can produce them.

You want to figure out what management really needs to see to understand what’s going on.

The financial statements are part of that, but sometimes there’s other information that explains the financial results better.

Kyle: And some of those measures can give you an earlier indication than the income statement.

If membership starts declining, for example, the financial impact may not all show up immediately.

Tom: That’s right.

That’s why you want to understand what drives the business.

If membership is going down, eventually that’s going to show up financially.

Same thing in a private business. If your margins are starting to decline, or you’ve got more inventory building up, or one customer is becoming a very large part of your sales, those things are telling you something.

It may not be a problem today.

But it’s something management should know about.

Kyle: The brewery you worked with is a good example of that same idea in a completely different business.

What were some of the things you were looking at there?

Tom: That was an interesting business because there was quite a bit going on behind what might look fairly straightforward from the outside.

You’ve got different beers, different package sizes and a number of different SKUs. And brewing isn’t necessarily a high-margin business to begin with, so you need to pay attention to what all of those products are costing you.

One thing we looked at was the impact of having a lot of different products and the size of the production runs.

If you’re running a larger quantity of one product, generally that’s going to be more efficient. Once you start producing smaller amounts of more products, you’ve got more changeovers, cleaning, setup and labour involved.

You’re spreading those costs over fewer units.

Kyle: So it can look positive from the sales side because you’re offering more products and generating more revenue, but there’s another side to it.

Tom: Yeah, exactly.

There’s nothing wrong with offering more products if that’s what the market wants. But you need to understand what it’s doing to the margin.

Maybe one product is selling very well and you’re doing long runs. Another one may only be produced in fairly small quantities. The cost of producing those two products isn’t necessarily going to be the same.

Then you’ve got inventory. You’ve got packaging. You may be buying certain things in lower quantities.

None of those things by itself is necessarily a major issue. It’s when you put everything together that you start to see what that product is really contributing.

Kyle: And I think that’s where finance can be helpful without trying to tell the owner how to run the business.

Tom: Right.

I’m not going to tell somebody which product they should make. They understand their customers and their market.

What I can do is say, okay, if we’re going to make this product, here’s what we’re seeing financially.

Maybe the margin isn’t as good as everybody thought. That doesn’t necessarily mean you stop making it. There could be a reason to have it.

But now you know.

Maybe you need a little more volume. Maybe you look at the price. Maybe there’s something you can do operationally to make it more efficient.

At least you’re making that decision with the information in front of you.

Kyle: Pricing gets interesting there too, because the cost structure underneath a product can change without somebody necessarily sitting down and reconsidering the selling price.

Tom: That’s definitely something you need to keep an eye on.

Costs move. Labour goes up. Materials go up. Freight changes. Maybe the volume you’re producing changes.

If the selling price stays the same through all of that, the margin can slowly get squeezed.

And in a lower-margin business, it doesn’t take a huge change to have an impact.

It doesn’t mean you can automatically increase your price every time a cost goes up. Obviously, the customer and the market are going to have something to say about that.

But you need to know where you stand. If you know what you’re actually making, then you can have the conversation about what to do.

Kyle: That’s a pretty transferable example. You don’t need to own a brewery to run into that problem.

Tom: No, you see versions of it in a lot of businesses.

Manufacturing would be an obvious one. Every time you add another product or another variation, there’s potentially more setup and more complexity.

A distributor can have a similar issue with inventory. You can have a lot of different products, but some of them may not move very quickly. There’s cash sitting in that inventory.

Even in a service business, you can keep adding different services or doing customized work for clients. You can get very busy doing it, but you still need to understand whether you’re making money on that work.

That’s really the question.

It’s easy to look at revenue and say the business is growing. You still want to know what you’re getting out of that revenue.

Kyle: I think there’s also a practical question for a lot of owner-managed businesses. They can benefit from that level of thinking without necessarily having enough work to justify a full-time CFO.

Tom: Absolutely.

A company can need an experienced finance person without needing that person five days a week.

That’s really where fractional can make a lot of sense.

If you hire somebody at a CFO level full time and there isn’t enough CFO work, they’re going to end up doing other things. Maybe they’re doing administrative work or accounting work that someone else could handle.

That’s not necessarily a good use of the person’s time, and the company is paying a fairly senior person to do it.

With a fractional arrangement, you can have the accounting people doing the day-to-day work and have the CFO involved where that experience is really needed.

Kyle: I think people can hear “fractional” and assume it means temporary too, which hasn’t really been our experience.

Tom: No. It can be temporary, but it doesn’t have to be.

There are certainly situations where you’re brought in for a specific problem or project.

But if you’re working with somebody over a number of years, you get to know the business pretty well.

You know the history. You know what management has been working on. You know why certain decisions were made.

And eventually they start talking to you before they make the decision instead of after.

That’s when you’ve really become part of the business.

Kyle: So if you’re talking to an owner who already has an accountant or controller, what might tell them they could use CFO-level support as well?

Tom: I don’t think there’s one answer to that.

It depends on the business and the kinds of decisions the owner is making.

If you’re getting into questions about growth, margins, cash, financing or which parts of the business are really performing, and you don’t feel like you’ve got the information you need, then it may be worth having somebody at that level involved.

It doesn’t mean the accounting team isn’t doing a good job.

It’s a different role.

The accountant is making sure the information is right.

The CFO should be helping you use it.

Financial Leadership Should Help You See the Business Differently

Tom’s examples are very different businesses, but they make the same point.

At the membership-based organization, the financial statements alone did not tell management enough. Membership trends and retention helped explain where future performance might be heading.

At the brewery, revenue alone did not tell the full story either. Product variety, production runs, pricing and margin all needed to be considered together.

That is where experienced financial leadership adds value.

The objective is not more reports or more numbers. It is understanding which information matters, what it says about the business, and how it should influence the decisions management is making.

For many owner-managed businesses, that does not require a full-time CFO.

It requires having the right financial experience at the table when those decisions are being made.