What is the role of a CFO?
It may not be feasible for small to mid-size businesses to hire a full-time Chief Financial Officer (CFO) due to economic or other reasons. As an alternative, they can outsource this role to an accounting or consulting firm. In this article we explore the role of a CFO.
The CFO is a member of the management team with other corporate officers, such as the Chief Executive Officer (CEO) and Chief Operating Officer (COO). The CFO is responsible for managing the company’s financial risk, and overseeing the financial reporting and analysis, internal controls, auditing, financial planning, cash management, budgeting and taxation. The role encompasses all three functions of accounting, finance and taxation:
- Accounting involves the recording of business transactions using double-entry bookkeeping, for example goods receipts, vendor payments, inventory changes, product shipments, customer invoicing and payment receipts, asset purchases, payroll and other expenses. Accounting software is typically used to capture and sort the data in a chart of accounts, and many processes are automated and integrated. These transactions are summarized in the four key financial statements: income statement, balance sheet, statement of cash flows, statement of stockholders equity. The accountant will analyze financial results, review trends, prepare key metrics to measure business performance, and explain the effects of operating decisions. The accountant can help prepare budgets and forecasts. A good accounting process can help prevent and detect both unintentional errors, as well as theft or fraud, by using internal controls such as access administration, approvals, segregating duties, and control reports to highlight unusual transactions. Independent internal and external audits provide additional assurance.
- Finance deals with money, banking and investing. A business needs cash to finance its start-up, operations and growth, and the sources of cash are typically equity or debt. Equity is contributed by the business owners, who expect a return on their investment from dividends and capital growth. Debt is paid back with interest. A company has a cash conversion cycle, whereby cash is received from customers for the sale of goods and services, and cash is paid to vendors for raw materials and operating expenses, and contractors/employees for services. Customers and suppliers may have credit terms allowing payments to be deferred, and payroll is typically run in arrears. The finance function manages cash and ensures sufficient amounts are available for operations, and also oversees the longer-term investment of profits or distributions to owners.
- Taxation involves compliance, research and planning. Tax compliance is the timely and accurate filing of tax returns by completing and submitting various forms to the regulatory authorities, and ensuring payment of taxes. There are various types of taxes: income taxes, typically levied at the federal and state level and based on profits, and other taxes such as sales and use tax, payroll tax, property tax, customs and excise duties. Tax research is the examination of tax rules to determine how and when to report income and expenses. This ranges from reading the tax form instructions, to studying the tax code, interpreting Treasury regulations and understanding precedent set by legal cases. Tax planning organizes the business structure and operations to optimize the tax consequences. This involves whether, where and when tax is paid, and at what rates. Taxable income, which is calculated using tax rules set by government authorities, is usually a different number than accounting net income, which is typically measured using Generally Accepted Accounting Principles (GAAP).
The CFO helps other managers read the financial statements and understand the financial implications of business decisions. For example, if the company is launching a marketing campaign, the CFO might analyze how much it will cost and the revenue from increased sales. If the company needs to improve profitability, the CFO might consider options like reducing expenses, increasing productivity, or raising prices. If the company wants to grow, the CFO might assess the implications of expanding current facilities versus opening new locations and evaluate how best to finance the expansion and the tax consequences.
The CFO works externally with auditors, government authorities, investors and creditors. Good qualifications for a CFO are an accounting or finance degree, coupled with a business education like an MBA, a professional certification like a CPA, and supplemented with on-the-job business experience. The CFO should possess good organization, management, and communication skills.
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