According to the Bureau of Labor Statistics, about 18% of small businesses fail within a year, with about 50% managing to stay up to five years before going belly up. By the 10th year, about 65% of these small businesses will have failed. Why is this so?
The top reasons for this failure rate include, among other things, poor financial management, issues with funding and capital, poor cash flow, and the lack of a clear business plan. All of these issues would easily have been handled if they had a Chief Financial Officer (CFO). The reality, however, is that most small businesses do not have the funds to be able to afford a CFO.
How then can they navigate this minefield that continues to be the burial place of many small businesses? A solution has been presented in the form of fractional CFOs. In this article, we will look at what this concept means and how it can help more small businesses move from being a number in the stats for failed businesses to the success stories.
What is a Fractional CFO?
At a first glance, this almost looks like a term from chemistry. However, it just refers to an arrangement in which a business can have access to a CFO without having to employ one. They simply engage the services of one when they need that service.
Another way to look at this is a pay-as-you-go CFO service where you only pay for the service when you need it. This means that the same individual or company will offer this service to multiple businesses at different times.
You can get a detailed explanation here.
What Does a Fractional CFO Bring to the Table?
This individual brings to the table everything that a regular CFO is expected to bring to the table. With respect to small businesses, the fractional chief financial officer can bring the following value to any small business that engages their service:
Financial Management
Efficient financial management is at the heart of any successful business, big or small. With a financial officer on board, a structure can be put in place to ensure financial discipline in the day-to-day operations of the business.
This will include ensuring proper budgeting, reporting, and management of cash flow. Over a period of proper financial reporting, decision-making will be backed by concrete data, resulting in better outcomes.
With efficient financial management systems put in place, these businesses can run better, make better decisions, and increase their chances of growing.
Financial Forecasting
Without adequate financial forecasting, business owners will be flying blind into the future. This obviously explains why many crash.
Financial forecasting relies on the historical performance of the business to predict future revenue, expenses, and cash flow. With this report, it becomes easier to see growth opportunities, identify challenge areas, and adequately prepare for them.
This tool comes in quite handy when the business wants to launch into new markets or push out new products or services. By having a basic idea of what to expect, better decisions regarding when and how to launch or make that move can be made.
Tax Planning and Compliance
Tax compliance can be a big deal as it can lead to compliance issues, which can be expensive. Aside from running afoul of tax laws and requirements, ignorance in this area can lead to a loss of funds. A good CFO will know how to find tax credits and identify deductions that your business qualifies for.
The overall goal of the CFO is to formulate a tax strategy that will save you the most while also reducing your liabilities to the barest minimum. So, you keep more of what you make while fully staying compliant with the requirements of the law.
Debt Management
Debt can be a great tool for business growth. This will, however, depend on how this debt is used. If mismanaged, it can become a weight that drags the business down into bankruptcy.
With an experienced chief financial officer, debt can be better managed to fit into the business’s financial objectives. This professional can also help negotiate better loan deals that will inject liquidity into the business, driving growth.
Many businesses have taken loans that are beyond their capacity to conveniently repay without crushing their cash flow. This is easily avoidable with proper debt management. By ensuring that debt stays within the capacity of the business and negotiating a repayment term that does not putan unnecessary burden on the business, a CFO ensures that the debt becomes an asset rather than the final straw that breaks the back of the business.
Risk Management
Every business desires growth, but many are unaware of the dangers and risks that come with it. Without efficiently anticipating these risks, a business can be crushed by its own growth.
The financial officer can mitigate this by identifying these risk areas and factors and ensuring that they are duly considered and prepared for. This will include ensuring sufficient cash flow for the new level, identifying any changes in regulatory requirement,s and more. Once these challenges are known, solutions can be put in place before they are even encountered.
Performance Analysis
It is impossible to grow effectively without proper performance analysis. There is a need to identify where you are doing well and where you are not. This may mean focusing on the areas in which you are doing well and scrapping the other areas, or putting some effort into growing these other areas.
Whichever the situation calls for, you can only make the right decision if you are constantly analyzing the performance of every aspect of your business. This is one area where a financial officer can play a big role.
Something as simple as identifying where you are getting your biggest revenue from and where you are recording the greatest losses can be the difference between success and failure. With the CFO, this information is easily obtained, giving you the tools to make informed decisions.
We can see from everything that we’ve looked at to this point that the CFO brings immense value to any business. Many businesses that previously could not afford to have a Chief Financial Officer now have the opportunity with the services of fractional CFOs.
It gets even more interesting because the individual or company you hire does not have to physically visit your place of business. You can even hire a fractional CFO in Alpharetta, GA and have them manage your finances in New York. It’s just a matter of having access to your financial records and other important information.
Conclusion
The growth or death of any business is determined by its day-to-day operations. The decisions that are made each day will either lead to its growth or demise. By working with a fractional chief financial officer, any business can now have world-class financial management, ensuring that their business has every chance to succeed.
The ball, like they say, is now in your court. Do you want to be part of the statistics of failure or one of the thriving businesses? What you decide today will determine which side of the divide you fall.
