We sometimes speak with owners of small to medium sized businesses who regard CFO services as being too expensive. Of course the services of an experienced CFO, even on a part-time basis, are not cheap.  But the question to ask is not, Can the business afford a CFO? The real question is, Can I afford not having a CFO?

There are many actual and potential costs that a business may face.  A number of them can be reduced or avoided entirely through effective financial oversight. Some of those costs include: cost of borrowed funds; cost of inaccurate, late or unavailable information; cost of incorrect estimated taxes; cost of late payments and missed discounts; cost of bad pricing decisions; and cost of internal or external theft.  Over the next few weeks I will discuss some of these costs in more detail, along with potential steps to avoid or reduce them.

Cost of Borrowed Funds

There are many avenues down which a company can turn in search of cash. For privately held small to medium sized businesses, the options include bank loans, SBA loans, equipment financing, asset-based lending, factoring, and loans from the FF&F (founders, family & friends). That’s not to mention equity investors of many types.

Of course the various borrowing options have a wide range of interest rates. Also, as most business owners have discovered, not all loans are equally accessible.  So while a traditional bank loan may have the lowest interest rate, you may be forced to resort to asset-based loans or factored accounts receivable, with interest rates that may be two or three times as high as bank loans.

Most, if not all, of the various lenders will ask for current and historical financial statements from a prospective borrower. Although the bank may have money to lend as well as a desire to lend,  if those statements are questionable, or patently wrong, the loan will most certainly not go through. The banker will have the unpleasant task, as one put it to me, of having to tell the business owner that “his baby is ugly”.

Robert T. Slee is President of Robertson & Foley, an investment banking firm that provides valuation, capital raising, and transfer advisory services to middle market companies. He speaks extensively on value creation for private businesses. His book, Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, is regarded as the definitive work on the private capital marketplace. In discussing risks that are likely to be found in privately-held businesses, he writes the following:

“Most small private companies do not employ a chief financial officer; rather they have either a controller or bookkeeper that closes the books. Yet this “money-saving” decision often costs the company because it leads to inadequate financial management.”¹

The risk of not having a CFO to provide adequate financial management, according to Slee, contributes to the fact that the private company is likely to pay significantly more for capital than does its larger, public counterpart. Lenders charge more for loans that are perceived to be more risky.

The lesson here is not that you should take your company public, but that you should put a financial management structure in place. For the small to medium business, while a full-time CFO may still be cost-prohibitive, a seasoned financial executive can be engaged on a part-time basis to provide the needed financial leadership and management. The benefit to you will be improved financial clarity, and the ability to provide trustworthy internal financial statements to your banker. That very well could mean borrowing at a substantially lower cost to your business.

¹ Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, Second Edition, p. 238.