I recently attended an Arizona State Football game where I found myself sitting next to John, an old friend who happens to own a small electrical contracting business. As we chatted, our conversation shifted to work, and John mentioned he was in the market for a new CFO.
Curious, I asked, "What do you expect a CFO to help you with?"
He paused for a moment before replying, "Well, my monthly financials aren’t getting done and I have both my bank and bonding company breathing down my neck for Q2 financials. Cash flow is so brutal I had to cut my pay last month. Something has to change."
I turned and said, "John, you don’t need a CFO, you need a Controller."
This conversation highlights a common misconception among small to medium-sized construction business owners: the belief that they need a Chief Financial Officer (CFO) when what they truly need is a controller. In this article, we’ll explore the differences between these two roles, the unique value each brings, and why understanding these distinctions is critical for your business.
Controller vs CFO: Understanding the Roles
While both CFOs and controllers play essential roles in a company’s financial health, their focus and responsibilities differ significantly. The primary distinction lies in their perspectives:
- CFOs are generally forward-looking, focusing on financial strategy, forecasting, and planning.
- Controllers are focused on current financials and controls, concentrating on the accuracy of historical financial data and the day-to-day management of financial operations.
However, these roles are interdependent. A CFO can’t effectively plan for the future without accurate and detailed financial records provided by a controller. If the books aren’t in order or if past financial performance isn’t accurately reported, any projections or strategies developed by the CFO will be flawed.
The Role of a CFO
A Chief Financial Officer (CFO) is responsible for guiding the company’s financial direction and ensuring that long-term goals are met. Here’s what a CFO typically handles:
- Long-Term Financial Planning: A CFO looks beyond the immediate numbers and focuses on where the company is headed financially. They forecast revenue, expenses, and investment needs to help guide major business decisions.
- Investment and Financing Decisions: A CFO decides how to finance new projects, whether through debt, equity, or internal funds, ensuring the company has the resources it needs to grow.
- Debt Management: Handling the company’s borrowing needs, a CFO negotiates with lenders and manages the overall debt structure to balance risk and growth.
- Mergers and Acquisitions (M&A): When a company is considering acquiring or merging with another business, the CFO leads the financial analysis and integration, ensuring the deal aligns with strategic goals.
- Investor Communication: A CFO serves as the liaison between the company and its investors, providing transparent financial updates and maintaining investor confidence.
The Role of a Controller
A controller is focused on ensuring that the company’s financial records are accurate, comprehensive, and compliant with regulations. Their work lays the foundation for effective financial strategy. Here’s what a controller typically does:
- Accurate Bookkeeping and Timely Financial Reporting: The controller ensures every financial transaction is recorded correctly, providing a solid foundation for financial reporting. They also prepare monthly, quarterly, and annual financial statements that are clear, comprehensive, and tailored to your business needs.
- Budgeting and Cost Control: The controller prepares and manages the budget, keeping spending in check and ensuring financial goals are met.
- Cash Flow Monitoring: A controller tracks the company’s cash flow, forecasting future liquidity needs to avoid any cash shortfalls.
- Construction-Specific Accounting: In the construction industry, controllers handle specialized tasks like Work-In-Progress (WIP) reports, ensuring job costs are tracked and financial statements reflect the true status of projects. It’s also crucial that the controller has experience with the specific software used in construction accounting, as the right software expertise can significantly enhance accuracy and efficiency.
- Compliance and Internal Controls: The controller ensures that the company adheres to financial regulations and that internal controls are in place to prevent errors and fraud.
Don’t Let Ego Drive Your Hiring Decisions
As a small business owner myself, I often hear other entrepreneurs say they need a CFO—sometimes not because of a specific business need, but because they like the idea of having a CFO. It sounds impressive to be able to direct someone to "talk to my CFO," and it can give the impression that the business is larger or more sophisticated than it may actually be.
However, hiring the wrong person for the wrong reasons can do more harm than good. Don’t let your ego get in the way of hiring the right person for the job. The right hire should be based on the specific needs of your business, not on the title you want to boast about.
Right Person, Right Seat
In business, there’s a concept known as "right person, right seat," which emphasizes the importance of not just hiring the right person but placing them in the right role. It’s not uncommon for companies to make hiring mistakes by expecting someone with a CFO title to clean up the books and handle controller duties, or conversely, by hiring a controller with an escalated title and expecting them to develop a strategic financial plan or restructure debt.
These mismatches can lead to frustration, unmet expectations, and ultimately, financial mismanagement. For instance:
- Hiring a CFO to Do a Controller’s Job: A CFO might be overqualified (and overpaid) for the day-to-day financial operations that a controller should handle. This not only wastes resources but can also lead to a lack of focus on the strategic initiatives that a CFO should be driving.
- Hiring a Controller and Expecting CFO-Level Strategy: Conversely, hiring a controller and expecting them to manage high-level strategic tasks like restructuring debt or planning for mergers and acquisitions can overwhelm them and leave your company without the strategic financial guidance it needs.
The key is to clearly define the roles and responsibilities your business requires and hire accordingly.
Why Most Small to Medium-Sized Construction Companies Don’t Need a CFO
When John mentioned issues like delayed financials, bank and bonding issues, and uncertainty about cash flow, these were all signs that his business needed the support of a controller, not a CFO. These challenges are operational, rooted in the day-to-day financial management of the company, and are best handled by a controller.
When a Controller is the Right Fit
- Timely and Accurate Financial Reporting: If your financial statements are often delayed or inaccurate, a controller can streamline the accounting process to ensure reports are completed on time and correctly.
- Clear Cash Flow Projections: If you’re unsure about your cash flow situation, a controller can provide detailed cash flow projections, giving you a clear understanding of your financial position.
- Construction-Specific Accounting: If WIP reports or other industry-specific accounting tasks are confusing, a controller with experience in construction accounting can clarify these areas and ensure everything is tracked correctly. Familiarity with relevant software is also essential, as it enables the controller to manage financial data efficiently and accurately.
When You Might Actually Need a CFO
There are situations where a CFO could be beneficial, but these typically involve larger-scale financial strategy rather than day-to-day operations:
- Strategic Growth Planning: If your business is rapidly expanding or planning significant investments, a CFO can develop and execute long-term financial strategies to support this growth.
- Complex Financing and Debt Management: If your company’s financial needs are complex, involving significant borrowing or restructuring, a CFO’s expertise in managing debt and financing can be critical.
- Mergers and Acquisitions: If you’re considering an acquisition or merger, a CFO can lead the financial due diligence and integration, ensuring the deal is financially sound.
The Fractional CFO and Outsourced Controller: Best of Both Worlds?
For many small to medium-sized construction businesses, fractional accounting services provide a practical and cost-effective solution. These services allow you to access the expertise of both a CFO and a controller on a part-time basis, offering the benefits of high-level strategic planning and precise financial management without the expense of full-time hires. This approach is particularly valuable for businesses that need expert financial guidance but may not have the volume of work or budget to justify full-time positions.
Fractional CFO Services
If your business needs strategic financial advice but doesn’t require a full-time CFO, RedHammer's Fractional CFO Services are the perfect solution. A Fractional CFO can step in to provide the expertise you need, exactly when you need it, ensuring your business is positioned for success.
Here’s what RedHammer’s Fractional CFO Services can do for your business:
- Strategic Financial Planning: Develop long-term financial strategies that align with your business goals, ensuring sustainable growth and profitability.
- Financial Forecasting and Budgeting: Create detailed financial forecasts and budgets that guide your decision-making and help manage cash flow more effectively.
- Investment and Financing Guidance: Get expert advice on financing options, whether you’re considering taking on new debt, raising capital, or investing in growth opportunities.
- Mergers and Acquisitions (M&A): Navigate the complexities of mergers, acquisitions, or divestitures with confidence, supported by thorough financial analysis and strategic advice.
- Risk Management: Identify and mitigate financial risks that could impact your business, ensuring you are prepared for any potential challenges.
- Flexible Engagement: Benefit from the expertise of a CFO without the long-term commitment or cost of a full-time executive, allowing you to scale services as your needs evolve.
By leveraging these services, you can make informed decisions that drive your business forward, all while maintaining financial agility.
Outsourced Controller Services - You Only Pay For What You Need
For businesses that need reliable day-to-day financial management, RedHammer's Outsourced Controller Services offer comprehensive support. This service is ideal for ensuring that your financial operations are both accurate and efficient, freeing you to focus on other aspects of your business.
Here’s how RedHammer’s Outsourced Controller Services can benefit your business:
- Accurate Bookkeeping and Timely Financial Reporting: Ensure every financial transaction is recorded correctly, providing a solid foundation for financial reporting. Receive monthly, quarterly, and annual financial statements that are clear, comprehensive, and tailored to your business needs.
- Cash Flow Management: Monitor and manage your cash flow to ensure that your business has the liquidity it needs to meet its obligations and invest in growth opportunities.
- Budgeting and Cost Control: Develop and maintain budgets that help control costs and align spending with your financial goals, ensuring your business stays on track.
- Construction-Specific Accounting: Handle industry-specific tasks such as Work-In-Progress (WIP) reports, job costing, and project profitability analysis, ensuring your financial statements accurately reflect your projects' status. Having the right software experience is crucial for maintaining the precision and efficiency of these accounting tasks.
- Regulatory Compliance and Internal Controls: Maintain compliance with financial regulations and establish strong internal controls to protect your business from fraud and financial mismanagement.
- Scalable Solutions: As your business grows, our services can scale with you, ensuring you always have the financial support you need without the overhead of a full-time team.
This approach allows you to benefit from high-level strategic advice and reliable financial management, all while keeping costs in check. With RedHammer’s Fractional CFO and Outsourced Controller Services, you can focus on growing your business, knowing that your financial operations are in expert hands.
Key Points to Remember
- CFOs and Controllers Have Different Focuses: CFOs are generally forward-looking, focusing on strategic planning and financial forecasting, while controllers are backward-looking, ensuring accurate financial records and daily operational management.
- Interdependence Between Roles: A CFO’s ability to make sound financial projections and strategies depends on the accurate financial data maintained by the controller.
- Avoid Ego-Driven Hiring: Hire based on your company’s specific needs, not on titles that sound impressive. The right person in the right role will deliver the best results.
- Right Person, Right Seat: Clearly define the roles and responsibilities you need and hire accordingly. Mismatches between titles and duties can lead to financial mismanagement.
- Consider Fractional and Outsourced Solutions: For many small to medium-sized businesses, fractional CFO and outsourced controller services provide the expertise needed without the cost of full-time hires.
Conclusion: Right-sizing Your Financial Leadership
The key takeaway from my conversation with John is that it’s essential to right-size your financial leadership. Jumping straight to hiring a CFO without fully understanding your needs can lead to unnecessary expenses and misaligned expectations.
Before you begin the search for a CFO, take a step back and evaluate your company’s financial challenges. If they revolve around bookkeeping, cash flow management, or timely financial reporting, what you need is a strong controller. For most small to medium-sized construction companies, this will be more than enough to keep your finances on track and your business growing.
If you are interested in improving your approach to hiring a construction accountant, check out our blog - What to Look for When Hiring a New Construction Accountant
