Do businesses need a CPA and a CFO?

CFO vs CPA

CFO vs CPA

Businesses need a CPA and a CFO – more than likely aren’t the same person.

There are different qualities that make an excellent CPA and there is other qualities that make an outstanding CFO (Chief Financial Officer). There is some overlap but there are some significant differences.

Unless a CPA firm is doing a company audit, they probably don’t ask you probing questions about your business or the data in your financial statements. Like “why is your gross margin moving up and down significantly each month?” What is the job description of that new person you hired? A CFO will dig into the story behind the numbers, the CPA not so much.

There is a difference in the job description between the two and in how they look at things. Let’s take a look at a comparison between them:

CPA CFO
Compiles financial statements from client-provided data Plans, considers and decides how financial transactions will be booked to reach stated objectives and strategies of the business.
Works with historical data – keeps score after the fact. Plans, forecasts, budgets and projects the future financial performance of the company, in light of the company’s objectives, strategies and capacity to perform. Diligently looks for any trends that will impact company objectives.
Delivers financials weeks or months after the close of the accounting period (month, quarter, or year) Focuses on a fast (within days) and consistent month-end closing of process. Generally has daily or weekly real-time numbers and indicators of performance or trouble and how they will impact the company plan and communicates this to management – action oriented.
Compiles financial statements in accordance with statutes and practices consistent with the type of business – GAAP compliance. Generates reports that analyze results in the context of the company’s objectives, strategies, and owners’ intent for the business. Establishes key indicators that provide early warning for management of trouble ahead.
Compiles financial statements that can be relied upon by 3rd parties, such as banks, creditors and investors. Works to maximize the value of the business to the owners, including investors, while remaining within loan covenants, creditor requirements, etc.
Assumes you (the owner or CEO) are going to read and understand the financial statements as delivered. Makes certain you and the management team understand the financials, the trends, drivers and the issues they identify. Reads them to you, if necessary. Helps develop the stories behind the numbers.
Does what he’s hired to do — generally Taxes and Audits — including mid-year tax planning, quarterly estimates, etc. Does what he’s hired to do — help you strategize, plan and operate your business to maximum financial results and build a sustainable business. The CFO helps you co-pilot your business!

In reviewing the above, it’s probably obvious why your CPA probably can’t be your CFO. He’s not in the game. In most cases, he does not have the perspective by which to help you plan, forecast or monitor financial performance. Because you haven’t invited him in (and paid him for this). CPA’s are valuable for what you pay them to do — they really are. CPA firms can be hired to fill the role of a part-time CFO, but normally this is not their expertise. The CFO role is what Franklin Business Works specializing in. Here is good article “How much not having a CFO costing you?” http://www.chiefexecutiveblog.com/2009/02/how-much-is-not-having-cfo-costing-you.html.

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Are discretionary bonuses a waste of money?

baseball scoreboard

My goal with this post is to get you to not waste your money on discretionary bonuses. A discretionary bonus is by definition optional. This also means employees don’t know if they will get a bonus or how it is calculated. Of course, who doesn’t like some extra cash that they weren’t expecting?
But the question is – did paying this discretionary bonus motivate the employees or drive company performance? Isn’t the reason to pay a bonus is because of good performance? I don’t believe discretionary bonuses do this.
Look at the chart below. It is interesting that employees who make less than $75K a year by and large only get discretionary bonuses.

Typical Bonus Levels as a Percentage of Salary
Base salary Target bonus (%)
Less than $75,000 0*
$75,000-$99,999 10-15
$100,000-$149,999 15-20
$150,000-$199,999 20-30
$200,000-$299,999 30-40
$300,000-$499,999 40-60
$500,000 or more 60-100
*Bonuses for this range are not typical, and if rewarded, are usually discretionary.
The data was put together by Salary.com.

So let’s think about this. The discretionary bonus is decided after the fact, at the owner’s discretion (or whim). Let’s relate this to baseball. I went to my nephew’s baseball game today and it made me think, how would the teams feel if the rules weren’t known and after the game the umpire got to decide who won the game? That would be pretty discouraging. I don’t think players would be too excited about the game if the winners and losers were chosen at the whim of the ref and the player didn’t know the rules to the game.
In a lot of ways, discretionary bonuses programs are setup that way. It doesn’t have to be that way.
Studies show there is more to motivating people in the work place than just money. But if people weren’t motivated by money why would they come to work at all and why are bonuses for the higher income levels so significant? Obviously companies think money must motivate employees that is why they give them.
So, how should a bonus be given? You need to think about and define the rules or critical numbers (like net profit, cash flow, etc) for winning / receiving a bonus. If you structure the bonus correctly and you include your employees in on how they can earn the bonus, and then let them track progress toward earning the bonus on a regular basis. It will be great motivation tool! More times than not they will be motivated to figure out a way earn the bonus – wouldn’t you?

Next week I will give you some ideas on the specifics of how to structure a performance based bonus program.