Role of A CFO for better Financial Management for SMEs

Ever wondered how some companies are able to raise substantial debt & equity funds, and grow organically as well as inorganically, rapidly? Ever wondered how some organizations are able to manage crisis far better than the industry average, when the going gets tough? The answer to that is having a good CFO, which makes a lot of difference.

Note however that a CFO should not be confused with Head of Accounts. SME’s usually ignore the finance & accounting function, which is left for the friendly CA to manage books and more so taxes, than proactive financial reporting to support key business decisions.

A CFO Jobs today leads every other function in an organization, alongside the CEO, shouldering equal responsibility in the success of the company. A CFO today not only leads the accounting function, but ensures robust enterprise wide systems & controls, manages cash flow & costs, negotiates key contracts/agreements, drives Fund Raising, handles Investor Relations, addresses key HR issues, strategizes M&A & post acquisition integration plan, is the official spokesperson of the company for banks & investors, and is an important member in Board Meetings.

Let me give you some practical examples, across multiple functions, to illustrate the importance of a CFO Services for better Financial Management of a Company, especially SME’s. Note that all these are from real life examples, from SME’s.

Illustration 1: Bank Reconciliation

* I have interacted with quite a few companies and few common responses I get when I ask about Bank Reconciliation is:
o What is that? Our auditors handle the same.
o We prepare once in a quarter, but it is never checked by us (Promoters/CEO).
o We prepare, but we clear bank reconciliation once in few months.
* Let me share an experience here. I was involved with a Finance Company. They had a Bank Reconciliation, which was regularly prepared, but cleared once in few months. When inspecting the same closely, we noticed there were a couple of cheque returns from a customer lying in Bank Reco. This meant that the system showed he had paid on time. Now that smart customer, after 3 cheque bounces, prepaid his loan and the company even returned all his papers. Later the company realized about this 3 cheque bounces, but by then it was late and it was not easy to recover the same.
* Remember, no matter how basic it may be, Bank Reconciliations say many things. It also helps you in tracking any misuse/fraud in your bank account. Do check and clear, as often as possible.

Illustration 2: Cost Centre Accounting / Divisional P&L

* Undertaking Cost Centre or Divisional P&L helps evaluate performance and potential of each of your business units. There is no point in continuously burning cash on a loss making division, while ignoring a good profitable business opportunity. And you don’t need an ERP for generating such a report. Combination of Tally and XLS could do the work.
* A Company setup a division, with expectations of great potential. However, on detailed review of the business & the finance model, we realized that it could have not turned profitable for over 3 years, and it had high collection risk, thereby increasing loss potential. The Owners had completely opposite perception about the business, and with detailed Cost Centre Review Reports they were able to quickly take corrective steps.

COMPLIANCES

When cashflow is under stress, Government of India becomes the funding agency, by default. This happens by virtue businesses electing to defer Statutory Dues, which is not right and can get dangerous for following reasons:

* This is not free money. The company will have to pay it, someday. And this deferral comes with high interest cost, penalties and sometimes settlement cost.
* This becomes a negative remark when you go out to seek External Investors. PE’s/VC’s do not like non-compliant companies.
* Some regulatory bodies have powers to even issue a Non-Bailable Warrant for a seemingly basic non-compliance.