I have often said that the first sign that a young contractor is developing business acumen is when they hire their first CFO. If you’re operating any size construction business larger than $5 million annual turnover you must have a professional CFO. Period. No procrastination. You can make your loyal bookkeeper, cousin Martha, the “head bookkeeper” and have her report to your new CFO who will take on a much wider role in the financial health, project management, and stakeholder relationships of your company.
Your CFO’s Role
In construction, the CFO’s responsibilities extend far beyond traditional financial management; they encompass strategic planning, risk management, compliance, and operational efficiency.
- Strategic Planning
If you are a regular reader of these Construction Message, you may be tired of hearing me talk about strategic planning. However, for these past six weeks we have been discussing the highly complex financial transaction a construction contract represents. Our industry must constantly cope with fluctuating and often unpredictable sources and uses of cash over long periods of time. We have reviewed some methods of tracking and planning cash flow and mentioned how important it is for CFOs to publish a Go/No Go cash flow plan before all new projects are approved. CFOs utilize various financial modeling techniques to predict cash flows, assess the financial viability of projects, and ensure that adequate funding is in place. This function is essential to the construction business management process. Moreover, the CFO plays a pivotal role in evaluating potential projects. They analyze financial metrics such as return on investment, net present value, and internal rate of return to determine the feasibility of new ventures.
- Risk Management
Most construction companies fail simply because they unexpectedly run out of cash. The cash flow management plan that we have been discussing is a vital part of a construction professional’s risk management. In addition to a cash flow plan with a future looking Go/No feature, CFOs also mitigate risk by:
- Securing adequate banking and bonding.
- Establishing adequate contingency reserves (cash flow plan).
- Negotiating favorable contract terms with suppliers and subcontractors.
- Compliance
The construction sector is subject to numerous regulations, including safety standards and environmental laws. By staying informed about these regulations, CFOs help the organization avoid costly fines and legal issues that could jeopardize its financial stability.
- Cash Flow Management
CFOs implement cash flow forecasting to predict future inflows and outflows, as we have discussed for the last four weeks.
- Financial Reporting and Accountability
- CFOs are responsible for preparing accurate, timely financial reports for the CEO, stakeholders, and regulatory authorities.
- CFOs implement internal controls to ensure accountability and prevent financial mismanagement. They establish policies and procedures for financial transactions and conduct regular audits to monitor compliance.
The Essential CFO
Because most construction concerns evolved from small (often one person) privately held businesses, the job of managing the money was naturally handled by the founder. or a trusted family member. The skills it took to handle banking, billing, collection, payroll, and accounts payable grew along with the volume of the tasks.
My brother and were handling the money of the construction company we founded, and I ended up going to night school to take accounting, economics, and finance 101 and 102 when I realized our company had quickly outgrown our self-taught bookkeeping skills, and that I could not understand what our outside accounting firm was saying to us. It never occurred to us to hire a CFO. I just kept going to business school. Many years later when I left the business to become an educator and consultant my brother decided to stop growing and run a business he and his family could handle.
The moral of my story is, if you choose to grow your business beyond a one person show (closely held family business) you either need to go to business school and become a CFO or hire one as soon as you feel financial matters getting out of control. If cousin Martha can handle all the tasks described above, give her the title of CFO immediately and turn her loose. If not, you had better hire a qualified CFO.
More about CFOs next week.
For more information the role of a CFO, read more at: ROLES
For a broader view on risk management, read more here: RISK
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Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
