Turn on the Headlights: 7 Essential Financial Tools Every CEO Needs to Confidently Accelerate Success & Growth

Many businesses make the mistake of believing that financials are all about historical numbers and budgets. However, if these are the financial tools you most rely on, you’re likely wasting time, money, and preventing significant growth within your company. In this article, founder and president of Preferred CFO, Jerry Vance, one of the most experienced outsourced CFOs in the United States, discusses the 7 essential financial tools every CEO needs to increase strategy and success.

At Preferred CFO, our financial strategy philosophy is based on turning on the headlights. We frequently ask companies to imagine driving on a mountain road without good headlights. What happens if a deer jumps out? It’s probably no big deal if you’re driving 10 mph, but if you’re going 60 mph, the potential for disaster significantly increases. You need to have on the “high-beam headlights” to see the deer before it jumps out on the road.

It’s the same in business. Seeing ahead not only means planning for the future, but also having the tools to quickly identify when adjustments need to be made, when opportunities arise, or when a change could save your company from disaster.

7 Financial Tools Every CEO Needs

Many CEOs have just enough information to know what’s going on and can keep the business functioning during good times. But what happens during difficult times? A good example is the recent COVID-19 pandemic. Many companies found themselves floundering as they realized they didn’t have the financial tools and reports in place to identify which cuts to make and how much, did not have enough working capital to sustain them in a disaster, and had not created opportunities for capital in case of emergency.

However, it doesn’t take an international disaster to cause a business to fail. Even relatively small issues such as a decrease in revenues, lower margins due to competition, or increased material costs can cause significant damages to a company. This is especially true if that company cannot quickly identify and resolve the problem. In fact, cash-flow contributes to the reason 82% of small businesses fail.

Here is a list of 7 financial tools every CEO needs to maximize opportunities for success, prevent disaster and loss, and “turn on the headlights.”

1. Accrual-Based Financials

One mistake business owners make is having cash accounting as opposed to accrual-basis accounting. Accrual accounting is the strategy of recording revenues and expenses when they are incurred, regardless of whether the money is actually received or paid. This gives you a more accurate view of business performance.

At Preferred CFO, we recommend monthly accrual-based financials that include a balance sheet, income statement, and cash flow. These should be tracked under GAAP (generally accepted accounting practices).

2. Actual-to-Budget Reporting

Many businesses take the time to budget, but a smaller amount focuses on actual-to-budget reporting. Actual-to-budget reporting is the process of comparing your actual revenues and expenditures to your budgeted projections, and continually roll forward.

Actual-to-budget reporting is important to encourage accountability and provide information for relentlessly improving your business each month.

3. Short-Term Cash Projections

Short-term cash projections include a granular cash-in, cash-out forecast for at least 13 weeks. This should be down to the detail with information by customer and vendor. This tells you what cash you have on hand, what cash you expect to have on hand, which expenses you expect to pay, and when.

This is considered a near-term forecast since it is projecting in the near-term future what you expect to happen. Aside from being a projection, the short-term cash projection should also guide your short-term financial decisions during that period.

4. 12-Month Budget

Most companies have a budget, but not all follow it—or follow it well. In order to have a successful budget, it should be completed by a financial expert (with input from department managers), not the other way around. When non-financial experts create a budget, it is often based on emotion and perception instead of hard numbers. A financial expert can separate perceived importance from proven importance for a more accurate budget that drives success.

A 12-month budget should be reasonable, realistic, and achievable. It should include a balance sheet, income statement, and cash flow.

5. Rolling 12-Month Forecast

Your 12-month forecast is a mid-term forecast and should inform your 12-month budget. This forecast should be updated monthly with actual financials and should be adjusted regularly with the updated information.

Many companies overlook a forecast after they first write their business plan or until they are seeking funding, but a financial forecast is important for all businessesof all sizes and stages of growth. A forecast helps you maximize your resources while minimizing waste and optimizing growth and success.

6. 5-Year Forecast

As outsourced CFOs, we tell our clients that their 5-year forecast is one of their most important financial tools for CEOS because it is their financial blueprint for building their business. It is the detailed plan that helps guide you from where you are now to where you want to go. A 5-year forecast takes the guesswork out of your financial decisions by providing a guideline for the best use of funds for your company to maximize resources, minimize waste, and put you in a more athletic position for success.

The difference between a complete and accurate forecast compared to an incomplete or inaccurate one is astronomical. In a 2005 study by the Institute of Business Forecasting, they found that an improvement in accuracy of just 1% from under-forecasting or over-forecasting resulted in an annual savings of $970,000 – $3,520,000 a year for the companies of $100M to $3B. If the trend is linear, this would translate to a $48,500 – $176,000 savings per year for companies of $5M to $150M. Consider what this comparison would look like for a company that had no forecast, then implemented and followed one.

7. Analysis of Financials

Last but not least, a CEO needs access to an analysis of financials as part of their essential financial tools. This analysis drives high-level financial insights that can be important for informed decision-making about your business, operations, and finances. This should include a:

  • Contribution margin analysis. This shows the margin between the revenues you make and the variable costs it takes to deliver the product or service you sell. Variable costs are expenses that fluctuate up and down with sales.
  • Break even analysis. This is your financial tool for determining at what point your company will be profitable—and what number of products or services you have to sell to cover your costs.
  • Product line analysis. This is an essential profitability analysis of each of your product lines. It allows you to see where there may be areas for improvement or which products could benefit from an additional push.

Don’t Make This Mistake

Historically, businesses hired a full-time controller for $150,000 and relied on them for all of their financial reporting needs. Eventually this person would assume the “CFO” title (if they didn’t start with that title to begin with.” This is because as many as 40-50% of business owners don’t understand the difference between controllers and CFOs. The biggest differences are:

  • Historical vs. forward-looking financials. Controllers are trained and experienced in historical figures. While they can often produce a budget, it’s not informed or strategic to the level of a CFO.
  • Higher level of strategy. CFOs have a wide range of operational experience as well as financial reporting experience. This means they can deliver strategic insights and updates that can elevate your company performance and profitability where controllers typically only have the capabilities to report on it.

Many companies believe that CFOs are reserved for large businesses and that a Controller can tide them over until they get to that point of revenue and growth. However, these companies don’t realize that a CFO could help them get to this point—faster.

A good way to do so without the cost of an in-house CFO (and often with less cost than an in-house controller) is to hire a fractional, outsourced CFO. Outsourced CFOs offer part-time CFO services, but full-time experience and expertise,at a reduced cost compared to hiring a comparably experienced CFO in-house. This gives you the expertise, reports, strategy, and insights that can propel your company’s growth and success, but at a more reasonable and affordable cost.

About the Author

Jerry Vance Outsourced CFO Utah

Jerry Vance
Founder, President Preferred CFO

Jerry Vance is the founder and managing partner of Preferred CFO. With over 15 years of experience providing CFO consulting services to over 300 organizations, and 28 years in the financial industry, Jerry is one of the most experienced outsourced CFOs in the United States.

You may also be interested in…

How to Determine How Much Your Business Is Worth

How to Determine How Much Your Business Is Worth

Business Valuation Methods & Determining What Your Business is Worth Whether you're preparing for a sale or acquisition, seeking debt or equity financing, or evaluating other strategic business decisions, it's helpful to have a good pulse on the value of your...

11 Things to Know About the 2020 Payroll Tax Deferral

11 Things to Know About the 2020 Payroll Tax Deferral

On August 8, President Trump issued a Presidential Memorandum to defer the payment of the employee share of social security tax from September 1 through December 31, 2021. But what, exactly, does this Payroll Tax Deferral mean, and should employers take advantage of...

9 Traits of a Great CFO: Evaluating Your Financial Team

9 Traits of a Great CFO: Evaluating Your Financial Team

As Preferred CFO performs speaking engagements and advisory with CEOs around the country, one of the topics we’re continually asked to address is how to evaluate the quality of a financial team. Among these is answering the question, “What makes a great CFO?” We’ve...

1 Big Budgeting Mistake You’re Probably Making

1 Big Budgeting Mistake You’re Probably Making

One Big Budgeting Mistake You’re Probably Making A budget-first mindset not only wastes time and resources but also often results in an unrealistic and/or inaccurate budget. It’s a time-old Q4 tradition—lengthy planning cycles consisting of sitting down to tap out a...

What is the Difference Between a Controller and CFO?

What is the Difference Between a Controller and CFO?

What is the difference between a controller and CFO? While there are functions of both a controller and CFO that support each other, both positions make distinctly different contributions to the organization. What is the Difference Between a Controller and a CFO? The...

Signs Your Company is Ready for a Part-Time CFO

Signs Your Company is Ready for a Part-Time CFO

A CFO brings high-level expertise and strategy to an organization. A CFO’s primary role is to elevate financial strategy, streamline operations, trim fat, and maximize sustainable growth. But how do you know if your company is ready for a CFO? How do you know if your...

Cash Flow: The Reason 82% of Small Businesses Fail

Cash Flow: The Reason 82% of Small Businesses Fail

Poor cash flow – How to recognize it and how you can make sure it won’t be a problem We know that the majority of small businesses fail within the first five years, but a recent study by U.S. Bank drilled down into the reasons why this occurs. In their study, they...

Handling Business Cash Flow During a Crisis

Handling Business Cash Flow During a Crisis

Managing Business Cash Flow During a Crisis Early in 2020, we were hit with an international crisis that most businesses were not prepared for. As COVID-19 swept through countries, quarantines and stay-at-home orders created economic stress that caused many business...

What is a 5 Year Forecast, and Who Needs One?

What is a 5 Year Forecast, and Who Needs One?

If your company is preparing to raise capital or if you are currently writing a business plan, you may be getting ready to build your 5-year financial forecast. It can be intimidating to plan this far into the future—as well as knowing what kind of projections to...