When Do You Need a Construction CFO?

Has your company outgrown your basic bookkeeping? If your financial operations are becoming more complex and you feel like you’re losing control, or if you’re getting into federal contracting, it may be time to consider hiring a CFO. This week we’re discussing when to do it, why you should work one who has construction industry experience, and whether to outsource or hire someone in-house.

Topics we cover in this episode include:

  • At what point do you need to hire a CFO?
  • How a good CFO can help your company grow
  • The importance of working with a construction-oriented CFO
  • How a CFO helps with compliance and reporting
  • A CFO knows your whole tax picture
  • Questions to ask yourself if you think you may need to hire a CFO

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:05] Wade Carpenter: Welcome to the Contractor Success Forum. In this episode, we are talking about what a construction CFO does, and if you need one for your company. When does it make sense for you to get more qualified help as your company grows?

What can a qualified CFO do for you, and how do you find one? So if that’s of interest, stick around, let’s get into it.

If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs. Here with me is my co host Stephen Brown with McDaniel Whitley Bonding and Insurance.

Stephen, this was your topic you brought up. What are we talking about today?

[00:00:35] Stephen Brown: Okay. Your business is growing. You can’t be an expert at everything. You need some help getting your financial part of your business in order. And CFO stands for Chief Financial Officer, of course, and that is a person generally that’s hired for the role of overseeing the accounting end of the business, but also I saw a good description of a CFO that said their job is to prepare for timely and important financial decisions.

That person has to be in charge of making sure the financial information is correct, things are posted correctly, but there’s so much more to CFO.

At what point do you need a CFO?

[00:01:15] Stephen Brown: And at what point, Wade, should someone use a part time CFO or a full time CFO to hire someone in house?

[00:01:24] Wade Carpenter: Well… Can I say it depends? I get this question all the time because part of what we do for contractors is, doing the bookkeeping is one piece. We do the whole back office for a lot of contractors, but we also will actually act as their CFO.

And a lot of companies really don’t need that to begin with. And I guess we can talk about when that starts making sense. But it’s different for different companies. It depends on the particular industry. It depends on how many jobs and the size of your jobs, and if you’re trying to work with a bonding company or work with a bank. So there’s a lot of factors that I was going to go into today, as we kick this around.

[00:02:06] Stephen Brown: Well, and not to mention all the thousands of other financial decisions. Should I buy or should I rent? Running these type of scenarios to give the owner of the company information or a report spells out what makes best sense financially for the company to present to the owner to make the decision, I would think, is mandatory.

Could you take me through kind of a typical scenario of how a construction company is set up from an accounting standpoint? In other words, CFO, accounts receivable clerk, accounts payable clerk. What do you see? Most people start off maybe with the bookkeeper until they grow?

[00:02:41] Wade Carpenter: A lot of times they start off with a bookkeeper and sometimes it’s their spouse or significant other or whoever it is. And when it is your spouse, that sometimes can become a problem because it’s their second job and they, sometimes they’re not even getting paid.

But then they graduate to trying to find a bookkeeper. And as we’ve talked about many times on this, somebody can call themselves a bookkeeper all the time, but especially somebody that has construction bookkeeping experience, there’s plenty of people in the industry, and maybe they’ve worked in the industry, but all they maybe did was reconcile the Bank account or paid bills or something like that.

At some point as a company grows, I hear all the time that I hired this person and they said they knew how to do all these job reports and they’re going to come in and they completely changed my system, but I’m six months later and I still can’t get good job reports. I don’t know where I am. We’re three months behind on reconciling our banks.

Yeah. You’re a contractor. You set your company. You set

[00:03:44] Stephen Brown: up a

[00:03:44] Wade Carpenter: bookkeeping system yourself.

[00:03:48] Stephen Brown: You get some help. Hopefully you find a family member that’s good at it and likes it. Sometimes you cram a family member in there to fulfill that role who doesn’t like it and isn’t good at it.

And, when I think about all the different positions in large construction companies, all the different people at the accounting end of things, someone has to not only oversee those, but prepare regular reports for the owner of the company to see their key performance indicators, their ratios, how they stand up from where they wanted to do. Tracking that information and saying based on our common goals, this is where we are.

And I know you provide services. There was a group I met out in California called Rent A CFO. This was years ago. And they basically said if you did six million dollars in sales, you need to start thinking about a CFO.

And that was a while ago, so that’s gone up. But, would you talk a little bit about it, at what volume of stress a CFO might be needed, and the differences between maybe a– without denigrating you, calling you a rental CFO– I’m not. Folks need to know they can hire you for those purposes. But also, a full time person that you hire.

What do you have to pay them and what kind of stock options or bonuses do you have to work in for a CFO generally?

[00:05:15] Wade Carpenter: Well, generally, if you do the outsource CFO type, CFO by the hour, however they want to call it, you’re not thinking about all the stock bonuses and stuff like that.

[00:05:26] Stephen Brown: So you don’t demand half of their stock to work with them?

[00:05:29] Wade Carpenter: No, I actually have had some of my contractors value me so much that they’ve actually given me a bonus even though we don’t ask for one, they just had a good year and they I’ve seen what kind of differences we can make.

But let me back up on that 6 million figure. I don’t know that’s a good figure or not. It depends on the type of construction again. And, as we were talking about, what a bookkeeper does, some point they say, well, okay, I can’t even get my banks reconciled. But then they start realizing, hey, I really need to know where I am on my jobs. The job costing, I think, is one of the biggest things. And so, if they try to start getting some of that, and that’s where they’re finding they’re not getting a good handle on their jobs.

And, one of the problems I’ve had with many of these contractors, when I’ll start talking to somebody, is they don’t know how to get started with, , cost coding. They get really hung up in this, we’ve had a couple of episodes where we talked about cost coding versus the, you know, chart of accounts level versus, getting the detailed CSI codes code in there. And that’s what I see is one of the things that a lot of times we help people with.

 I guess I’m going to dance around the dollar figure for a little bit as far as what the revenue level is, because it, again, it depends on, somebody that–

How many moving parts there are.

Exactly. So, you could have a general contractor doing a million bucks and, not being a lot of transactions, I mean, you could have a few jobs and get to a million. But if you got a plumbing contractor or, electrical or something like that, they can take a while to get up to a million dollars, so you have to have a lot of jobs to get there, depending on the size of the job.

So it’s a subjective thing, and it really, it depends on what they’re needing, so.

Well, to base anything revenues, it’s assumptions. It’s not what we do at the Contractor Success Forum, so it’s,

[00:07:33] Stephen Brown: it’s kind of repugnant for us to talk in that realm, because we see revenue only as a part of what determines your profit, and it’s the profit that we care about. It’s the profit that the CFO cares about.

How a good CFO can help your company grow

[00:07:50] Stephen Brown: The CFO, in my opinion, provides so much to allow you to grow.

What do you do when you have a lot of cash in your statement and you want to put it to work? What do you do when you want to rent or lease or buy a piece of equipment? What do you do when you want to project your number of cash flow days? What do you do when you want to build your company up to sell and make it worth the most money possible?

The strategy of the financing part of your company and the risk management of your company can fall to that CFO. And like I always say, you don’t learn construction accounting in college and also you get what you pay for, and good advice or bad advice from someone. It’s the same with the CFO.

In my opinion, I’ve seen construction companies hire a CFO just because they were told they needed one and that CFO didn’t know what they were doing. It’s easy to interview well with a contractor that doesn’t understand the ins and outs of what being a CFO entails.

What’s your comments about that?

[00:09:07] Wade Carpenter: Well, there’s a lot of loaded comments in that. So, first of all, let me take what you were talking about. A lot of things you mentioned that a construction CFO would do, a lot of them would be very different from, say, a retail industry or manufacturer, things like that.

And that’s one of the questions I get when I talk to a prospect, a construction company that comes to me and says, what can you do for me? And a lot of times there are different needs.

 Many times it’s more of, we’ve got cash flow problems. We’re in growth mode. So, we’re trying to grow through this. So, we’re trying to manage cash and get cash in the door. And there’s a lot of things I can do with that. , a lot of the, heavy equipment guys, we may be doing exactly what you said, lease versus buy decisions on equipment. There’s a lot of things like getting your company ready to sell. So many of these things you’ve said that are all encompassing.

[00:10:06] Stephen Brown: Well I’m sure you work with a lot of CFOs on just projects, certain projects that need to be done.

[00:10:11] Wade Carpenter: Well, yeah, that’s a lot of it, too is getting, even from month to month, just looking at job reports and helping the owner interpret what those job reports mean and seeing if you’re winning.

And number one, just trying to figure out if you are losing on a job well before you know, it’s it’s six months later and you’re, the loss is done and we can’t do anything about it. The time to figure it out is as soon as possible. So there’s a lot of things that go into it.

The importance of working with a construction-oriented CFO

[00:10:43] Wade Carpenter: I would say also that there’s people that can call themselves a CFO all day long. And there is some art to construction CFO. There’s some things that you just wouldn’t do in some of these other industries. And the cash is one of the biggest things. The jobs, you don’t have that in a lot of the other industries that might need a CFO.

[00:11:06] Stephen Brown: And then there is the whole new accounting terminology that applies just to contractors.

[00:11:12] Wade Carpenter: Right. Again, it may be things like scaling your business up. I mean, it’s just, integrating with another software product or something like that. We see that all the time.

And, ultimately a lot of these people are just going and chasing all these software products. I’ve seen a lot of this lately. And they think that this software is going to fix their problem. , just, I’m going to go get this shiny new thing that does all these job costing and all these nice things. But if you don’t put the inputs in there and you don’t get it set up right, it’s never going to work. So.

You help

[00:11:46] Stephen Brown: with that as well?

[00:11:47] Wade Carpenter: Yeah, I mean, we work with certain packages too, but, part of the key is the fact that, I think I’ve told this many times on here, but. I have a contractor that is actually still running 150 million dollars on QuickBooks Desktop. And they don’t need all this other stuff if you set it up right. Now, some of these other ones like QuickBooks Online, if you’re really trying to get some really detailed job cost code reports, you have to have one of these extra third party softwares. But a lot of this stuff is budgeting, forecasting, cash. It’s partly risk management, too. It’s more like dealing with insurance, workers comp, and namely working with you, bonding agents.

[00:12:30] Stephen Brown: I work with a number of CFOs on their insurance, on their bonding, on the meetings with the underwriters and it’s about risk. It’s about everything from the cybersecurity. It seems to me like it’s everything involving the finance of the company.

As a contractor if your wife is running your books for you, or your husband is running your books for you, if you’re a lady contractor, your spouse is watching your money as if it was yours. So it’s kind of a natural extension to have that person doing that with you. It’s our money. So I’m gonna go work and you watch it.

And but it’s at almost every point in time that spouse says enough. Enough. And I’ve seen some spouses say enough and they said no, not enough. And they’ve gotten divorced over it. And I’ve seen every kind of different scenario that you can conceive of.

But to get timely and important financial information in order to make the right decisions, that’s everything. I mean, to me, that is everything. I said it again. And the reason is because, just like you said, if you’re looking at garbage, you’re making garbage decisions. But if you’re looking at good information and someone can help you interpret that information, then it’s great.

You know, I always say it’s pulling with the same set of oars. Everybody. It’s so true. Once you communicate a financial plan for your company and then you find out you need to tweak it or change it, the CFO’s the best person to help you figure out how to do that. and make the right decisions. That’s just my opinion.

How a CFO helps with compliance and reporting

[00:14:22] Wade Carpenter: Right. Well, another area we really haven’t talked about is more like, compliance and reporting. Sometimes, if you’ve got a contractor that’s crossing state lines and dealing with licensing, you sometimes have payroll tax issues and several other things, dealing with workers comp crossing state lines, and things like that.

 Dealing with financial statements as well, and When you get a certain level, whether you’re trying to go to your bank or your bonding company, you need financial statements. And in my role now, I did audits for most of my career, but what we’re doing, number one, is we’re getting great clean books.

And so if somebody needs a review, financial statement or an audit, we can give it to that CPA– we’re not independent if we’re doing the bookkeeping and the CFO role. But we can feed it to another CPA. We know what they’re looking for and we usually can cut down on those fees as well to do an audit or review.

A CFO knows your whole tax picture

[00:15:24] Wade Carpenter: The third part of it, which, we don’t have to, but a lot of our packages we just go ahead and roll in the taxes. So, that’s where we are so much better when we have clean books, and we’re doing the books. And so October, November, December, we’re actually able to look and project where are we, especially if we know the whole tax picture, so we can do the tax return and, we can make plans to increase your bonding while decreasing your taxes. And we talked about the different, you know, maybe a cash basis taxpayer versus needing to do percentage completion for you.

So, that’s the compliance side. Any thoughts on that?

These are two huge

[00:16:11] Stephen Brown: headaches that as a general rule, business owners don’t have the time or knowledge to deal with. That could get you in a lot of trouble if you don’t handle it right.

[00:16:20] Wade Carpenter: There’s a couple other things that are a little different.

How the construction industry is different for a CFO

[00:16:23] Wade Carpenter: But, I mean, how is it different from other industries? I think we’ve already talked about it.

Focusing on the projects is one of the biggest things I would say. The revenue recognition is a little harder than most industries. You know, doing a percentage of completion, and they’ve changed some of the revenue recognition rules in the last couple of years.

Dealing with regulatory. Crossing state lines as well as some of the other things that you’ve got to deal with. And having somebody that understands some of that. Dealing with the materials, labor fluctuations, and pricing, and having somebody separate.

I’ve seen a lot of people missing their bids lately. They’ve had consistent losses in the last few years, and they really haven’t been capturing their overhead, and they don’t know where they are. So there’s a lot of pieces that go into it, and it is a very capital intensive industry. So, dealing with, do you need a line of credit increase or negotiating that kind of stuff.

And I guess the last piece on that, construction can be very cyclical. , There’s ups and downs from years to years, but there’s also seasonal fluctuations a lot. That’s another thing we deal with, so.

That’s a great point.

[00:17:32] Stephen Brown: As you’re preparing to not have seasonal fluctuations, the CFO can help with that as well. To me, the part of construction that is so difficult is just all of the different projects that you may have going on at the same time. And making sure they’re accounted for individually. And they’re billed properly and individually, and that the job costs are posted and allocated individually. It’s everything. And it’s a lot of work.

[00:18:02] Wade Carpenter: Well, I guess if we can, I’d like to try to address your question of when you need a– just by analogy. You know, if you’re looking to see if you need a CFO and you maybe you’re in growth mode or whatever, I would say, okay, so let’s take your revenue.

I usually do start saying at about a million dollars, sometimes it makes sense. A million dollars and up in revenue. The most ones we take is usually the 1 to 10 million, but we have some that are 1 to 30 million. We actually have one that is to the CFO level we took on this year in a very large city that is doing 100 million, but they could not find somebody locally to do that because they couldn’t find the local talent that had the industry experience.

The majority of people at least start looking and considering it when you hit a million dollars to say 10 million. That’s really the sweet spot. Once you get above that 25-30 million, you may be needing somebody permanent on site all the time.

[00:19:04] Stephen Brown: Mm-hmm.

 Also providing management for your in-house accounting staff that you’ve had to build up to get all the work done.

You could have a million dollars in revenue that is just, one project that’s clear cut. But at the same time, a million dollars of revenue produces a lot of income and expenses. A lot of receivables and payables. And just depending on the make up of that amount of revenue just depends on whether you need to rent the services of a CFO like Carpenter and Company or hire someone full time in house.

I Just wanted to point out that our listeners can contact you and ask you questions about this, right?

[00:19:45] Wade Carpenter: Oh, absolutely.

Questions to ask yourself if you think you may need to hire a CFO

[00:19:47] Wade Carpenter: Again, it’s not really just around revenue, but I would just maybe throw a million dollars and up as kind of a starting point where you think about it. you know, I would ask how ask how complex are your financial operations? Are you on a growth path? Is your revenue growing? And that’s where I’ll see a lot of people, they all of a sudden are thrust into higher revenues and they feel like they’ve completely lost control.

Are you getting into federal contracting? We’ve talked about, do you require bonds is another question. How effective are you in getting your job costing and really being able to look at your figures? Do you have cash flow issues?

[00:20:26] Stephen Brown: You just kind of have to feel people out and know where they are now. And help guide them in where successful contractors need to be need to be.

[00:20:34] Wade Carpenter: Right. But again, a lot of people don’t need a full time CFO. And I think a lot of people have never really thought about. Being able to afford that and it really isn’t as expensive, especially if you’re doing a part time CFO type thing.

So, I hope this has helped everybody maybe think about whether they might need to consider getting better books or getting a better handle on their financial statements.

[00:21:00] Stephen Brown: Well, I appreciate you doing the topic because it’s something I’ve always been curious about. And I wanted to remind you of that listener that said once, the Contractor Success Forum to him is the equivalent of getting an MBA in construction finance. So here’s a real cheap plug for us.

But then again, I wanted to remind our listeners we are there to help you. We’ve seen so many contractors make m istakes in different ways or need help and that’s what we’re all about.

[00:21:28] Wade Carpenter: Well, with that, let’s go ahead and wrap this up. Thank you all for listening to the Contractor Success Forum. If you’re listening on a podcast somewhere, check out the show notes at Contractorsuccessforum. com or at CarpenterCPA’s YouTube channel.

Consider subscribing to our channel and follow us each week as we post a new episode. We will look forward to seeing you on the next show.