Archive for February, 2010

The Difference between a Bookkeeper, Controller, and A CFO

February 7, 2010 Leave a comment

When we work with companies on a consulting basis we work essentially at three levels; Bookkeeping, Controller, and CFO services. For most small companies these roles are merged. You have the brand new company started by one individual. He or She has an idea to sell a product or service. At this point already and without even realizing it in most cases this person is already assuming roles within their start-up company. This person is the CEO, COO, CFO, Controller, and Bookkeeper all in one. And for a company at this stage that is probably just fine. As the company grows the company will evolve and these roles will start dividing off. Perhaps the most common and logical evolution is for the bookkeeping function to break off from Controller and CFO. If the business owner recognizes that he or she does not really understand bookkeeping, but they generally understand that they want to see a profit and loss at least to see how they are doing, then the roles have just split off. So he/she goes out and hires a bookkeeper or hires a company like ours to come in and enter and reconcile once per month, then show him his Profit and Loss statement. At this point the business owner is assuming the roles of controller and maybe CFO, but it may be too soon for that. The bookkeeping is now a separate function.

As things evolve these roles become more defined and depending on the size of the company it eventually becomes necessary to break these roles up – at least in terms of definition. Why is it important to define these roles? It is important to define these roles because it is important to understand them so that their functions are implemented within or outside of the company. They are all very important for every company who hopes to succeed.

I’ve been writing and speaking a lot lately about working backwards. We see the end and work our way back from there to today so that we can see what our goals are and how we can reach them. The way I saw this article and video coming together was by doing just that. I see the CFO’s function as the one who sees the end in terms of the financial and then develops the plan for how to get there. In real world terms we call the CFO’s plan a financial model. The controller comes right before the CFO. That person’s role is to provide financial oversight. Make sure that the systems are in place to ensure that the accounting and bookkeeping information supports the following:

  • Existence or Occurrence
    • If the Balance Sheet says we have a piece of equipment, does it really exist? Did the transaction underlying that asset really occur?
    • If the profit and loss shows that we made $100,000 are there really sales to support that?
  • Completeness
    • Is everything that should be included in the financial information in fact included?
  • Valuation or Allocation
    • Have we recorded everything at true fair market value and is the information allocated in the right category (e.g. principal vs. interest)?
  • Rights and Obligations
    • Do we have the rights to collect what we say is owed to us and are we in fact obligated to pay our Liabilities?
    • Going back to completeness are all the liabilities that should be recorded in fact recorded on the books?
  • Presentation and Disclosure
    • Is the information presented in proper form and have we given our readers all of the information they need to evaluate the financial statements?

The Controller needs to review and audit the financial information in order to be sure that the above outline is taken into account. Based on the foregoing, the controller is the one who really has to set up the chart of accounts for a company. I had this argument with a client once. He wanted to work with his bookkeeper on his chart of accounts instead of me. I tried to explain that this was a mistake – that the chart of accounts is the thing that will ultimately describe “Presentation”, and “Allocation”. This is not an area I would ever feel comfortable having a bookkeeper work on unless that bookkeeper really had a lot of experience preparing financial statements so that they can visualize what the end result must look like. In the end the client has to do what they feel comfortable with. I can only advise and guide as well as the client will let me.

Finally we have the bookkeeper! The poor bookkeeper J. He or she has to enter all of the data and it has to be entered correctly otherwise when the controller reviews the financial output they will have many corrections for the bookkeeper. This is why it is so important to have a bookkeeper who really understands the financial statements because after all, they are the ones who are really putting those financial statements together every time they hit “Save and Close” or “Save and New”. The minute those buttons are clicked the information posts to the balance sheet and/or the Profit and loss statement. Unfortunately I have encountered many bookkeepers who really do not understand this. They think that once they’ve entered and paid a bill they are finished, little realizing that what they have just done is provided information to the controller and then the CFO about what is happening with the company financially. Each individual transaction may in fact not be significant but all of the transactions collectively will be very significant. So you have to treat the pieces the same way as you treat the whole pie in order to be sure the pie comes together correctly.

Now let’s work forward again. Assuming the bookkeeper has done their job well, then all bank accounts are reconciled and so are all credit card accounts. This helps to ensure completeness and accuracy, and to some extent ensures Valuation. Next assuming that the controller has reviewed or audited and generally satisfied themselves as to the financial information and whether or not it fairly states the financial position of the company, now the CFO can do their job.

The CFO sets yard sticks out. Goals for the company to reach with really one basic thing in mind – how do I increase the net worth of my company? We set up the financial model which is management’s best guess as to how the company will perform in the future. The standard model is 5 years out. Personally I have always felt it was a waste to go beyond one year because so much can change during that year that even if it does turn out to be accurate 5 years out I think that can only be chalked up to coincidence or luck! These forecasts are reviewed regularly and compared with actual results of operations to be sure everything is moving along as expected and to determine if changes are needed to get/keep the company on course.

So let’s summarize by outlining each function and their roles in bullet point fashion:

  • CFO: Financial Management of the company – looking forward, planning, projecting, measuring and tracking progress. How do I increase the net worth of my company?
    • Analyze monthly statements – Balance Sheet, Profit and Loss, and MOST importantly the Statement of Cash Flows.
    • Set up review and update financial projections
    • Secure financing with the right banks if/when needed to reach the goal of increasing net worth.
  • Controller: provide internal assurance that the financial information is presented in a manner that fairly states the financial position of the company. Set up the systems (ie documentation and flow of the same) to be sure that information is captured completely and accurately. Review information to ensure valuation, allocation, presentation, and disclosure.
    • Audit, review, and present the financial information for the CFO, and CEO to manage their functions.
  • Bookkeeper: Enter all transactions into the set of books with an eye towards proper classification and presentation on the Balance Sheet and Profit and Loss Statements.
    • Enter, Reconcile, and review bookkeeping data entry to be sure that the controller has what she needs.

At Nerd Enterprises, Inc. we can provide services at any or all of these levels. If you would like more information call us at (866) 945-8070 for a free ½ hour review of your balance sheet or business model. We can review your books, make sure that everything is entered properly and accurately then we can work with you to put the plan in place for increasing your businesses net worth.