On a recent episode, we talked about working with a construction CFO. This week, we dive deeper into how to find the right person. We help you define what the CFO’s job role is and get the maximum benefit out of the person who fills it.
Topics we cover in this episode include:
- How to know if you’ve hired a bad CFO
- Tracking cash flow problems
- Optimizing existing low gross margins
- Reducing high expenses
- Upgrading and automating your financial statements
- Identifying and executing cost reductions
- Managing financial audits
- Implementing Best Practices
- Enhancing existing financial relationships
- Providing future-focused planning
- Reviewing the numbers on the bids
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
[00:00:00] Wade Carpenter: On a recent episode, we talked about getting a construction CFO, and we were a bit blown away by the interest in it. How do you know you got the right person? How do you define what their job role is , and how do you get the maximum benefit out of that person? Come on in, let’s talk about it.
This is the Contractor Success Forum. If you’re new here, I’m Wade Carpenter with Carpenter Company CPAs and with me is my cohost Stephen Brown with McDaniel Whitley Bonding and Insurance.
Stephen, this again was one of your topics. Why did you want to revisit this?
[00:00:32] Stephen Brown: It’s important to me as a bonding agent. I see a lot of discommunication between contractors and their Chief Financial Officers. And a lot of that, you know, has to do with literally the owners, or the CEOs discounting what the numbers are telling them and what the CFOs are telling them that the numbers are telling them.
I had a story I wanted to share with everybody and it literally, what happened was the CFO was telling the owner information he did not want to hear. He fired the CFO, hired a new one in. New one told him after a few weeks, the exact same information. Their CPA got involved, told him the exact same information. Their bonding company got involved and told him the exact same information. Yet, he discounted all of it and he refused to believe any of it.
And he screamed at the new CFO in front of the entire office. The new CFO quit, three fourths of the office quit, went into massive bond claims. Subcontractors were not getting paid on time. They started bad mouthing him. It was just a chain reaction of claims he couldn’t control.
So I’d like to say that this story has a happy ending, that he turned himself around and became less stubborn and more humble about why you work with experts, but he didn’t. And the company went under, he’s gone now. Just a real sad story.
So, anyway, in light of our last conversation about CFOs, we talked about hiring a CFO. We talked about do you need a CFO. We also talked about the fact that you provide CFO services on a part time basis, so not as a full time employee. And I think “Rent-a-CFO” is not a term you care to hear, I don’t know. But, that’s basically what you’re doing. And you’re providing an expert to help get your system back where it needs to be, your accounting system. So, that’s what I wanted to talk about.
[00:02:29] Wade Carpenter: Can I ask you before we leave your story though, was it a question of the owner just did not want to hear what the CFO was trying to say or not believing the information?
[00:02:39] Stephen Brown: The owner was so desperately defending his estimators and project managers and the work end of things that he wouldn’t listen to the problems that were staring him right there in the face. And each one of the problems needed immediate attention and had for years.
So the entire net worth of the company was dwindling. Cash flow was a problem. Maxed out on your bank line. Everything that could be wrong was going on because of bad bids. And this owner was blaming the CFO. The owner was the CEO of this company. And he was the sole owner. And he was blaming him for everything. So you can get stubborn about numbers, but numbers don’t lie. But maybe the interpretation of them can be open to discussion.
[00:03:30] Wade Carpenter: Well, I think I sometimes see both sides of that. And, me sometimes filling that role as well as working with several CFOs with my companies that I work with. And sometimes it’s a situation where no matter what you do, the owner is not going to listen and they’re going to do what they want to do , whether they are told differently or not. And there’s other times where they’re not getting good information or they’re not getting good advice.
And that was my concern when you started bringing this up.
[00:03:59] Stephen Brown: Yeah. Well in this situation he, you know, he was getting good advice. It wasn’t my account but I was an underwriter at the time. My thinking at the time was that somebody in this process needs to convince him to change and make him think it’s his idea. But nobody was willing to step up and be able to do that. But it affected a lot of people. It affected a lot of jobs. Nevertheless in this situation, he was getting good advice.
But what happens if you’ve hired a bad CFO? I wanted to talk a little bit about what a CFO should and can be able to do for you. So you can map out their job description, but I also wanted to talk, maybe we could at some point in this podcast about how do you know you’ve hired a bad one? What are you looking for?
[00:04:47] Wade Carpenter: Right.
[00:04:47] Stephen Brown: Just one more time, I don’t think it could hurt.
How to know if you’ve hired a bad CFO
[00:04:50] Wade Carpenter: One of the biggest things that, say, the owner of a construction company, a lot of times they don’t understand the finances of the company. Many of them do, but there’s a lot of them that don’t, that’s why they need somebody in this role.
But the problem is, whether it’s an owner of a construction company or owner of a restaurant or whatever it is, a lot of times they don’t understand the accounting, so they don’t know if that person is actually qualified.
So, what can you do about that? Well, obviously with, like, skilled things like somebody doing accounts payable or just doing bookkeeping, straight bookkeeping is one thing. There are tests out there. Construction bookkeeping, I don’t know that there’s too many tests out there.
But that’s where I think that sometimes getting an outside perspective on that person or, I have actually been hired by clients to help them find somebody, to vet them because they don’t understand whether these people actually know what they’re talking about.
[00:05:47] Stephen Brown: Mm-Hmm. That makes sense. That makes sense. I don’t have to know how my computer works, the nuts and bolts of it. to know whether it’s doing what I want it to do or not.
And I guess that can also apply towards your accounting division. To own a construction company, you gotta bid the work, you gotta do the work, you gotta account for the work.
[00:06:08] Wade Carpenter: Right.
[00:06:09] Stephen Brown: accounting function is as vital as any of the other two functions. If that accounting function is producing the kind of information you need to make your decisions as an owner, would you say that’s a successful accounting department CFO, or?
[00:06:24] Wade Carpenter: Well, if they can get you the information, that’s one, the thing I hear all the time is I can’t get timely information. I don’t get information that I trust, I can’t get job information even though I spent all this money on this fancy software. And the big thing that I would say is anybody can stick a shingle out there and say, I’m a CFO.
And I see it all the time and I’ve come behind some failures in the last six months, big failures. One I had talked to, 10, probably a 15 million company that hired a kid out of school, had a degree, but had no experience and paid him a hundred grand a year for two days a week. Well, he did not understand anything about construction. And he was actually struggling to get accrual basis books, and that’s pretty basic.
But I do see that all the time. People can make your resume look really good. Maybe you’ve worked in a construction company for many years, but all you did was really did the accounts payable and somebody came behind you, or the CPA came in and cleaned it up once a quarter or once a month or something. I see that all the time.
[00:07:31] Stephen Brown: That’s what our podcast is about. Construction finance. And we’re talking about construction financial officers. CFOs. And to me, a board member doesn’t necessarily have to be in the construction business to be on your board and be a really good board member. And sometimes I see that the CFO has that title, but they’re not even on the executive committee, so in that case, are they a CFO or a bookkeeper?
[00:08:01] Wade Carpenter: Talk to your construction oriented CPA and maybe have them vet this person. Obviously look at their resume if you’re hiring in-house and do they have construction experience, but that doesn’t mean anything, but also I would say if you’re getting bonds, have your bond agent talk to this person because you could probably very easily talk to this person and know if they have any understanding of what over and under billings mean and you might be surprised that, with all your experience that you could probably do all that. So, that’s one thing I would say.
The other thing I would say, I see websites that say we’re a CFO, we do construction, but we also do manufacturing and retail, and we also do restaurants and we can be your CFO for all of them.
This is my opinion. If you’re not specializing in it, you’re probably not very good at it.
[00:08:50] Stephen Brown: Well, job cost accounting for mercantile industry or manufacturing industry is completely different from the construction industry. Nobody can not argue that.
[00:09:01] Wade Carpenter: Yeah, if you want to get into the job functions and I think I said last time, it can depend on the job and what that particular company needs.
Ten things things that should be in your CFO’s job description
[00:09:09] Stephen Brown: I listed ten. And there may be a lot more, there may be some huge ones that I missed. But I figured we need to at least start somewhere. Ten things that should be, you hire a new CFO that should be on their job description to be able to do for you.
Tracking cash flow problems
[00:09:26] Stephen Brown: And I’ve got number one, tracking cash flow problems.
[00:09:29] Wade Carpenter: I would absolutely agree with that for most contractors.
[00:09:31] Stephen Brown: These are not in order of importance, but it’s huge, all of them I think are important.
Alright, so, what do you think about that? What would you do if you were a new CFO?
[00:09:41] Wade Carpenter: Probably 98 percent of contractors do have cash flow as a problem. I did recently come across somebody I was talking to that they got paid up front and they actually were doing a lot of those things.
I was surprised because, that wasn’t their sole focus, but it, for 98 percent of contractors out there, yes, it is probably one of the top ones, if not number one, not number two. Because chasing that cash is king to be able to meet your obligations, to be able to grow.
And, from my perspective, I would think you’d want somebody that has experience planning and projecting those things because it’s easy to run out of cash, especially if you’re very seasonal. So, somebody that can do a short term and a long term cash flow plan for contractors.
[00:10:28] Stephen Brown: Sure. Just looking at your accounts receivables, your overdues is not gonna tell you the whole story of your cashflow problems. How many podcasts, Wade, do you think we’ve done on cashflow?
[00:10:39] Wade Carpenter: I have no idea. It’s one of our top subjects.
[00:10:41] Stephen Brown: 80% of them maybe?
Okay so tracking cash flow.
Optimizing existing low gross margins
[00:10:45] Stephen Brown: Number two would be optimizing existing low gross margins. So you’ve got a job that’s, you’re hoping will break even. How can a CFO help you with that?
[00:10:57] Wade Carpenter: There’s a few different thoughts I have here. Obviously if you’re missing the mark, you need to be looking at what types of jobs and what caused that low gross margin.
Sometimes it can be the mix of, hey, I subbed out a lot more of this job than normal, or the materials prices went through the roof on us in the middle of it. And there’s things that you can explain and correct for next time, but that’s the biggest thing I would say is, Optimizing the low gross margins, which you’re saying, being able to recognize that before you’re done with the job and doing something about it is one big key, as well as learning from the mistakes.
[00:11:35] Stephen Brown: I’m saying you hire someone to come ride that big ugly horse till the job’s finished. It’s, it’s a bad job. If you break even, you’ll be happy type of situation.
[00:11:47] Wade Carpenter: Yeah, again, just minimizing the damage. When you can recognize something like that. And getting in there and working with the project managers, and what can we do to trim the costs on this stuff so that we don’t have this problem? I think that’s a great idea.
[00:12:02] Stephen Brown: Yeah, I’m thinking the CFO would go in there and present the most accurate, detailed numbers as soon as possible, to see what the situation is. And then to project, on a pro forma basis, what kind of cost and effort it’s going to take to finish the job and what it’s going to look like in a worst case and best case scenario and present that information to the owner. But, you’re right, lots of times I see people hire CFOs because of situations. They need someone to help them manage their way out of it.
I’ve seen that before.
Reducing high expenses
[00:12:37] Stephen Brown: But anyway, number three, reducing high expenses. So, who knows what a high expense is these days? My goodness, everything’s higher.
[00:12:47] Wade Carpenter: That’s also another loaded question. Are we talking about overhead? Because–
[00:12:51] Stephen Brown: That’s all we talk about, overhead, because contractors don’t like to recognize overhead. It doesn’t exist. I don’t want to hear it or see it. But yeah, that’s definitely one of them. And how can you take advantage of getting better deals on the materials that you’re getting? As far as you’re paying for them, the delivery methods.
What about the high expense of having a bank line of credit? With interest rates so high right now, that’s a serious issue. A CFO might help you negotiate with the bank a little bit better. A CFO might be able to present the information that they can talk to the bank. And take that line of credit and amortize it and make a longer term loan out of it to cap your losses if you think interest rates are going to continue to go up.
That’s the sort of thing I was thinking about.
[00:13:43] Wade Carpenter: Just a couple of comments on that. As far as reducing expenses and just the thought of the CFO role. What is the CFO role? It has to be communicating with the owner, but also it needs to be communicating with the project management staff, like the other accounting staff, sometimes HR.
We get into a lot of different things, but as you said, like reducing the high expenses, you got to have the relationships with the bankers. Sometimes you got to have a relationship with the vendors and maybe working out cash payment deal. So, yeah, as far as like the expenses, that’s indirectly answering your question, but it goes to somebody that can get into the relationships. So.
[00:14:24] Stephen Brown: Right. They might be able to handle that better than you. They might know how to be able to talk to another financial professional a little bit better than you and provide options for that. So, number three, reducing high expenses.
Upgrading and automating your financial statements
[00:14:39] Stephen Brown: Number four, upgrading your financial systems and the automation of it.
So, you make a decision to go with a, let’s just talk about accounting system, not estimating or anything. But you’re implementing a new system. You’ve got to bring it online. You’ve got to get everyone in the organization up to speed on how to use it. Wade, this is right in your wheelhouse.
[00:15:02] Wade Carpenter: Well, yeah, I guess I would say that, number one, I do love technology, but sometimes there’s a thousand different packages out there to use for accounting. And there’s a lot of different tools to do things like mileage tracking and, those kinds of things. But the one comment I would make here, if you’ve got a new CFO coming in and you’re looking for a new system, if they’ve got a true experience on one of these bigger packages, that can go a long way to reducing the learning curve on of these higher end softwares. Because, if you’re trying to bring in a new CFO and then implement a new software package, everybody’s going to have a learning curve.
The rule of thumb for construction companies is that it takes two to three times the cost of that software to get true good implementation from consultants. You can cut that learning time significantly if that CFO knows a construction package. Does
[00:15:57] Stephen Brown: that make sense?
Yeah, it does. And also, I might add that if I was a contractor looking for a good accounting package especially if I was CFO, I’d be talking to other construction company CFOs. That network is invaluable to you.
[00:16:11] Wade Carpenter: Absolutely. It’s in their CFMA or, that kind of that, especially that particular organization, a lot of times you can bounce stuff off of.
[00:16:20] Stephen Brown: Yeah, that’s, that’s huge. Not only your accountant, but the more perspectives you can get would help.
Identifying and executing cost reductions
[00:16:25] Stephen Brown: Number five, identifying and executing cost reductions.
So you might say, well, does that go in there with reducing high expenses? Is that just being a jerk and cranking everything down, and saying no more of these fancy paperclips?
[00:16:43] Wade Carpenter: Well, I’ve also come behind CFOs and, if a company’s in trouble, like on the verge of bankruptcy, there are people that’ll come in and slash everything. But the one thing that I’ve learned over my career is that you can have somebody come in and slash expenses, but if you cut the muscle out of a company, you cut all the stuff that makes the meat of the company, you can kill that company just as fast as not cutting those expenses.
So as far as knowing what to cut, and being mindful of what you’re spending for what you’re getting.
[00:17:19] Stephen Brown: Alright, that makes sense. I like that.
Managing financial audits
[00:17:21] Stephen Brown: Next thing, managing financial audits. What does a CFO do to help?
[00:17:27] Wade Carpenter: Well, there’s a lot they could do especially if they’re familiar with the process or if they’ve worked in public accounting. A lot of times they know what the auditors will need and they can cut down on your audit bill, number one, because If you’re feeding the auditors good information and they don’t have to go back and dig into everything, and they’re going to double check things, but if you provide them numbers they can trust and they don’t have to go dig all this stuff out themselves, it can definitely save you quite a bit of time.
As well as, I know you probably know the drill when you’re going through the financial statements and looking at the jobs and explaining to them what happened on a job. A lot of CPAs, if they’re doing financial statements, they may not really look at the gross profits and those kinds of things, but I know you and I do, and it’s key to making sure that, you know, what’s going on and having a CFO that can communicate that not only to the audit team, but also to the bond agents and those kinds of things, that again, it goes back to the relationship.
[00:18:26] Stephen Brown: Yeah, if you have a December 31st year-end, like this podcast is taking place in early November. So if now is the time you need to be meeting with your bond agent, your, your CFO and your accountant to talk about to the numbers, and how that year end financial statement is going to look and how it’s going to affect the future.
[00:18:45] Wade Carpenter: Yeah, just one other thought too, which, I don’t know that everybody would be able to do this, but somebody that understands not only the financial audit side as well as the tax side, if you can find somebody that understands both sides of it and can be able to help you plan, or if you don’t have somebody like that, make sure that you’ve got a CPA that can go in there and help you plan for those things, because they are two different goals and sometimes you can achieve maximizing your financial statement while minimizing your tax return, but again, a good CFO ideally would have the tax side as well. Doesn’t always.
[00:19:21] Stephen Brown: That’s huge.
Implementing Best Practices
[00:19:21] Stephen Brown: Alright, the next one, number seven, implementing best practices.
[00:19:27] Wade Carpenter: Well, again, best practices can be taken a lot of different ways. And I would say that having some kind of experience with what those best practices is. You can read an article and say this is what best practices are, but actually having lived what works and what doesn’t, that can go a long way into implementing those best practices. And–
[00:19:49] Stephen Brown: A good CFO ought to know what best practices are. If you–
[00:19:52] Wade Carpenter: –have the experience to know what works and what
[00:19:54] Stephen Brown: doesn’t.
Right. That’s what it all boils down to. And there are some companies that do things so well you can look at them and admire the way they do it and want to emulate it. That’s the best practice.
And the insurance industry, I’m pleased to tell you that McDaniel Whitley is a best practicing– it’s actually something you compete for every year, but it’s a top 1 percent of the insurance agencies in the country get to be best practices agencies. So, the whole idea is to bring up insurance companies nationwide to do things better for their customers.
Enhancing existing financial relationships
[00:20:28] Stephen Brown: Number 8. Enhance existing financial relationships. What could that mean?
[00:20:33] Wade Carpenter: Well, obviously your bonding agent. And also working with the bankers as well. If you’re needing a lot of credit and renegotiating equipment lines and those kind of things, those can go a long way, especially if they’ve got experience doing that.
[00:20:46] Stephen Brown: Okay. All right. So they can talk that talk and they can prepare the information that that person’s gonna wanna see, and they’re gonna be able to have the wisdom and experience to negotiate better rates for you as well. What I would say too. Would you agree?
Okay. Alright, moving on.
Providing future-focused planning
[00:21:05] Stephen Brown: Number nine. Provide future focused planning.
[00:21:09] Wade Carpenter: Well, we can save out there, but depending on what the owner’s goals are, if you’ve got an owner that’s looking to retire in five years, you know, how do you build that company so that it’s sellable? I know we’ve done a few recent episodes where we talked about selling a construction company, but if you’ve also got an owner that says, I want to grow this thing, or double in five years or whatever, one of the biggest hurdles for contractors is not outgrowing your working capital.
And having a plan in place to do that, as well as being able to communicate that to the stakeholders, your bankers and your bonding agents, that can go a long way. And having a cashflow plan to get you there.
[00:21:50] Stephen Brown: Okay.
[00:21:51] Wade Carpenter: These are intertwined.
[00:21:52] Stephen Brown: Well, they, they are. And I paraphrased in that article that I wrote and sent you about what a CFO does. He or she is a verifier, there are catalyst of supplying options when change is apparent, and they’re a steward of your money.
[00:22:08] Wade Carpenter: Right.
[00:22:09] Stephen Brown: And so, when you’re providing future focused planning, what a better person on the team to consult and get on board with what you want to accomplish than a CFO. So, that should be on the job description.
Reviewing the numbers on the bids
[00:22:23] Stephen Brown: Last but not least, review the math, the numbers of the bids. Just an extra set of eyes. I know that may sound crazy, but a lot of construction companies leave the CFO out of the bidding process. This is what we’re thinking about bidding and why. In the very least, you can check as a CFO those numbers are accurate. But what you’re accomplishing also is that the CFO is brought on the board on projects you’re going to undertake.
So, I think that’s worth its weight in gold. But others may disagree.
[00:22:58] Wade Carpenter: Well, I absolutely agree that sometimes having somebody double check the math, because a lot of times you’re bidding a job under the gun, trying to get it in by a certain time, and a big miss on a particular job can mean success or failure on that job.
Another thing that a lot of times we are hired for, even as an outsourced CFO sometimes, is that people don’t understand pay applications and they mess up the pay applications and figuring retainage and stuff like that. Just having somebody else do that and having had several contractors that they throw out their bid or their pay application because it’s not right, and they may have to wait for another 30 days to collect that same money.
[00:23:41] Stephen Brown: So they need to be familiar with the job. The contract and the terms and conditions of it.
[00:23:46] Wade Carpenter: Right. As well as being able to actually do the math.
[00:23:49] Stephen Brown: Yeah. A CFO might argue, don’t come to me five minutes before the bid date to check your numbers. But at the same time, that estimator is going to say, it is what it is, okay? We’re dealing with what we’re dealing with.
That extra set of eyes can say, look, this is habitually happening and is a problem. Why don’t we do this to fix it? It’s lIke that expression of being able to see the forest through the trees, that you’ve heard before.
So, anyway, these are just basically ten items to create a job description for your CFO as a construction company owner or CEO this can change, of course, you can add more. We may have another podcast on another 10 that I completely missed. Wade, I bow to you on that, but I can just say that it’s a very important thing to communicate.
It’s a very important thing to make that person involved on your team. And that’s what I want to wrap up leaving on this podcast. What about you?
[00:24:45] Wade Carpenter: Okay, well, I mean, great thoughts on this. One thought I had after the last episode on the CFO thing was that number one, I appreciated the input we got from a few viewers on YouTube and some of the podcast engines and we actually really do want to hear from you guys.
If you have topic suggestions, if you have questions about what we’re talking about, if we were not clear about what a CFO should be doing, reach out to Stephen, reach out to me, and I’m glad to talk to you. We’d love to talk to you. That’s what we’re doing here is trying to get some education out. So I appreciate you revisiting the topic and appreciate all the thoughts on it.
All right. Well, if we’re good to wrap up, then thank you all for listening to the Contractor Success Forum. Check out the show notes at ContractorSuccessForum. com or on the Carpenter CPA’s YouTube channel. For more information, consider subscribing and follow us every week as we post a new episode.
And we will look forward to seeing you on our next show.