CFO vs. CPA: When You Need To Graduate From Minimizing Taxes

CFO vs CPA

If you have run a business for a while, you have undoubtedly used the services of a Certified Public Accountant, or CPA. Every year you need to file taxes. People who have gone through both the training and the testing for a CPA know a lot about tax rules. Plenty of companies treat their tax accountants like their Chief Financial Officer or CFO, and defer to them on critical financial decisions. But do you know the CFO vs. CPA difference?

I first really understood this difference when I had coffee about 18 months ago with Michael Fetters, at the time Provost of Babson College. If you’re not aware of it, Babson is the most centered on entrepreneurship of any college in the world. And as it turns out, Michael lives in Maine where I live. And what I learned about accountants shocked me.

He oversees a terrific program for businesses that have achieved some critical mass: Goldman Sachs 10,000 Small Businesses. Babson designed and implements this training and mentoring program funded by investment banking giant Goldman Sachs, which helps businesses that are beyond early startup stage but need help getting to the next level. I’ve known a handful of companies who have gone through the program, and they rave about its impact.

One significant component of the program is helping company founders really understand their financials. Many small businesses are started by people with no financial training. Heck, I just had a single semester of accounting in college. My degree in economics didn’t really help with understanding my business.

Michael told me a story about a GS10,000 business owner with a distribution business grossing about $8 million a year in revenue. The light went on about how he needed to analyze financially the way his trucks were being used.

After finishing the program at Babson, he went back home and fired his accountant.

The problem, I learned, is that CPAs – tax accountants – are very often focused on minimizing taxes. But that’s not really the way to run a successful business!

I don’t have a CPA, but I know how to minimize taxes from a business: lose lots of money! I did that for an embarrassing number of years with my a cappella business. It successfully minimized taxes from my venture capital windfall since I was an S Corporation, and the business losses flowed to my personal income taxes.

In that conversation with Michael Fetters, he insinuated with a “don’t get me going” side comment that this is a really big systemic problem. CPAs are default CFOs and they minimize taxes, but as a result the business owners are minimizing their profits.

Let me be clear: this is not the fault of the CPAs! They are just doing what they’ve been trained to do.

A Chief Financial Officer, on the other hand, has a holistic financial sense for businesses. A CFO lives in spreadsheets and performs financial analyses about how to make a business more financially successful (among many other things).

The goal: maximize EBITDA vs. minimize taxes. That’s the CFO vs. CPA difference.

Earnings Before Interest, Taxes, Depreciation and Amortization or ee-bit-dah is the preferred measure of financial success in the eyes of equity investors, especially private equity investors who buy large established businesses. It might also be called operating cash flow, or cash flow from operations.

A good CFO understands that paying taxes will decrease the cash available for future growth, or for owner draw, but that job one is to create lots of available cash in the first place from profitable business operations.

CFO vs CPA: Why Is There A Problem?

Unfortunately many CPAs are not trained to think that way. And they end up giving business owners the wrong advice because they aren’t being asked the right question: how can I make more money from my business?

Part of the problem, too, is that businesses with tight cash flow during parts of the year often don’t pay quarterly estimated taxes. Instead, they “borrow” that cash to fund operations. By yearend a hefty tax bill looms, and in desperation they turn to their tax accountant for advice. The recommendation is often to spend money on purchases that might help the business in coming years.

But it might not be a great investment that leads to an increase in future operating cash flow.

There’s of course a lot more to the CFO vs. CPA question. And there are some CPAs who are qualified to be CFOs as well. But if you are running a sizable business and aren’t happy with the profit it’s generating, it’s likely time to graduate from a CPA to a CFO.

But p.s. you won’t actually end up firing your CPA. A CFO will hire a CPA to worry about tax specific issues and free herself up to focus on making the business a financial success.

Don Gooding

Add comment

Follow us

Get in touch! We love meeting interesting people and making new friends.