Clarifying Confusion in Business

Many times over the past 30 years, I have heard many people confuse business terms and definitions. No surprise, since most of the professionals in the field blur these definitions. So, today I am going to define several distinct corporate sizes, job titles and tools to clarify the confusion.

Definition of company size

According to Federal Small Business definitions, depending on the industry classification, small business company is the one that employs less than 100 employees and has less than $25 million in annual revenue. In general, that is the standard that most investors and analysts go by. Mid-market firms are loosely defined as companies that, are not small by definition above, but employ less than a 1,000 employees and have revenues of less than $750 million. These two segments of US economy employ close to 70% of the US work force.

Controller vs CFO

This one confuses a lot of people. In small and mid-market companies, lack of resources places more responsibility in hands of fewer people and titles become synonymous. Chief Financial Officer, or CFO, is a business watchdog. This person is not a bookkeeper, but is responsible for the accuracy of the financial reports submitted. This person is a risk assessor and is responsible for protecting corporate assets. He/she does not create a vision for the company, but lays out a financial path to the Promised Land based on the vison CEO created. A Controller is the key accounting person within companies. The most telling difference between the two is foresight. A CFO is trying to predict what will happen tomorrow, what to expect from existing, what are the changes that need to be made today in order to avoid problems tomorrow. CFO is responsible for creating a path to get to the goal the company has. A Controller is making sure company functions well today, that the bills are paid and sales are collected on time. Controller is responsible for day to day activities and resolves problems that occurred. So in a nutshell, CFO is like a person carrying a flashlight; its dark all around, but the light is shining on some objects in front. A Controller is more like a shepherd; making sure nothing and no one goes astray, and the wolves are kept away.

Budget vs Forecast

Most of us know what a personal budget is. It is important for the individual to have a budget to make sure that we live within our means. When it comes to corporations, the budget has somewhat different use. It is a critical tool for management, that is put together annually. Budget serves as a guide and a benchmark for the managers to identify critical issues in corporate performance. It is not a spending allowance, but rather a monitor of deviations from the expected operations. Forecast, on the other hand, is a vision of management turned into numbers for all to see. The difference between the two is stark, but can be confusing since the numbers are quite often laid out in the same plan. To distinguish the two, consider the budget as the next 12-month worth of expenses: payroll, rent, travel and so on. Forecast is one to five years’ worth of revenues and costs. Forecast is based on expected customer buying patterns, and anticipated growth in demand. Forecast provides a glimpse into what products the company should produce or how much to charge for the services rendered.  Both of these together, should act as a guiding line which must be compared to actual results. Any deviations from the line should be analyzed for patterns and warning signs.

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