I have a friend whose wife graduated from Chiropractic College in 2008. Soon after graduation, she opened her own practice. Alot of time in 2008 was spent marketing the business and equipping the office. At the end of 2008, my friend took his taxes to a local CPA firm. The CPA concluded that the business didn’t make any money in 2008, so no taxes were due.
In 2009, the business did a little better, but still lost money for the year. The CPA filled out the requisite tax forms reporting no business income and no taxes due for 2009.
Fast forward to April 2011. My buddy calls me on April 12th and says he just got his taxes back from the CPA firm, and he owes the IRS $40,000! Apparently the business did very well in 2010, and now significant taxes were due. He asked me to help him come up with $40,000 in three days.
This story illustrates the difference between a CPA and a CFO. The CPA mechanically prepared an accurate tax return for my friend and his wife. The $40,000 was the result of several complex tax calculations. The CPA was in production mode, trying to complete several tax returns by the April 15th deadline. Unfortunately, it never entered the CPA’s mind that his client hadn’t paid taxes in the past and the $40,000 that was due was a huge surprise.
One of the primary functions of a good CFO is to anticipate events like this. CFO’s prepare short term cash flow forecasts, as well as long term growth and strategic plans. The CFO would have anticipated the taxes that were due on April 15th, and would have developed an internal source of cash or obtained a bank loan to cover the balance. A good CFO will assure that the business has no surprises.