Ultimate Guide to Outsourcing Your CFO
This guide is designed for the small or medium business owner who:
- Can’t find a qualified CFO or doesn’t know where to find one
- Needs help with their financial strategy
- Has had rapid growth and desperately needs guidance
Has cash flow concerns and how to plan for future cash flow.
Small and medium size businesses eventually encounter the same problem—regardless if they sell products or services, they eventually need help with their financial statements.
Entrepreneurs who start businesses are great at identifying the need for a product or service. They will light up when asked about their product. The joy they exuberate is contagious!
However, when asked about their financial statements they often seem lost. They’re passionate about their product or service, but not so much about how to manage their company’s books.
When first starting their business, they usually will rely on family and friends for assistance. Eventually the financial statements complexity exceeds even the most well-meaning family or friend. When this point is reached, what does the business owner do?
The answer is outsourcing their CFO.
Outsourcing to a chief financial officer (CFO) leverages the knowledge of a full-time CFO with the reduced cost of having a full-time CFO on staff.
There is no avoiding it. Hiring someone trained an experienced in strategically positioning the company is imperative if the business owner wants to:
- Take their business to the next level
- Reach long-term business goals
- Generate more cash
Outsource CFO : Table of Contents
Definition – What is an outsourced CFO?
An outsourced chief financial officer (CFO) is a professional with advance accounting, management, and strategic experience. They work either part-time or on a contract basis for a company. Outsourced CFOs are also known as fractional CFOs. These professionals will usually work remotely or virtually, thus they are also known as virtual CFOs
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Chapter 1 – Don’t Know Where to Start or How to Vet Candidates?
Like any service that a business purchases, the question that comes up is where to start? How to find an outsourced CFO? Who is qualified?
Before tackling these questions, the business owner needs to understand what their goals are and what they hope to accomplish in hiring a fractional CFO.
A. Identify the business goals.
To hire the correct person, the business owner needs to have an idea as to where they want the business to go.
Some business owners want to have significant sums of net income every year. Some want to sell their business for 3x revenue. Some what to pass along the business to their family.
Whatever the goal is, it needs to be clearly defined. The goal can always change as life changes, but before contacting an outsourced CFO make sure there is focus on the ultimate financial destination.
An excellent resource along the lines regarding business goals the book The E-Myth Revisited by Michael E. Gerber. This is a comprehensive book that discusses what every entrepreneur needs to understand when operating a successful business.
B. What does the business owner want to accomplish?
Once the goals have been identified, what does the owner want to accomplish by hiring an outsourced CFO? Do they need help in understanding financial statements? Do they need assistance in cash flow management? Do they want to turn over all strategic financial analysis to a CFO?
Answering these questions will help make a better decision on who to hire.
Assume a person is wanting to purchase a car. If they know they need to haul large objects over rough roads, then a truck versus a small sedan would be the better choice. Both vehicles are cars and can transport, but one is designed for what needs to be accomplished.
The same should be considered when looking for an outsourced CFO. When you have mapped out what want from an outsourced CFO, the selection process will be more efficient.
Additionally, both the business owner and the fractional CFO will understand the services and deliverables needed.
C. Internet Search
The goals have been identified and the needs established. Now the business owner must find a qualified individual or firm. Many of the fractional CFOs work remotely or virtually, so the logical place will be to perform an online search. Consider using different search terms:
- Virtual CFO
- Outsourced CFO
- Interim CFO
- Fractional CFO
- Contract CFO
The next step is to compile a list of firms to visit or contact. Once the list of firms is complete, review the services offered. Do they match the goals?
Determining the qualifications of a CFO is a tough task. The easiest way to determine if they are qualified is if they have obtained the Certified Public Accountant (CPA) designation. To achieve the CPA designation, an accountant needs to have a college degree plus pass a rigorous 4-part examination.
The pass rate for all 4 parts of the CPA exam is approximately 53% (2019 Pass Rates per AICPA.org)
This designation provides comfort that the CFO has sufficient knowledge in regard to accounting and analysis. One designation isn’t always enough.
CFOs that have additional designations, such as in business valuation or forensic accounting, can pull from other resources and experiences to help the company.
Like in any other profession, knowledge is built and formed by experience. The more experience, the better qualified the CFO will be to handle the issues for every company they work with. When searching, a business owner should:
- Review how long the CFO has been in the accounting or management profession.
- Focus on the professional’s level of experience and not necessarily the firm’s experience.
- For example, assume one individual who has 20 years of experience, but the firm has existed for only one year, and another individual has one year of experience by the firm has existed for 20 years. Which option will provide the best level of experience?
Chapter 2 – The Cost of Hiring a CFO
The cost of locating, interviewing, and ultimately hiring a full-time, in-house CFO can be daunting. The most qualified professionals often command a substantial salary. CFO median salary is approximately $132,000 (Payscale.com) and can go north of $200,000 depending on experience.
This cost can be prohibitive for a small and medium business owner.
So how can a business owner get the experience necessary without having to incur such a high cost?
Using an outsourced or virtual CFO is a cost-effective alternative for the small and medium sized businesses. An outsourced CFO will be a fraction of the cost of a full-time CFO because:
- They work remotely or virtually, so little overhead is required.
- They focus only on specific aspects of the financial statements where assistance is needed.
- They are a contractor, so there are no additional costs as associated with a full-time CFO, such as health benefit and bonus plans.
The cost of a fractional CFO can range from $30,000 – $70,000 per year.
To put this in perspective, the cost of hiring a full-time first year staff accountant usually will run between $39,000 – $63,000 (Payscale.com).
The business can access financial expertise at the cost of a first-year accountant. This is one of the strongest points for a small or medium business to hire an outsourced CFO.
For more on fractional and outsourced CFOs, check out this Podcast.
What Can The Outsourced CFO Do To Help Your Business?
Chapter 3 – Financial Strategy – Help!
Small and medium size businesses seek out outsourced CFOs because they need help with financial strategy. They need someone to walk them through the financial statements, key performance indicators (KPIs), trends, budgets, forecasts, and so much more. Below are the main items an outsourcing CFO will help with.
How to understand financial statements.
Reading financial statements takes practice. The term reading financial statements really should be analyzing the financial statements. While text of the statements is read by the user, the main point is to truly understand and analyze them.
The outsourced CFO will help communicate:
- The relationship between each of the statements. The balance sheet is linked to the income statement, and both are linked to the cash flow statement.
- Which of the numbers are most important on the statements and what their effect is on the overall operations of the company.
- How the balance sheet is as of a point in time and the income statement and cash flow statement is for a period.
Key Performance Indicators (KPI)
Key performance indicators are an efficient way for a business owner to evaluate a substantial amount of data quickly. A business can set up KPIs on just about anything, both financial and non-financial metrics.
The key is to make sure you analyze the metrics necessary to get the company to its goal.
KPIs can be simple, such as days sales in AR.
Or they can take a more complex review of several data points.
The more automation built into a KPI the more effective the analysis.
The outsourced CFO should design the KPIs in such a way that when a predetermine trigger point hits, the KPI will notify the user. This notification can be a simple as the information turns red or an actual notification is sent.
Many KPIs are built into graphics, such as thermometers, speedometers, or scales. Regardless of how the KPI is built, the overall benefit should allow for quick and informed decisions.
The outsourced CFO will also build trends for analysis. The simplest trend that is used is called a horizontal analysis. This is taking a balance from one period and comparing it to another period to evaluate the percentage change.
Another common analysis is the vertical analysis. This analysis will usually take an expense item and compare to total expenses. This is then compared to the same expense item for the same time frame in the prior period.
The last common trend is called a regression analysis. This type of analysis is performed within spreadsheet software. The regression analysis helps not only identify historical trends but can map out what the probability will be in the future.
Forecast and Budgets
The outsourced CFO will help develop a budget and a rolling forecast. The main distinction between the two is:
- A budget should be considered a destination.
- The forecast is how to get to that destination.
The budget is an important tool for any company. The budget helps owner understand all the revenue and cost the company earns and incurs, respectively.
Utilizing this information, the owner can map out how they want the company to perform in the upcoming fiscal year.The forecast is a fluid document that changes every month.
The forecast helps predict what direction a company is heading in relation to the budget.
If revenues start to decrease for a specific product, the forecast will alert management. This will then allow management the ability to either allocate more resources to that product or possible cut expenses.
Without continuing monitoring the forecast the odds of reaching the budgeted net income become left to chance.
The more advance notice management and the owners have to adverse conditions, the faster they can react and get the company back on track.
Financial statements, key performance indicators, trends, budgets, forecasts as some of the main items that allow the outsourced CFO to bring the financial strategy to a company. Realization of successful outcomes are increased.
Chapter 4 – Cash Flow Concerns
Cash is the oxygen that a business needs in order to survive. Once a business runs out of cash it will cease to exist in its current form.
Cash flow concerns will keep even the most seasoned business owner up at night. For small and medium business owners, the cash flow concern is even more stressful.
This is due to most of their personal assets, such as their retirement investments and their personal home, are tied up with the business.
An outsourced CFO will help the business owner understand where the business is at regarding cash and where they are projected to be. The outsourced CFO will help set up:
- a cash reserve,
- calculate cash conversion,
- and project free cash flow.
Cash Reserve – Businesses operate by bringing in more revenue, watching costs, and looking for new opportunities. Setting up a cash reserve is many times not at the forefront of this process.
However, all businesses require a cash reserve. The general rule of thumb is a cash reserve should be 15% – 30% of prior year’s gross revenue. This reserve will allow the business comfort in knowing they can:
- make payroll,
- take advantage of a purchase opportunity, or
- ride out a slow economic time.
Cash Conversion – Not all the products sold, or services provided, will bring in the same amount of cash. The cash conversion calculation determines what product or services are bringing in the most cash.
This calculation allows the business owner to make an informed decision based on product or service. If one product has the highest conversion, then putting more resources into that product make sense.
If another product has the weakest conversion, then eliminating that product might make sense. Having this calculation on every product or service will allow for more efficient management of the company.
Free Cash Flow – Free cash flow (FCF) represents the cash that a business has in excess of operating and capital costs. It represents the extra cash that a business has available to use outside of standard operations.
The excess FCF allows a business to purse opportunities, pay off debt, or make additional contributions to a profit-sharing plan. The use of the FCF is solely up to the owner.
The FCF is important to continuously calculate because a negative FCF can have devastating affect on a business, especially if management doesn’t react quickly enough. It is possible to have cash in the bank but have a negative FCF.
Understanding the FCF of a business is vital to the overall health of a company.
These three cash calculations are designed to analyze, prepare and prevent any cash concern issues. An outsourced CFO will guide a business through each of these and monitor regularly.
Chapter 5 – Ready to Grow
Small and medium business don’t want to stay small and medium. Eventually, they move further and further toward becoming a large organization.
Sometimes the growth is gradual and sometimes the growth is rapid. Regardless of the speed, the owner will eventually transition out of their comfort zone on the finance of the company.
When this happens, the need for expert help becomes vital.
An outsourced CFO will help break down the company’s analysis on a more finite level. A good CFO will:
- identify every revenue producing item into a budget,
- identify opportunities and pitfalls,
- create financial pipeline reports, and
- develop ‘what-if’ analysis.
The most common assistance a business owner will need is help with budgeting individual products or services. Up to the point of rapid growth, a business owner usually has budgeted revenue based on an overall estimate.
With significant growth, the top revenue number should be based on the budget for each individual product or service. If the revenue item is based on a service, then the budget should be based on the individual production employees.
These budgets then can be summed up into an overall budget. Having the individual budget allows for micro changes to operations and determination of any inefficiencies.
The CFO will help identify opportunities and pitfalls. The biggest benefit is they will have the ability to run a ‘what-if’ analysis on minor and major changes to a company.
What happens when a sale price of a product is increased by 1%? What happens when you give employees an extra day off? Each of these decisions, while initially minor, can have a significant impact on the overall cash position of a company.
Businesses want to know the value of future sales already in process. Knowing this allows the business to hire or reduce employee hours in a timely fashion. The sales department will tend to portray every contact as a probable future sale. Not all contacts will convert to sales.
The outsourced CFO will help calculate a reasonable financial picture. They do this by breaking down future sales between new customers and established customers.
Then they will calculate a probability of future sales for both categories. This calculation will provide the owner a baseline to understand what impact future sales are going to have.
Leverage the knowledge of a full-time CFO with the reduced cost of an outsourced CFO. Take your business to the next level, reach your long-term business goals, and generate more cash. You know where you want your business to go – so take the next step and let’s get to that destination.