When you decide your company needs support in a given area and outsourcing makes sense, how do you choose the right provider? Let’s assume you do not simply run a Google search and go with the first name that comes up, but how do you make a decision? Referrals are helpful, of course, but ideally, you apply some thoughtful criteria in making your choice.
In some cases, the criteria are fairly straightforward. For example, a computer repair service should be able to repair your computers quickly, at a reasonable cost. But knowing what to look for and what questions to ask is not always obvious. That is definitely the case when looking for a firm to handle your outsourced CFO needs. In this article, we describe what an owner or CEO of small to mid-sized businesses should look for, and what they should avoid when seeking to outsource the critical role of CFO.
Who uses an outsourced CFO?
First, it is worth noting that outsourcing the CFO function is fairly common – more common than you might think. Businesses that use outsourced CFO services typically do not need a full-time, in-house CFO, or have not found the right person to bring in and are looking for an interim solution. Beyond that, we feel that firms that use an outsourced CFO tend to fall into one of two categories:
(1) Companies that are backed by venture capital or other investors who insist on having a CFO in place, partly to make sure the CEO does not try to do the CFO’s job while executing on the business strategy. These investors expect and require financial reporting and analyses on a regular basis;
(2) Owner Operated companies that are experiencing some type of “pain”. The pain may occur because the company has not built the financial models it needs to forecast the costs that go along with achieving growth targets. Or, the pain may arise because the company does not project its cash flow needs and ends up in a cash crunch fairly regularly.
The pain may surface because the business owner does not understand the financial statements prepared by the controller or bookkeeper, or even worse, the financial statements the controller or bookkeeper produces are wrong. Or (and this happens more often than you might think), the pain throbs because the business is not profitable and the CEO/owner does not know why. In a nutshell, companies in these situations seek outsourced CFO services because they are under stress, and they are under stress because they do not have the financial information they need.
What should you look for in outsourced CFO services?
If you are thinking of hiring an outsourced CFO, here are suggestions to help you make an informed choice for this critical role.
Identify what financial services you need.
Do you want someone to handle CFO responsibilities only, or to cover both CFO and accounting needs? If you need both, find a single outsourced firm that offers both – inefficiencies and miscommunication occur if you try to use two different firms.
Look for knowledge of, and experience in your industry.
For example, if you run a manufacturing business, you want an outsourced CFO that understands inventory issues, logistics, warehousing, and other aspects of your operations that a service business does not entail. Similarly, there are issues specific to service businesses, software business, online retailers, etc., that affect the choice of performance metrics and forecasting approaches for those industries – your outsourced CFO should be familiar with the ones that matter in your particular niche and your overall industry.
Can the outsourced CFO take the lead on compiling the right kind of internal and external analyses and reports?
Your outsourced CFO should be able to recommend KPIs and other metrics that you should be monitoring internally – this relates back to understanding your industry. He or she should also be able to define, collect and present the kind of information your investors and board of directors want, in the way they will understand.
Does the outsourced CFO firm ask the right questions?When interviewing an outsourced CFO firm, what questions do they ask? How detailed are those questions? This will reveal how the firm works to understand your business and whether they are likely to get down into the nitty-gritty to figure out what is and is not working well. In our view, asking a lot of questions is essential – we need to gather a lot of information before we can build an accurate model of what drives a business from a financial perspective.
Is this someone whose judgment you will value, and that you can bounce ideas off of?Companies face crises – that’s a given. A good CFO helps the CEO to think things through and decide how to react. When we enter into an engagement with a client, we know that at some point we are going to be in a foxhole together and need to be able to support and be honest with each other. You might find yourself in a financial crisis – maybe you lost your biggest customer, or an aggressive competitor is undercutting your pricing and hurting your profits. Or maybe sales are exploding, you are looking at growth that is bigger and faster than what you are set up to handle, and you know that if you do not deliver, your new customers may not give you a second chance.
An experienced outsourced CFO who has been through various crises with clients over the years can be a calm voice of reason, helping you to work through difficult situations (supply chain bottlenecks, tensions with your bank, cash flow problems, sudden growth, and many others). Acting as a trusted advisor can be a valuable part of the service an outsourced CFO provides.
A good outsourced CFO offers a perspective that is often therapeutic. He or she can help you to see alternatives when you feel dejected after a setback and should be willing to bring you down to earth after a big win. In other words, you want an outsourced CFO who can guide you to keep moving so that you recover from setbacks, or focus on supporting the new business you just brought in.
What to avoid in an Outsourced CFO
The suggestions above point out what to look for in an outsourced CFO, but what should you avoid in making this choice? In addition to the obvious – no experience, poor understanding of your industry, lack of interpersonal skills – there is a big red flag that should warn you away from hiring an outsourced CFO candidate: the “yes-man” or “yes-woman” syndrome. The outsourced CFO who suffers from this syndrome is someone who agrees with you on every issue. He or she tells you what you want to hear and agrees that your approach is solid, even if you are burning through cash by hiring too many people, are planning to take on too much debt, or have been pursuing clients that are likely to be unprofitable.
The “yes-man/woman” outsourced CFO is afraid to push back when your growth projections are unrealistic, is unwilling or unable to ask uncomfortable questions, and does not recognize or does not want to challenge your evasive, non-specific or inadequate answers.
Your outsourced CFO should be willing to risk losing you as a client to try to help you to do the right thing, even when that means disagreeing with what you think is right. You want someone who is willing to risk your business by arguing for what is the right thing for your business. Of course, any argument must be respectful and backed up by facts and analysis, but a CFO who is not willing or able to engage in those kinds of discussions is not the right CFO for your company.
As a business moves beyond the start-up phase, the hardest part of achieving growth over time is not raising capital; the hardest part is having the pieces in place so that the company can pursue growth that is profitable. While you have a vision, a strategy, and you know your product or service, you need someone to analyze the financial aspects of how to get where you want to go. A good, trusted outsourced CFO partner can help you do that.