There are multiple scenarios where outsourcing the “CFO” function can be the best way to address the challenges that many entrepreneurs and other business owners face, from start-ups to private equity-backed firms, to second- and even third-generation family businesses. In this article, we describe what the term “outsourced CFO” means and why this approach to managing the numerous financial aspects of a business can be the best solution for many business owners.
Companies outsource many functions in today’s economy, including accounting, payroll, IT, and marketing, among others, but many business owners don’t realize they can outsource their firm’s Finance functions, and the many advantages of doing so. Outsourcing CFO services gives small firms access to financial experts with a wide range of experiences, who are committed to keeping up with best practices in the field. It gives business owners the flexibility to access that expertise as needed, rather than committing to a full-time in-house resource.
Who is Most Likely to Outsource Financial Services?
Situations that call for outsourcing the CFO function are varied, and include the following scenarios:
- You’re an entrepreneur. Your business is taking off and you have a lot of balls in the air – you simply don’t have enough time for budgeting, forecasting and analyzing financial results;
- You run a small- to mid-sized business. You know your customers and your services and/or products inside and out, but you’re less focused on dissecting the financial side of the business. As a result, you sometimes make decisions based on instinct instead of financial data and other objective inputs;
- You’ve raised some venture capital to expand your business (congratulations) and you need to update your investors about profit margins, customer acquisition costs and other key performance indicators, but you’re not sure how to put that together;
- Your business has been getting along with a one-person finance department, and that person just gave two-weeks’ notice. While you have a bookkeeper, you don’t fully understand the financial statements they prepare. You’ve been feeling like you could use more in terms of financial planning and analysis but you’re not really sure what you need.
- You have a bookkeeper or controller and you do not understand the financial statements that they are preparing and presenting.
- The business is not performing as well as you think it should. An objective third party can help you understand where it is falling short and where action is required.
Are Your Financial Decisions Based on Inadequate Financial Analyses?
Business owners make decisions every day, but those decisions are not optimal when based on inputs that are insufficient or incorrect. The implications of faulty financial inputs, including quantities, costs, margins, inventory, cash flows, and so on, can be profound, affecting profitability, market share and access to capital. If your financial data is not well organized and clearly presented, it is not as useful as it could be, and if you are getting inadequate or inaccurate information, that is even worse.
Consider a business that offers both a product and service contracts to support the use of the product. The owner doesn’t have the financial information needed to allocate expenses appropriately between the two, and doesn’t know the critical metrics or KPIs for a software business versus a service business. In this situation, the owner simply cannot know whether both sides of the business are profitable. Managing a business with inadequate financial information is like being given critical news that is scrambled or written in a foreign language. You need a capable translator to help you interpret the information and take appropriate actions. If you do not have that translator on your staff, an outsourced CFO could be the right solution.
Outsourced CFO services add significant value to all types of businesses in many ways, including:
- ongoing financial planning and analysis (budgeting, forecasting, assessing long-term and short-term financing needs)
- analysis of overall financial strengths and weaknesses, with suggestions for improvements
- assessment of the financial viability of new product ideas, including projections and NPVs and IRR calculations
- analysis of pricing and cost structures to improve margins
- evaluation of financial data capture and reporting systems, with recommendations for improvements
- assistance with raising capital, advising on debt/equity mix
- preparing financial presentations for the Board and/or investors (e.g., pitch decks)
- assistance with quarterly financial reporting
- analysis of M&A opportunities, including financial forecasts of BAU and post-acquisition operations
Recognizing the Need for CFO Services
You may already realize that many of the items on this list could and should be done more effectively in your business. Or, in many cases, a business owner will simply have the feeling, “something isn’t right here”. It often starts with cash and cash flow – your financial statements say the business is making money but sometimes you don’t have enough cash on hand to meet expenses. The trigger might be a particular event that requires an in-depth financial analysis and takes too much of the CEO’s time, leading to the feeling that, “we just can’t do things this way anymore.”
Frequently, the CEO of a VC-backed firm is told “you need to have finance people to provide various types of financial information to our Board.” VCs also want to know that the CEO has access to reliable financial information to make informed, data-driven decisions. Regardless of whether or not a firm has outside investors, CEOs often have an unfulfilled need for someone to help interpret financial data, or to provide financial data they don’t have, but don’t want to commit to hiring a full-time, in-house CFO.
If your firm handles financial matters by a committee because no individual is truly responsible for compiling those analyses, that’s another indication that outsourcing your CFO needs could provide a substantial benefit. If your accounting needs are handled by outsourcing you know the relief that comes with having that work handled for you. The same applies to the finance function, but your accounting firm is not the place to turn for help. Accounting firms do auditing and tax planning, but they are not well positioned to help with financial forecasting, improving the profitability of your operations and analyzing opportunities to grow your business. For that, you need financial experts.
Outsourcing the CFO function can make a significant contribution to the financial and strategic decisions made for many businesses. As an expert in providing outsourced CFO services, G-Squared Partners is ready to help your firm achieve its financial goals.
Learn more about outsourced CFO services. Contact us today.