Owning your business or a small company could be one of your goals in life. You have this idea, and you believe it will work. However, even the best ideas can fail without sound financial management.
For founders with little financial expertise, it can be a significant challenge to record financial data, analyze it, and decide your business's next move based on those numbers.
And that's why most startups or small businesses fail.
According to the latest U.S. Bureau of Labor Statistics research, nearly 1 in 5 U.S. businesses fail within the first year. 49.7% fail after five years, and more than 60% shit down after ten years. And 38% of companies fail due to cash flow problems and failure to raise new capital.
As you read this, you may be scrambling to find a way to get your financial management processes in order. But hiring an in-house CFO is too expensive for a small business, especially since they're spending on growth and haven't generated too much profit yet.
Luckily, outsourced CFO services have emerged and have grown rapidly in recent years, providing startups and small businesses with high-level financial insights at a relatively low price.
So what are outsourced CFO services? How can you know you need them and what kind of outsourced CFO service should you look for?
What are outsourced CFO services?
Before we can get to choose the type of outsourced CFO services we need, we need to figure out what outsourced CFO services actually are and what they offer.
A chief financial officer or CFO is the head of the finance department of a company and is responsible for overseeing and managing all financial activities. They are also in charge of financial data keeping, analysis, and reporting to upper management.
Outsourced CFOs are financial experts who work as strategic financial consultants for businesses on a part-time or contracted basis.
However, outsourced CFO services are not limited to an actual individual with significant expertise in finance and your industry, they can also be provided by an outsourced CFO firm or an organization with experienced CFOs, or they can be software or applications powered by machine learning that help you handle all the dirty work.
Moreover, virtual CFOs emerged as technology and the COVID-19 pandemic reshaped the landscape of accounting services.
Those CFOs may never need to come to your office and can help monitor your finances remotely. A virtual CFO can save your cost further as they won't increase your G&A expenses.
"Outsourced CFO services" is a blanket term and can refer to fractional CFO services, contract CFO services, and more. For instance, some outsourcing CFOs may provide controller services as well.
Below is a list of some of the most common types of outsourced CFO services that founders may benefit from:
What are the standard outsourcing CFO services for startups
Financial statements are the key to knowing an organization's current (and future) financial position. Generally speaking, a chief financial officer won't be responsible for preparing your balance sheet when you have someone to do your controller services or bookkeeping services to generate those reports.
But most outsourced CFO services involve financial reporting facilitation, interpretation of financial reports, and in-depth financial analysis of your company.
You will receive an overview of your finances and critical next steps to improve your financial health with an outsourced CFO solution.
Accurate and fast financial projections, especially cash flow forecasting, are vital to business growth. A financial forecast requires analysis, strategy, and practicality, which needs a strategic understanding of your company's current and future capabilities, financial trends, and specialized knowledge of the industry's competitive landscape.
Outsourced CFOs can help you with forward-looking analyses in the long term and short term.
Budget plan and cash flow management
Budgets are a detailed spending plan based on your business' income and expenses (in the coming months or one year). To monitor whether you can achieve your business goals within the time frame, outsourced CFOs could compare your financial position with your budget.
By evaluating the difference between the actual numbers and your budget, you may adjust your business strategy or review whether your business goals are realistic. Some outsourced CFOs may advise you on adjustments based on comparing actual and budgeted transactions.
In business, you should make decisions based on strategic planning rather than relying purely on "gut feel." What you can benefit most from outsourced CFO services is a higher level of financial strategy.
An outsourced CFO is a finance professional in long-term planning who can work out exactly what is needed to take your company from where it is now to where you want it to be.
In broader terms, unit economics relates to a given business's "base unit of activity" and profitability. It is crucial to evaluate SaaS companies' profitability and financial drivers. For example, the revenue and cost drivers for SaaS companies are usually the price of the subscription, CAC (Customer Acquisition Costs), and LTV (Lifetime value).
Outsourced CFO services can help you monitor those metrics and track the unit economics for your business model.
Risk mitigation and crisis control
Risk is an inevitable part of any business. If you don't discover risks in time, they could destroy a company on a fast track to growth.
Outsourced CFOs have comprehensive knowledge of different markets, industries, and products. Therefore they can help you identify and address critical risks from the internal operation and financial management or the external environment.
In addition, outsourced CFOs draws a line of defense to avoid severe damage to the organization's finance. They monitor and control risk factors such as strategic risk, changes in government regulations and overall economic climate.
To maximize your profits, you must take care of your expenses. Outsourced CFO services can offer unbiased advice on cost-cutting compared to in-house CFOs.
With their knowledge and skills, they are less likely to struggle with making decisions on cost-cutting as they are not as involved with the company as internal employees.
Moreover, each department needs to run well and efficiently in the organization to accelerate financial growth. An outsourced CFO acts as a mediator, monitoring and controlling the operational speed of each department, thus ensuring that the entire company grows. This will greatly increase your company's profits without sacrificing the quality of work.
The most common reason to use Outsourced CFO services is fund-raising, which is a challenging and time-consuming process for most small companies.
Outsourced CFO services can make the progress of raising capital more smooth. An outsourced CFO can help you prepare the documents, slides, and financial models you can take into investor meetings.
Besides, they can also offer you a leg-up, e.g., refer you to their network of investors. They have connections with financial backers and may be able to introduce you to fund-raising possibilities that you would not have discovered on your own.
From researching and analyzing your financial status to creating a business strategy to assist with negotiations, an outsourced CFO will ensure you are well prepared to raise capital.
Why do you need outsourced CFO services?
An outsourced CFO usually has more independence and expertise in certain industries than a full-time CFO. So what are the benefits of using outsourced CFO services compared to a traditional CFO?
Hiring an outsourced CFO is a more cost-effective solution for many companies than a traditional CFO, who is likely one of your company's highest-paid staff. Outsourced CFO services are great alternatives if your company is growing or a small company because the money you save can be used to expand your business.
Outsourcing can help companies significantly reduce costs (direct: salary, benefits, and indirect costs: office space, office snacks).
For example, A fractional CFO company will provide you with the services of a highly competent CFO, and you will only pay for the time that person works.
However, for an in-house CFO, there will be costs in addition to their salaries, such as recruitment fees, benefits, payroll taxes, insurance, bonuses, mandatory retirement account contributions, severance pay, office space, and other expenses. And it would be a heavy burden for startups and small companies.
An Outsourced CFO can help you get results fast. Their expertise and experience help them know where to start and how to deliver results quickly. With a CFO, you are more likely to achieve your business goals quickly.
Also, if you create a clear overview of your company's goals and objectives, they can help your company achieve its financial goals in a short period so you can focus on other aspects of your business.
As mentioned above, outsourcing your finance and accounting operations cuts overhead costs and leads to increased operational efficiency because outsourcing gives you immeasurable flexibility in both high and low periods.
Offering clear and objective information on financial data about your company is the core function of the outsourced CFO.
They are unbiased and honest about the financial decisions they make about the business. Unlike an internal CFO, whose perspective may be affected by interpersonal relationships and, as a result, may not express unfavorable opinions to preserve those relationships.
An "outsider" CFO can point out your finance and accounting problems without such worries. And that is valuable to businesses.
An Outsourced CFO often has years of financial knowledge and can help you achieve your business goals and deliver the best results for your company. When you hire an outsourced CFO, you can expect high-quality services because many professionals have worked in accounting departments in companies of different sectors and sizes.
The outsourcing CFO organization will assign you the ideal CFO based on your company's requirements. Therefore, you can have a CFO that aligns with your company's values, which avoids unnecessary clashes and ensures a smoother collaborative process.
Interim CFO services
Outsourcing interim CFO services can help keep your business running while you hunt for a new or permanent CFO. Especially for a growing company, sometimes it's too early in the startup phase to form a finance department.
An outsourced CFO is a low-cost option to ensure that business flow and operations are not interrupted until you appoint an in-house CFO for your company.
Therefore, outsourcing is the best alternative if your company is still in the early stage of growth and has not yet hired an in-house CFO.
When do you need outsourced CFO services?
Here are several scenarios in which I recommend you to take outsourced CFO services:
- When your business is taking off
- When you already have someone to do bookkeeping services for you but are confused about analyzing business financials