News

What is a Virtual CFO

I am often asked what is the difference between a virtual CFO and outsourced CFO. These have become widely used terms to describe the concept of having access to the skills of a highly experienced CFO for a fraction of the cost of hiring a full time CFO.

From my experience the services of Virtual CFOs fall into 2 distinct categories:

  1. Those services provided by Accounting firms – these are an extension of their existing accounting and tax services to provide more input and guidance into their client’s business, and
  2. Those services provided by specialist Virtual CFO firms – these firms do not provide taxation advice or bookkeeping services.

 

Using that distinction, if virtual CFO firms don’t provide the usual taxation and accounting services provided by an accounting firm – what do they do and why are they needed? To a larger business that has always had the services of a full time CFO, this is never in question. The need is evident, but a small to medium sized business owner who has never had one would struggle to grasp the concept.

The reason for this is clear when you look at a typical business growth journey. When a business starts, it needs to establish operating structures and basic compliance processes to cover their BAS and end of year tax. Information systems are not a priority because the business owner understands how their business runs and only employs a few people. An external accountant with their experience and technical expertise is the perfect trusted partner for this situation. Over time the business build rapport with their accountant and the account is able to provide constructive advice which can extend to virtual CFO services.

Larger businesses, however, do not rely on their external accountant in the day to day running of their business. In fact, they would define the engagement of their external accountant more narrowly to include only year end accounting and taxation advice because this is what they do best. The larger business would have built their own internal accounting team to manage transactions and provide financial information and would be dependent upon their internal team for day to day management.

So if we look at how that transitions from a small business to a large business, this is what usually happens. The small business engages an accounting firm when they commence. As a result of their trusted relationship and experience working with small businesses, the external accountant extends their services to include providing monthly financial reports and a monthly meeting to discuss and strategise. This service extension could be termed Virtual CFO services.

Over time, the business grows and volume and complexity of transactions grow, the business might hire a bookkeeper and an accounts clerk. These new staff need to be trained and developed and impact the integrity of the financial data of the virtual CFO. At this point, the Virtual CFO services of the accounting firm can be stretched as people management of the client staff is required to get accurate financial data, and something they are more likely not structured to provide. The business owner is now challenged with the management of a new finance function which he has no experience in and could be considering hiring someone.

In a business that reaches this point, hiring someone full time is not straight forward. If the budget does not allow the business to pay a full time CFO salary the business would probably get a Finance Manager which leaves a skill gap. The Finance Manager would want career prospects and the business owner is probably not the ideal mentor for them to grow and develop their skills. If the new Finance Manager doesn’t feel they are being developed they may leave.

This is where a specialist CFO firm that does not provide accounting and tax services can really be of assistance. The Virtual CFO can manage the finance function on behalf of the business owner and provide the ideal mentor for the Finance Manager to grow and develop. This will improve the chances that the Finance Manager will remain in the business and possibly become the CFO at some point in the future. It also provides the business owner that their finance function is being independently managed and controlled but someone with expertise in that area.

To this point I have only described the growth of the finance function in relation to transactional data. For a business to be successful, reports, analysis and insights into financial performance are critical. As the business hire more operation staff and sales staff, that information becomes critical to measure performance and set targets. Conversations around financial measures are not what a new business owner would be used to, but these are the core skills of a Virtual or outsourced CFO. The Virtual CFO will present the data in a way so that an impossible target sounds achievable.

So you now have your Virtual CFO, so what happened to the external accountant? Well, they are still a very important part of the business and will still offer some very valuable insights. Taxation is a very complex area and they have the skills and appropriate fee structures for that type of specialist service. Their virtual CFO service has done its job to successfully get your business to this point in the growth cycle, but that model has been outgrown by your growth and success. Likewise, as your business continues to grow, at some point you will engage a full time CFO and outgrow the services of the specialist virtual CFO firm.

So that explains a Virtual CFO, but what about an outsourced CFO? In reality, the two terms are interchangeable. I had this conversation with a good colleague of mine who has an accounting firm that provides Virtual CFO services. We came to the understanding that a virtual CFO referred to the extended services of an accounting firm as the services were usually provided from the accountant’s office and an outsourced CFO referred to a specialist provider of CFO services as these services were provided more in the offices of the client. I am sure there are many exceptions!

Whether its an outsourced CFO or Virtual CFO, the real opportunity for a business owner is to bring in a level of experience into their business to assist with all the challenges with growing a business. A CFO with many years’ experience working within growing businesses would have seen it all before and can save you the trouble of suffering avoidable errors and mistakes which could be costly. They will also bring to the table people management skills and be able to build you finance team and information systems so you as the business owner can focus on getting new customers and providing a quality service. So why not hire a part time Virtual CFO for a fraction of the cost of a full time CFO?

 

ABOUT BRIAN DOUGHTY

Brian Doughty is founder of the outsourced CFO which is a part time CFO service for small to medium sized businesses. Brian’s experience in large corporates and small business is unique and has enabled him to develop a simple to understand set of tools which will help business owners engage staff, monitor performance and achieve their goals.