What is the difference between a virtual CFO and an 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:
- Those services provided by Accounting firms – are an extension of their existing accounting and tax services to provide more input and guidance into their client’s business.
- Those services provided by specialist virtual CFO firms – these firms do not provide tax advice or bookkeeping services.
Why Virtual CFO?
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 a 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 its BAS and end of year tax. Information systems are not a priority. Because the business owner understands how their business runs and only employ a few people. An external accountant with experience and technical expertise is the perfect trusted partner for this situation. Over time the business build rapport with their accountant. Also, the account can provide constructive advice which can extend to virtual CFO services.
Virtual CFO Services
Larger businesses, however, do not rely on their external accountant in the day to day running of their business. They would define the engagement of their external accountant more narrowly to include only yearend accounting and taxation advice because this is what they do best. The larger business would have built its internal accounting team. They 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 strategize. This service extension could be termed Virtual CFO services.
Over time, the business grows and the volume and complexity of transactions grow, the business might hire an accounts clerk. These new staffs need training and development and impact the integrity of the financial data of the virtual CFO. At this point, the virtual CFO services of the accounting firm can stretch as people management of the client staff is required to get accurate financial data. The business owner is now challenged with the management of a new finance function in which he has no experience and could be considering hiring someone.
How to Become a Virtual CFO
In a business that reaches this point, hiring someone full time is not straightforward. 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. 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 does not provide accounting and tax services. The virtual CFO can manage the finance function on behalf of the business owner. It provides 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 about 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 use 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.
CFO Services for Small Businesses
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. 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 outgrown 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.
What about an Outsourced CFO?
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 usually provided from the accountant’s office. An outsourced CFO referred to a specialist provider of CFO services as these services provide more in the offices of the client. I am sure there are many exceptions!
ABOUT BRIAN DOUGHTY
Brian Doughty is the founder of the outsourced CFO which is a part-time CFO Service for small to medium-sized businesses. Brian’s experience in large corporate and small businesses is unique. It has enabled him to develop a simple to understand set of tools that will help business owners engage staff, monitor performance and achieve their goals.