This post was originally published January 19, 2016 and extensively updated February 01, 2021.
The role of a Chief Financial Officer (CFO) is to oversee the financial operations of a company. CFO is an important job, and yet many small and medium-sized businesses do not have one. They handle finances themselves or delegate them to employees.
At Cook Martin Poulson, we work with business clients every day. One of the recommendations we make frequently to our clients is to consider an outsourced CFO. In this post, we will explain what outsourced CFOs do and provide guidance to help you decide whether to outsource a CFO for your company.
What is an Outsourced CFO?
Our clients often ask us, "What is an outsourced CFO?" An outsourced CFO is a CFO who provides services on a contract basis. They are also known as a fractional CFO. The person who handles CFO responsibilities will be a contractor with your company, not an employee.
Outsourcing is a great choice for companies whose budgets do not allow for a full-time CFO. If you hire a contractor, you are not paying for benefits. Even if the outsourced CFO's hourly rate is high, it may be significantly less expensive than hiring someone full-time.
What Does an Outsourced CFO Do?
The duties and responsibilities of an outsourced CFO are the same as those of a full-time CFO. The CFO of a small-to-medium sized company is responsible for the review of financial results and the interpretation and presentation of results to the management team.
Other crucial CFO responsibilities include:
- Cost control measures
- Cash flow forecasting and management
- Capital acquisition decisions
- Inventory control
In addition to day-to-day financial management, CFOs must be forward-thinking. It's the CFO's job to take the economic, industry, tax, governmental regulation, and social issues into account as they direct the strategic financial objectives of the business. Accurate financial information is critical to business owners, the management staff, and external stakeholders such as banks, investors, and tax authorities.
Should I Outsource My CFO?
Before researching outsourced CFO services, you’ll need to decide whether outsourcing a CFO is the right decision for your company. Here are some questions to ask.
- Can I afford to hire a full-time CFO? Make sure to factor in salary and benefits.
- Am I spending time handling CFO duties when my time could be better used elsewhere?
- Am I worried about wasteful spending or fraud?
- Am I committed to aggressive growth?
If the answer to any of these questions is yes, you may want to work with an outsourced CFO service to find a part-time CFO.
Is My Business Big Enough for CFO Services?
When we bring up the topic of CFO services, some of our business clients wonder if their businesses are big enough to justify paying for a CFO. The answer depends on many factors, but most importantly the complexity and transaction volume of the company.
A company generating $5 million in revenue may be ready for a CFO while a company generating $20 million may not. One business could sell a product for $1.5 million but sell only five units in one year, while another might need 48,587 transactions to reach $10 million with an average transaction of $206. The complexity of the transactions themselves is a factor in determining the need for a CFO.
There is no one answer to the question about the company size and the need for CFO services. A small company with cash flow issues or complicated financial transactions might need a CFO more than a larger company with less complexity. The CFO role is important but in some cases, it may not be necessary to hire someone.
In some cases, an interim CFO may be all you need. If your company is headed for a merger, acquisition, or struggling to find investors, you may need a high-level financial person to help you. In that case, a fractional CFO may be the right solution.
What Types of Small Businesses Need an Outsourced CFO?
The need for a CFO is not always clear to business owners. In some industries, a CFO is a necessity. Examples include banking, finance, and insurance. When a company has a fiduciary responsibility to clients, having an experienced in-house CFO is essential.
In other industries and businesses, the decision may not be so clear. Regardless of your industry, here are four key factors that indicate you need an outsourced CFO to handle financial decisions and strategy.
- The financial complexity of your transactions and goals is beyond your ability to manage. Even business owners and managers with accounting experience may need help managing financial decisions at a high level.
- You need to gain respect from people outside your company. For example, you might need to gain the respect of lenders, customers, shareholders, suppliers, or government regulators.
- Your company is growing rapidly. Accelerated growth brings potential pitfalls with it and an experienced CFO can help you navigate them.
- You are preparing for a merger or acquisition. A CFO can help you interpret due diligence reports and present information to potential investors or lenders.
The best way to determine whether you need outsourced CFO services is to be honest about your company's current financial situation, ongoing challenges, and long-term goals. If you recognize that you need guidance, then CFO services may be necessary to ensure your financial health and growth.
Benefits of Outsourcing CFO Services
There are significant benefits to outsourcing CFO services instead of hiring someone in-house. These benefits include:
- Saving money. It is far more expensive to hire a full-time CFO than it is to outsource one who works only when you need them.
- Saving time. In-house CFOs sometimes get pulled into projects that don't relate to the company's financial goals, taking time away from their most important work. Outsourced CFOs handle only financial data and because they're not in the office all the time, they are less likely to get pulled into projects outside their scope.
- Gaining the expertise you need for large projects. In-house CFOs may not have the experience needed to take on a large project, whereas a fractional CFO might have experience in a variety of industries and situations.
- Providing an independent viewpoint. A full-time CFO is in the thick of things during the workday and that makes it difficult for them to have perspective or see the big picture. They may struggle to express independent opinions. An outsourced CFO doesn't have a horse in the race. This means they can see things differently and -- in many cases -- more clearly, providing you with some perspective.
- Ensuring complete financial management capabilities. Your outsourced CFO can aid with budget planning, training accounting and bookkeeping staff, improving accounting systems, managing payroll, and filing and paying taxes.
There are significant benefits to using outsourced CFO services for your company. Outsourced CFOs are less expensive than full-time CFOs and they bring some much-needed skill and perspective to the companies who use their services.
Does My Business Need a Controller, CPA, or CFO?
Business owners are sometimes confused about which type of financial assistance they need. In some cases, a CPA may be required while in others, a Controller or CFO is better suited to the job.
A Certified Public Accountant or CPA is licensed by the state where they do business. They are qualified to handle day-to-day financial tasks including bookkeeping, payroll, and taxes.
A Controller is a financial manager whose job is to supervise a CPA or in-house accounting staff. They may also handle some big-picture financial tasks such as creating budgets.
A CFO is the highest-level financial job in a company. Outsourced CFOs are typically responsible for overseeing financial decision-making and management, including long-term financial planning.
You should evaluate your financial needs to determine what your company needs. You may need both a CPA and a CFO, or you may need to fill all three positions.
Why Hire an Outsourced CFO Over an In-House CFO?
Some companies may need an in-house Chief Financial Officer, while others can benefit from outsourced CFO services. The primary benefit of hiring an outsourced CFO is, as we mentioned above, the financial savings. It is significantly less expensive to pay for contracted services than it is to hire an employee who receives both salary and benefits.
If you're worried about the bottom line or you want the outside perspective you can get from someone with diverse experience, you may want to consider an outsourced CFO.
How Much Does an Outsourced CFO Cost?
According to Salary.com, the average salary for a full-time CFO is $393,412 as of the end of 2020. That works out to $32,784 per month. At the low end of the scale, you can expect to pay about $299,000 on an annual basis.
By contrast, a smaller company might need someone only one day per week, which could cost between $1,200 and $2,500 per week or between $5,000 and $10,000 per month. By outsourcing a CFO, you can put the money you save into your business.
What to Look for When Hiring an Outsourced CFO
It may take time to find the right CFO. You will want someone that understands the latest financial and accounting practices, and you also need someone you can trust.
Due diligence is essential. Ask candidates these questions:
- What financial training do they have? Some CFOs are CPAs, while others may have certifications in business valuation or forensic accounting.
- Do they have references from their last three clients?
- How have they helped these clients grow their businesses?
- Do they have experience in your industry?
- Do they understand your accounting system?
Make sure you contact all references and verify any claims the candidates make about the results they have delivered for their clients.
Outsourcing a CFO may be the right solution for your company. The information we have provided here will help you evaluate your needs and decide whether outsourcing is the best choice.
Do you need help with financial management and planning for your business? Contact us today to learn how Cook Martin Poulson CFO services can help.