Should I outsource my CFO? This guide will help you decide by covering the pros, cons, costs, and key signs your business might need outsourced CFO services.
An outsourced CFO is essentially a part-time, fractional CFO hired on a flexible, as-needed basis. Unlike a full-time CFO, who is a permanent part of the company, an outsourced chief financial officer brings in the same level of strategic financial expertise but without the long-term commitment. This makes outsourced CFO services an attractive option for businesses that need high-level financial guidance but cannot justify the cost of a full time basis position.
The primary role of an outsourced CFO is to provide an objective financial picture and seamlessly integrate into the business. They offer a broad range of services, including:
This holistic approach ensures that all other aspects of the company’s financial health are covered, thereby supporting informed decision-making and strategic growth through a solid financial strategy that aligns with strategic goals.
One of the significant advantages of utilizing an outsourced CFO is their flexibility. They can be engaged for specific projects, ongoing financial oversight, or strategic initiatives. This flexibility allows businesses to scale their financial management needs up or down as required, ensuring they only pay for the services they need.
Outsourcing CFO services offers a myriad of benefits that can significantly impact a business’s bottom line. First and foremost, cost savings are a major advantage. Outsourcing allows companies to bypass the substantial salary and benefits package associated with a full-time CFO. Instead, they can allocate these funds to other critical areas of their business.
Another significant benefit is access to a diverse range of expertise. Outsourced CFOs bring a wealth of experience from working with various industries and companies, offering insights and strategies that an in-house CFO might not have. For example, many SaaS companies have adopted outsourced CFO services to leverage specialized financial expertise at a lower cost than traditional in-house CFOs.
Improved financial management is another key benefit. Outsourced CFOs can implement advanced financial systems and processes that may be beyond the current capabilities of the in-house team. For instance, a SaaS startup saw significant improvements in their financial management and reporting capabilities after their outsourced CFO introduced cloud-based accounting systems.
Finally, outsourcing CFO services allows business leaders to focus on their core operations without being bogged down by financial details. With the guidance of an outsourced CFO, companies can enhance their profitability, optimize cash flow, and ultimately improve their overall financial performance by choosing to outsource CFO services and utilize outsourced services for certain financial tasks.
When it comes to cost, the difference between an in-house CFO and an outsourced CFO is substantial. The average salary of an in-house CFO typically starts at $240,000 annually. This figure doesn’t include additional costs such as bonuses, benefits, and office space, which can significantly increase the overall expenditure.
In contrast, outsourced CFO services typically range from $5,000 to $12,000 per month, depending on the specific needs of the business. This cost includes the flexibility of engaging the CFO on an as-needed basis, allowing businesses to pay only for the services they require. For companies with revenues between $1M-$20M, this model is often more cost-effective.
Moreover, hiring an outsourced CFO eliminates costs associated with recruitment, benefits, and infrastructure that a full-time CFO would require. This makes it a cost effective solution for businesses that need to hire an outsourced cfo high-level financial expertise without the long-term financial commitment.
Strategic financial planning and financial forecasting are vital for any business aiming to achieve long term goals and success. Outsourced CFOs excel in this area by analyzing both historical data and current market trends to create informed financial forecasts. These forecasts guide strategic planning and help businesses make more accurate financial decisions.
Outsourced CFOs also implement advanced forecasting tools that provide real-time updates and scenario planning. This enables businesses to adapt quickly to market changes and unforeseen challenges. For instance, a SaaS company improved its decision-making process by 60% after adopting new financial systems and predictive analytics tools provided by an outsourced CFO.
Additionally, they assist in identifying and implementing key performance indicators (KPIs) that align with the company’s strategic financial goals. This ensures that the business stays on track to meet its objectives while maintaining financial health and stability.
Ensuring compliance and managing risks are critical components of financial management. An outsourced CFO plays a pivotal role in this area by ensuring that financial statements are accurate and compliant with regulations. This builds trust with investors and prepares the business for audits.
They also help businesses stay updated with regulatory changes and ensure necessary adaptations are made. This is particularly important for companies expanding into international markets, where financial regulations can vary significantly. The objective perspective of an outsourced CFO aids in identifying financial risks and opportunities that may not be visible to in-house teams.
Outsourced CFOs develop comprehensive risk management frameworks to foresee and address potential challenges. This proactive approach helps protect the business’s success and ensures long-term stability.
Raising capital is a complex process that requires meticulous preparation and financial clarity. Outsourced CFOs contribute by:
They also enhance investor relations, which is crucial for securing funding. By creating a clean capitalization table and comprehensive financial forecasts, outsourced CFOs ensure that businesses are well-prepared for future funding opportunities through accurate financial reporting.
Moreover, their ability to conduct thorough research and prepare business plans provides a clear financial picture and track record for the firms’ resources organization, which is essential for attracting investors and securing enough cash, unlike other businesses in the industry. This helps the business grow within a budget, ensuring sound finances.
Recognizing when your business needs an outsourced CFO is crucial for making timely and effective decisions. One clear indicator is rapid business growth accompanied by profitability challenges. As your business grows, the financial complexities increase, requiring advanced financial expertise to navigate through them.
Another sign is struggling with cash flow predictability. If your business frequently faces cash flow issues, an outsourced CFO can provide advanced forecasting and proactive strategies to address these challenges. Their expertise in cash flow management, along with insights from experienced cfos, can help anticipate shortages and ensure smooth financial operations.
Finally, if your company is preparing for fundraising or facing limited financial expertise in-house, it’s time to consider outsourcing CFO services. An outsourced CFO can optimize pricing models, provide strategic financial planning, and support fundraising efforts, ensuring your business is financially prepared for growth and investment opportunities. Seeking expert advice can further enhance your financial strategy.
Choosing the right outsourced CFO is crucial for aligning financial strategies with business objectives. It’s important to select a CFO with experience relevant to your industry’s challenges and opportunities. Client feedback and testimonials can provide insights into their past performance and reliability.
The CFO’s services should be adaptable to the changing needs of your business. Regular communication and collaboration are vital for maintaining trust and ensuring that financial strategies remain aligned with business goals. Transparent pricing is also essential to avoid unexpected costs and ensure clarity in financial planning, including controller services.
Ultimately, the right outsourced CFO will provide the strategic financial expertise needed to support your business’s growth and success as a chief financial officer.
Outsourcing CFO services offers numerous benefits, from cost savings and access to diverse expertise to improved financial management and strategic planning. By recognizing the key indicators that your business needs an outsourced CFO, you can make an informed decision that aligns with your business goals.
In conclusion, hiring an outsourced CFO can be a game-changer for businesses looking to enhance their financial strategies and achieve long-term success. By choosing the right CFO, you can ensure that your financial management is in capable hands, allowing you to focus on growing your business.
An outsourced CFO is a part-time, fractional chief financial officer who offers strategic financial expertise on a flexible, as-needed basis, allowing businesses to access high-level financial guidance without the commitment of a full-time role.
Outsourcing CFO services offers significant benefits such as cost savings, access to diverse expertise, and enhanced financial management, allowing businesses to concentrate on their core activities. This strategic approach can lead to overall improved performance and efficiency.
Your business may need an outsourced CFO if you are experiencing rapid growth accompanied by profitability challenges, cash flow unpredictability, or a lack of financial expertise in-house. Evaluating these factors can help determine the necessity for external financial leadership.
Hiring an outsourced CFO generally costs between $5,000 and $12,000 per month, depending on your business's specific requirements. This investment can provide substantial financial expertise tailored to your needs.
When choosing an outsourced CFO, prioritize candidates with relevant industry experience, a strong record of client feedback, adaptability, effective communication, and clear pricing structures. These factors will ensure that you select a CFO who can meet your specific business needs.
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You might have heard these grim statistics before: more than 80% of all small businesses fail within 10 years, and more than 80% of those businesses fail due to cash flow issues. While some dispute the exact numbers, the underlying issue can't be. Cash flow is important. Period.
One would think that one of the most important business areas would be well understood. That isn't the case though. Cash flow is still one of the most ill-understood topics within the small business community. And forecasting cash flow? Even though it is just as important, it is even more misunderstood.
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In this post we will shine light on these misunderstandings, talking about what cash flow is, what cash flow forecasting is, the different types of cash flow forecasting there are, and how forecasting your cash flow can greatly benefit your small business whether you're a founder of a startup or a web3 company, or a professional that has ventured out on their own (say a veterinarian, dentist, chiropractor, optometrist or lawyer).
So, let's start with the basics: what is cash flow?
Cash flow is simply the movement of money in and out of your business. Money coming in is called inflow, while money going out is called outflow. Your business' cash flows can be positive (more cash inflows than outflows), negative (more cash outflows than inflows), or neutral (equal cash inflows and cash outflows).
The movement of money within, and through, any business is extremely important. At a basic level, every entrepreneur sets out to make money. So stripping everything down, each business' ability to generate positive cash flow, consistently over time, determines just how good that business is performing.
The more cash flow a business can make, the better it is doing.
Now, the above discussion on the importance of cash flow might seem overly simplified, and it is, but most small business owners don't have a great handle on this basic construct.
And there are two reasons for this:
Double entry accounting underpins all accounting as we know it. It requires that every financial transaction to be recorded in at least two different accounts. For example, when you make a sale, you would record this transaction both in your sales account on your income statement and your cash account on your balance sheet.
While this system provides greater accuracy and transparency around business finances, it also makes measuring cash flow more difficult. And that's because changes in cash can occur in two places: your income statement or your balance sheet.
Examples:
There are two basic methods of accounting: cash accounting and accrual accounting.
Cash accounting only records transactions when the actual cash changes hands. So if you make a sale and the customer pays later, you wouldn't record that transaction until you collect payment from the customer.
Accrual accounting records income and expenses as they are earned or incurred, regardless of when any actual cash is received or paid out. Using our same example, if you make a sale and the customer pays later, accrual accounting would record the sale right away and create an accounts receivable. It would then eliminate that receivable and increase your cash balance when you collected payment.
Accrual accounting is a double edged sword. It creates financial statements that are more accurate and reliable for various users, but also creates timing differences, estimates and other complexities that aren't necessarily well understood by business owners.
Examples:
The cash flow statement is the report that helps overcome the shortcomings that accrual accounting and double entry accounting processes make. This report ties the balance sheet and income statement together within your typical financial reporting. It measures all cash inflows, all cash outflows and eliminates any non-cash estimates that are also contained within your financials. And ultimately it reconciles all of this information to the cash balance contained within all of your bank accounts.
You can see two different forms of cash flow statements: those using the direct method and those using the indirect method.
Cash flow statements using the direct method are considered by some to be more accurate. This method reports all cash inflows and cash outflows from your business operations separately from any other inflows or outflows. This could include things like customer payments, vendor payments, interest income, dividends and other operational items.
The indirect method is a bit more simplified. It adjusts your net income for any timing differences between when you record accrual based items and when the actual cash is paid or received. This reconciles your net income to your actual cash. While this method isn't as detailed as the direct method, it's also not as susceptible to error.
Regardless of the method used, cash flow statements are a very important piece of your financial picture. As mentioned previously, they show how cash moves through your business. That said, cash flow statements are historical in nature. They show you what your business did, but not where your business is going. To see that kind of information, you will want to use a cash flow forecast.
A cash flow forecast is a projection of all of your future cash flows. It is a best guess, based on all available information, of what you expect to happen in the future. This includes things like expected:
A good cash flow forecast will show you:
This will give you a clear picture of where your business is heading, and how much cash you will have on hand at any point in time.
We touched on some of the high level benefits of cash flow forecasting in our Definitive Guide To Managerial Accounting For Small Businesses. Simply put, knowing the future net cash flow of your business, and your estimated cash balance at any point in time gives you a lot of power as a business owner. You will be able to:
By forecasting cash flow, you can see when your business might have a shortfall of cash. This allows you to take steps to avoid or mitigate the effects of a cash shortage, such as delaying expenditures, extending payments on accounts payable or shoring up working capital with short term debt.
Cash flow forecasting will give you a better understanding of how money moves within your business allowing you to more effectively manage your activities with operating cash. This can be particularly helpful if your business:
Knowing when and how you will get paid, and how and when you will make payments will make you a lot less reliant on debt and lines of credit.
A cash flow forecast will give you a better understanding of your business's financial health. This information can then be used to make better informed decisions about how to best use your resources.
Do you have enough cash to buy the equipment you need to grow and hit your sales targets? Can you afford to hire that stellar employee you interviewed? If you open a new location how will that impact your bank account in the short and long term?
Whether you have negative cash flow or a host of cash surpluses, thinking through exactly how you will progress your business, and knowing the effects of these decisions is an extremely helpful exercise. It will surely boost your confidence.
A cash flow forecast will help you track your progress towards your strategic business and financial goals. The information gleaned from the cash flow forecasting process itself can be used to adjust your budgets and your business plans, making these documents dynamic and more relevant as your operations change.
There are a number of different types of cash flow forecasts. Just like cash flow statements there are different methods you can use to create a cash flow forecast. And depending on your goals, the time frame you use in your cash flow projection should change.
Similar to its cash flow statement counterpart, a direct forecasting shows the exact cash inflows and outflows that result from your business' operations. This is the more straightforward approach to cash flow forecasting as it directly ties to all incoming cash receipts and outgoing cash payments.
Indirect forecasting does not start with your business' operational cash inflow and cash outflows. Rather, it begins with your company's net income figure. From there, non-cash items and changes in working capital are added back into or deducted from the bottom line to get to a net cash flow figure.
Indirect cash flow forecasting is more common associated with three way cash flow forecasting. This cash flow projection method forecasts your income statement, balance sheet and cash flow statement and ties them altogether. Hence the term three way forecasting.
Three way cash flow forecasting is sometimes viewed as the most robust way to cash flow forecast. It eliminates a lot of possibility for errors, especially when using a spreadsheet, and also presents bank ready financial statement projections that can be used for lending purposes. This method is typically a lot more customized however, can take a lot more time to create and maintain, and sometimes isn't as easily understood by entrepreneurs.
Long term cash flow projections are typically forecast from one year to five years out, with most going to three years in range. This type of cash flow forecast is most often associated with strategic planning and indirect/three way cash flow forecasts. These types of estimates are often used to:
A short term cash flow forecast is much more operational in nature. It can range from days to months in terms of time frame, and often does not go beyond a year. This type of forecast is much more granular in nature, and has much more accurate information in terms of timing. It is often updated quite frequently, as regular as weekly forecasts or daily, and is ultimately used to answer the question "do I have enough cash to do X?" in the near term.
The biggest difference between a short term and long term cash flow forecast is its use. Long term forecasts are more strategic, while short term forecasts are more operational.
The best analogy is a road trip using a map. A long term cash flow forecast determines exactly where you are going and loosely determines how you will get there. A short term cash flow forecast is used while you are driving to that destination, constantly shifting due to traffic, construction and road closures.
It is often a best practice to use both a long term strategic and a short term operational cash flow forecast.
An accurate cash flow forecast can be a game changer. Whether you're a professional, such as a veterinarian, dentist, chiropractor, optometrist or lawyer, or a founder of a startup or a web3 company, you will experience cash flow issues. Studies show that the vast majority of business owners have at least once in their lives.
Knowing exactly when that cash flow issue will come, and what you are able to do to mitigate the problem is a definite advantage. One that will let you sleep a whole lot better at night. And that's exactly why cash flow forecasting is a must-have tool.
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Knowing exactly where your business cash flow is headed will let you sleep a whole lot better at night. And that's exactly why cash flow forecasts are a must have tool for every small business.
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