Running an energy services business is hard work.
Managing the finances for an energy services business can be a complete head f***.
I know this because I spent nearly 20 years as a CFO working in the industry for them.
I’ve dealt with seasonal cash flows, unknown cost spikes, duplicate bills & invoices, lack of funding, and poor financial insights. It’s not always pretty.
But one thing’s for sure…
If you're an energy services business doing $1M in revenue or more - a CFO could help manage this headache for you.
The question is - should they be in-house or outsourced?
In this article, I’ve spent some time outlining the key differences, responsibilities, and roles a CFO will play in your business.
Let’s get into it with the basics…
An in-house CFO is a senior executive who takes charge of financial decisions.
They’re a full-time employee of your business and take responsibility for owning and overseeing the execution of your financial strategy.
An in-house CFO helps to:
An outsourced CFO is an external finance consultant who leads financial operations.
You can hire an Outsourced CFO in an interim, full-time, on-contract, or part-time role, depending on the budget and requirements of your business.
They do everything an in-house CFO would do without being employed.
This makes Outsourcing CFO services much more cost-efficient than hiring an in-house CFO.
Like I said, having a CFO for your energy services business is a no-brainer.
Here are some of the things they’ll help with and take off your plate:
A CFO is responsible for developing and maintaining financial forecasts for the company. They analyze:
This is super important because accurate forecasting helps with:
Budgeting and Cash Flow Management.
Constantly watching your bank and worrying about having enough cash to pay for things or invest in future growth, e.g. acquisitions?
Budgeting and cash flow management can help. With a CFO in place, they will:
Guide system efficiencies
Having the right systems in place to effectively manage your finance function is important. You can’t effectively manage cash, and create up to date budgets & forecasts if you’re stuck using desktop accounting software like Sage 50.
A CFO will come in and help to guide what your finance function tech-stack should look like and help to build that system, creating efficiencies in day to day tasks as well as giving you more visibility in your business.
The CFO is responsible for managing your company's assets. This includes working capital, fixed assets, and investments.
They’ll help you to:
Effective asset management contributes to improved profitability and long-term financial stability.
Audits and Financial Reporting
A CFO ensures the accuracy and integrity of financial information.
They manage all of the things needed for any future audits so that you don’t need to worry about it.
They also ensure:
Plan Mergers and Acquisitions
Acquisitions are a crucial part of an energy service company's growth strategy and something we’ve been helping out with lately.
Your CFO deals with due diligence during M&A. They perform financial analysis and valuation of target companies. They assess the financial impact of M&A transactions. They’ll also develop integration plans and negotiates financial terms.
Your CFO ensures the company's compliance with tax regulations. This includes timely filing of tax returns and payment of taxes. They stay updated on tax laws and interpret their implications.
They’ll also help to implement strategies to optimize the tax efficiency of the firm, complying with legal requirements. Effective tax compliance helps in avoiding penalties.
Sounds like a CFO is going to take a whole load of trouble off your plate?
You got it.
So should you choose to hire in-house or outsourced?
Here’s a bit more info to help you decide:
An in-house CFO is a full-time employee of the company. They are directly hired and work exclusively for the organization. Hiring people full-time has its benefits but also challenges.
An outsourced CFO is not a permanent employee of the company but is hired through a third-party service provider (like Twenty Eighty). They work on a contractual or part-time basis, providing financial expertise and services as needed.
Hiring an in-house CFO involves the cost of a full-time executive. This includes salary, benefits, and other associated expenses. You’re going to be looking at a minimum of $200K per year to bring a decent CFO in-house (which if you’re between 0-$5M in revenue will eat into most of your net profits).
It requires a long-term commitment and investment from the company. However, it allows for:
This offers a more cost-effective solution for companies. It’s a viable option for firms with limited financial resources or specific short-term needs. The cost of an outsourced CFO is often more flexible. It can be tailored based on the required level of involvement and the duration of the engagement. An outsourced CFO provides high-level financial expertise without the commitment of a full-time hire.
Both in-house and outsourced CFOs can provide valuable financial expertise and contribute to the success of a company. The choice between the two depends on factors such as:
I can say this honestly having served as a CFO for 20 years inside energy service companies.
It depends on size, but if your revenues are between $1M-$20M per year, you should consider an outsourced CFO.
Hiring one internally at this stage is likely to incur too much cost, which should be instead focused on building out other aspects of the business and investing in further revenue growth.
Here are some reasons why you should consider Outsourcing CFO services:
Want to explore if hiring an outsourced CFO makes sense for your energy services business?
Book your profit & cash maximization call today, where we will:
Let’s help to fuel your growth today!
Subscribe to receive the latest blog posts, ebooks and videos directly to your inbox.
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.
Jump to a section of this post:
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.
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.
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.
Business budgets are powerful tools for small business owners if used properly. Learn how you can use them to spend less and save more in this article.
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.
As a business owner you are busy. This definitive guide will show how managerial accounting will get you back to your entrepreneurial dream: creating something you love, helping people in the process, and earning money and free time while doing so.