A bit less than a half (48.4%) of all businesses reach the threshold of 5 years and about a third (31%) of them last about 2 years according to the U.S. Bureau of Labor statistics report. This means that a staggering number of companies fail for various reasons, including cash flow problems. 38% of failed startups attribute their failure to problems with cash flow, which can be the result of poor financial management or miscalculations. After all, it’s hard to underestimate the importance of a constant money stream circulating in the company. Financial health is one of the pillars of success if not the most important thing to keep an eye on.
Although hiring an experienced CFO seems like a no-brainer, we have to take into consideration that smaller startups simply can’t afford an in-house CFO. That’s when a virtual CFO or Virtual Chief Financial Officer comes on stage. Let’s look into some more details about this profession and why virtual CFO services are getting more and more popular today.
What is a CFO?
It makes sense to get back to basics when talking about a virtual CFO. It’s hard to find a business person unable to say what stands behind such abbreviations as CEO, CFO, CTO. However, it’s not just three of them : CSO, CCO, CDO and CPO – the C-suite list is getting longer, which makes it a bit of a task to decipher them all.
CFO or Chief Financial Officer is the senior position that holds the responsibility for managing a company’s finances, including bookkeeping, financial planning and reporting, and investment programs. CFO is considered to be the highest financial position and the third-highest position among top-level executives in a company and the job in demand. As the business landscape is constantly changing, the role of a CFO has evolved from mere reporting tasks to consulting and fostering decision-making based on financial data analysis with the final goal to drive a company’s success. There’s no need to mention how crucial this role is and what impact it may have on the company’s growth and development.
If we turn to numbers, the average CFO salary in the United States is $434,315 as of October 25, 2023, based on the information from salary.com. A typical salary is somewhere between $329,027 and $557,194, depending on education, certifications, additional skills, and experience in the profession. So, judging by the numbers, it’s obvious that hiring a professional CFO might be too hard of a burden for a company’s budget.
What is a virtual CFO or virtual CFO services?
When it comes to a virtual CFO, it’s essentially a part-time virtual or remote basis service that covers all the duties of a traditional CFO. A company doesn’t employ an in-house CFO, rather outsources it. It’s most certainly a wise solution for small and medium-sized businesses that are tight on the funds to employ an in-house CFO, but understand the benefit of having a financial professional and advisor with a good experience on the team. Virtual CFO services essentially bridge the gap for a business that needs the services of an experienced CFO, but can’t invest in hiring a full-time professional just yet.
As virtual CFOs are mostly employed by small and medium-sized business as well as start-up, the range of their duties might encompass basic financial operations, like bookkeeping and reconciliation as well as more profound ones, like making financial forecasts, drawing financial strategy, tracking cash flow, analyzing trends in the field, and creating budgets.
The benefits of using virtual CFO services
As long as virtual CFO services are getting more popular, let’s take a look at the major benefits such services offer:
- Cost-effective expertise
As it was mentioned before, hiring an in-house CFO can be far beyond the expenses a business can afford, so virtual CFO services give an access to top-tier financial expertise allowing to save money on hiring a full-time executive. What’s more, virtual CFO services can be used on the “need” basis when the company is only paying for the services it requires.
- Flexible and scalable solutions
Virtual CFO services are usually tailored to meet the specific needs of each business. There are various plans, and businesses can choose from a range of services the ones they require at the moment. Virtual CFO services are highly scalable and ready to meet the changing needs of growing businesses.
- Access to a wider network of experts
Virtual CFOs come from a variety of backgrounds and industries and have their own network of professionals, which means that they can provide additional support and expertise by bringing their knowledge to the table. This is particularly important for businesses that need some experience in a particular industry or expertise in a specific area of finance.
- Enhanced decision-making
Based on the high level of expertise and experience in the field, virtual CFO services can provide companies with the financial data and insights as well as their unbiased opinion needed to make informed decisions.
- Improved financial performance
Virtual CFOs that fulfill the functions of an in-house CFO should help businesses improve their financial performance by providing insights into their financial data, identifying areas for improvement, and developing strategies to achieve their financial goals.
- High compliance standards
Virtual CFO services guarantee that companies they serve are compliant with all applicable financial regulations, which reduces financial risks. It’s also their job to help businesses identify and mitigate potential financial risks.
- Increased focus on strategic development
Outsourcing financial functions to virtual CFO services means that the financial side is covered, which allows business owners to allocate time and resources to focus on other aspects of running their businesses, and give priority to strategic development.
- Improved morale and motivation
Strong and reliable financial management in place can boost employee morale and motivation. Knowing that the company is financially robust helps the staff feel more confident about their jobs and the company’s future.
This list of benefits proves that hiring virtual CFO services can be a wise investment for a company as a virtual CFO can provide it with the financial expertise, guidance, and support needed to achieve financial goals and grow.
What virtual CFOs do or virtual CFO responsibilities
If we were to sum up the description of CFO’s work in one word, this word would most likely be “liquidity”. Ensuring the liquidity of a company is a huge task that can be divided into smaller responsibilities.
The responsibilities of a virtual CFO overlap with those of an in-house CFO, though they vary depending on the needs of the particular client business. However, the key responsibilities are common for many virtual CFO roles:
Financial planning and forecasting services
Virtual CFO services help businesses develop detailed financial plans and forecasts that align with their strategic goals. Analyzing financial data, identifying the trends of the industry and potential risks are all part of a virtual CFO work.
Budgeting and cost management services
Virtual CFOs assist in creating and managing detailed budgets for companies, identifying and controlling costs, which helps improve profitability as strong return on investments (ROI) is one of the priorities of the job.
Cash flow management services
Virtual CFO services should ensure that businesses have adequate cash flow to meet their obligations. They also take part in developing strategies to optimize cash flow for their client companies.
Financial reporting and data analysis services
Accounting tasks like preparation and analysis of financial statements, and cash flow statements, providing insights for making informed decisions is one of the virtual CFO’s responsibilities.
Compliance and tax preparation services
One more responsibility of virtual CFOs is to help businesses with tax preparation, compliance, and planning to minimize their tax liabilities.
Financial risk management services
Virtual CFOs duties also include identification, assessment, and mitigation of financial risks as well as developing strategies of risk management and protection of the business’s financial health.
Investment analysis and advice
Virtual CFO services can advise companies on investment decisions which might help grow their assets.
It has to be mentioned that all these responsibilities and actions by a virtual CFO must be in compliance with GAAP principles and the Sarbanes-Oxley Act that include fraud prevention and disclosing financial information provisions.
In addition to these core responsibilities, virtual CFOs may also provide other services, like payroll processing, human resources financial reporting, international tax planning, fraud prevention and detection.
How to choose the right virtual CFO services?
According to Max Hansen, Forbes Council member and Co-Founder and CEO at Y Scouts (leadership search firm), the right CFO will help build a solid foundation of scalable processes and systems that put the company in a healthy financial position, which creates future value for investors. Before starting the search for the right CFO he recommends coming to grips with the following exercises:
- Define your organization’s values and culture;
- Define the CFO role;
- Put yourself in a position to attract talent.
Indeed, this three-point plan seems useful, applicable and concise while choosing any C-suite professional. A more detailed instruction on what things to consider while choosing the right CFO is in order though.
What factors to take into account when choosing a virtual CFO
Let’s get into some factors that help make the choice of your virtual CFO more informed.
Clearly defining specific financial needs and challenges of a business helps find the right service. You need to assess the areas where your business requires expertise, such as budgeting, forecasting, financial reporting, or cash flow management.
Experience and expertise of virtual CFOs
Experience and expertise are the most important criteria to be considered when looking for any professional services. CFOs with a proven track record of success in your industry should be the best fit. Make sure that the virtual CFO services you choose have the experience to address your specific business needs. If your business is a startup, focus on the services that cater to the needs of startups. Asking for references from previous clients to gain insights into the provider’s service quality and ability to deliver results is a good strategy.
Pricing and engagement options of virtual CFOs
As long as the key moment in hiring a virtual CFO is to stay within your budget, pricing and engagement options should be carefully considered. Virtual CFO services today offer a range of pricing models, such as hourly rates, monthly retainers, or project-based fees. Choosing the best fit for your business and budget is crucial.
Communication and collaboration of virtual CFOs
Effective communication is essential for a successful virtual CFO partnership. Evaluating the provider’s communication style, responsiveness, and willingness to collaborate closely are the factors to consider as the process of integration of virtual CFO with your financial team is only possible through collaborative and strategic approach.
Technology and infrastructure used by CFO services provider
Ensuring that the virtual CFO service provider utilizes robust and secure technology platforms and knows your accounting software to manage your financial data is a must. Technological compatibility is the basis for a productive collaboration.
It’s necessary to ensure that the virtual CFO service provider’s culture and values align with your company culture, as a good cultural fit can foster a stronger working relationship.
Trial or pilot periods
Many virtual CFO services offer trial periods or pilot programs, which allow you to experience their services before committing to a long-term cooperation. Getting a trial period is a great strategy when it comes to services.
Conduct thorough interviews and due diligence
Finally, making some introductory calls or meetings with your potential virtual CFO provider won’t hurt. Get more detailed information about their experience, approach, and proposed solutions. After all, it all looks great on the site.
There’s one more piece of advice on choosing the right CFO from Jack Perkins, founder at CFO Hub, which provides on-demand CFO, controller, accounting and HR services. He argues that traditional understanding of a CFO role as an “astute accountant” is long gone. But with technology drastically changing the world of business, that place is now taken by a “strategic CFO” with a more holistic view of a company’s financial state. A strategic CFO is able to analyze the situation in a rapidly changing context and develop long-term strategies. So he advises looking for the three qualities that make a strategic CFO, which seem to be applicable for a virtual CFO as well. These qualities are:
- Financial and analytic prowess;
- A cross-disciplinary strategic mind;
- Excellent communication and leadership skills.
Choosing the right virtual CFO service is an investment in your business’s financial health and security. Careful consideration and evaluation of various options and selecting a virtual CFO service provider can help a business achieve its financial goals and drive growth. Virtual CFOs can be valuable partners for businesses of all sizes as they provide cost-effective financial expertise.