Outsourcing a C-level position can be a great way to access a highly experienced executive, even if your company cannot afford to bring that person on full-time. Outsourcing a C-level position is also a great idea if you do not have a full-time need for that role.
You can do that in either a fractional capacity, bringing on a fractional CFO, or an interim capacity, bringing on an interim CFO.
The CFO role is a common position to outsource and is generally the first executive position to outsource in the growing stages of a company. The size and complexity of the organization will dictate the scope of work for which the CFO is responsible and which type of CFO you should engage. Below we will highlight some of the differences that companies need to consider.
Here are a few areas where a CFO supports a company:
To understand the financial health of your organization, you must have a solid accounting function in place. Good accounting will be the basis upon which your financial decisions are made. A CFO can support your organization in correcting accounting issues and establishing the right policies moving forward.
In a small business, the CFO may take on the responsibilities of the Controller or bookkeeper, posting to the general ledger, managing receivables, and reconciling bank statements. In larger companies, the CFO is rarely involved with “rolling up their sleeves” in this way. Instead, in large companies, the CFO is responsible for setting the accounting function up for success and guiding its operations.
Having well-organized financial statements is a must if you ever want to get a loan from a financial institution or almost any investor. A CFO can help a company clean up its books in preparation for discussions with a bank, securing the best terms and loan amount possible.
A CFO can help a business understand and minimize its tax liability. A CFO will establish a tax strategy that saves the business money and opens the door to strategic opportunities. Tax-oriented CFOs are great strategists. Understanding how taxes impact the organization allows for better risk management, tax mitigation strategy, corporate development, and more.
There is much overlap between finance and legal, so it is not uncommon for a company’s general counsel to report through the office of the CFO. Tax is a prime example where collaboration between accounting and legal is needed. An effective CFO understands the best channels for cross-functional teams, establishing reporting lines that mesh with the objectives and politics within the organization.
Financial reporting is the process by which a company compiles and organizes its accounting data into reports and dashboards that allow stakeholders to view the performance of the business over time. Management relies on timely and reliable financial reporting for executive decision-making. The company also has specific fiduciary duties to shareholders, and if found negligent, the CFO and other executives can be held personally liable. Having sound financial reporting allows executives to exercise the proper duty of care regarding the organization’s performance. An outsourced CFO can ensure that the organization’s reporting processes are organized and efficient.
The three primary financial statements are the balance sheet, income statement, and statement of cash flows. These financial statements and other financial data feed reporting and analytics tools that executives can tailor to their needs. For example, the chief marketing officer may not need to see ROI numbers on recent software investments, and those numbers would benefit the chief information officer and the CFO more. These reporting metrics are derived from reporting tools and compiled into dashboards, where executives can see a real-time view of the metrics most important to them. Even at the highest levels within a company, not all metrics are relevant to a given executive. The CFO and CEO’s job is to empower and trust the rest of the management team by giving them visibility into the metrics that matter to them and allowing them to use their expertise to make the appropriate decisions. An outsourced CFO can help create dashboards and verify that accurate financial data flows through the reporting environment.
There are many forms of compliance that concern a business, most of which do not have any bearing on the responsibilities of the CFO. The CFO’s primary compliance concern deals with financial laws and regulations. Every company, public or private, is subject to compliance with all federal and state tax laws. The rest of the compliance environment the CFO is responsible for is subject to significant variability based on the company’s industry, ownership, and more.
Publicly traded companies and companies that work in the securities industry must follow the laws the SEC enforces, including SOX. It is the duty of the CFO to ensure the company’s internal controls and reporting standards are in full compliance with the laws of the SEC and the independent audits they require. Not every outsourced CFO will be capable of bringing a company into SEC compliance.
Private companies are not subject to the strict compliance requirements of public companies. Instead, private companies are governed by their owners and the applicable laws based on the nature of the business. GAAP is not required in private companies; however, financial institutions will require GAAP-based financial statements as part of the debt covenants on a loan. Many investors are also wary of investing in companies that do not follow GAAP. Any CFO should be capable of bringing a company into GAAP compliance.
There are many advisory services that an outsourced CFO can provide. The word advisory is somewhat of a catch-all for helping a company plan and execute. These advisory services will usually fall into a few categories: compliance, strategy, or operations.
Compliance pertains to everything covered in the section above. A CFO can help a company evaluate its IPO readiness, ensuring the financial reporting complies with the requirements of the SEC and other governing bodies. Strategic advisory can include corporate development, capital raising, exit planning, and more. Advisory in financial operations centers around the day-to-day operations of the finance function. This includes maintaining an effective accounting environment, correctly forecasting and budgeting, and managing cash flow.
In small companies, hourly rates for a consulting CFO can be as low as $150. In large, public companies with complex finance environments, consulting CFOs will cost as much as $350 an hour and sometimes more. On average, companies can expect to pay between $200 - $250 an hour for an experienced outsourced CFO. Calculating the cost of a fractional CFO may vary from that of an interim CFO depending on the hours needed as well as the complexity of the work.
Many fractional CFOs will charge a small monthly retainer. A fractional CFO often sits in wait until the company that has engaged them decides to call upon their expertise. This creates a circumstance where the CFO is unsure how much support the company will need in a given month. For this reason, the CFO may ask for a retainer so they can rely on regular compensation.
Depending on the location of the outsourced CFO, the company may need to reimburse the consulting CFO for their travel expenses. Outside of travel, there are not many additional expenses. In some scenarios, a company may incentivize the CFO based on the results of their engagement. For example, it is not uncommon for a CFO to secure a bonus for achieving a high sale price in a transaction.
All stages of a business can benefit from the expertise of a CFO, but the stage of your business plays a part in determining what type of CFO you need. Hiring decisions here require you understand what an outsourced CFO does as well as the needs of your unique circumstances. Growth-stage companies may be looking to raise additional funds and need a CFO experienced in working with venture capital. Mid-size companies looking to take an acquisitive strategy will require a CFO with transaction experience who can identify great deals and secure the best purchase price. Large companies may need the help of a CFO for a special project where there is a lack of internal expertise, like guiding a large digital transformation initiative.
Many companies will outsource a CFO for an interim period while transitioning that role. The interim CFO will serve as the full-time CFO of the company for a period of months while a full-time CFO is identified.
Here is an example of a common scenario: A company hires an outsourced CFO to establish or restructure the finance department. The CFO's work is properly monitored and the engagement is a success. After the CFO’s work is done, the company can manage its financial operations with a controller. Since this company is not very large, the need for strategic finance at this stage in the business is not enough to justify a full-time CFO. Instead, the company continues to engage the CFO on a fractional basis for fewer hours. This way, the company has its operations comfortably covered, but they still have access to high-level guidance from the CFO. Additionally, the company may decide to engage the CFO as a coach, to support their Controller or CFO who is new to the industry or role.
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