Healthy businesses are in a constant state of evolution as they react to work or business environment changes, information technology developments, growth, new restructuring or regulatory restrictions and so much more. For many emerging and mid-market companies, in-house finance staff may not have the experience necessary to navigate changing landscapes successfully, especially at the CFO level. Engaging a skilled outsourced CFO may be the answer.
Why Businesses May Need an Outsourced CFO
Businesses may find themselves in need of sophisticated outsourced CFO skillsets for a multitude of reasons, starting with new challenges related to COVID-19. Other reasons include:
- The business is growing, and a reporting structure is needed that can scale. The system needs to be set up for remote management when necessary.
- More information in a reduced timeframe is needed to manage production and the supply chain when faced with changing lock-down orders and customer demands.
- CEOs or COOs no longer have enough time for budgeting, forecasting and analyzing financial results, or the complexity of the business requires a more specific skill set.
- Small to mid-market businesses don’t have the right expertise to make decisions based on data and objective inputs, instead relying on instinct.
- Venture capital to expand has been raised, and financial results and performance indicators need to be provided to investors.
- The business has been getting along with a small finance department that lacks cross-training and transferability of processes and knowledge.
- Remote work can’t be adequately supported due to lack of automation and digital information.
- Financial results are not well understood.
- More financial planning and analysis is needed, but specific needs are unclear.
- The business is not performing as well as it should.
In many emerging and established businesses, the CFO function has been performed by the CEO relying on limited finance staff. Or, if there is a CFO, that individual may have grown up with the business without exposure to a wide range of experiences and challenges.
The CFO might be very comfortable with an entrepreneurial style but lack the ability to implement operational processes that come with an expanding operation or one that must function in a virtual capacity. This can be especially true for start-ups and multi-generation family businesses, but the problem occurs within equity-backed firms as well.
Additionally, the CFO might not be comfortable implementing advanced forecasts or information systems, helping a company overcome financial challenges associated with unsustainable growth, getting through an event such as an audit or capital raise or helping to achieve a specific goal such as preparing for a strategic exit or an IPO.
Why a Company Might Be Hesitant to Outsource the CFO Function
Sometimes CEOs are reluctant to make a change at the senior level fearing that it will be too disruptive to operations or difficult for the staff. They may also fear the loss of support staff when creating a CFO role or in the event of a CFO departure. Additionally, in many entrepreneurial environments, there is little documentation and a lack of established protocol. The CFO often manages from memory, using his or her own unique processes. If a CFO like that is no longer there, CEOs worry about a knowledge void.
There can also be little to no collective knowledge or system by which financial and economic information is collected, with few, if any, collection processes easily transferable. Excel spreadsheets tend to be the primary tool, and data is unavailable to other managers of the company. The CEO might be overly reliant on a CFO who is actually a primary source of failure given a concentration of knowledge with that one individual, manual financial reporting, outdated technology and unsophisticated forecasting and budgeting.
What an Outsourced CFO Can Bring to the Organization
Initial hesitancy to outsource the CFO function can be overcome once benefits to this new arrangement are clear. Most outsourced CFOs are accustomed to engagements in high transition environments with multiple challenges including substandard reporting processes, inadequate forecasting and budgeting, cash flow challenges and a lack of financial strategy. They aren’t intimidated by the issues that confront growing or distressed businesses because they have been in these situations before and anticipate a volatile environment with execution risk.
Often, they are brought in because the former CFO has left the organization, unable to accomplish critical tasks. And, because this departure has occurred quickly, there is little time for transition for the incoming CFO. An outsourced or Interim CFO entering this environment can adapt quickly since they typically possess a multidisciplinary skill set. Because they have been in this situation many times, they already know what information and processes should exist. If a needed process is not developed or documented, they can do both.
They also know how to maximize reporting and automate where possible using existing software. They have forecasting, budgeting, reporting and metric models that can be modified for the business, and they are comfortable working cross-functionally to develop key metrics. They also bring an objective viewpoint, providing new insights regarding profitability, restructuring and financing alternatives.
Outsourced CFOs also understand how to collect and use data. As well, they recognize talent who can collect and use data. Today, the priority is analytical work by business-minded people who understand the industry, data organization, database structure and how to get quality information out of a database. In addition, outsourced CFOs possess the ability to prioritize tasks in a changing environment and use appropriate scope when creating work product. They know how to focus on areas where material improvements can be achieved.
If a CEO is looking for an exit strategy or possibly an IPO, an outsourced CFO can be relied upon to conduct positive conversations with potential investors or lenders, provide financial statements, reports, and documents for due diligence and assist in structuring capital and determining how much and what type of financing is needed. He or she can also bring confidence, reputation and professionalism to the organization and task at hand. Without all this, a capital raise or liquidity event will likely be extremely stressful for the organization.
Addressing Other CEO Concerns About Using an Outsourced CFO
A CEO might be concerned about the dedication and support of a consultant in such a senior role or worried that knowledge may remain concentrated with this one individual. Or, the CEO may feel uncomfortable giving sensitive information to a non-employee. To address these issues, find a consultant who is a dedicated resource, exclusive to each engagement and able to make a full commitment to projects. He or she can provide confidentiality and continuity while having a vested interest in creating a sustainable finance and accounting environment given that the relationship often continues beyond specific engagements.
How Should Success be Measured?
The goals of any skilled consultant are to de-mystify the financial reporting and forecasting processes, document information gathering processes and add value and transparency to the client’s financial organization. They want to design documented, repeatable processes and infrastructure such that the finance department can perform without depending on a single individual. The objective is to create a financial function, not just a finance position. Success for this type of engagement should be measured by the new finance department’s ability to prepare meaningful financial information in a repeatable and timely manner with a limited amount of managerial involvement, guided by processes created by the consultant.
