Outsourced CFO Services – A Detailed Guide With Examples

The Covid pandemic has brought a drastic change in the business landscape. The giant corporations were shaken up, and the Small and Medium Enterprise businesses felt the biggest hit. The focus in business from long-term financial planning shifted more towards cost optimization and crisis management. The shift in the paradigm of employing in-house staff changed to outsourcing major roles, to benefit from the expertise of different individuals and the main factor, affordability. The same focus has been more on Outsourced CFO Services, rather than hiring in-house. Let’s have a deeper look at the reasons behind this shift and its benefits.

Understanding Outsourced CFO Services

An Outsourced Chief Financial Officer is an external resource with expertise in business finance, who designs financial strategies, analysis the financial structure of the company through analysis and modeling and designs means for operational optimization. The main reason why a company requires the help of Outsourced CFO Services is as follows: 

• Small and growing businesses require the expertise of a CFO but cannot afford to hire a full-time in-house due to financial restraints.
•  Small businesses facing difficulties in day-to-day operations and are looking for a third party to do the financial restructuring.
• Growing businesses looking for an expert for a one-time setup of the financial structure, and identify key performance indicators.

The Outsourced CFO Services are available as per the functionality requirement, these can be categorized under the following heads:

• Part-time CFO Services- These Outsourced CFOs are hired for a certain period of time to take care of the entire financial structuring and working of the business.

• Fractional CFO Services- These Outsourced CFOs work for a very shorter period of time ranging from half a day to two months. They may be hired to take care of short-term restructuring solutions.

• Interim CFO- These Outsourced CFOs are hired as a short-term replacement of the existing CFO or till the time the company hires a permanent CFO.

• Contractual CFO Services- These Outsourced CFO Services are hired on a contract basis with the term ending after the desired results are achieved.

• Virtual CFO- In this type of Outsourced CFO Services the individual consults virtually over the matters and does not physically visit the business premise.

Although all these services fall under the same category of Outsourced CFO Services, depending upon the requirement of the firm, they can choose.

Cost Effectiveness and Scalability

The Covid Pandemic taught us to be prepared for the worst possible business scenarios which are unexpected. One crucial aspect of this preparedness has always been being cost-effective. Big companies have an in-house CFO to take care of their financial front, as they can afford to pay them a reasonable remuneration and can extend the benefits and perks involved with the role. On the other hand, small and medium companies who are either starting or have an insufficient turnover as compared to the target, require an expert to guide them without burning a massive hole in their pockets. Here is where the Outsourced CFO Services fit in. In terms of cost-effectiveness and scalability here are a few advantages of hiring an Outsourced CFO: 

• Access to Expertise – Outsourced CFOs have already worked with several companies and have an in-depth knowledge of the process flows and risk factors in various companies. The CFO and their team are thus, better equipped to handle the situation in the client company, as they have no problems in quickly understanding the requirement of the client.

• Cost Effectiveness- Hiring a full-time CFO means paying for their hiring, training and salaries, and perks. Hiring an Outsourced CFO individually or with their teams gives the benefit of getting expert opinions at a much optimized cost, for only the period required.

• Flexibility- The company can hire an Outsourced CFO  as per their requirements. This service provides the flexibility to increase the term of the contract for an extended period in times of growth and more support is required. During times, when business is slow or the goal has been achieved, one can terminate the services.

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Access to Expertise

The need for a business to employ an Outsourced CFO is to get the right degree of financial support that helps them achieve their goals in an effective and long term manner. Managing a business with inadequate expertise is like sitting on a live ticking bomb. In the present business scenario, the Outsourced CFO Services are recommended for the following benefits: 

• Pool of Expertise – Whether the CFO is an individual, a team of CFOs, or a CFO with his team, the company is always benefitted by getting an expert opinion on various scenarios, as the team has already worked with several other companies. In instances where the company is facing any new challenges, the expert with the teams can immediately either work or give opinions on new challenges in a much more efficient manner and a shorter period. 

• • Collaborative Partnership – It is easier for an Outsourced CFO and the team to maintain a short term partnership with the business and their team members. This is due to the fact, that the CFO and their teams have in the past collaborated with different teams and trained them, thus striking a partnership and maintaining good work relationships comes easy. The client teams also get the opportunity to get trained in different areas from one source only. This again in turn proves cost efficient to the client company.

• Objective Insights- As the Outsourced CFOs are not a part of any in house team, they provide unbiased and honest opinions which can be very valuable while restructuring the processes and teams. With their network in the financial sector connecting to the right people becomes faster and easier. These experts can start to work faster with the company due to their vast experience and arrive faster with results.

Strategic Financial Planning

The main role of Outsourced CFO Services is providing their valuable insights into the strategic planning of a company. Their expertise helps the company to make more informed and data derived decisions. The following expertise in strategic planning is offered by the Outsourced CFO: 

• • Financial Analysis and Insight– They analyze the overall financial strength of the company like, preparing financial budgets and reports. They provide an unbiased view of the areas of improvement and restructuring.

• Budgeting and Forecasting- The CFOs examine the historical financial data and trends of the company and help in preparing a future budget on this basis. They help establish realistic short-term and long-term financial goals. They forecast the future financial position of the company and help in making data-based strategic improvements to overhaul the system if required.

• Assessment of Financial Viability- The CFOs help in assessing the pricing and cost structure of the company’s products and help in restructuring the same for improvement in the profit margins. They assess the financial viability and help in projecting the expected revenues of new products to be launched. 

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Data Analysis and Reporting

The Outsourced CFOs play a very crucial role in the financial data analysis and reporting for the client. Banking on the pool of expertise that Outsourced CFO Services carries, they offer the following services in this area: 

• Data Consolidation- The Outsourced CFOs collect data using balance sheets, financial spread sheets, accounting systems, and every other financial documents. They ensure all possible financial data is consolidated and compiled for further analysis. This ensures any oversight by the company is covered and reduces the possibility of error in judgments. 

• Financial Analysis- After the data is consolidated, the primary focus of a CFO is identifying trends and patterns in the data with the help of financial modeling softwares and other analytical softwares to figure out the key performance indicators. This helps in analyzing the present financial health of the company and its performance.

• Financial Reporting- Outsourced CFOs present financial reports in the form of balance sheets, income statements, and cash flow statements. These documents help in analyzing a clear picture of the financial position of the company. They help in identifying areas of improvement and concerns. They help give oversight in areas like optimization of allocation of resources, improvements in both cash inflow and outflow, and identifying the risk factors to be worked upon to enhance the financial performance of the client.

Risk Management and Compliance

 The business environment post-2000 has drastically changed. It has become more volatile and uncertain due to new digital innovations and changing regulatory laws and procedures. The company cannot become reactive only during a crisis but has to be ready with all strategies. The members of the company could overlook risks arising in several areas due to a lack of financial knowledge or lack of time. Here is when the Outsourced CFO Services play a major role in assessing, managing, and integrating these risks into the financial strategies to help the company be better prepared. They identify the following risks and provide ways to tackle them: 

• Debt Risk- There are no companies that are operating without one or the other kind of debt. The risks while taking debts from lenders are the fine-printed terms and conditions in complicated financial terminologies not very easily understood. The chances of nonrepayment of loans pose risks of bankruptcy, thus the CFO has to manage systems to avoid this scenario. The company might be paying high debt interest. The CFOs ensure shifting to lower interest debts and compilation of debts to shift to lower debts.

• Liquidity Risks- Any negligence even slight in monitoring the cash flow can lead to risks to the liquidity of the business. The Outsource CFO ensures and implements processes to ensure constant monitoring of the cash flow and forecasting to prevent any disasters in the future.

• Personnel Riskes-  The Outsourced CFO Services may include taking care of the financial management of the workforce like salaries, benefits, and costs related to training and severances.

• Operational Risks-  There is monitoring required for the financial aspect of the products or services offered by the company. The Outsourced CFO ensures that the viability of the product or the service is long term and increases the profit margin.

• Contract Risks- When companies draw contracts there are many finer points and financial details which are difficult to comprehend by the client company. The CFO studies the contract, lays the terms and conditions which work in favor of the client, and ensures no hidden cracks are there in the contract which can present themselves as pitfalls for the company in the future.

• Catastrophic Risks- The CFO ensures that the company is prepared for catastrophes like earthquakes, floods, and any other natural disasters. They ensure all the operations of the company are insured in the correct form.

• Compliance – Staying within rules and regulations and following compliance in all business proceedings is mandatory for the company to avoid the hassle of getting involved in lawsuits and paying hefty fines. The CFO assesses all the processes to ensure all the compliance standards are being followed. They ensure that reporting requirements and adherence to regulatory laws and standards are followed diligently. They help in setting up compliance programs in new businesses, establish controls and the integrity of the business values followed.

• Preventing Fraud- Outsourced CFO Services play a big role in fraud detection. They implement methodologies and checks to monitor internal functions and detect potentially fraudulent activities. Their expertise in forensic accounting and data analysis helps in detecting any anomalies and irregularities in financial activities. This early detection prevents the risk of loss of assets and huge losses to the business.

Mergers & Acquisitions and Exit Strategies

The Outsourced CFO Services are much valued especially during the entire process of Mergers and Acquisitions and deciding on the Exit Strategies for the client. The CFOs execute the following roles during these two processes:

• Financial Diligence: The CFO does in-depth market research on the target companies’ financial statements, revenue structures, debt analysis, risk factors, and credibility in the market. They have an extensive network of known professionals who help identify the credibility of the financial information of the target company. This helps the company in making better-informed decisions.

• Valuation: A CFO evaluates the actual value of the target company by evaluating the market value, its assets, liabilities, cash inflows, and expected growth potential. As the CFO is well aware of the market benchmark and market conditions, it is easier for them to correctly assess the value of the target company.

• Projections and Modeling- The CFO develops financial models to evaluate the transaction’s financial impact. They forecast the potential of growth, profits, and cost benefits with the target company. 

• Contract Preparation- After evaluating the financial impact of the merger or the acquisition, the CFO prepares the contract diligently, ensuring that all the details are covered and the terms and conditions work towards the benefit of the company. They evaluate the contracts if drawn by external agencies diligently to ensure that the post-merger processes take place smoothly.

• Negotiation Support- The Outsourced CFO proves valuable while negotiating M&A deals. They analyze the financial terms, contingency, and risks associated with the deal. They negotiate terms and conditions and propose areas of restructuring and points to be renegotiated so that the final ‘proposal works in the favor of the client. 

• Exit Strategy Planning- The CFO helps in making decisions regarding planning exit strategies after analyzing the financial impact on the client. They help plan the entire exit procedure starting from forecasting the financial impact of the exit, tax obligations, legal and regulatory compliance, and the terms of agreements during the deal confirmation. They set up the entire exit procedure to ensure the process is smooth. The exit strategy is planned to provide better credibility in the market and optimize cost-effectiveness and increase profits.

Financial System Implementation and Optimization

An outsourced CFO helps in implementing financial systems and optimization of the system according to the need of the company. Their expertise comes in handy in the following processes:

• They identify the areas where there is a need for implementation of processes and requirements.
• They decide on the financial system depending on the functionality, ease of integration, cost-effectiveness, flexibility, and scope of further integration of newer technologies.
• They plan the key performance indicators, the goals, the timelines of analysis, and the data resources required for the implementation.
• They plan system implementation which is easily integrated with the other existing systems.
• They provide the necessary training and adequate support to run the systems after their contract gets completed.

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Business Performance Analysis

Businesses take the help of Outsourced CFOs to identify key areas of improvement and give an unbiased analysis of the actual business performance. Here are a few areas for analyzing the performance of the business:

• According to the strategic goals of the company, the CFO identifies the Key Performance Indicators(KPI) to analyze the profitability and revenues.
• They analyze the cash flow, financial statements, balance sheets, and income statements to analyze trends and patterns. This helps in identifying risk factors and potential areas for improvement.
• They conduct variance analysis on the financial data and identify the reason for variance between the actual results and the forecasted figures. The variation can be positive or negative impacting the profitability of the company. If the variance is negative then the risk factors can be identified and due corrections can be taken care of in advance.
• They help to plan various external scenarios and help in forecasting the potential impact of these scenarios on the revenue and business performance of the company, thus testing the sensitivity analysis in different scenarios.
• CFOs implement monitoring and reporting processes to ensure the board members and stakeholders have access to the performance indicators on time.

Conclusion

The business scenario is an ever changing , volatile , unpredictable landscape. With the introduction of new processes and softwares the working module of the companies have changed drastically. Keeping the same thought of line, there was a time when the CFO position was only in the corporate giants. Small and medium companies had to rely solely on their in-house finance teams or chartered accountants for crucial financial decisions and analysis. With the boom in the small and medium industries and later the Covid pandemic, was born the Outsourced CFO concept. Companies did not have to pay heavily to be stuck with just one resource but had the option of hiring their talent for a period suited as per their business requirement. They need not spend fortunes like they do for in house CFOs. A pool of expertise, was available as per the business’s goals which also proved to be cost effecient. The service is tailor-made and is in alliance with the business goals. Thus, in conclusion, companies should take advantage of the vast experience, strategic decision planning, and result-oriented of Outsourced CFOs.

FAQs

Q. What services do Outsourced CFOs carry out in a company?

The Outsourced CFOs conduct financial data analysis and financial planning. They analyze the financial strength and weaknesses of the company. They evaluate the financial and operational processes of the company and collect the data. They study the data and analyze the trends and variables based on which they forecast future budgets, revenues, and cost management for the company. They set up Key Performance Indicators (KPIs) for the company and set up financial modeling structures. They set up short-term and long-term goals for the company. They identify the risk factors and help in preparing the company against all downfalls. They carry out variance and sensitivity analysis.

Q. What are the advantages of hiring outsourced CFOs?

Outsourced CFOs may be hired need-based, thus they work out more cost-effective than hiring a full-time CFO. They adapt fast and deliver results soon as they are familiar with working with all types of business. They assist in identifying the capital needs of the company and help in debt management. They help in Mergers and Acquisitions and assist the company in negotiating deals, drawing contracts, and understanding the cracks and pitfalls if any during the deal and post the merger. The CFO helps in the financial restructuring and assessment which enables the board members to focus on their key areas.

Q. What qualities should a good Outsourced CFO possess?

A good CFO would have a strong background in finance, strategic financial management, accounting, and financial modeling. They should have experience in project management in the same business area as yours. A group of CFO or a CFO with a team showcases a better pool of expertise.