Chief Financial Officer (CFO) is an executive who takes care of the functions, such as financial forecasting, financial planning, and financial reporting. A CFO measures and manages the finances of an organization.
Does every business need a CFO? Yes, most businesses need the services of a CFO at various stages of the business lifecycle. For instance, the organization that goes for an Initial Public Offering (IPO) takes the help of the CFO to meet the regulatory, governance, and audit standards required for the public companies. The emerging company needs the services of the CFO to develop a suitable financial strategy.
The role of a CFO varies from company to company depending on the needs, size of the operations, and business goals.
Small and medium-scale businesses (SMB) gain a lot of benefits from hiring a CFO. In most SMBs, a CFO assumes the responsibility of raising capital, cutting operational costs, facilitating mergers & acquisitions, and developing a suitable capital structure.
CFO is a high-ranking executive title that draws huge monthly and annual salaries. Do small and medium-scale organizations afford CFOs?
No, most SMBs don’t have the financial resources to pay another C-level executive.
This is where the concept of having a part-time CFO or fractional CFO comes in. Yes, businesses can utilize outsourced CFO services from a reliable third-party that has relevant experience and expertise.
Benefits Of Outsourcing CFO Services Over Hiring A Full-Time CFO
Most small businesses don’t have enough work for a full-time CFO. They need CFOs occasionally. Why should the organization hire a full-time CFO when it needs CFO skills occasionally? The organization can hire an accounting firm on an as-needed basis to perform the tasks when and where they arise.
The outsourced CFO Service is cheaper when compared to full-time CFO salaries. According to Salary.com, the median salary of a CFO in the United States as of June 2021 is $395,100 per year. CFOs earn eight times higher than the average salary in the country.
The outsourced CFO service providers are available for their clients 24/7. Accounting firms have multiple CFOs at their helm.
They can assign a suitably skilled CFO based on the service need of the organization at any point in time. Organizations that hire a full-time CFO struggle when he goes out on vacation or resigns due to personal reasons at a crucial time of filing taxes or presenting business plans to investors.
The outsourced CFO service providers can help organizations avoid such headaches.
How Can A CFO Benefit An Organization?
Every organization needs a financial strategy that outlines how an organization secures, uses, and manages financial resources.
A CFO develops short-term and long-time financial strategies based on the business goals of the organization.
Outsourced CFOs are experts in developing financial strategy because of their ability to:
- To identify low-cost funds
- Develop desired debt-equity ratios
- Draw plans for generating cash flow
Financial Forecasting (Short-Term and Long-Term)
Financial forecasting is a process of estimating and predicting the future cash flows of an organization.
CFOs use historical data, current market conditions, and the existing resource strengths of the organization to predict cash flows.
Outsourced CFO service providers have the tools and expertise to come up with accurate financial forecasts.
Forecasting helps the organization in the following aspects:
- Take control of the cash flow
- Determine the funding requirements
- Develop benchmarks for future predictions
- Mitigate financial risks
A listed company in the United States should present financial reports quarterly and annually. Financial reporting is the process of presenting the financial performance of the organization to stakeholders.
The components of financial reporting are:
- The Balance Sheet
- The Income Statement
- The Cashflow Statement
- The Statement of Changes in Stockholder’s Equity
Outsourced CFO service providers can help organizations prepare financial statements that meet the standards of U.S GAAP.
CFO would also help organizations to prepare accurate management accounting reports. The senior management teams use management accounting reports for internal decision-making purposes.
There is no legal obligation for organizations to prepare management accounting reports. Organizations that don’t have reliable data analysis systems can use outsourced CFO services for financial decision-making insights.
Every emerging organization would raise capital at one stage or other to expand the business. Raising capital is a stressful job for most business owners. An outsourced CFO relieves this stress and assumes the responsibility to raise the capital from the network of financiers and investors.
A few roles of outsourced CFO in raising capital are:
- Aesthetically presenting the historical financial data of the organization
- Developing forecasts that reflect the future growth potential of the organization
- Participating in the negotiation process with lenders and investors
Liquidity is the amount of money that the organization has in hand or bank. The current assets that could quickly transform into cash would also enhance the liquidity situation of the organization. Liquidity helps the organization to survive a crisis like COVID-19.
An experienced CFO would understand the need for maintaining sufficient liquidity. He takes appropriate steps to maintain a current ratio of 2:1 and a quick ratio of 1:1 for the organization.
Reducing Operational Expenses
Organizations fail to report strong profitability if the operational expenses are too high. CFO takes the responsibility of reducing the operational expenses and improving the profitability of the organization.
Outsourced CFO services can be highly effective in reducing operational expenses for the following reasons:
- Since they regularly work with several companies within the same industry, they would know areas that could consume higher costs than expected
- They don’t have biases in cutting costs; all departments are equal for them
- They have the experience of implementing costing methods like batch costing, job costing, and process costing that help to come up with appropriate costs for projects
On a whole, small and medium-scale businesses can use the outsourced CFO services to get assistance in financial reporting, strategic financial decision making, raising capital, maintaining liquidity, and cutting costs.