outsourced cfo

How do you know when a company needs a CFO?

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Is it useful to buy expensive tools if you plan to remodel only one room? Does it make sense to buy a car if you drive it once a month? Short answer: no. In these situations, it is both financially and practically easier to rent what you need. This type of approach is often used in companies as well – hiring a permanent employee can be both disadvantageous and uninteresting for the employee. This practice is most widely used in IT, marketing, law, and accounting services, but as entrepreneurs become more aware of its benefits, outsourcing is also being used in other industries. AG Capital outsources CFO – in this blog article, we look at situations where this type of service is not useful and when it really provides added value.

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At first, when a business is very small, say less than 10 people, the business processes are usually simple and the company’s owner has full control over what is going on in the company. Strategic decision making is usually done without sophisticated calculations, using a gut feeling of the business owner. At this stage neither can a company afford a CFO (even a part-time CFO), nor the CFO’s actions can bring in some improvement into the company’s activities and decision-making that would be substantial enough to pay the CFO’s salary.

Perhaps the only exception here would be business planning for the start-ups, especially if the business plans need to be presented to investors or banks. Hiring a professional for creating at least the financial part of a business plan is a must.

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In the second stage of development, a company gets bigger, attracts more employees (the headcount is now 10 to 100) and the business processes become more sophisticated. The owner needs to control the company’s and individual division/product performance, coordinate efforts of different divisions, plan for the company’s development, etc.

At this stage, a regular CFO is needed to deal with budget planning, performance analysis, cash flow planning, and similar activities within the company. However, at the moment the company cannot afford a CFO full time –  the employer’s costs for hiring financial directors per month go above 10 000$. In addition, a position cannot be interesting for a good CFO as a job because he cannot be fully employed.

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Financial outsourcing prices differ depending on the required analysis (for example, full budgeting will take much longer than cash flow analysis), but on average they will always be lower than full-time services (AG Capital quotation). Also, company executives will not have to worry about vacations, training, obtaining licenses or replacing a person related to hiring a permanent employee.

At this point, it is best for companies to use part-time/outsourced CFO services like ours.

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Finally, when the company has grown to about 100 and more employees, there is a clear need for an internal finance director – operational and strategic decisions are too complex to deal with for a part-time employee. In these cases, outsourcing the CFO, while useful, is no longer profitable. However, large companies will benefit from financial modeling services – dynamic financial plans that provide for automatic changes depending on the size of the business. With the help of such a model, companies can timely forecast the amount of money needed for different development scenarios.

 

All of the thoughts above are made from observations of our clients that use our CFO outsourcing services. We rarely can be useful for a very small company and we also had clients whom we have helped to outgrow ourselves. But for the stage 2 companies an outsourced CFO solution is the best.

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