What to Consider When Evaluating an Outsourced CFO

Posted by (Not set) - Mar 10, 2021, 2:23 PM

By Kathleen Garvin for Brainyard

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In short:

  • Entrepreneurs who desire a higher level of financial skill but lack the funds to hire a full-time leader should consider outsourcing the CFO function.
  • Maintain an objective, metrics-driven mindset when evaluating fractional CFO candidates and their performance.
  • Keep in mind that an outsourced CFO should be able to provide accurate and regular reporting on cost savings or revenue generation.

Outsourcing is common, particularly among entrepreneurs looking to save overhead. And amid social distancing and evolving work environments, remote work has never been more accepted in business culture. Pair those effects with the need for stronger finance leadership as your company matures, and it could very well be time to vet outsourced CFO candidates.

A CFO does considerably more than keep the books and make sure the bills are paid. That’s what bookkeepers do, and it may be all that a new startup initially looks for. But as companies begin to scale, they need a higher level of expertise and experience to manage growth. CFOs provide a variety of financial services, from leading accounting and budgeting efforts to business planning and forecasting.

An outsourced CFO, also known as fractional or on-demand CFO, works for an organization on a part-time or contract basis. Maybe you have an onsite bookkeeper or small accounting team but don’t have the need (or funds) to keep another full-time executive on board. Or perhaps you want a future-focused specialist to lead your finance team into the next phase of the business. If you’ve determined an outsourced CFO is for you, here are the next moves to make.

Qualifications of an Outsourced CFO

Hiring an outsourced CFO can help growing businesses save money up-front and in the long run, but of course it constitutes a cost. Full-time CFOs command six-figure-plus salaries and come with other likely costs, from laptops to benefit and vesting plans. On the other hand, a part-time CFO earns an average $59 per hour, according to ZipRecruiter — though note that others cite the range as more like $175-300 per hour. In general, $5,000-8,000 per month is typical for a fractional CFO. Some will consider taking equity as part of their compensation, which can further reduce your burn rate. Recognize the importance of the role, and be prepared to pay accordingly.

Beyond money, you’ll want to evaluate candidates based on the job at hand. Keep in mind your business needs — do you want help with financial modeling, advice on navigating an acquisition or establishing an executive voice in the planning stage?

Perform due diligence as you would with any critical hire. When evaluating an outsourced CFO candidate, consider their:

  • Education: A CFO has a bachelor’s degree and usually an advanced business or financial degree. CPAs and other financial designations are also common.
  • Experience: Your pick should have eight to 10 years’ experience in the field and be up-to-date on the latest tools and best practices.
  • Vertical expertise: You’ll want to seek out someone with specialized skills working in your target market and industry.
  • Network: A strong outsourced CFO can cast a wide net for future referrals and gather educated feedback on a problem from their peers.
  • References: Ask for and review the candidate’s references to make sure they’ve delivered as a fractional CFO for other companies at a similar stage.
  • Communication skills: Can the candidate distill complicated concepts easily? Can they comfortably communicate with members of the team?

Rank the specific qualifications that are most important to you, and assign objective scores on each to the candidates you’re evaluating. Remember that while technical, quantifiable qualifications are a must, soft skills are important in a good match, as well.

Kate Torgersen, founder and CEO of Milk Stork, hired an outsourced CFO early in her entrepreneurship journey — and defined her criteria appropriately.

“I was looking for a turnkey solution but not a cookie-cutter approach,” said Torgersen.

She wanted to make sure her fractional CFO understood her business’s challenges and opportunities, as well as her business model and client base. She also wanted this professional to:

  • Have experience with venture capitalists to help her navigate fundraising;
  • Be accessible and responsive so she had immediate access to them; and
  • Have a solid rapport with her.

That last one was especially important to Torgersen as a first-time entrepreneur looking to continually grow and learn. Hello, soft skills.

Overall, Torgersen had a positive experience in working with her chosen candidate. Using an outsourced CFO enabled her “to get access to important expertise at a critical time without overcommitting [her] limited and precious resources.”

Reviewing Outsourced CFO Firms

You have a few options when it comes to staffing this position: You can go through job boards, workshops, referrals or your network. You can also reach out to an agency or firm that specializes in outsourcing finance roles, which might save you a few bucks. Some financial services firms offer the following features:

  • Individually-priced services without a retainer, so you only pay for the tasks you need, when you need them.
  • A bundled approach to services, so you can group multiple features — need someone to handle your taxes and wealth management services, too? — into one project fee.

Another plus: By going through a firm, you’ll often gain access to a wide pool of finance professionals — maybe you’re in the market for a specialized tax consultant, as above — with various backgrounds. There’s typically little training needed on your company’s end, too, since firms bring on technically savvy and seasoned professionals.

“Outsourced virtual CFO firms are already staffed with knowledgeable and experienced CPAs and accountants who specialize in high-level accounting, eliminating most training needs,” said Jody Grunden, CPA and co-founder of Summit CPA Group.

So, while you’ll still want to incorporate a formal onboarding process to familiarize your new team member with people, processes and goals, you won’t need to worry as much about specific technical capabilities.

If you choose to outsource through a firm, consider:

  • The services included for the cost. Will you be paying for unnecessary features?
  • How (and how often) will results be reported? You shouldn’t have to hunt for the ROI of your fractional CFO. They should be able to produce that for you almost on-demand and with the detail you’d expect from an analytical professional.
  • What is the onboarding process? The agency might have its own in place, so get clear on that upfront and figure out what it entails. You should also decide on an internal process and a point of contact for the fractional CFO.
  • References. Talk to a few that seem similar to your own company. Look for the firm’s proven results and past clients’ evaluations of them.

Run through the above steps and review at least a few firms. From there, see if one or two align on your needed experience and price point.

Advantages to Maximize and Pitfalls to Avoid

Outsourced CFOs can bring perspective to your company that you wouldn’t get otherwise. Also, due to the nature of the business, they’re typically up-to-date on the latest software, tools, accounting rules and trends in the space.

Scott Ackerman is a fractional CFO for a manufacturing company in Brooklyn, New York who also operates a consulting firm for startups and small businesses. Ackerman says his current employer hired him because of his technical expertise and his experience working with similar companies in the field. You should look for candidates with those same traits.

“[My employer] values my outside perspective, because I can show them ways to improve based on my experience with what other companies are doing,” Ackerman said.

And this outsider point of view can be a valuable asset to your company in more ways than one.

“I provide a level of independence that you can’t get with an employee,” Ackerman added. “Since I’m not dependent [on a particular company] for all my income, as a full-time employee would be, and the CEO is not my boss in the traditional sense, I’m not afraid to ‘speak truth to power.’”

In other words, a contractor can tell the business what it needs to hear without fear of retaliation, as long as you enable them to. Independance and your encouragement can embolden a fractional CFO to bring fresh ideas and constructive criticism, if needed, to the team. During the interview process, ask candidates about how they’ve handled sensitive or difficult situations to gauge their communication style and willingness to speak their mind.

There are pitfalls to watch for when hiring a fractional CFO, of course. Depending on your arrangement — per project, hourly or another contractual arrangement — you may only have access to your fractional CFO during select times. As a result, you might find that you need someone around more often for heavier lifting. If you have a team member whom you think can grow into the CFO role, or VP of finance, this can be a powerful mentoring relationship. Carefully discuss your needs and your budget with every candidate you interview.

Because they’re a contract hire, the outsourced CFO may not have as much ownership of their success as an everyday employee or stakeholder would. They need to have a shared passion to move the organization forward to keep things running smoothly. It’s essential to bring up culture and working styles during the interview phase to see if there’s a match. Offering a combination of equity and salary may help ensure that virtual CFOs keep their head in the game.

Also, like any new hire, it may take a short while for the CFO to get acclimated to working with your company. Whether in-office or not, you want to make sure this new hire meshes well with your executive team and other financial staffers. Virtual CFOs can work anywhere: Unless you make it a requirement that they live in a specific area or work in a particular time zone, you’ll want to make sure both sides agree on a cadence of communication. Thankfully, due to shifting trends and better technology, it’s easier than ever to work asynchronously.

How to Onboard and Manage an Outsourced CFO

Once you find the right person for your organization, set them up for success. A great way to help both the hiring and hired side is to develop an onboarding and regular check-in process for your CFO. Clearly defining the rules of engagement and making introductions to team members early on gives you a set of standards against which to evaluate the relationship on an ongoing basis.

Grunden has a fine-tuned onboarding process for his firm — spanning over a few weeks and involving an onboarding specialist — to ensure new clients get up to speed.

“In the beginning of the relationship, we host a kickoff call and introduce [the CFO] to their team and address who will be responsible for what,” said Grunden. “We also re-review the statement of work (SOW) line-by-line with each client, explaining everything in the document. This includes the deliverables for each item, the process for each deliverable or project, and communication expectations for each project.”

This kickoff can be particularly useful for agency CFOs, who may not have been part of creating the SOW. From there, regular check-ins commence to evaluate whether the CFO-client relationship is operating efficiently.

“We send a feedback survey once a week to the client,” Grunden continued. “So if the client is not satisfied and has not voiced that with their CFO, they have the opportunity to let us know what is going on and how we need to progress.”

This check-in helps keep both sides informed and aligned. And once adaptations are made — perhaps it’s a communication-style mismatch or the CFO needs to educate the client more on financial metrics — the survey goes from weekly to monthly.

Sure, this is just one firm’s experience, but you can take similar steps to grade your own working relationship with an outsourced CFO, whether via an agency or not. Consider including the following in your process:

  • Schedule a kickoff video call to introduce both parties.
  • Create and distribute a structured onboarding plan to key stakeholders.
  • Outline key performance indicators (KPIs), expected results and deadlines.
  • Develop a regular check-in and point of contact for both sides.
  • Be upfront about any improvements needed and clear about how to proceed.

Creating guidelines for this type of working relationship helps keep things running smoothly.

How to Evaluate the Fractional CFO Relationship

When working with a fractional CFO, you want to measure and track your results and hold them up against your goals.

Ask yourself two questions:

  1. Are expectations and objectives being achieved?
  2. Are deadlines and budgets being met?

Let’s break this down further.

Measure and report results.

With outlined objectives, detailed reporting and a regular meeting schedule, both parties should be aware of how results will be measured and evaluated. Whether check-ins are weekly, monthly or on a different timetable, it should be easy to evaluate which objectives are being met. At the same time, be flexible with objectives. Your virtual CFO may identify new goals that are more important than the ones you initially outlined.

“Unlike bookkeeping or filing taxes, CFO services can earn your company a serious profit,” said Jenn Viridis, chief visionary officer (CVO) of accounting firm Prax, which offers outsourced CFO services. “A decent outsourced CFO can help you turn an immature and floundering company into a sustainable business with consistent profits and specific expansion plans.”

The fractional CFO should own their role here.

“A CFO should be hyper-aware of the financial value of their advice, research, guidance, reports and more,” Viridis continued. “Part of their role is proving that value to you. Don’t accept platitudes or excuses here. Look for results. Ensuring your company is truly benefiting, in tangible dollars, is the only real measure of success.”

As discussed, outsourced CFO services can cost thousands to tens of thousands of dollars a year. Do some math here: Are you paying a flat day rate versus an hourly rate for the two hours worked, for example? Are you seeing any financial return on your investment? Keep tabs on your tasks and costs. Review these numbers with your team to make sure the arrangement makes financial sense for your business, especially as your needs change or evolve throughout the year.

Assess whether needs are being met.

After you’ve worked with a CFO for some time — and, say, have conducted a couple of weekly check-ins to identify any roadblocks and a monthly evaluation of milestones — and gone over the reports, you can assess the overall success of the partnership.

If the results aren’t there, do some digging. Is it due to:

  • A lack of data?
  • A lack of understanding about the business?
  • A poor attitude or fit?
  • Something else?

Then, have a conversation with your CFO and “identify specific metrics you consider essential to measure the CFO’s performance,” said Viridis.

As mentioned, you should have set deliverables and deadlines in place, so key stakeholders know where and when to look when tracking results. Use this time to discuss any discrepancies, and see if there’s an opportunity to course-correct.

“This step usually sorts out most non-attitude relationship challenges,” Viridis said.

Consider whether the fractional CFO delivered on financials: Do they offer recommendations to make operations more efficient or a desired return on an acquisition, for example? Did they deliver on other objectives? Do a gut check: How’s it working out — really?

Here are five questions to ask yourself before continuing a working relationship with an outsourced CFO, according to Milk Stork’s Torgersen:

  1. Are they proactive?
  2. Do they make recommendations as aspects of your business or industry change — regarding the Paycheck Protection Program, for example?
  3. Are they organized and meeting deadlines?
  4. Do they help you stay on track for tax deadlines and investor reports?
  5. Do they participate in board and other team meetings as outlined in your contract?

Lastly, are they helpful? If they go the extra mile when you need them to and meet the rest of the above criteria, you have the makings of a good outsourced CFO relationship. But to facilitate your virtual CFO being helpful, you’ll need to encourage a bidirectional conversation. Encourage your expensive and talented virtual CFO to give you a few ideas on how to improve both the finance department and the business.

Kathleen Garvin is a personal finance writer based in St. Petersburg, Fla. She worked as an editor and writer for a leading personal finance digital publication for nearly four years and has appeared on 6abc in Philadelphia as a consumer finance expert.

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