Debunking Virtual CFO Myths: What They Do & Whether Your Business Needs a (virtual) CFO?

When I mention that we specialise in virtual CFO services, I often get confused looks from others. Even some accountants aren't sure what a CFO does. In this article, we'll debunk the myths about CFOs, give you a clear understanding of the roles of CFOs, and help you figure out if your business could benefit from having a (virtual) CFO.

What does a (virtual) CFO do?

Budgeting and Forecasting

Budgeting and forecasting responsibilities are typically held by a CFO or finance manager in a business. However, in small businesses, an accountant or bookkeeper may also assist in this task.

For a forecast to be accurate and useful, it must be built after conducting a comprehensive analysis of both financial and non-financial data. This analysis should consider the business's internal and external environment. In addition, a forecast should incorporate sensitivity analysis or scenario planning to assess the impact of different scenarios. Simply relying on historical data by multiplying it with a growth rate will not guarantee a useful forecast for decision-making.

Providing budgeting and forecasting services requires more than just accounting knowledge. It demands strong analytical skills, effective communication, and business acumen. These are skills that a capable CFO possesses.

Performance Measurement: Diagnosing and Improving Business Health

A CFO helps set relevant and measurable Key Performance Indicators (KPIs) for your business, which include both financial metrics (such as revenue, EBITDA, ROI) and non-financial metrics (such as online review ratings and lead conversion rates).

By monitoring and analysing these metrics, the CFO provides valuable insights into the health of the business and identifies areas for improvement.

For example, declining revenue could be investigated by examining the lead conversion rate, uncovering issues like delayed follow-ups or lengthy inquiry forms. Armed with this information, the virtual CFO offers practical recommendations to enhance performance.

Cash Flow Management

Effectively managing cash flow is crucial for businesses, but it can be challenging, especially for small business owners. A capable CFO can provide valuable assistance in this area by undertaking various tasks. They can create cash flow forecasts, regularly monitor the inflows and outflows of cash. This allows them to promptly identify and alert management to any issues or funding gaps that require attention.

For instance, if a business faces cash shortages, a CFO can analyse the data to determine the underlying reasons behind this problem. It could be attributed to slow inventory turnover or customers who consistently pay late. In the case of inventory issues, the CFO can assess stock levels and identify obsolete items that need to be sold to generate cash. Regarding late customer payments, they can review credit policies and contracts and propose shorter credit terms for customers with poor credit history.

Collaboration between the CFO and the management team is vital to ensure accurate cash flow forecasts and effective cash flow management. The CFO needs to be informed of major decisions or plans that could impact cash flow in order to provide an accurate forecast.

Cost Control and Process Optimisation

Controlling costs and optimising processes are key to maximizing efficiency and profitability. CFOs play a vital role in cost control, system improvement, and process optimization. They closely monitor ongoing expenses, analysing financial statements, invoices, and expense reports to identify areas where costs can be reduced or eliminated. Conducting thorough cost analyses, the CFO seeks potential savings and cost inefficiencies. This may involve reviewing supplier contracts, identifying process improvement opportunities, or implementing cost-saving initiatives.

To illustrate, consider an e-commerce business where the CFO noticed high inventory holding costs, inefficient fulfilment, and customer complaints about receiving incorrect orders. In response, the CFO recommended implementing an automated inventory management system. These systems utilise data analytics to optimise inventory levels and streamline the supply chain. By accurately forecasting demand and tracking inventory in real-time, businesses can avoid overstocking or stockouts, reducing carrying costs and minimising lost sales.

Pricing Strategies and Product Profitability Analysis

When it comes to pricing your products or services, it may seem logical to follow your competitors' pricing. However, it's essential to consider if that aligns with your business goals and ensures long-term sustainability. A virtual CFO can provide valuable assistance in defining your goals, whether it's achieving market penetration, increasing market share, or maximising profitability.

They will thoroughly analyse your costs to ensure that your pricing covers expenses and generates a suitable profit margin. If your objective is market penetration and you're willing to sell at a loss initially, a virtual CFO can help you determine how much loss you can sustain and for how long before encountering financial difficulties.

Furthermore, a virtual CFO can help you evaluate the profitability of different products, geographic locations, and customer segments. This information is crucial as it allows you to allocate your resources and efforts to the most profitable areas. For instance, you may discover that your largest customer, Customer A, is actually causing losses despite high sales. Armed with this knowledge, you can make informed decisions about adjusting prices or improving operations to increase profit margins.

Identify investment opportunities and due diligence

Virtual CFOs play a crucial role in identifying and evaluating investment opportunities. They analyse the available financial resources and provide guidance to management regarding potential investments. By assessing risks and calculating the financial impact of different scenarios, they help determine the feasibility and profitability of investments.

For example, if you are considering acquiring a software development company, a virtual CFO can assist with due diligence. They will review the target company's financial statements, evaluate its market position, assess operational efficiency, and analyse potential risks. Through this process, they may uncover issues such as inconsistent revenue growth, high expenses, or overreliance on a single client. Armed with this information, they can help you make an informed decision about the acquisition and potentially negotiate a more favourable deal.

Does your business need a (virtual) CFO?

If your business is a startup with a small team and generates less than $2 million in annual turnover, you can likely manage your finances with the help of an accountant or bookkeeper. At this stage, you possess a deep understanding of your business, and it is likely that your costs are already optimized. Your main focus should be on increasing sales, establishing standardised processes, and scaling your capacity to meet customer demands.

However, if your business falls within the $2 million to $20 million annual turnover range and you feel like you're flying blind, it's highly recommended to consider hiring a virtual CFO. A virtual CFO brings a financial wizard into your business without breaking the bank. They offer a cost-effective and accessible solution, eliminating the need for an in-house finance manager. Even if you already have an accountant on board, a virtual CFO can provide a fresh perspective and a unique set of skills that go beyond number crunching. They can assist you in making more informed business decisions and uncovering new growth opportunities.

I hope you now have a clear understanding of the valuable role a CFO (What you choose to call them is not as important as the services they provide, in my opinion) can play in your business.

At Cleverly, we offer more than just accounting. We consider ourselves strategic partners, guiding business owners in making informed decisions. Our specialities include strategic management accounting and virtual CFO services. Reach out to us today to discover how we can assist your business.