Are Virtual CFO Services For You?

by Mar 10, 2022Blog0 comments

The short answer is at least $1.0m in revenue and sometimes this can be more in the range of $1.5m to $2.0m in revenue. The long answer is it depends.

 

Is your revenue enough that virtual CFO services make sense?

Companies using virtual CFO services typically have an annual revenue of $500k to $30m. It rarely makes sense for a pre-revenue or low revenue company to engage a Virtual CFO (the exception may be a tech company who just received funding). There should be existing revenue streams in place so a positive return can be delivered. For those companies that may be smaller, typically you will receive value in more one-off projects from a CFO company, such as creating a forecast for the next year.

Depending what type of business you may have can also be a big factor. A SAAS based tech company who has raised $5m to $25m from outside investors or private equity could have some very complex financial needs and reporting requirements even with a small annual revenue number. A professional service company may not have CFO based needs if they have a decent bookkeeper, until they get closer to the $1.5m to $2.0m range.  That same professional service company could have the need for CFO services if they are $800k in revenue but looking into an acquisition or perhaps brining on a new partner and growing into a new market.

 

What do hours and billing look like for a virtual CFO?

If you use a one consultant shop I would expect rates to be anywhere from $150 to $400 an hour. Typically, if you have that person as more of an “in-house” contactor (meaning they are spending lots of hours with you) that would typically be on the lower end of the above range. Sometimes they may be doing work that would be billed at $300/hr. and other times since your company doesn’t have the infrastructure built-out they may be doing some basic admin that would have a $50/hr. bill rate. Frequently, they will propose a blended rate of $150 or $200 per hour.

It is becoming much more commonplace to use fixed-fee pricing on a monthly basis. Both the client and CFO firm typically like this setup due to rare cost spikes and a monthly recurring revenue for the firm. These fee ranges vary greatly by size, complexity, and needs. As an example; we have small business CFO clients at $3,500/mo. and larger corporate clients at $15,000 to $20,000 per month. Most true small businesses have fee ranges of about $2,000 to $5,000 per month.

 

How do I know when to hire a CFO?

There are a lot of business events that can trigger the need for a CFO. Below are just a few examples:

  • You don’t trust the numbers (bad accountant/bookkeeper)
  • Lack of timely reporting
  • Not enough information to make decisions
  • No forward-thinking documents like a forecast
  • Board/Investor reporting or just better reporting in general
  • Understanding the necessity but not wanting to manage an accounting/finance department
  • Need process improvements around finance function
  • Knowing where to dig to discover issues or trends
  • Help with pricing (many small businesses don’t charge their customers enough)
  • Advice on when to hire new employees
  • Assistance with a strategic planning
  • Tax-time is a disaster because books are mess

 

Should I use a CFO or an accountant? 

First, let’s make sure there is some clarity around each role. Before we get into that it is important to clear up one thing as business owners have some confusion around this. The individual who is really skilled at the numbers, business common sense/strategy, AND tax is a unicorn. Due to specialization, it is extremely difficult to find these types of people and if you can, they aren’t cheap.

A CFO is higher up the pyramid than an accountant and focuses more on strategy and forward-looking data. They often focus more on things like cash flow management, business strategy, budgeting/forecasting, and provide delivery of reports to management or investors. Compare that skillset to an accountant and they typically handle things like basic reporting (profit and loss and balance sheets), report prep, processing transactions, payroll, and compliance type items.

Often times a CFO will not do accounting work and an accountant doesn’t have the skillset to do CFO work. How do you handle this and understand your exact needs? As more firms have gone to the outsource CFO model this is helping business owners to split the costs a little better. 

To give you some context here I wanted to share a conversation I had with a CEO of one of our now larger clients. This CEO is very business savvy and took a company public during his career. This was a few years ago as he was upping his spend with us and bringing us on to a more full-time based pay structure.  The CEO needed board approval, so I wanted to paraphrase our conversation from several years ago:

CEO: We talked about having you get more involved and being our full-time accounting/CFO team. We discussed $15,000/month was a good rate (to the readers – the same math works for smaller companies it would just be a lower rate) for both parties. What would someone like you cost as a full-time employee?

Me: I wouldn’t work for anyone for less than $250k/yr and would much rather make in the 300s. If you get someone specific to your niche and more experienced than me you are for sure in the $300k range and could hit the $400k range.

CEO:  Would you want a bonus?

Me: Yes : )  And preferably as large as you were willing to pay. I would think 10% would be reasonable in a kind of standard year and would want ability to get in the six-figure range with my bonus.

CEO: Would you do any of the accounting work?

Me: No

CEO: How much would an accountant cost?  Do you need a controller (this is an upper tiered accountant if you don’t know accounting lingo) or would a regular accountant work?

Me: I would recommend getting a senior accountant who could potentially grow into a controller as the company grows.

CEO: What would they cost?

Me: Light on experience and not as good $70k a year. Solid and able to grow with the company you are looking at $85k to $95k.

CEO: And I have to pay self-employment tax and insurance for these full time employees. What does that cost?

Me: We add anywhere from 18 – 22% of overhead burden (cost of self employment tax, insurance, 401k, vacation) to full time employees.

 

Bundled Services

Bundling services is where you can be quite a bit of value add as a potential customer of an outsource CFO firm. It is becoming more common where these firms will provide a team for your account. As such you get an accountant at a reasonable cost to do day to day work. There is usually a more senior person with CFO experience on those teams who are going to be more skilled at strategy and have better business knowledge. 

Furthermore, you usually gain efficiencies over someone who may only do project work. If you have a team that understands both the day-to-day accounting system and the CFO understands this system the team is much more integrated into your company. This makes it easier for you to get more strategic insights into your business.

Bundling usually results in better communication and relationships as well. There is no friction when the CFO may want your in-house accountant to change something, it eliminates that push back if they aren’t on board. If you use a project-based CFO only, they might not have the details in the accounting system to get your current accounting team to provide the exact details that would be useful for you to gain better insights.

 

In Conclusion

Is a virtual CFO service right for you? Alas, it’s not an easy answer given all of the different possible scenarios. Typically, a virtual CFO service company’s rates are such that you should either have a revenue stream in place of roughly $500k-$1.5m to receive a positive return. There are always exceptions to any rule. For example, maybe you’ve just received some funding, or perhaps you have an angel investor and only require a small-scale service to get your books in order as you begin. For a full-service solution, we have clients that net upwards of $30m annually, but they require full teams, in-depth and complex accounting, while you might be looking for something sustainably smaller. As you scale up, so do the services you need to run efficiently.

Let’s not forget the option of one-off projects, opposed to monthly service contracts. Let’s say you merely need a bookkeeper for a short time to help get some processes and basic accounting setup; this will be much cheaper than hiring a CFO to help you with strategy on a monthly basis. There are several skill levels, and several contract variations, so make sure to consider your immediate and long-term financial goals to ensure you get the ideal service and maintain a positive return.

If you are unsure of what you need or if a financial service company is right for you, give us a call. We genuinely want to help and are happy to spare a few minutes to offer some friendly advice. It’s essential that you find a service company that you can trust, especially when it’s your money. Here at Upside CFO, we are confident that our integrity and willingness to help small business owners achieve their goals will lead to a mutually beneficial outcome.

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