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Five Reasons It Makes Sense To Outsource The CFO Role

So you’ve decided you need to engage a CFO. If you’ve done even a nominal amount of research on the position, you may also be asking, “Do I need a full-time CFO, as opposed to an outsourced, or ‘fractional’, CFO?” The outsourcing of F&A, particularly at the CFO level, has proliferated across the business landscape in the last twenty years. You will find countless articles, opinions, and even white papers online about this topic, in addition to the websites of numerous providers of CFO services like myself. However, I encourage you to peruse some of this information to gain adequate insight and then give the topic meaningful consideration. The following are my top five reasons for outsourcing the CFO position.

1. You Value the Independence of An Outside Voice

I have come to believe that there is one key advantage that trumps even budgetary constraints when hiring an outsourced CFO to be your trusted advisor. Many CEO/owners in lower-middle market companies are not only type-A personalities, but they are so used to being the key decision-maker as they’ve built their companies that they have come to rely on a command-and-control management style to protect the business, and in turn, their net worth. Often times, they’re not even conscious of that fact. Employees, in logical response to that management style, can easily fall into the trap of working primarily to please or agree with the CEO, or at least not to cross him or her. Even the most senior employees then lose some of their objectivity and willingness to express contrarian ideas or opinions, or worse, to deliver bad news.

Does that sound familiar or ring true to you? It’s not necessarily ideal and may not be easy to swallow, but in my experience, it’s very much the reality of the lower-middle market. In contrast to that dynamic, outside advisors, including outsourced CFO’s, can be an objective voice without the fear (however unfounded that fear may be) of internal repercussions or specifically, of losing their job. And you, as CEO, may be more willing to listen to harsh truths and follow advice from those you think of as peers, advisors, or experts, rather than from your employees. When it comes to the finances of your business, you should want nothing but the truth, as well as the accompanying recommendations. So when it comes to the value of an outside voice, my conclusion may not exactly reflect your particular business or your style, but it is something to consider as you contemplate the right way to fill the CFO position.

2. You Have Budget Constraints

This easily takes the second spot. Let’s face it, executives are expensive. Outsourced CFO’s are great for saving the money you would otherwise spend on an expensive, full-time employee. Consider that most full-time CFO’s in the lower-middle market will look for base compensation of at least USD $175,000, with $250,000 being closer to “normal” – and that’s before the 30% bonus, benefits such as 401K matching, severance package, and equity stake that most will seek as well. Outsourced CFO’s who work for you part-time (typically no more than 2 days/week) as a 1099 contractor cost a fraction of that amount on an annual basis. You can structure their work and time in a variety of ways, and most are open to creative compensation (such as equity) in lieu of fees if that fits your business model and you’re cash constrained.

3. You Have a Strong Controller, Accounting Manager, or Senior Bookkeeper

This may seem contradictory to the idea of needing another person in the F&A department, but outsourced CFO’s will work best, and can be most effective, when paired with a strong second-in-command. Maybe that person is your long-time bookkeeper who has grown into the role, or a young Accounting Manager or Controller with great potential but still lacking the experience you need. Ideally, this second-in-command will be a full-time employee with the maturity and skillset to manage day-to-day tasks, as well as maintain the books of the business in accordance with GAAP. That frees up the outsourced CFO to not only oversee F&A, but to focus on initiatives and areas of concern where his/her value can be fully realized, such as counseling with you on strategy and organizational issues; financing of the business or capital structure; forecasts, budgets, and financial analysis; and acquisition or exit activities like due diligence or sale presentations.

4. You Have a Specific Project or Need With a Defined Timeline

Potential projects for an outsourced CFO are as varied as the issues that arise and impact the F&A department. They could include anything from creating and implementing new KPI dashboards for your management team, to overseeing an ERP system conversion, to assisting with the preparation for your next liquidity event … and the list goes on. If all goes well with the project, you will have found a resource the company may want to call upon again when future needs arise.

5. You Have a Temporary Hole to Fill Until You Hire a Full-Time CFO

If you’ve lost your prior CFO, for whatever reason, an outsourced CFO can be a great temporary place holder until you’ve filled the full-time position again. These type of engagements usually last from three to six months, but can be as long as a year depending on the length of your search. No matter the length, you’ll have the peace of mind of knowing that someone with significant experience and maybe even a little gray hair is “watching the shop” in the F&A department until you name a permanent successor.

The decision to outsource the CFO position may be difficult, or relatively easy, depending on your circumstances. However if you are struggling with the decision, particularly as it relates to your budget, I feel confident in stating that with today’s qualified contract resources in the market place, you take much less risk up front in hiring a 1099 contract CFO part-time, than in hiring a full-time employee. If nothing else, you will learn what you like or dislike in a CFO and can terminate the relationship very quickly and without employment repercussions. Like most issues involving human capital, this is one to which you will do well to give your attention and to seek out further advice from those you trust. Good luck!

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