What is a virtual CFO, and should you hire one?

The most obvious answer to handle the difficult task of managing the finance department of a company, would be to hire a CFO (Chief Financial Officer), but most startups can hardly afford to onboard an experienced individual full-time. This is where a virtual CFO comes in to manage liquidity with experience.

Virtual CFO: Who is it?

A virtual CFO or vCFO is an experienced financial professional or entity responsible for handling a business’s financial strategy, reports, and other finance-related activities on a part-time basis.

But what all activities fall under the purview of a virtual CFO? Let’s find out.

What does a virtual CFO do?

Let’s break down the role of virtual CFOs to understand their scope of work better:

• A virtual CFO would forecast the business’s cash flows, prepare budgets, and develop cost-saving measures to offer financial guidance.
• They would manage financial risk and devise long-term goals to improve the business's bottom line
• They would prepare financial reports, such as profit and loss statements and balance sheets, to conduct financial analysis.
• They would integrate accounting and payroll software to automate, manage, and monitor the daily financial transactions of the business.
• They would take care of regulatory compliance and tax filings.

Virtual CFOs help prepare a business for financial instability, recognise and capitalise on their cash streams, and ensure that the business’s books of accounts are up-to-date based on the latest regulations. But what type of businesses would benefit from a virtual CFO?

Who needs a virtual CFO?

In the UK, around 581,824 were dissolved between 2021 to 2022. While there are several reasons for startup failure, 38% of startups fail due to a lack of working capital or an inability to raise more cash. This makes it essential for businesses to always have access to a steady stream of cash and keep a finger on their financial pulse.

Generally, small and midsize businesses can’t afford to hire a full-time CFO. So CEOs handle all financial activities, but they’re seldom equipped to create financial plans and budgets, carry out bank reconciliation, forecast trends, and acquire capital.

Such businesses would benefit tremendously from hiring a virtual CFO since they can handle all finance-based tasks and offer actionable insights to business owners.

Virtual CFO for small business: Pros

A virtual CFO can benefit a small business in the following ways:

• Delegation: Small business owners can easily delegate all finance-based activities to an experienced professional and focus on growing their business.
• Budget-friendly: Hiring a virtual CFO in the UK is cost-effective since they cost less than a full-time CFO as you’ll only pay them based on the number of hours or days they work for. Moreover, you don’t have to provide them access to office space, provide employee benefits, or take care of any employee-related expenses as they work remotely.
• Flexibility: Virtual CFOs allow businesses to decide their scope of work, nature of engagement (hourly or otherwise), work hours, and experience based on their requirements.
• Stability: A business struggling to make sense of its financials or experiencing a cash crunch would benefit immensely from an experienced finance professional.
• On-demand: You can hire a vCFO on-demand based on your business needs without having to shell out the money for a full-time CFO.
• Specialised expertise: Virtual CFOs might be employed at multiple businesses at once. So you get someone with expertise in solving a diverse set of problems for a diverse range of businesses. Additionally, you might be working with an entity, so you get access to multiple minds at once based on your requirements.

Virtual CFO for small business: Cons

It’s not all roses in the world of virtual CFOs. There are certain drawbacks to outsourcing CFO services, such as:

Limited industry knowledge: A virtual CFO might not necessarily be knowledgeable about your industry, making it challenging for them to offer quality services. Access to information: Virtual CFOs will have access to all your confidential financial data, and while working for multiple businesses at once, they might not handle your data sensitively. Communication problems: vCFOs’ working hours might be different from the company’s. This would make it difficult to communicate with them effectively or get their guidance on urgent matters. Lack of motivation: Since they won’t be a full-time team member, they might be as vested in your company’s success as other full-time employees. Additionally, it will take time for you to build a trustworthy relationship with them.

What should I look for in a virtual CFO?

When hiring a virtual CFO, you must look for the following things:

1. Educational requirements: The CFO you hire will be responsible for your company’s financials and have a huge impact on its success. So you need someone on your team who has the requisite educational qualifications.
2. Experience: See if the CFO you’re looking to hire has experience in your industry and go through their prior work experiences to understand their strengths and weaknesses. This will help you judge their reliability.
3. Communication skills: Your virtual CFO must’ve good communication skills to clearly communicate their advice and insights and pay attention to your needs. They must also not take too long to get back to you.
4. Pleasantness: Although this is a matter of personal preference, working with someone friendly and helpful will work wonders for your team too.

Virtual CFO vs Fractional CFO

There are quite a few similarities between virtual CFOs and fractional CFOs.

But fractional CFOs are different in the sense that they often engage with multiple businesses at once to fill their workweek. However, virtual CFOs constantly engage with companies to offer financial guidance and are involved in their financial planning.

Simply put, while all fractional CFOs are virtual CFOs, not all virtual CFOs are fractional.

Virtual CFOs are a good alternative

Hiring a dependable and experienced virtual CFO can help you outsource your financial obligations, determine your cash flow problems, and mitigate financial instability.