Machine learning in accounting is changing how startups manage their finances. Learn how it could apply to your business.
August 18, 2020
If you’re considering outsourcing the Chief Financial Officer (CFO) role for your startup, you’re not alone: In our experience, almost all startups outsource CFO services at some point. Contract CFO solutions offer many of the benefits you would expect from an in-house CFO, but on an as-needed basis that suits early-stage startups. Their services vary, so as you research the options you may be wondering: Which functions can (and should) you outsource?
The short answer is that most functions requiring a CFO’s advanced finance knowledge and business acumen can be handled successfully by a third party; the top services of outsourced CFOs are listed below. (Note: The outsourced CFO function may also be described as temp, contract, part-time, fractional or virtual CFO services). However, there are some functions that aren’t appropriate for outsourcing—keep reading to find out what they are, and why an outside CFO isn’t the best solution.
An outsourced CFO is a financial expert that works as a strategic financial consultant for businesses on an hourly, part-time, or otherwise contracted basis. They have experience in high-level financial roles across private and/or public companies at different stages of growth, and work with businesses of all sizes on everything from strategic planning to scenario modeling, unit economics, financial projections, and more.
Every startup needs financial projections: They show the revenue potential of your business and help attract investors. Financial projections also form the basis of your budget and indicate the amount of investment the business needs, so it’s important to work with a finance expert to make realistic predictions.
An outsourced CFO solution will use your financial results from previous periods to help predict how the company will perform over future months and years. This includes projecting your expenses and revenues across all key verticals, how your sales expenses will grow, and how many salespeople you’ll need to meet revenue targets. If you already have financial projections in place, an outsourced CFO can extend and maintain them.
Scenario modeling involves creating alternative projections that show how your company is likely to perform under various conditions. For example, you may model an aggressive scenario where the business grows by 30% in one month, as well as a more conservative scenario where it grows by just 10% in a month. For each scenario, the modeling would predict the impact on financial results like revenue and costs. The current circumstances may also call for a COVID-19 impact scenario, where growth decreases month over month. Planning for multiple scenarios is necessary but time consuming, so outsourcing this task can give you back valuable hours.
The budget sets targets for how the startup should perform each month in order to achieve the results in your projections. To monitor whether the business is on track or underperforming, the outsourced CFO will compare your actual financial data to the budget and report back on where you stand. Calculating the variance between your budget and actuals highlights where you may need to adjust your strategy or review whether the budget is achievable.
An outsourced CFO solution can help you establish and track the unit economics for your business model. For SaaS companies, this usually involves looking at the average revenue and costs per customer. The CFO will likely monitor the ratio of customer lifetime value (LTV) to customer acquisition cost (CAC) to show how sustainable your business is, and to indicate ways you can improve profitability.
As a startup, your finance needs are different than those of established businesses. An outsourced CFO who has years of experience in your vertical can guide you through processes like building out your team and exploring funding options, and highlight details someone with less specialized knowledge may have missed; for example, contract loopholes that need to be fixed. However, if you choose an outsourced CFO without the relevant experience, the support they can offer will be limited. For instance, if your business is a SaaS startup and you work with a CFO specializing in direct-to-consumer businesses, chances are they’ll only be able to act as an adviser rather than being a hands-on partner.
Many of the topics that board meetings cover are directly linked to your finances: fundraising, business strategy, the annual budget, etc. Some outsourced CFOs offer the service of attending board meetings to lead financial discussions and interpret the figures. The outsourced CFO can field questions, go into detail about financial projections, present financial models, and explain the theory behind the assumptions in their projections.
Even if an outsourced CFO won’t be presenting at meetings, they can support the team by preparing the reports, slides, and figures for you to present yourself. This service is particularly helpful when you’re preparing for meetings with investors. Having key financial documents on hand means you can respond immediately to requests and avoid the embarrassment of looking disorganized. Plus, your outsourced CFO will review and confirm the accuracy of your key monthly financial statements -- Profit & Loss (P&L) or Income statement, Cash Flow Statement and Balance Sheet.
Founders who are new to the startup world (and sometimes even those who aren’t!) may make strategic decisions that have unexpected consequences on their expenses or revenue growth. An experienced outsourced CFO will help you avoid these kinds of mistakes by advising on strategies that work from both finance and business viewpoints. For example, the interim CFO may be able to give advice on the business models you’re designing, and suggest an alternative model that might be a better fit.
An outsourced CFO can advise business owners on how to negotiate more profitable contracts with customers. From a finance perspective, the CFO can identify potential risks that could end up costing the company, and make sure contracts are watertight. From the business perspective, they can assess whether the contract terms are in your best interest, and suggest ways to make them more profitable.
For a CFO to produce accurate financial statements, they need to have a clear view of the company’s contracts and legal obligations—something they can only get by working in close collaboration with your legal team. Such collaborations also give them an opportunity to review your legal documents to see if they’re in the best interests of the business. Having a CFO’s perspective on legal decisions ensures you’re aware of the financial outcomes before you make a commitment.
Headcount is a main HR function and also often the biggest expense of a startup (or any company, for that matter). An outsourced CFO can collaborate with the HR manager to monitor how changes to the team affect your ability to hit budgeted figures, and, if necessary, make recommendations about how to cut staffing costs. They can also advise on how to develop a competitive compensation package that is still good value for the business.
An outsourced CFO can offer a huge amount of value to your team, but if you rely on them for the wrong kinds of services, you won’t get the maximum benefit from this relationship. There are two main mistakes founders often make here:
Below are two common examples of how some startups use fractional CFOs in a counterproductive way.
Some articles suggest using an outsourced CFO solution to handle fundraising for your startup, however, we don’t recommend doing this. Investors are usually buying into the story of the founder’s vision, so it’s the founder who should be meeting with investors and developing relationships, rather than a representative from an outsourced CFO solution. Where outsourced CFOs can help with your fundraising is by preparing documents, slides, and financial models you can take into investor meetings.
Although the founders should always take the lead on fundraising, if your startup has progressed to the point of Series B or Series C funding, you may need a CFO who can become more involved in the process. Once you get to this stage, it’s probably time to hire a full-time CFO for your team.
A lot of people who engage the services of an outsourced CFO ask them to do their business’s day-to-day bookkeeping and accounting. This is a bit like having a samurai sword and using it to cut vegetables. CFOs usually command a high price for their time, so using them for basic accounting tasks can be an expensive and ineffective use of their expertise. Instead, it’s best to delegate the day-to-day finance tasks to a bookkeeper or accountant, freeing up the CFO to work on higher-level (and therefore more valuable) projects. If you want to outsource CFO and accounting services to the same firm, make sure you’re working with a finance solution that has CFOs and accountants on their team, so each function is managed by someone with the appropriate qualifications.
Looking for the best outsourced CFO services for your startup? Zeni is a next-generation, full-service financial firm that handles finance functions more cost-effectively and intelligently than traditional outsourced CFO solutions.
Our experienced finance team of CPAs, tax advisors, accountants and CFOs work in tandem with artificial intelligence and machine learning technologies to deliver expert finance management services. Enrolling in the Zeni CFO Plan means your day-to-day bookkeeping and finance functions are handled by our certified bookkeeping and accounting experts, and tasks related to financial planning and analysis are managed by our CFO-level finance experts. With one integrated team managing every aspect of your financial management and planning, results are fast, accurate, and actionable every time.
With Zeni you get a dedicated always-on finance concierge, and access to a sleek finance dashboard that turns your accounting data into powerful visualizations. Plus, our team has firsthand knowledge of what it takes to make a startup successful, and can help you manage your finances smartly.
Unlike many other CFO firms, you won’t have to worry about mounting hourly charges: Our flat monthly fee includes all your fractional CFO services, including: