Growth of virtual CFO businesses hinges on SMEs, as start-ups too offer opportunity

Small businesses, especially early-stage start-ups, consider outsourcing financial strategy to virtual CFOs as they lack wherewithal to employ a full-time CFO, but experts suggest a change in policy with growth

One of the significant reasons why businesses fail within the first three years of operation is financial incompetence. A recent research done by the US-based Small Biz Trends indicates that 90 per cent of new businesses fail. Of which 82 per cent fail due to cash flow problems. Clearly what companies need is more than bookkeeping. Financial statements, tracking profit and loss and maintaining budgets play an important role in the success of an organisation. Government reforms too have changed the way businesses are being conducted. Now it is necessary to have a chief financial officer (CFO) by your side. But, small and medium enterprises (SME), especially start-ups, may not have the wherewithal to employ a full-time CFO. It is here that the concept of a virtual CFO becomes important.

Praveen Nigam, national managing partner at Amplus Consulting, a Delhi-based company that provides virtual CFO services says, “Small- and mid-sized businesses which cannot afford to pay Rs 1 crore annually to a full-time CFO can now easily pay Rs 25 lakh annually to a virtual CFO. The concept has grown in the last few years. I call this trend a cost arbitrage, which helps emerging and mid-size businesses stay on their financial grounds.”

Who benefits?

In 2017, Xero, a global small business platform which provides advisors for accounting and bookkeeping, released a study based on US firms. According to the study, finance advisory services have become a large source of revenue for firms. Sixty-one per cent of US firms reported advisory revenues per client of $5,600 from advisory services, which include virtual CFO services also.  Keri Gohman, president of Xero, said in the study: “Small businesses succeed when they work closely with advisors. We’ve found that only 32 per cent of all small business owners have an accountant, and almost half of small businesses lack an advisor of any kind.” Gohman continued, “While only 50 per cent of small businesses survive the first five years, the number significantly increases to 85 per cent for Xero customers. When we compare their success rate against the nation’s average, it becomes crystal clear how important advisory is for the growth and longevity of small businesses.”

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In India too, given the cost benefit, mostly start-ups or SMEs are using the services of a virtual CFO. Confirms Sriram S, founder and director of Mumbai-based UR CFO: “Many tech founders do not have adequate knowledge of finance and accounting. VCFOs bridge the gap. A VCFO will help companies in their budgeting, valuation, strategy development, sensitivity analysis, etc. The companies are realising that outsourcing CFO services help not only in reducing cost, but it gives them the competitive advantage of experts on call.”

Rahul Magan, CEO at Treasury Consulting, a Singapore-based finance service provider, agrees with Sriram. “The market is quite volatile and different instruments are coming up. Companies are also innovating and taking services of virtual CFOs, as hiring a high-profile CFO is a costly arrangement while outsourcing a finance guy is a win-win situation.”

A Bhubaneswar-based SME owner Soubhagya Routray, who is currently expanding his footprints into different sectors, offers proof of the concept of virtual CFO. He says that traditionally he used to work with accountants, but with time he needed to make changes in his way of doing business operations and that is where outsourcing the key financial planning made sense. “My business is expanding, and now I am looking at the virtual CFO option to make correct finance decisions with right finance expertise,” he says.

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Concept to execution

The virtual CFO idea started in the United States in the 1990s, when many organisations set forth their sail in the Silicon Valley, buoyed by the innovation wave. A significant number of these new companies were not sufficiently huge to warrant a full-time CFO, yet were doing enough business to hire finance experts with much experience. After the dotcom spur, 2007 bought another reason to ascend the graph of virtual CFOs as recession pressurised companies to cut back their finances. Eventually, the trend jumped globally.

In India, Mumbai-based wealth management and consulting firm SuperCFO — according to its managing director Bhairav Kothari — has been providing virtual CFO services from early 2008. As per Kothari, in 1999 when he joined M*Modal, formerly known as CBay Systems, which provides clinical documentation services, he had served in various capabilities. In this period, he says, he met many entrepreneurs who could use the support of a financial officer. However, they were unable to hire a full-time CFO. “I was working full time as a CFO, I myself needed an extra hand in executing some tasks.” This is when Kothari realised the need for VCFOs who could help several companies at a time and also who could assist full-time CFOs. “I had a mentor in the US. With his help, this thought developed into a concept, and I built a solution suitable for the Indian market. I started my own venture in January 2008,” he adds.

The huge SME market

While there is no specific data on the size of virtual CFO market per se, according to experts, there is a huge potential and opportunities for finance experts. “India is a hub of SMEs, and there is a humongous opportunity for VCFOs. There are millions of small businesses which can use the aid of a good financial expert,” says Kothari.

Sriram of UR CFO says: “With increasing number of companies, new ventures and increase in compliance, there is a serious gap between demand and supply that SMEs and new ventures are facing. Indian Accounting Standards, GST, direct tax code and several amendments in Companies Act 2013 are taking a lot of time of the senior management. This creates a great opportunity for VCFO to fill the gap.”

According to Magan of Treasury Consulting, not just SMEs and start-ups are outsourcing the services, but even big companies are opting for virtual CFOs. “In my opinion, more than start-ups, big corporate houses are taking this trend to an upward growth. Out of our 10 clients, seven to eight are big companies.”

The National Management of an Accounting Practice (MAP) survey, conducted in December 2016 in the US, also predicts the growing penetration of the client accounting services in larger firms. The slice of net client fees represented by that service area, which includes outsourced finance and accounting services and other back-office support for clients, more than doubled to nine per cent for the largest firms with annual revenue of $10 million or more who are active in this area.

Internal vs external CFO

Virtual CFOs also allow SMEs and start-ups to focus on establishing and growing the business, rather than getting bogged down with the accounting intricacies and statutory compliances. Similarly, large companies look at outsourcing many of the non-core activities, like accounts payables management, payroll, accounts reconciliation, etc.

Sandip Khosla, who is the full-time CFO at Paras Healthcare and has multi-industry experience over 27 years, feels that the concept has a limitation. He says: “Some start-up firms that are initially in the R&D phase or are just developing their systems may lay more emphasis on their product and consider the aspects of financial reporting, financial planning and risk management separate. These companies may not be ready to support the cost of the CFOs and hence may opt for a VCFO. Please note that this may be a short-term approach after the company gets ready to roll out the services they will need and should include a CFO in their team.”

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Kothari also agrees that virtual CFOs can never replace in-house CFOs. “Start-ups may outsource the financial services to jumpstart their business, but once they are ready with a solid base, they can hire a full-time CFO. However, VCFOs can assist with various responsibilities in accounts management.”

While, according to Sriram, it is not about traditional companies but the size of the company that calls for outsourcing financial planning. Virtual CFOs cannot replace CFOs in all places, he feels. A virtual CFO caters to the clients who cannot afford a full-fledged CFO or companies small enough to be managed by outsourcing to the experts. “If the company is large, then VCFO is not the right approach. However, these are hardly five per cent that we are referring to. For companies that are in the growing phase or in a start-up phase, a VCFO could be the answer to a lot of challenges they face, starting from compliances to valuation. With companies that are considerably large, VCFO can bring in a lot of expertise on a plug-and-play basis. Many tasks that CFOs are doing can be outsourced so that CFOs can concentrate on material aspects of the company.”

But irrespective of whether the CFO is in-house or virtual, the moral responsibilities do not change. Says Sriram: “VCFOs are equally expected to ensure true and fair representation of the companies that engage them. Today VCFOs are directly reporting to audit committees. VCFOs are answerable to the auditors. VCFOs are also being part of the strategic meeting of clients to give their feedback. In all VCFOs are no different than the CFOs.”

Tech advantage

CFOs are becoming strategic partners in organisations. Being the owner of financial data, CFOs provide the top management with insights that can be crucial for a company’s long-term profit target, and sometimes even survival. And with growing changes in the technology and regulatory landscapes, financial experts are also spending significant amount of time in managing a wide range of changes in the firms and style of working. These trends are applicable both for in-house CFOs and virtual CFOs.

Pradeep Agarwal, senior director, cloud, at Oracle says that technology plays the all-important part in a CFO’s work profile and with contractual and freelance workers forming a large part of the modern workforce, technology comes to the centrestage. He says, “We at Oracle talk about Digital CFOs, who are the CFOs who leverage emerging technologies to go beyond the role of a financial custodian and turn data into valuable insights. In a future where the sheer volume of data flowing into an organisation will render it impossible for humans to analyse it, technology will play a crucial role. CFOs, in the future, will embrace alternative work styles, those that incorporate a wider range of freelance and contract workers.”

Sriram of UR CFO feels that while technology plays an important role for a virtual CFO, it is important to consider the size of the client before applying tech solutions. “Generally SME businesses and start-ups prefer using relatively simple technology solutions rather than high-end technology platforms, which call for significant investments. Based on the client requirement, technology can be adopted by VCFO. However, largely companies use Tally or Zoho solutions as core software.”

Apart from these well-known companies providing tech and accounting solutions to virtual CFOs, many smaller players have chosen to develop their own cloud-based software to align with their virtual CFO services. As virtual CFO service develops as a sector in India, technology can play an important part in winning more clients.

Also read: How HR leaders of Indian businesses handle workplace conflicts among employees

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