A virtual CFO should be more than just a utility position, and they shouldn’t be focused solely on keeping score. The CFO position is only truly leveraged when it’s operating at the highest level to help manage the always-limited resources of the business, and in order to help the company grow.
The good news for smaller firms is that if you run a company that’s not large enough to hire a full-time CFO, you can still get the benefit of one by engaging a virtual CFO. Here are some of the reasons why you should consider hiring a virtual CFO in 2023.
1. Economic Uncertainty & Cost Consciousness
In the midst of Silicon Valley Bank’s demise in early March of this year, a couple of us at Laurentian spent an entire weekend building multiple financial scenarios for two of our clients. We wanted to be sure that these tech firms would be able to continue to operate even if they didn’t have access to their funds on the Monday after the bank failed.
In building out these scenarios, Steve and I had to entertain the idea that our clients might have to enact temporary layoffs in order to preserve cash. Fortunately, over the weekend federal regulators worked out a deal in which all SVB depositors would have access to all their funds. With that happy resolution, SVB’s failure did not affect the viability of our clients, but it’s something of an understatement to say that things were tense for a few days. The takeaway for our clients is that Laurentian had plans in place to ensure their survival, whatever was going to happen the following week.
Yet, even without the bank failures that we’ve seen so far, 2023 has shown us continued rising interest rates, persistent inflation, and a possible economic slowdown. All these together have created an environment in which a company’s financial agility is likely to be critical, and cost management will continue to be a prevailing concern.
With this increased uncertainty comes a greater need to monitor costs to ensure that the company is investing its resources efficiently. Are all personnel productive in their current roles? Are we paying many thousands of dollars for unused subscription licenses? Can we optimize our hosting costs? I’ve seen many companies find cost savings without having to endure too much pain. Ultimately, having an experienced finance professional focused on managing resources will help extend your runway — and will possibly keep you from having to go back to investors for what likely would be a dilutive round.
2. Strategy & Planning
A virtual CFO can provide key inputs into setting the direction for your firm with well-reasoned strategic choices. As Roger Martin famously described, strategy is about making a set of clear choices in order to win in the marketplace. The process involves defining the firm’s winning aspiration, deciding how and where to play in the market, and what capabilities and management systems are needed.
One of my favorite insights from Professor Martin is his test of the strength of strategy. He asks the organization to state their strategic choices, and then to state the exact opposite. If the opposite is nonsensical, that’s a strong indication that the organization has not truly made a strategic choice. For example, if XYZ Company were to say their strategy is quality service, that sounds reasonable on its face. However, since no organization openly strives to provide non-quality service, that suggests that XYZ’s strategy is not very strong. You can see my full blog on this here.
A virtual CFO can help provide objective financial insights that can clarify those choices and help determine whether the risks are financially attractive. Not only will this assist in fundraising efforts, but it will also focus your management team on the task at hand.
3. Financing Help
Establishing a solid financial base is vital when building a sustainable, competitive business. Finding and maintaining the right sources of capital, whether debt or equity, is an essential characteristic of a successful company. Most entrepreneurs underestimate the time and effort it takes to raise capital, and a virtual CFO can assist in this endeavor with planning, advice, and well-prepared financial documents.
In addition to negotiating long-term debt financing with the company’s relationship bank, the CFO is typically in a good position to lead efforts to attract additional equity funding through an angel investor, venture capital firm and/or private equity firm. The CFO is usually the person most well-versed in the “finance-speak” common to these investors, and he or she can best represent the financial prospects of the company.
Once an appropriate investor group is identified, the CFO will work to ensure that negotiations result in an appropriate deal structure. Over the years at Laurentian, we’ve helped dozens of tech firms raise debt and equity on sensible terms.
4. Board Meetings
One of the main issues with board meetings is the time commitment in preparing for the meetings. Careful preparation is key to running an effective board meeting and ensuring that only timely and relevant data is presented will help to make sure that all priorities are addressed. Much of the preparation for board meetings can be undertaken by your virtual CFO, which can help to free up the CEO’s time to manage other critical tasks. A CFO can also handle investor questions that routinely come up during the year.
At Laurentian, we’re adept at answering questions related to the company’s financial health. Keeping outside investors informed about the company is an important part of relationship management. In addition, we are knowledgeable about best practices in corporate governance, which give outside investors’ confidence that the company is being well managed.
Additionally, a virtual CFO can prove to be very helpful by taking part in a firm’s investor presentations and helping to answer challenging financial questions.\
5. M&A and Exit Strategy
Even small and growing companies may be involved in M&A activity or in selling a piece of their business. A firm’s virtual CFO can add value at all stages of the M&A transaction by either: 1) preparing the financial schedules and documents necessary in the event of a sale, or 2) performing up-front due diligence in assessing the financial health of a target acquisition, as well as the quality of its finance-related systems.
Once the transaction has closed, managing the integration of people, processes and systems is a necessary, and often underappreciated part of the M&A process. I’ve been through my fair share of integrations during my time at Molson, Newbridge, and NASDAQ. My advice is to treat the integration just as carefully as the pre-deal activity. Ideally you want many of the same people on both the pre-deal side and post-deal side to maintain accountability and reduce the chance that anything falls through the cracks.
6. Financial Audits
Independent audits or reviews by outside accounting firms are usually required by investors or lenders. That fact may not be a surprise to anyone, but many entrepreneurs are amazed by the level of scrutiny that an audit entails. Undergoing an audit not only requires proper financial statements, but also detailed schedules, notes, contracts and other documents to support the financial statement data. At Laurentian, we have supported dozens of audits and know the steps necessary to get a clean audit opinion.
7. Is Your CFO Part of Your Sales Team?
For many years, CFOs have touted themselves as “business partners,” but all too often what that really means is simply managing and advising on the internal finance and operations of the firm. That’s a solid start, but a really good CFO considers him or herself not just head of the finance team, but truly a key player in running the business. And I believe the same should be true for virtual CFOs. In that spirit, I’m proud of the fact that it’s not unusual for me to go on sales calls with account managers as a way of learning the business better, all so that I can provide better strategic advice to the CEO.
One other thing: A savvy entrepreneur will take advantage of not only their virtual CFO’s extensive experience, but also their network. Most virtual CFOs have strong networks of outside contacts in a wide variety of companies and industries. On occasion, I’ve been in a position to make introductions that result in promising partnerships or even new customers for my clients. This is how a Laurentian virtual CFO can help grow not just your bottom line, but your top line, as well.
Could your firm benefit from some strategic financial planning? If your company is at the stage where you’re starting to need more financial foresight than your accountants can provide, it may be time to consider hiring a virtual CFO.
And when you begin exploring what that might look like, those of us at Laurentian recommend looking for someone who has the potential to become a valuable and vital member of your top management team.