Outsourced CFO Services vs In-House CFO: Which Is More Appropriate?
When growing companies reach a certain size and scale of operations, it typically faces the Outsourced CFO Services vs In-House CFO dilemma? In other words, it has to determine whether to outsource accounting or keep it in-house?
The rapidly changing business models and dynamics have made companies keenly aware that expert financial management is a requirement for their business. As per a survey, 47% of the executives say that their current finance function does not have the right mix of capabilities to meet its future priorities.
But, every business cannot afford to hire a full-time CFO. That’s why many small and medium-sized businesses are resorting to professional outsourced CFO services.
In fact, one-third of executives now rely on outsourced Finance & Accounting teams for intellectual capital, global scalability, and cost savings. There is no doubt that outsourced CFO services help a business reduce the traditional accounting costs involved in keeping an in-house CFO. However, outsourcing finance and accounting is something that worries many SME owners.
They worry about outsourced CFOs’ reliability, quality, compliance, and problem-handling skills. The SME owners often are doubtful whether the outsourced CFO service providers would be able to maintain high standards in delivering accounting services.
So, it is important to first distinguish between Outsourced CFO Services vs In-House CFO for businesses to understand the importance of Outsourced CFO Service.
Outsourced CFO Services vs In-House CFO – The Differences
The only way to understand the unique value proposition that outsourced CFO services render to businesses is to compare it directly with the in-house CFO alternative. The following are the various parameters to distinguish between outsourced CFO services vs in-house CFO.
1. Finance and Accounting Costs
Keeping a full-time or in-house CFO involves costs related to staffing, software, and equipment.
For instance, the cost of onboarding and training new CFO hires is extremely high. In addition to this, choosing and implementing an effective digital accounting platform that represents a significant cost in and of itself for businesses. Other labor and financial costs, including training, hiring a consultant to support software implementation further add to the finance costs.
Thus, achieving strong ROIs from the in-house accounting strategy is challenging, especially for small and medium-sized businesses.
The outsourced CFO service offers businesses a cost-effective model. Such a model covers all the people, processes, and systems costs that remain consistent and predictable over time. This is unlike the in-house CFO model that calls for increased costs whenever a new CFO is hired or when a major software update takes place.
Note that the in-house CFO model involves direct costs like CFO’s salary, benefits, and other onboarding costs. Whereas, outsourced CFO services depend on the size of a business and are more direct as well as predictable relative to the in-house CFO approach.
In fact, these costs do not arise over time as the accounting department grows in the case of outsourced CFO services.
2. Access To Expertise
The rapidly changing business models and dynamics require business owners to have access to expert financial management. Having financial expertise provides financial leadership to a business. Besides, it also helps a business to avoid common mistakes that can detour a company from achieving its plans.
Many businesses think of recruiting a full-time CFO, accountant, or bookkeeper to access financial expertise and share the burden of the finance function. The in-house CFOs are experienced, finance professionals. They know how to finance a business, deal with business growth, present monthly insights, and bring the best deals from banks.
However, the major challenge with bringing a full-time CFO is that it comes with a huge cost. As mentioned above, these costs relate to CFOs’ salary, benefits, and other onboarding costs.
But, the outsourced CFO model overcomes such a challenge as it enables CEOs to access specialized skills at cost-effective pricing. The outsourced CFOs offer high-quality and reliable service irrespective of the speed at which the business scales or grows.
This means that CEOs do not bear the burden of rising CFO salaries along with business growth through outsourced CFO service. Moreover, such a service eliminates the need for maintaining infrastructure internally in order to support the accounting software.
Besides this, the executives get consistent, accurate, and timely information through outsourcing CFO services. The external CFOs serve as trusted business advisors who undertake finance and accounting tasks by leveraging their strategic expertise.
CFOs have immense knowledge and experience as they have worked with various industries and have experienced almost every situation. Such experience and technical expertise help business executives to avoid making common errors on a daily basis.
3. Level Of Security
As per a report, the average business loses about 7% of its annual earnings to fraud and embezzlement. It’s because a typical business has a small team, say 2 or 3 finance professionals. Thus, the entire control of the finance function is in the hands of a limited number of finance professionals. This makes such businesses vulnerable to fraud.
Outsourced CFO service helps small and medium-sized businesses overcome this challenge. It has a dedicated team of accounting professionals who work within a set of checks and balances.
The outsourced CFO service providers are highly trustworthy, reliable, and dependable professionals. They provide consistent and honest data reporting as well as data analysis to business executives. The outsourced CFOs are able to maintain a high level of consistency and integrity in terms of reporting and analysis as their market position is at stake.
Additionally, these professionals implement new processes and software in a streamlined manner. As a result, the business executives benefit from the highly secured technology stack offered by them.
Enhanced security in terms of providing technology and financial management brings confidence and peace of mind for business executives.
Business executives of high-growth companies restrict themselves from hiring full-time CFOs unless they encounter a significant financial event. That’s because these executives are aware of the extremely increasing costs of hiring full-time CFOs. All thanks to the ever-increasing compliance and need for transparency that’s increasing the compensation programs of top finance executives.
The rising costs of hiring in-house CFOs is shifting businesses towards virtual or outsourced CFO services. Since financial management is a requirement for businesses these days, the outsourced CFO model is becoming popular with high-growth companies.
The question that arises is that when should a company decide to hire outsourced CFO service? Typically, there are three different reasons why a business would consider outsourcing the CFO function.
The most common reason is when a business reaches a level where it requires experienced leadership. For instance, a business reaches a point where it:
- intends to raise funds from outside investors
- has more customers, more employees, or more vendors
- requires better planning for developing policies and procedures as there is an increase in complexity of its operations
- undergoes a merger or acquisition for a particular line of business
2. Highly-Specialized Projects
A business may encounter situations where it needs special expertise to resolve the underlying challenge. For instance, specific projects involving:
- M&A activity where the company is either the buyer or the seller and needs support for either assessing the target company or packaging the company for sale
- Issue of equity
- Clean-up of the company’s financial statements before the audit
- Issues pertaining to revenue recognition, GST cleanup, etc.
3. Transition Issues
When a company grows big, it is in need of an in-house or full-time CFO to lead its finance function. Since it’s challenging to hire a full-time CFO on an immediate basis, the company hires an outsourced CFO to fill the gap.
As we can see, hiring outsourced CFO services gives CEOs the much-needed flexibility to undertake professional guidance at their own convenience. In addition to the timing, they also have flexibility over costs. Instead of paying a regular monthly salary, the CEOs can increase or decrease hours or work according to business demands in the case of outsourced CFO service.
5. Focus On Core
Business owners do not have the expertise to carry out specialized tasks like financial management. They do not have the knowledge and the skill set to report and analyze the financial activities of the business.
Hence, businesses need the support of experienced finance professionals who can guide them to success. They need strategic advice from CFOs who can navigate the accounting complexities of a business with ease.
Virtual or outsourced CFOs help businesses fill this gap. They provide a financial strategy to a business and enable business owners to concentrate on their core operations. Additionally, they put in place checks to ensure that a business is not spending more than what it is supposed to. The objective behind rendering such services is to give business owners enough leeway to focus on growth.
This is challenging to achieve in the case of hiring in-house CFOs. The business owners have to get involved with full-time CFOs to oversee accounting and book-keeping. This breeds inefficiency and diminishes business productivity.
High-growth or high-stress companies find it challenging to hire an in-house CFO, given the limited available resources. Outsourced CFO services are cost-effective, more efficient, and more flexible than hiring in-house CFOs. Furthermore, it gives businesses access to expertise that they would otherwise not be able to afford. Also, it gives business owners the opportunity to focus on revenue-boosting areas of their business.