Staying on top of finances and forecasts can be tricky for smaller businesses, especially those without a chief financial officer. Many are turning to a flexible, part-time portfolio or virtual solution, giving them much-needed advice at a fraction of the cost
For many smaller businesses, a full-time chief financial officer (CFO) is a luxury they cannot afford. With even a small business expected to pay between £80,000 and £150,000 for such a position, some are instead opting for a portfolio CFO arrangement, perhaps at a few thousand pounds a month, to ensure they get the right advice and direction to manage and grow their companies.
Such professionals most often work freelance or in a part-time position for a number of businesses at the same time.
David Gormer, a portfolio financial director who also runs Square Mile Accounting, explains: “Companies are becoming more savvy and considering fractional C-level hires. Not only do they avoid the high salaries of a full-time hire, but they also avoid dilutive effects of giving away precious share options, at least in the short term.”
Describing his portfolio role as more satisfying than “just being an accountant”, he says the job includes being able to understand the business model and sensitivities, mapping these out so the chief executive can understand the impact of any decisions he or she makes.
“You get to really work with the business owners to help them make their dreams a reality. It enables me to have a greater impact as I’m involved in strategic conversations at board level and own the finance function from end to end,” says Gormer.
“Invariably issues crop up on a week-to-week basis, such as funding rounds, devising staff incentive plans, diligence on potential acquisitions and so on. I take the pressure off the CEO as they don’t have to muddle through trying to do a DIY job.”
Working with more than one company may, however, throw up ethical challenges. Gormer says: “Issues with portfolio CFOs can include them also working with competitors, having proprietary knowledge gleaned from prior engagements and conflicts with potential referrers of business, for example investors.
“Also, occasionally, founders may work contra to minority investors’ interests, the very investors who may have referred the CFO to the role in the first place. Safeguards include hiring regulated professionals, such as ICAEW [Institute of Chartered Accountants in England and Wales] members who meet a strict ethical code.”
Confidence is key among a portfolio of skills
John Miller, chief operating officer at Addition, a London-based financial services firm offering outsourced CFO services, believes the key areas a portfolio CFO focuses on are not too dissimilar to a full-time one, including financial management and strategic planning, forecasting and budgeting, tracking performance and key performance indicators, and cash-flow management.
But he says: “One of the key skills to possess and provide to your clients for the relationship to be a success is confidence. When it comes to numbers, the CFO’s analysis and guidance needs to be true and actionable for the client on the journey to achieving their goals.
“However, due to the portfolio nature of the role, this is a challenge. Dipping in and out of several businesses means focus cannot be 100 per cent sole focus like the clients who live and breathe the business every waking hour.
“Therefore, it is about building solid advice on the facts of the business and I have found that providing experience of how these events have played out in historical scenarios really helps clients understand ramifications.
“Failing that, it is about drawing on the diligence disposition of a CFO to research, investigate and provide insight, as well as drawing on the network of contacts.”
Flexibility can encourage a diverse pool of entrants
While a portfolio CFO can be a stepping stone for someone looking to build experience in a chosen niche, develop a track record or grow a network, it can also offer much-needed flexibility and freedom, including working from home, and picking and choosing who to help.
Rachel Armstrong, a finance business partner delivering an outsourced CFO function at MAP, accountants and advisers to the digital creative industry, currently has a portfolio of 18 clients and explains it is important for her to work with businesses “who share my ethics and values”.
“Empathy with the values and goals of each individual business is crucial. Your idea of success may be different from your client’s ideas and so it’s important to get aligned to help them most effectively,” she says.
“Versatility and adaptability to deal with changing economic climates and emerging technologies is also important. Plus, entrepreneurs are always excited about the next big project and often the finances are not top of their priority list. Finding ways that engage different personalities with their financial data is a skill in itself.”
Given the lack of women as full-time CFOs, Armstrong also suggests this new way of operating could help redress the imbalance.
She adds: “The need to always be present to perform the role has also made it less accessible, but with remote or virtual working this will hopefully create a shift, making it a more accessible career path for women. Women are adaptable, natural problem-solvers and multitaskers, and so I believe they are ideal in the role of a CFO.”
Having spent two decades in a corporate career, Martin Mellor has now been a portfolio CFO for the past six years, taking on the role with “the aim of doing things more on my terms than the way the corporate world worked”.
Citing the variety of his role as one of the things he loves most, Mellor offers this advice to anyone thinking of doing the same: “Think about whether you want to specialise either in a sector or type of work, for example turnaround; I favour growth. Identify what your ideal balance is and where you think you will add value.
“The role is about more than just saying ‘yes’; ensuring decisions are appropriate and effective is a key element.”
Accounting for a virtual CFO
Dr Martin Lukavec, senior lecturer in finance at the London School of Business and Finance, assesses the trend for using portfolio or virtual chief financial officers.
He says: “For a lot of small businesses, it is difficult to make financial decisions. This might be especially important to many businesses because CFOs are capable of identifying macroeconomic threats on the horizon, especially right now.
“Many business owners simply have no idea what their order books will look like in a few months, so this level of advice has become even more important in the turbulent times we are living through.
“There are some problems with the set-up, of course. A virtual CFO has incentives very different from a traditional CFO. Most importantly, their job is not connected with the fate of the company they are advising.
“CEOs are often people whose main instinct is to push a deal through. In doing so, CEOs might, for example, not care so much about excessive leverage (too much debt) or to favour lower interest rates at shorter repayment schedules. And for any CFO, what is too much risk and what isn’t is always a thin, arbitrarily chosen line.
“A good CFO can foresee these trends, a skill that is invaluable to big enterprises as well as small ones.”
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