Virtual CFO

What is Virtual CFO

Virtual CFO means an outsourced service provider who offers the expertize of a full-time CFO at fraction of the cost. Virtual CFO services are extremely flexible as the engagements are driven the by the client’s requirement.  The services are typically charged on monthly basis or on the per visit basis

That’s precisely the reason the Virtual CFO services are growing popular and are sought by most of the companies. Companies of all sizes and in various industries avail Virtual CFO services as a CFO can solve lot of challenges faced by the organization.

Below are some of the instances where small and medium sized companies need the services of Virtual CFO. We also show how the CFO delivers the work in such situations

When the need of Virtual CFO does arise?

When the business growth suffers?

Most of the businesses when they reach a certain point get stuck.
Funny part is if you ask the owners of the company they will give following reasons:

1. Too much competition
2. Lack of Funds
3. Lack of good business deals

And the list goes on and on…

But let me tell you the no.1 reason businesses get stuck
“They are playing not to lose”

Companies want to protect their assets, their goodwill so much that they tend to forget that only way to grow is to expand and go after the vision

That’s why it’s common to see growing at break neck pace for first five years and then stagnating.

So if your business is in the similar position

What you should do next?

Here are following steps a CFO helps you take:

1. Make a bold and aggressive vision for your company for next five years
2. Come up with an execution plan to achieve that
3. Prepare projections, budget that clearly lays out the financial position of the company
4. Determine the cash flow requirement  to support the growth
5. Monitor and measure the progress which the company is making

Proper Usage of Funds

What’s the first thing business owners do when they run out of money?

They go the bank for the loan and solve the problem temporarily in the process

So my question to you is this a good or bad loan?

99.9% of times loans in such scenarios tend to be bad as they add to the pressure which the business is already facing
Such loans increase the interest cost and Cash Outflow

if you analyze closely the need for the loan arose because of the following reasons

1. Bad Receivable management
2. Low Inventory Turnover
3. Thin profit margins

Unless the above problems are resolved such scenarios will keep happening
on other hand… a good loan helps the business to grow. Examples are:

1. Loan taken to invest in new Plant and Machinery
2. Loan taken for expanding sales and marketing activities

Most of the times business owners are so caught up in running their business, they do not get time to instill financial discipline in the business process and end up losing lot of money and taking lot of unnecessary headaches in their business.

Virtual CFO helps you to instill financial discipline in the business

Over-Come Financial Issues in the Company

There are many reasons why companies face cash-flow issues in their business. It could be attributable to

• Absence of collection process
• Unexpected costs
• Bad Decisions

Following are some of the things a CFO does to set right collection process:

• Prepare the list of customers by invoice no and date of issue to know the over-due. Then assign such customers to accounts team, accounts manager or where the account is big to the business owners itself
• Once the follow-up begins, the real reason why the customer is not paying will come to surface.
• It could be on account of bad product or service not delivered as per expectation.

Following steps are taken by a CFO to increase profitability:

• Measure the profits at the customer level
• Measure the profits at the product or service level
• When measuring the profits, also attribute interest cost, this will show the real profitability
• Calculating Life Time Value of the Customer (Average transaction price*No. of times customer buys)
• From life time value of the customer minus the acquisition cost and cost of delivery or product
• If this number is positive then probably its worth continuing the business with the customer else that customer need to be phased out
• If  this is not done,  loss contributing customers will eat away all the profits
• The above exercise will be supplemented by cost reduction program with targets to achieve cost reduction in next one year to five years
• Availing tax incentives offered by State government as well as Central Government. Lot of times, after availing tax incentives cash flows increase by 5-20% depending on the business model and the nature of the industry
• Creating a strategy that takes into account evolving technologies like AI, IOT or 3d printing so that company is well prepared for the changes to come soon in the future

When there is a need to Increase Wealth and Net-Worth of the Company

Businesses are started to make profits as well as create assets for the business owners.
However, in day to day running of the business, stakeholders take an eye off from this bigger picture and get stuck.

Here are some of the steps that CFO takes to increase the net-worth of your company:

1. Finding what is the net-worth right now.
2. Targeting net-worth goal for next two-three years
3. Create a Business plan around it
4. Document the sales growth and related expenses
5. Relentlessly review so that you hit the targets

Manage the Budgets and enforce decisions in the company

Below is a classic situation, when the CFO steps into the crucial decision making at the company

The tale of Ramesh (CFO) controlling the budgets in the company

It was usual Monday morning in the office.
Then all of sudden Sanjay (Head-India Sales) stormed into managing director office. He frustratingly said to the director, Ramesh (CFO) is a control freak.

Ramesh is not letting me do my work; he is not approving my team’s requested expense.  I am really really angry at him.Immediately Managing director called Ramesh in his cabin and asked him to explain his side of the story
Ramesh began…

Sir… In last 6 months, the sales team spent close to 80 lacs on various conferences, exhibitions and various other sales activities. We have only acquired only three customers in the last six months.

The life-time value of this customer based on our past data is expected to be INR 18 lacs only.  This has resulted into loss of (62) lacs. Sanjay is aware of this numbers, but despite knowing all this, his team requested approval of INR 17 lacs for an event in Singapore.

I rejected the request and conveyed the reasons to Sanjay

Now you tell me Sir, whether I am right or not?

After Listening to the both sides, Managing director told Sanjay, we cannot spend any more money on sales acquisition activities this quarter.  You need to work on the existing deals in the pipe-line

Sanjay left the office with expression of rage on his face
So what’s the message?

Situations like this are common where spends have to carefully monitored and tracked. In such scenarios, a CFO will stand for the company and convey in financial terms what is good or bad for the company.

He acts like a custodian of the finances of the company. Virtual CFO helps to enforce strict decisions in the company

Ensuring Laws are complied on time

Do you know the first thing the companies do when they see a big hole in their working capital?
They start deferring the statutory payments like

Before you know the amount piles up and few lacs turns into crores of payout.

Why this habit?

Unlike suppliers, the department does not call you for the payment of tax every second day, therefore business owners think that they can get away with not paying taxes to the government in time

but the fact is more you delay, the more liability adds up over the period of time.
Before they realize they get entrapped in this cycle and gets tough to get out of it

we have had clients who have borrowed money only to pay taxes.

How CFO helps

• Prepares a checklist of compliances to be followed along with due date
• Works with various members across the company to compile the relevant data
• Prepares a forecast statement so that management is well prepared to pay the taxes

Helps to review the decisions objectively

Lot of times, companies makes decisions and sticks by it; no matter what
they are of the view of that some-how they will prove that their decision was right.
So as a result they keep pursuing, invest lot of time, effort and money, even though that project is making loss

why does company behave in such a manner?

The underlying reason behind this is a sunk cost fallacy.  Since the money has been already spent, it becomes very difficult to stop the project in between.
Also, most of the business owners do not like to be proven wrong.

So the cycle of hope and spending continues, driving the company resources to zero

this is precisely the reason, most of the business owners continue to sell the same products or services, continue to sale to same unprofitable customers, have the unproductive employees on board and the list continues.

How CFO helps management to take a step back and review decisions:

• Evaluate the products or services dispassionately
• Map the current profits, life-time value and expected market trend against each of these product line or service-lines
• When launching a new product line or service, monitor the progress closely over a period of at least three months or six months or even longer period depending on the nature of the product or service
• The ones who are doing well, he suggests to retain and kill the not performing ones
• Drives culture in the company to question the underlying assumption when it comes decision making
• Have a business plan that is flexible

Transforming Company Fortunes

Illustration of CFO helps in transforming the company-Mission Turnaround –INR 215 cr by 2022

The directors of Lovet Private Limited were in gloomy mood. They finished reviewing the financials of year 2018-2019. Below is the summary of the financials:

Sales: 129 cr

Gross Profit: 21cr

Net Profit: 3cr

Though the company made profit of 3cr, it was way below the expectation. Despite increase in sales by 23% over the previous year, the profit infact came down by 5cr

There was lot of soul searching to do

Keeping their emotions aside the board asked CFO Nataraju to come with the turnaround plan for year 2019-2020 in next two days.

Natraju laid down his plan starting with following statement

“No doubt the company made significant progress as far as growth is concerned, but this has to be sustainable, keeping this in mind, I present to you my turnaround plan”

The turnaround plan is going to be divided into buckets. One is short-term wins and other one long-term goal.

Following will be covered under short-term win:

Repaying all the high interest cost loan that is eating away the profits

1. Going hard after the customers, where debts have been outstanding for more than 60 days-Recovery needs to be made at the earliest or no business with them
2. Availing the tax incentives offered by the government, this will increase profits by 1.5% and cash-flow
3. Stop all the planned expenditure, where we do not see revenue in next two years

Following will be covered under long-term goals:

1. Pursue the strategy to reduce the material cost by 15% in two years’ time
2. Investing in automation wherever possible, we will create a special fund. This can reduce the people cost to the tune of 35%
3. Measuring the results at the product segment level
4. Tight budgets, no more expense unless it is justified with increase in revenue or increase in efficiency

He concluded his presentation if execute the above, I estimate that company turnover will be around INR 215 cr by financial year 2022 and we will have healthy profit of 40cr

What’s the message?

      The above example is a classic case of a CFO leading the ship of the company and steering in the right and progressive direction. If you get a good CFO, you are lucky, because he can turnaround the fortunes of the company

In reality most of the companies do not have cfo in board citing the cost as the major reason

When there is a need to build practical business forecast

The process of preparing budgets and projections for next one year to five year becomes a routine in the company, kind of a checklist that a company should do

Most of the companies fail to realize that business plan/projection determines how big the company will grow. Therefore this process should be taken seriously
What a CFO does in this regard

Make it a realistic one: Most of the plans paint glorified numbers, lacking substance, facts and numbers. He creates a model where the numbers are backed by the logic broken at granular level such as no. of leads, conversion rate

Relentless execution: Targets are broken into smaller chunks to achieve. Sales numbers have to broken-down to daily sales if possible else weekly. The theme of operational excellence is imbibed into the culture of the company where people take responsibility for achievement of numbers

Measuring business performance

What gets measured gets accomplished is a very old saying but does make lot of sense

this is the reason majority of the successful companies spend fortune on measure and tracking the key aspects of their business.

They know that by looking at the KPI’s in each area, they can tell how well the business is performing and take proactive decisions.

Following are some of the examples:

1. Performance indicators like Cost per lead, Cost of Acquisition, Conversion cycle in Sales and Marketing department.
2. No of deals in the pipe-line when it comes specifically to sales department
3. Average collection days, average payable days, working capital cycle, break-even point, customer profitability when it comes to finance department
4. Average production per day, order fulfillment percentage when it comes to operations department
5. Growth of the company vs. market share

Again these parameters vary from company to company and industry to industry.

In most of the small and medium sized companies, business owners are so busy in arranging funds to make payments to employees and suppliers, that they do not have the time to look at qualitative aspect in their business and as a result business does not grow beyond a certain point

That’s where Virtual CFO comes in, he or she helps measure business performance and give suggestions to enhance it

Assisting Startups to raise funds

When it comes to raising funds by a startup, CFO’S play a very important role in this entire process.

Some of the things they do are:

1. Preparing pitch decks for the investor presentation
2. Creating a business plan with cash-flow forecast
3. Working with investors to structure deal
4. Review the term-sheets
5. Ensuring statutory laws are taken care of when the funds come into the company

The raising of funds is not only limited to startups. CFO also helps mature companies to raise additional funds for expansion or to support the growth of the company.

What is the difference between full-time CFO and Virtual CFO

How do we deliver Virtual CFO Service?

As you can see, a CFO can do many tasks. Therefore, our CFO services are highly customized and are purely dependent on the business objectives of our clients.

Before ascertaining the scope of our services, we do following:

1. We have a discovery call or meeting to understand the client needs
2. Determine whether we can make impact on our client’s business
3. Once the above two steps are completed
4. We define the scope of the work based on the client problems and ultimate business objectives
5. This is further broken down into milestones with expected outcomes at each stage.

What is the Model of delivering Virtual CFO Services

There are two models as how CFO services are delivered

1. Remote Model: Under this model the CFO works with management or business owners remotely. The support is given by a telephone or email.  We update the client on weekly basis.
2. Hybrid Model: In this model, a CFO visits the client either weekly or fortnightly. Again this can be customized based on the requirement. This is also supplemented by phone and email support.

Do note when we take any engagement, we as a team deliver the services. The CFO deployed to the client is supported by resources as well as experts for the advice.

What is the Pricing of Virtual CFO Services

Full-time CFO’S are really expensive and at the same time difficult to retain.

Typically our CFO services come at 1/3^rd cost of full-time CFO and is dependent on the scope of the engagement model.

We have flexible pricing structures too. We charge clients on retainer basis or on per visit.

Our CFO services are extremely flexible and need not be long-term contracts. Our CFO’S can step into any situation and carry out the work. To know more about Virtual CFO services, contact us.