As companies continue to grow, finance becomes a much more difficult aspect of the business to manage. Founders find themselves at a place that’s beyond the simple bookkeeping type of way to look at finances, but hiring a full-time Chief Financial Officer (CFO) at this stage may seem to be too much of a commitment or simply too expensive. This is where outsourced CFO services can help. One of the most frequently asked questions from the founders of startups is “What does an outsourced CFO cost, and what does an investment in CFO services actually provide?”
An understanding of outsourced CFO service’s pricing and value to startups helps founders to make educated financial decisions without breaking the bank.
What Is an Outsourced CFO?
CFO services are essentially a form of financial leadership provided to startups at various times throughout their growth trajectory. An outsourced CFO typically provides financial services to multiple companies, providing strategic financial guidance that is customized for the startup’s stage of development and specific needs.
Some of the standard duties of an outsourced CFO will include things like financial forecasting and analysis, creation of budgets for the company and projections of its cash flow, tracking of key performance indicators, preparation of financial reports for investors, assistance with fundraising efforts, and providing support when making long-term strategic decisions. For the founder of a startup, outsourced CFO services tend to create a bridge between the basic accountant and the C-level financial leader.
Why Startups Choose an Outsourced CFO
As a startup grows, the need for financial expertise increases as does the speed with which the business environment changes. Hiring a full-time CFO in the U.S. can be a very large financial commitment for a business and an expensive salary and benefit offer to a prospective employee.
By hiring an outsourced CFO for their startup, founders can receive the expertise of a senior level CFO without the commitment of a full-time salary. Additionally, hiring an outsourced CFO provides a level of flexibility, allowing founders the ability to adjust or increase financial support as their company grows, while ensuring they are staying within a reasonable cost structure.
How Outsourced CFO Pricing Is Structured
There are many ways to set the price of an outsourced CFO, but typically there is a pricing model for each of the following method(s):
Monthly Retainer
The monthly retainer is the most common way startups to engage an outsourced CFO. This method provides continued access to financial expertise at a fixed monthly price. The scope of the work is typically established up front, but adjustments can be made to the scope as the company changes.
Hourly or Project Fees
Some startups choose to work with their CFO on an hourly or project basis. This structure works well for short-term relationships with their CFO. Examples of this type of work include preparing to raise capital and developing financial models or performing due diligence for a planned acquisition.
Tiered Package of Services
A tiered package of services typically gives startups an option to select the level of service that best fits their growth phase. This service level is determined by several factors, including the amount of involvement being requested, and whether a start-up has begun to scale in size. Therefore, earlier stage companies can select a level of involvement that is smaller scale than other companies that are further along in their growth phase.
Typical Cost Considerations in the U.S. Market
The pricing structure for outsourced CFO services in the U.S. market can vary greatly. Pricing ranges and total dollars quoted for outsourcing CFO services will be based upon several different factors, including a startup’s size, a company’s planning processes, the nature of the startup company’s business, and the terms of the startup company’s financial agreements with its investors.
Although there are different variables that will affect the total time and dollars required per month for outsourced CFO services, the average monthly fee for outsourced CFO services for startup companies varies based upon:
- The average number of total hours of service required per month
- The average depth of strategic involvement needed
- A startup company’s revenue level and operational capacity
- Its investor and reporting relationships
Even though all these fees should be considered an investment for the company, an excellent CFO will usually help the startup company miss or avoid costly errors, will enable the startup to generate more revenue than what will be lost during operation, and will increase the company’s overall value.
Key Factors That Influence Outsourced CFO Costs
There are several factors to consider when looking for an external CFO for a start-up company. For example, the stage of development of your company is critical when looking for an external CFO service. An early-stage start-up will typically have minimal financial foundations (i.e. budgeting, tracking burn rates and basic reporting). Conversely, later stage companies will often require more complex high-level forecasts, investor relations and strategic planning. Thus, depending on the stage of a company’s development, the level of complexity will determine the required CFO time and expertise which can increase the cost of external CFO services.
Outsourced CFO vs. Full-Time CFO
Complex operations will also require an increased amount of time, expertise and higher-priced services provided by an outsourced CFO. This is due to the increased amount of time spent managing more than one revenue stream or being international in nature. Many start-ups will have complex operations and will therefore need a higher level of service and therefore will incur a higher price for external CFO services.
Outsourced CFO services for start-ups in the United States represent a lower overall cost, to some extent, when compared to hiring a full-time CFO to manage the company’s finances. For most start-ups in the U.S. market, the size of their investment into hiring a full-time CFO is not warranted by the level of revenue they currently have. An external CFO can provide similar and often better strategic advice at a lower price and thus be a better value to the start-up. The value of the external CFO can be maximized by only using the level of service required for the stage of development of the company and by there being a lower cost to the company during the start-up and growth stages of the company.
Additional Benefits of Outsourced CFO Services
In addition to providing financial leadership, outsourced CFO services can provide additional benefits that can often outweigh the cost of these services to start-ups. The advantages of an external CFO include:
- Improved cash flow visibility and runway planning
- Increased confidence from investors
- Improved financial control internally
- Increased ability for founders to concentrate on product and growth rather than financial issues
When Should Startups Engage an Outsourced CFO?
Start-ups should consider engaging an outsourced CFO at the following points:
- Financial decisions have begun to impact long-term strategy and execution
- Managing cash flow is critical
- Preparing for fundraising or accelerating growth.
- Founders need better insights into financial conditions.
Using an outsourced CFO at the right time can significantly enhance decision-making and improve financial stability. So how much will it cost to have an outsourced CFO? The answer is directly related to the stage, complexity and goals of your start-up. However, the value proposition remains the same: receive experienced financial leadership without the expenses associated with hiring a full-time executive.