As your business grows, you shift from being a service/product provider to a capital manager. The shift is gradual but represents a significant challenge if these aren’t skills you’ve developed or have any aptitude or interest in. Most often the solution to any skills gap is to bring in expertise, which for capital management, is someone with financial credentials to become or act as a ‘Chief Financial Officer’ (CFO).
Ten years ago, the establishment of a CFO role was an obligatory step in breaking through the ‘small-to-medium’ glass ceiling and corporatising a growing business. However, the landscape has changed.
XERO, and other innovative accounting software, has disrupted everything. Use of a cloud based central ledgers reduces the need to hire finance staff. These functions can be more cost effectively outsourced, and in real time. You’ve already engaged an accountant to lodge BAS statements; it should be an easy adjustment for the agile accounting businesses to provide an ‘outsourced finance department’.
Outsourcing some of the finance functions, such as payroll, inventory management and capital allocations, results in your business getting an experienced finance manager, affordably, without the burden of another mouth to feed. Additionally, this outsourced finance manager is more akin to a partner than just another employee, greatly improving your on-boarding of capital management skills.
The Business lifecycle – and how outsourced finance functions might work
As a start-up, you’ll keep costs lean and use professional advisers as little as possible. Depending on how much interest or expertise you have you probably have the time to tackle things yourself and wear many hats, even that of budding accountant or CFO.
Sometimes things just take off. You win a contract or suddenly half a dozen pitches roll in the door. You naturally bury yourself in that work ‘producing the goods’. Things start to get hectic but it’s still too risky and expensive to hire someone to manage the finances in house. You start to lean on your accountant, and maybe an outsourced bookkeeper, to pick up the slack.
Survived the first few years
You’ve nailed those pitches and winning work is becoming a more regular occurrence. You have hired some staff to help to deliver your services or products. You should have handed over a lot of the responsibility for bookkeeping by now. You’re still a lean business but you’ve got a bit more skin in the game and start to consider some longer term investment decisions. Do you raise capital or credit? Have you retained some earnings? Are you reviewing partnership/shareholder agreements and other structures?
Is it time to bring in a CFO or do you dive a little deeper with the accountant? – much will really depend on how the relationship has gone to date, as well as your skills, growth ambitions and the skills of the accountant and how much you have utilised financial technology.
So you’ve reached the tipping point. Things are growing and there’s no avoiding some of the pitfalls (or benefits) of a growing business. With a larger and growing business, it is almost impossible to avoid hiring in house expertise such as a CFO, HR, finance and marketing departments. You might actually find that your accountant’s role in the day to day of business management winds-down and that relationship with your accountant shifts to become more focused on structuring your growing personal wealth needs.
The Take Out
It’s a great time to be starting a business. The internet introduces you to a global market place, technology has streamlined the pesky administration tasks and with record low interest rates it has never been cheaper to finance new investment.
Take advantage of agile business services that can support your growth. CharterNet and Nudge Accounting are just two providers we’ve come across that seem to have nailed what we are talking about (we have no association with either). They’ve adapted their businesses from the traditional accounting model to leverage XERO and provide the outsourced finance and CFO style services to many successful businesses. A growing number of accountants have jumped on this opportunity.
Small investments in the right software and advisers will take you further along your business journey than at any time before.
By Matt Vickers CFP®