Saturday Essay: How The Flexible Finance Revolution Is Empowering SMEs
When it comes to multi-tasking, entrepreneurs take the prize. Wearing a vast array of hats is pretty much a given. However, not all roles can be juggled - which is why a growing number of startups are choosing to outsource vital business tasks.
According to recent reports, accounting is the most-commonly outsourced task by SMEs. In fact, 40% of small businesses in the UK outsource their accounting services to other companies.
Considering the average self-employed person spends 12 working days per year on tax compliance and financial admin, these figures make sense. However, SMEs aren’t the only ones saving time.
Accountants are shifting to cloud-based software in droves. Programmes like Xero, with its multi-tool integration options, are redefining the relationship between external finance teams and clients.
So what does this mean for SMEs?
Previously, small business owners got the dregs of the financial services pool. Large companies with deeper pockets built strong in-house finance teams to forecast for growth. Outsourced accounting, on the other hand, meant outdated paper systems, overpriced fees and often only the most basic of service.
As a result, many SMEs turned to accounting software, preferring DIY bookkeeping to mediocre financial support. However, even one missed deadline or miscalculation can result in hefty fines from HMRC - not to mention the stress that comes with keeping on top of new tax guidance whilst running a full-time business.
With the digitisation of everything finance (from fintech to MTD), accountants began to evolve. The ability to access real-time information - anytime and anywhere - means the days of endless excel tables and shoeboxes stuffed with receipts are over.
It’s not just bookkeeping that’s gotten an overhaul, either. The expert financial insights and support that were previously reserved for corporate giants are now more accessible than ever for SMEs. The new face of outsourced finance isn’t just digital - it’s also flexible.
According to Glassdoor, the average annual CFO wage in the UK is £121,443 - too big a cost for most small businesses to absorb. However, the need for insights and advice to help them plot a course for growth remains.
Here’s where Portfolio CFOs come into the picture. This increasingly attractive dynamic is transforming SME finance.
What Is a Chief Financial Officer?
A chief financial officer (CFO) is a senior executive who manages the financial actions of a business. Typically, they:
Track cash flow
Help with financial planning
Analyse and act on financial strengths and
A CFO oversees every aspect of your company’s accounts, finances and compliance. Their job is to ensure informed decisions are made to support the financial wellbeing of your business.
What is a Portfolio CFO?
More and more startups outsource their financial management to a third-party CFO. These high-qualified individuals usually work with agencies or freelance. They’ll manage multiple company accounts – or portfolios – at once. Typically, they’ll have extensive experience in their field, and offer dedicated services at a much more affordable rate.
Why are Portfolio CFOs so popular
Startups are becoming increasingly attracted to Portfolio CFOs. But what’s the chief driver behind this surge in popularity?
Startups don’t require a CFO on a full-time basis, as the cost is arguably not worth it. At £80k – £150k+ for a full time CFO in a small to a medium company, this expense is often hard to justify.
Of course, hiring a portfolio CFO is still an expense. However, the investment is well worth the cost. The aim for all back-office roles - like finance - is to pay for yourself. Having a CFO on a part-time basis makes this easier for SMEs. At £3k per month, it’s almost a third of the cost, whereas the benefits will be significantly higher than a third.
Are Portfolio CFOs similar to Accountants?
As your business grows, you’ll likely be advised to hire an accountant. This is definitely good advice. Accountants will help with your tax compliance, bookkeeping and reports. But once the ball gets rolling faster, a CFO can work wonders for growth.
To appreciate what each of these roles brings to the table, you need to understand what they do.
An accountant or bookkeeper is focussed on implementing the rules and guidelines set out in the accounting standards for companies. This includes ensuring your company meets its statutory and tax obligations, accounts filed, and returns processed.
A CFO, meanwhile, is a strategic position in a company with the aim of driving the business towards its goals.
CFOs need a particular set of skills that accountants generally don’t have. One of the main skills needed is agile thinking – the ability to understand the ramifications from decisions very quickly.
For example: should business A start offering their online english tutoring business to China? The Portfolio CFO needs to quickly think about the ramifications of selling in China and the tax implications. They need to consider legislation, marketing the service in a different language, hidden charges and how to monitor progress. The role of a CFO goes beyond following the letter of the law – it involves creating strategic opportunities for growth.
Ultimately, an accountant and CFO work hand in hand. It’s a symbiotic relationship, which is why at Addition we have a team made up of portfolio CFOs, accountants and bookkeepers. This gives our clients access to both elements required and is more economical. There is no point in paying a CFO day rate to complete bookkeeping tasks.
What does a Portfolio CFO do?
They might not be a full-time employee, but make no mistake: portfolio CFOs are definitely on your team.
During their contracted hours, a portfolio CFO will work as strategically and diligently for you as any of their full-time colleagues.
Here are four of their main areas of focus:
What Can a Portfolio CFO do for your small business?
1. Financial Management and Strategic Planning
Your portfolio CFO will implement controls so funds can be spent easily, but with solid regulations. They’ll help you determine where the business wants to go, and what it needs to get there. Finally, they’ll turn this understanding into a financial strategic plan.
2. Forecasting and Budgeting
This involves breaking the overall strategic plan into nuts and bolts. Your CFO might ask questions like, “How much are we going to spend – and hopefully earn – on all elements?” They’ll help adjust your budget to reflect this.
3. KPI and Performance Tracking
KPIs are vital to financial growth. A portfolio CFO will implement automated ways to periodically track performance to plan. They’ll help answer questions like, “What do we need to do more of, less of, or differently?”
4. Cash Flow Management
Cash is king for all startups. Staying on top of what is coming in and what is going out is essential. Your portfolio CFO will help you utilise your cash-flow efficiently.
The best fit for this service are small to medium businesses - especially ones who are focussed on operational delivery direct to customers.
What constitutes ‘small to medium’? Once a business gets to a certain size - say, 50 full-time employees and £25m+ revenue - a full-time CFO is more economical. Someone who is fully focussed on the CFO role would be able to add the most value. Businesses who are smaller than that may not get the full benefits for the cost of a full-time CFO.
Portfolio CFOs can boost SME growth in many ways. For example, you could be a restaurant group with several sites. You’ll obviously have experience when it comes to running the restaurant profitably. However, a portfolio CFO could help with raising money to open a new site.
Another example would be helping an online tutoring startup which offers global English courses to manage their taxes. Or maybe you’re looking to sell your business. A CFO could support with financial reporting to give to potential buyers, as well as projections to support the valuation.
All of the above examples are in need of good financial management and leadership. However, they aren’t large or complex enough to require a full-time CFO within the business. But in order to capitalize on these opportunities, a part-time CFO would work wonders.
Portfolio CFOs aren’t just the future of SME finance. They’re the present. More founders than ever are using this new partnership to level the financial playing field - and score big wins.
Of course, as with any partnership, finding the right fit for your business is essential. ‘Portfolios’ are client cases, and even the most dedicated part-time CFO will need to know how to juggle their attention and skills.
The Addition Team
The biggest challenge as a Portfolio CFO is staying on top of multiple clients and prioritising effectively. The way we get around this at Addition is by having a team of portfolio CFOs to share the load. We also have a group of highly qualified accountants and bookkeepers to ensure the financial information is clean, robust and clearly presented. That way, instead of using your allotted time to put out financial fires, we’ll be helping you plan your company’s next steps for success.
If you’ve got a goal for your business you’d love to achieve in the next 12 months, we can help transform it into an actionable finance plan. Not only that - we can help you turn that plan into reality. Talk to us about your business today. There’s nothing we love more than hearing about your goals, and figuring out how we can help you get there!