What are Virtual CFO Services?
Small and medium enterprises usually cannot afford a whole time professional accountant to head their finance function. They engage a part time accountant, or outsource the activity to a professional firm, which offers accounting services. While the term accounting services is well known for quite some time, Virtual CFO Services gained popularity, because of:
- Growing role of computers in handling accounting and related processes with ease and efficiency,
- With Process Focus, entrepreneurs are quickly identifying areas which can be handled easier and better through outsourcing, examples: Payroll Processand Accounts Payable.
- Geographical distribution of operations, making it cumbersome to set up accounting organization at every location and
- Outsourcing being considered as a smart business practice to fill any gaps in the skillset within the organization. This happens in large enterprises.
What does a typical Virtual CFO engagement cover in a small or medium enterprise?
- Review and setting up basic financial processes and controls
- Financial Operations: Processing Vendor Invoices, Employee Reimbursements, cash & bank operations, Invoicing and Receivables management
- Processing Payroll and crediting salaries to employees’ bank accounts
- Direct and Indirect Tax compliances including reconciliations and filing of related returns, in line with a Compliance Calendar
- Maintaining books of accounts, recording transactions, preparing monthly, quarterly or year-end Financial Reports and providing details for statutory or tax audits.
What is the relevance of Virtual CFO Service in large enterprises?
Before we identify such areas, we need to understand the difference between Financial Accounting and Management Accounting. This will help us to appreciate the scope for Virtual CFO Services in large enterprises.
Typically, what we see in services we have listed above for small and medium enterprises cover Financial Accounting. Management Accounting could be broadly represented under two further sub-headings:
Planning: There could be a 3 year Business Plan, where an organization could look at certain strategic aspects on how to prepare for reaching its long term goals. Annual Budgets also fall into this category. A Quarterly Operating Plan is gaining significance in organizations focused on closer monitoring of operations to achieve business objectives.
Management Reporting: Also known as MIS, Management Reporting uses the same base data and information generated through Financial Accounting, reorganizes, regroups or structures the data, in line with the plans like Annual Budget or Quarterly Operating Plan, to highlight variances to help in performance reviews.
What is the difference between Financial Accounting and Management Accounting?
Financial Accounting principles are universal and are uniform for all organizations. They are determined by the statute and the local laws applicable. On the contrary Management Accounting is entirely dependent on the nature of business, and the expectations which the management has for driving business with the accounting information available.
How do you prepare for offering Virtual CFO Services in SME sector?
We have seen what is covered in these services. Most of the subjects are in the professional course curriculum. You only need to keep updating your knowledge as changes take place through legislation or equivalent pronouncements. Even systems orientation is getting addressed in the curriculum. Only suggestion I can make is that we need to be “Process Focused”.
How can you prepare for offering Virtual CFO Services in Large Organizations?
By the term “large” I am referring to enterprises with a turnover over Rs 100 crores pa or employing more than 500 employees.
In some of these organizations, Finance Heads confine themselves to the boundary of “books”. They are all the time pre-occupied with Financial Accounting related tasks and compliances, that they hardly think of contributing in Management Accounting areas. It is in this case that CEOs look for external help.
Once you get such opportunity, you need to understand the business of the organization, its business model, its important processes, critical success factors, how the organization is conducting itself from the perspectives of “efficiency” and “effectiveness” of its operations, its governance style, and achievement orientation, people practices and financial prudence and so on.
Planning and Management Reporting offer avenues for helping such organization in performance improvement.
Other important factor is designing systems to generate relevant reports on a timely basis. Here inefficient operational practices, like employees submitting travels claims months after concluding travel, or vendor invoices getting misplaced and not provided for in time. For unlisted entities, where external financial reporting is not mandatory, practice of preparing financials once a year, that too months after the year end is quite common. Of course, GST is compelling organizations to be more prompt in bookkeeping now. Thich needs to extend to complete financial reporting.
Earlier, through this forum, I had written articles on different topics like Financial Applications to help in achieving Business Objectives, How Internal Controls manifest in an Organization and How do we design Effective MIS? Such articles will help in strengthening related knowledge base. Apart from these articles, please read my book “Translating Operations into Money” a collection of my actual work experiences over 3+ decades, narrated as business case studies. The book is available for online purchase at Amazon. Please visit www.operationstomoney.com to know about the book.