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Tech insights: Outsourcing Financial Management: The Perks of a Virtual CFO
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Outsourcing Financial Management: The Perks of a Virtual CFO

08 March 2019, by Helené van Tonder

OutsourcedCFO is a Cape Town-based financial management boutique that gives emerging companies access to the skills typically associated with a Chief Financial Officer (CFO). Young companies often do not have financial experts on their team and this can limit their potential to move fast, scale and attract investment.

In this Q&A, Co-Founder and Managing Director Louw Barnardt talks about the common mistakes emerging companies make when it comes to financial management.

In a nutshell, what problem are you solving?

CFOs play an important strategic, forward facing, decisionmaking role in teams. They have to ask: Where are we going to be five years from now? What are the details of the financial model that will get us there? How should we navigate to get there? What do we have to do to attract finance? Is our current burn rate sustainable? Is this the right time to hire a senior employee?

We play that role for companies who don’t yet have CFOs and help them move to the next level. Our team offers a variety of financial services, specifically to emerging tech businesses: strategic financial planning and management, cloud accounting, compliance management (company secretarial and taxes) as well as assistance with fundraising.

What are the common mistakes or misconception about financial management that you encounter?

In general, people underrate the value add of the finance function. Founders often wing it for too long and don’t recognise the value of solid expertise in this field.

In terms of mistakes or misconceptions, these are the things we mostly encounter:

  • Cash flow management: It’s really easy to run up a burn rate that is not sustainable. That can put you in a situation where you have to sell shares, raise debt on bad terms or simply fold. All our clients ask about cash flow management and our workshops are always oversubscribed.
  • The depth of the field: Companies generally overestimate the abilities of a single accountant. They expect to find one person that can do everything a company needs in terms of financial management. As a field, it is much deeper than most people realise. Monthly bookkeeping, compliance, smart tax management and structuring, raising funding, reporting to investors - doing all of that requires a lot of skill.
  • Directors’ responsibilities: Young companies are often unaware of the responsibilities of directors in terms of the Companies Act. It places quite a big burden on directors in terms of the finance and tax of a company and that can cause a huge personal liability issue - directors can get into significant trouble if they don’t understand the Companies Act.
  • Financing your company through SARS: SARS’ interests and penalties are incredibly expensive - not even loan sharks charge that much. If you run into a situation where you cannot pay VAT, PAYE or Companies’ Tax, it’s rather easy to get into a situation where SARS basically finances your company. It so often happens that companies pay out salaries, but cannot pay the payroll taxes two weeks later because they don’t have any cash left. The same happens with annual companies’ taxes: A company makes a huge profit this year, they spend all the cash and six months later when they have to pay the tax on that profit, they can’t. We’ve seen companies tank because of that.
  • Raising funding: Founders can spend months trying to raise funding - sometimes with no success. The problem is that the energy they spend on fundraising is energy NOT being spent working in their companies. One of the main reasons they fail at fundraising is the inability to convey the value of their company to potential investors - they simply don’t know what investors are looking for.

Who are your clients?

Our clients are mainly emerging tech companies - companies with an annual turnover of between R1 million and R100 million. We are also very focused on technology and innovation as an industry, with about 85% of our clientbase falling in that segment.

CFO-services are not necessarily needed in the early days of a startup. You first have to get market validation and some kind of traction or investor backing. But when you near the R1 million annual turnover mark, things can quickly become more complex.

It’s typically the point where the company gets too big to just run in the founder’s head. Financial decisionmaking and cash management becomes more strategic: You would have a couple of employees, fixed expenses and capital layout. So there are different types of things to navigate.

Why do emerging companies in South Africa need CFOs?

Entrepreneurs and financial experts often sit on opposite sides of the personality spectrum. That makes for a very good balance in a team eventually, but it also means that founding teams often don’t include a financial expert and therefore end up neglecting the financial management of their young company.

Emerging companies also typically don’t have a full-time financial team - either because they can’t afford it or because it’s not a priority. Even if someone takes proper care of their bookkeeping (in house or outsourced), they mostly don’t have a financial director or manager.

South Africa has exceptional entrepreneurs - highly skilled people who are able to bring great products and services to market. But doing that is different from successfully setting up and scaling a company. Our team can play that part - providing the skills needed for strategy and finance - and we think we can add a lot of value to South African entrepreneurs, helping them to systematically scale their companies.

How do you assist startups with fund raising?

We offer a Funding Readiness Gap Analysis (at a cost of R9 500) during which we spend 8 hours to analyse a company and then provide them with a 10-15 page report. Part of the report is a fundability rating between 0 and 100.

  • A score of 70 and higher means you are ready to raise funding. Our team can then advise on which type of investors to look at and even introduce you to investors.
  • A score between 40 and 69 means you still have some internal work to do before you start raising. We would then work out a plan for the company to get to a score of 70 and assist them where necessary.
  • A score lower than 40 means you are not ready and that the management team themselves have lots of work to do.

In the last three years, our client base has raised more than R300 million worth of seed and growth investment. With that, our team gained a hell of a lot of experience: We know what a due diligence looks like, what you need in an investor pitch, and how you should position a deal.

What software do you recommend to your clients?

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