Virtual CFO vs. Traditional CFO: Which is Right for Your Business?

Running a small business can be just as tough as running a big one, but without all the cash and resources. And you know what? One of the most important things for any business, big or small, is making sure their finances are in order.

The finance function of larger companies consists of many elements: accounting, financial management, financial controls, and financial planning and analysis. They might have a CFO (Chief Financial Officer) to handle it all or focus on one part. But in smaller companies, it's usually the owner or entrepreneur who takes care of everything finance-related.

As the business gets bigger, it's going to be too much for the owner to handle all the financial functions alone. They can't be expected to do all the jobs they used to do when it was just them running the show.

When a small business reaches this point, it's time to think about bringing in a CFO. It's indeed a big decision that can shape the future of the business. Small businesses should be careful not to make the wrong choice here because it could set the business back and slow down its growth.

When thinking about bringing on a CFO, small businesses nowadays have lots of choices, and not all of them involve hiring someone full-time. A traditional full-time CFO is someone who works right at the company's location and is dedicated solely to that business, usually for a long time.

Instead of going the traditional route, small businesses have other options. They can hire a CFO part-time, bring one on for specific projects, or even use a virtual CFO who works remotely.

In straightforward terms, a virtual CFO is a service that offers the expertise of a Chief Financial Officer to small businesses at a price within their budget.

The types of services offered can vary greatly, but typically they are a plug-and-play solution for your financial oversight—everything from providing financial statements, key performance indicators, and trend analysis to dashboard development and oversight of accounting and HR departments.

So, this type of service is different from traditional part-time CFO services because virtual CFO services are often run by a single person with fewer expenses, which means they can offer their services at more competitive prices. A virtual CFO might work alone or have a small team of other financial experts.

A virtual CFO is a great choice for small businesses aiming to expand because they can get the financial guidance they need without spending a large portion of their revenue.

A traditional CFO plays a vital role in a company by engaging in informal discussions with teams like development and marketing to understand expected spending and returns. Then, they create a financial plan and budget for the organization and set up systems to track and report expenses.

In simpler terms, a traditional CFO takes care of the company's connections with financial institutions and decides where to invest its money. The traditional CFO keeps the company safe by focusing on reducing risks in different areas through insurance and other risk management solutions.

The chief financial officer (CFO) reports directly to the chief executive and the board of directors. They're usually responsible for financial analysis, planning, managing systems, handling investor relations, reporting financial statements, and ensuring compliance with regulatory agencies and tax authorities in most companies.

During times when companies carefully assess how to invest in the future, every hire becomes crucial. The debate over what type of CFO to hire—virtual CFO vs. traditional CFO—arises from the need to ensure that the company is financially supported at all levels.

Virtual and traditional CFOs are both capable of managing your finance function, but they take different approaches. Let's compare the two based on several key factors.

Both virtual and traditional CFOs are skilled at providing strategic direction and financial management for your business. However, the main difference lies in how they integrate this with their day-to-day financial tasks.

Virtual CFOs are often better at enhancing systems, optimizing processes, and implementing efficiency improvements because they have experience working with various businesses. They also tend to prioritize risk management and are skilled at creating and executing contingency plans, which is something traditional CFOs may not be as accustomed to.

Quality virtual CFOs usually bring more experience to the table compared to an in-house resource. Many of them are former business owners or traditional CFOs with extensive experience that's hard to come by in a corporate setting. This extra experience can be a huge advantage for SMEs.

Traditional CFOs are well-established in the field. They have a wealth of knowledge and usually possess a wider range of business skills compared to virtual CFOs.

However, their expertise is often found in the higher-level financial management functions, leaving a potential resource gap for the small to medium business owner in the more transactional accounting and finance areas.

Choosing the right CFO for your company depends entirely on your unique situation because every company has its own financial needs based on factors like industry, size, and growth potential.

In most cases, traditional CFOs are more suitable for large corporations because they need hands-on financial expertise to assess the current situation, analyze past trends, and forecast the future to develop a strategic plan for increasing revenues and profits.

An experienced traditional CFO has the ability to propel a company toward higher growth or, in the unfortunate event of a decline, stabilize and turn around the business. Their hands-on financial expertise, achieved through thorough analysis and strategic planning, forms the core competencies of a traditional CFO, as further elaborated in the examination of financial management and corporate governance.

To be honest with you, virtual CFOs are a good choice for small to mid-sized businesses. These companies often have considerable financial needs but may not have the resources to hire a traditional CFO.

Hiring a virtual CFO is a cost-effective method to access the professional financial management and guidance that a company requires. The cost of hiring a virtual CFO is comparable to that of hiring a controller or senior accountant, typically ranging from $60,000 to $120,000 per year as a base salary.

Considering the lower cost and increased flexibility, hiring virtual CFO services is undeniably cost-effective compared to a traditional CFO, whose salary typically starts at 3-5 times that base amount. With advancements in technology and the availability of various financial analysis tools online, a virtual CFO can effectively fulfill all the core competencies of a traditional CFO.

A virtual CFO is most helpful when someone on the management team is knowledgeable about finance, even if they are not experts. That means the CEO only needs help with the big financial decisions. This allows the virtual CFO to still be a valuable part of the decision-making team without having to take on all the CFO duties.

The smaller your company, the more a virtual CFO makes sense. For small businesses, financial needs often boil down to having someone to handle and give financial advice, rather than leading with finance expertise. A virtual CFO fits the bill perfectly, handling finances while also working nearly full-time elsewhere.

Like many business decisions, there's no one-size-fits-all answer to whether you should go for a traditional CFO, a virtual CFO, or none at all. Each company is unique, and a CFO isn't a one-size-fits-all resource. The right choice for your business will match your specific identity and financial requirements.