Ask any start-up Founder and CEO how big her company is and she is bound to rattle off revenue, cash-flows and projected profits. But ask her if her founding team includes a finance expert, chances are that the answer is ‘No’.

“Given the emphasis on finance, valuations and million-dollar dreams that entrepreneurs set out with, it is ironical that too few start-ups actually have finance as an in-house function,” said Sachin Sancheti, Chief Technology Officer and Founder at the 18-month old cloud-service provider Scalable Solutions. “I have not yet met or heard of a technology start-up that has a finance expert as one of the co-founders.” This, he attributes to the fact that business ideas, which go on to become business offerings, typically emerge from technologists and business folks. “Before we start out on our own, we tend to meet with and ideate with those like ourselves in technology or project management teams. And rarely does a finance person participate in those sessions.” Mr, Sancheti got lucky, when a relative, a qualified accountant, was willing to bet his all on Scalable and wanted to be part of the founding team. “You need a co-founder you trust and with a close relative, trust comes first.”

For the now 20-strong team that his business is, Mr. Sancheti said, “We did not need to outsource processes such as salary payment and filing of tax returns. We knew exactly what laws to comply with.” All this, he said, helped him focus on servicing his customers very early in the business. But now that he is ready to grow and seek investment, he feels the need for a financial ‘strategist’ even if only outsourced. “I want someone to tell me how to account for the numbers and how to present my finances to an investor.”

Here’s where the concept of the outsourced CFO comes in.

Alok Subudhi, who founded Thinkways, a company in the area of mobile apps and software as a service, said that he felt the need of a trusted confidante acutely in his early days as entrepreneur. According to him, having a CFO, in-house or outsourced, is priceless. Thinkways started in 2005, and was sold to Vattikutti Ventures in 2011, Mr. Subudhi said that if he started up all over again, he would rope in a finance person as partner from Day One. “We too started off thinking that an accountant would do to take care of our vouchers. Only as we grew and sought investor money, did we feel the need to better present our balance sheet and did we realise the importance of a finance person.”

Financial strategy

In Mr. Subudhi’s case, the finance expert happened to be Jayant Tiwari who calls himself the Outsourced CFO. Mr. Tiwari, was financial consultant, investment banker and legal advisor all rolled into one, according to Mr. Subudhi.

“From categorising the money you put into the company between expenses and investments, to tax-law compliance to saving for a rainy day, all of these were brought home to us by our OCFO.” In fact, one of diktats that Mr. Tiwari had for Thinkways was to set apart 10 per cent of net profits for an unforeseen expenditure. “He ensured that a separate bank account was created for this amount. In time, this became a matter of discipline for us.” Mr. Subudhi realised the value of this discipline when unexpected emergencies cropped up. “Imagine being able to lend a lumpsum to a colleague in dire need of finances during a medical emergency. In a small team, these things matter a great deal.”

The strategy part came later, for Mr. Subudhi. Thinkways’ client Vattikutti Ventures was interested in a buy-out. “We went back and forth a bit. At one point it seemed like the deal would not go through.” Differences cropped up on whether the deal would be an outright acquisition or what is now called an ‘aqui-hire’ – ie, the business, brand and employees alone would shift to the buyer. “Our outsourced CFO represented us to the buyer in all the three mentioned capacities.” But for Mr. Tiwari, the transaction would have fallen through, said Mr. Subudhi.

The OCFO

Mr. Tiwari, whose email id includes ‘ocfo’ (for outsourced CFO), said, “It’s easy to do the accounting – the recording of a company’s history in rupees.” A CFO should be able to tell the management team how to look at its finances, as a tool to where it wants to go, as well as an accurate reflection of the context of events it records, he said. “Routine accounting captures the events but rarely the context.”

Business strategy is easy to understand. But how exactly does Mr. Tiwari contribute to financial strategy? “If an entrepreneur has spent Rs.60 lakh in his first year of operations, a first-timer would categorise this as an expense, in all probability.” He explained that for an entrepreneur, a majority of that amount would have gone into developing a proof-of-concept, integrating pieces of software and creating a platform. All that, emphasised Mr. Tiwari, is investment which is expected to provide both revenues and returns over time, well beyond the financial year.

“The amount spent on rentals and peripheral infrastructure, would be current operating expenditure.” This may sound basic, but many entrepreneurs fail to draw the distinction in their financials, as they busy themselves with building a product or finding customers. According to him, there are clear, statutory guidelines to draw such distinctions. “With a little thought, the company accurately reflect the loss in the first year to be Rs.10 lakh or less, instead of Rs.60 lakh!” The financials will then reflect the investment in its future, accurately at the Rs.50 lakh level. Could not agree more, said B Sriram, founder of 8-year old software services company Contus. He said, “Even though I am a commerce graduate, I was focused on developing my business.” The first time he felt the need to better present his finances was when Contus was setting up its office in the U.S. Once the CFO function was outsourced, “the value-add was immense.” Data leakage was key for Contus. “Merely understanding debit and credit did not help us. Our finance partner Mentoris was able to identify where our money was going.” Mr. Sriram also said that capitalisation of product development expenses was something his finance partner guided him on.

This is where, said Mr. Tiwari, financial strategist is irreplaceable. Imagine, he urges, the impact on the financials, profitability and balance-sheet of a company if as much structured thought is applied to these areas as is applied to prospects and operations.

But that does not mean to say that daily accounting does not have its place. Typically, accounting service providers take on the duty of filing tax returns for the company, offering company secretary-ship through an associate firm, deduction of tax at source for their clients’ employees and even HR services such as salary payments.

Accounting services

This also helps them spot opportunities to offer financial ‘strategy’ when needed. This combination of offerings has helped popular chartered accountants ‘place’ people in finance roles in their client companies. Much like the outsourced manpower concept in software services, these accounting firms charge per month per head. And should an opportunity arise, step in for financial strategy consulting as well, According to Mr. K.G. Suresh, “It is difficult for a company to retain a CFO full-time. We have seen it so many times – where a young CFO is crucial to the organisation, but leaves for greener pastures, for the very reason – that he is good.”

With the ability to attract and retain talent by offering young minds the opportunity to shift roles quickly in their career, Mr. Suresh’s accounting firm keeps a client’s boat steady. Ask for a few numbers and you get a ball-park. “If it costs a client Rs.10 lakh for outsourced accounting services, placing a couple of skilled accountants in their office costs them only Rs.12 lakh a year. Add to this the benefit of the top minds in the accountants’ firm being at hand for financial strategy consulting.” For instance, he and his partner stepped in to facilitate a merger between two firms. “A client of ours wished to get listed on the stock exchanges. The Initial Public Offering, or IPO, was their first thought. It requires going through quite a few processes before your shares finally list on the exchanges. We spotted, and helped facilitate the merger with another firm that was listed but was in financially bad shape.” Acquiring the listed company allowed the aspirant to meet its goal of having its shares traded on the stock exchange. Suresh’s accounting firm services between 12 and 15 clients at any given time.

Corporate services

Some have scaled up even further to offer outsourced CFO services. MyCFO offers services in strategy and governance, formulating business plans, participating in annual budgets, fund-raising through stake sale or raising loans and business process improvements. This allows them to tap clients across various sizes, from early-stage to mid-sized companies. According to Murali R, Vice-President, MyCFO, “Customers could even include listed companies that come to us as an interim measure. The decision to recruit a full-time CFO is not dependent on the size, stage at which the company is or a timeline. If the company derives value out of the outsourcing arrangement, the relationship could continue for long.” With 150 full-time people, experience of accountants ranging from 3 to 30 years, MyCFO sees what it calls a ‘massive’ opportunity in the Indian market.

“We are talking of 60,000 companies in India with a turnover of Rs.100 crore and above.” Add to the mix multinationals, start-ups and private-equity backed companies. “The availability and quality of finance manpower is just not adequate. This gap is not going to go away for the next 20 years.” In effect, he said, even with “10-15 high-quality CFO services firms, the demand will still be left unmet.”

Global opportunity

Some service providers have identified niche opportunities to offer services in specific geographies beyond India. Sundaram Business Services works with accounting firms to offer business process services to clients. According to Rajesh Venkat, CEO, SBS, “id-sized accounting firms see themselves as experts in their area. Over time, they want to move into consulting and be positioned as cutting-edge experts in the accounting space.” This, he said, offered players like SBS an opportunity to offer adjunct BPO services. He cited SBS’s domain knowledge as critical to its work with accounting firms in Australia. “In accounts finalisation, not everything is template-based. There could be quirks and nuances in an industry that is specific to that sector. In an industry, marketing spends are spread over a period and revenues happen only in short bursts. One would know this unique aspect only if you are clued in to the industry.”

According to him, “This is the start of a trend. Along with accounting firms, BPOs offer total finance functions to small and mid-sized firms especially where they cannot afford a full-fledged CFO. It is a smarter model.”

Outsourcing the finance function is a smart model for small firms. Which is one of the reasons why, despite being the sole founder, Sancheti of Scalable Solutions has even the CEO position open for his company. “CEO or CFO, one cannot ‘recruit’ a co-founder. Minds have to click and there should be chemistry.” Till then, it is opportunities galore for the outsourced CFO.

(This article first appeared in The Hindu dated July 18, 2016)

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