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December 9, 2019

Is the Outsourced CFO Model Right for Your Business?

5 Considerations When Choosing to Engage an Outsourced CFO

In this highly competitive environment for raising assets, it takes much more than superior risk-adjusted returns to attract meaningful allocations of capital.  Investors who can ‘move the needle’ with a substantial contribution are sophisticated and will seek assurances that, amongst various other things, the investment manager has designed and implemented an effective and robust internal control environment in its back office.  However, hiring a full-time experienced CFO (and perhaps even support staff) to oversee the back office is a costly endeavor.     

An alternative to a full-time CFO is to engage an outsourced CFO on a part-time or even a project basis.  An outsourced CFO can provide the oversight, financial direction, and planning that a fund needs to attract institutional investors and can bridge the gap until enough capital is raised to justify a full-time hire.

But is an outsourced CFO right for you? Below are five things to consider:

ONE: WHO IS RESPONSIBLE FOR THE BACK OFFICE?

A CFO has an invaluable role within an investment firm. They become a trusted adviser and are often involved in leading the strategic direction of the firm.  The CFO does more than oversee the daily trading and risk calculations, manage the fund administrator, and direct the year-end audit and tax work.  The CFO adds credibility to a firm’s operational infrastructure. The ability to give these areas the focus they require will prove beneficial and provide investors with the assurances they want before investing. This becomes particularly important during investor due diligence reviews.  They will want to understand the inner workings of the back office to determine its effectiveness.

TWO: HOW EFFECTIVE ARE THE INTERNAL CONTROLS?

Reducing the risk of errors is essential to the success of any organization, regardless of the industry. A CFO’s background and skill set lend itself well to establishing the quality and controls framework to minimize errors. Whether it’s reviewing the administrator’s NAV calculation or putting in processes to ensure employee trade compliance, CFOs are able to add tremendous value by overseeing these critical areas.

Errors are costly. In addition to fines, firms can suffer reputational damage, or even worse, lose investors. Giving this area the attention required will benefit the firm in the long run.

THREE: WHO IS LOOKING AFTER THE TILL?

Since investor confidence is part of what fuels the firm, an investment manager wants to do everything within its power to keep their minds at ease. Having a sophisticated infrastructure goes a long way toward accomplishing this. In particular, a CFO instills confidence that there is someone with the proper skills to oversee the firm’s finances.

When an investment manager has a CFO on board, even if on a part-time basis, the presence of that individual adds credibility and conveys the impression that a fund manager is focused on safeguarding investor capital.  The CFO can effectively monitor all cash disbursements from the fund, broker receipts and payments, bank account activity, and investor activity.  As well, the CFO can monitor the investment manager and/or general partner books and records to make sure fund-related fees are received, and employees are paid, and expenses are tracked.    

FOUR: ARE BACK OFFICE TASKS TAKING TIME AWAY FROM THE FRONT OFFICE?

Although investors seek assurances that an investment manager’s operations are robust, they ultimately choose to invest in a fund because of the portfolio manager.  Having a CFO on board lets the front office do what they do best – trade. Outsourcing the back office functions gives the investment manager the ability to delegate tasks to a qualified professional trained in these areas.  Further, the CFO will allay concerns the investment manager may have regarding the timing of regulatory filings, reporting to investors, and ensuring the NAV is being calculated correctly and distributed on a timely basis.

FIVE: WHEN IS THE TIME RIGHT?

The outsourced CFO option is available for firms that aren’t ready to hire a full-time CFO but know that one is critical to the growth and success of the firm. Investment managers can engage a CFO either on a part-time basis or on a project basis and obtain the financial expertise needed.  Some examples include a review of the administrator’s NAV calculations, liaise with the auditors for its year-end audit, manage cash flows, prepare forecasts for the investment manager, draft manager commentary, or even prepare regulatory filings.  One thing is for certain, the value a CFO brings to the table is invaluable to not only the firm’s operations but also adds to the credibility of the firm’s reputation.

IS AN OUTSOURCED CFO RIGHT FOR YOUR FIRM?

Hiring a CFO is a big commitment, and it’s a decision many emerging managers struggle with.  Most often, either the workload isn’t sufficient for a full-time employee, or it is just too expensive to add another C-level staff.  This is where the outsourced CFO model can be of great benefit.

Engaging an outsourced CFO offers enormous benefits by indoctrinating policies and procedures, creating effective internal controls, alleviating the investment manager of spending time on back office functions, adding value to the firm’s infrastructure, and most importantly, instilling investor confidence.

If you would like to find out more about how we can help, please feel free to contact us.

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