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How Virtual CFOs Are Driving New-Age Startup Finance Operations

How Virtual CFOs Are Driving New-Age Startup Finance Operations

Startups in the early stages can rarely afford full-time CFOs and are increasingly turning to virtual CFOs to meet investor-centric compliance and for efficient financial planning

Performing the CFO role, a single virtual CFO handles multiple startup clients at once for all financial, regulatory and banking needs

Banking solutions such as One Stop Banking by HSBC are helping reduce client management and compliance overheads for virtual CFOs

No matter how young or old a business is, and whether it is a startup or an enterprise, financial planning is proving the key to long-term business stability. If anything, 2020 has proven that financial planning and having a roadmap are crucial to dodge unprecedented economic impacts. While enterprises have the luxury and the capital to spend on finance leaders, the same cannot be said for startups, who — at least in the early stages — are primarily geared for product development and technology. 

Most startups only consider financial planning after they have raised funds or when they are in the process of raising funds. While large organisations have full-time CFOs on payroll, it is not feasible for startups to spend in this manner in the initial stages till they scale up. Often, startups may not even require the service of a full-time CFO, which makes spending to recruit one quite a tall ask. This is where the trend of virtual CFOs is gaining steam in India.

A chief financial officer or CFO is responsible for managing all the major financial transactions of a business, the role goes beyond that often involves guiding top management on finance-related as well as spending-related decisions. The core responsibilities of a CFO include financial and tax planning, risk management, compliance management, cash-flow forecasting, cost-control measures among others — all things critical for startups raising funds or those looking to survive through tough times. 

The role of a virtual CFO — which could be an individual or a service provider — is like any other full-time CFO employed by a large business. They manage the accounting of finances so it reflects the true and fair value of the business. They use their accounting knowledge, data and information about the financial markets to take strategic calls that drive the business forward without straining its resources.

Financial services expert Amit Jindal, cofounder of financial advisory company Felix Advisory, believes an efficient CFO can be the difference between a startup finding the right balance in investment deals and these financial experts help control spiralling losses in cases where cash burn is high. 

“A proper accounting & compliance system gives comfort to investors. We have seen a lot of investments being called off due to non-compliance on the part of startups. With a virtual CFO taking care of the compliance formalities and internal-external strategising, the chances of attracting funding increases,” said Jindal.

The Problem OF CFO Expertise in Indian Startups

A large number of startups are run by financially less experienced innovators, who are well versed with the technology that will power their platform, but not so when it comes to managing finances. First-time entrepreneurs also tend to be less aware of financial regulations and tax incentives, which can prove very costly for startups with not much money in the bank. A CFO can address the experience part easily, but the costs involved are too high, which is why virtual CFOs have become an option.

“There are a lot of incentive schemes available for startups. They must be apprised about the schemes available and work towards making the most of it. For instance, there are SEIS and MEIS (RoDTEP) schemes available for exporters. If availed, this can help startups avail 5-7% of their net foreign exchange as duty scrip licence and can be sold to importers and receive bank credit in their books. Further by taking some initial steps, startups can optimise the fund flow. For example one needs to apply for GST registration after reaching the INR 20 lakh limit. But, if we opt for voluntary GST registration from the beginning, it can help the startup avail GST credit on the expense invoices later when there is a need to clear government dues. Startups can also opt for lower withholding of taxes in the beginning. This also helps in fund flow management,” added Jindal.

One of the major tasks of a virtual CFO is to analyse financial data and break it down succinctly for the top management to help them make future business calls and make a course correction if there are flaws in the current system. Chief executive officers and founders of businesses tend to focus on the top and bottom end of financial statements, which may not offer a true and full picture of the business.

“Virtual CFOs scrutinise financial reports and provide a fair picture to the decision-makers. They plan budgeting and prepare reports which show where the business is lacking. They manage the fund flow of the system and alert the top management about any potential liabilities,” explained Jindal.

New-Age Banking Powers Virtual CFOs 

Apart from being a more economical option for startups, virtual CFOs help them bring in more flexibility. Having a CFO at an early stage could incur big costs to the company. However, the advantage of having a virtual CFO gives the business an option of managing the level of engagement with the virtual CFO according to its requirements.

But, what is a startup CFO who does not use technology to analyse, plan and execute? A virtual CFO often engages with multiple organisations at the same time, which translates into a larger volume of data and financial transactions to be analysed. This is where modern banking becomes a bridge between the startup and the virtual CFO. Today the ask from Banks is to go beyond technology-based solutions. 

In the virtual CFO segment, the likes of HSBC have invested time and resources in the research and development of banking tools.

“I have seen only a few banks not only helping startups in their international expansion but also help meet global compliance standards. Recently I saw a product developed by HSBC where all financial statements could be accessed conveniently at one place with convenience to reconcile on fingertips. The platform can be replicated to existing work-flows and help us perform domestic and international payables with complete ease,” said Jindal.

Anuj Kanwar, Head Transaction, Business Banking, HSBC India, explained that ‘HSBCnet’, the commercial net banking platform that powers the virtual CFOs experience can automate a number of processes to make handling multiple clients easier. It provides a one-window view to domestic and international bank accounts across financial institutions and helps overcome tedious processes for balanced reporting and downloads of statements from multiple bank platforms leading to cost savings. This smart backend engine helps virtual CFO teams to combine all payments into one integrated, consolidated file: just one format for multiple payment types for multiple entities with complete flexibility of payment initiation option(s) and direct integration with the accounting systems and ERPs.

Simply put: a One Stop Solution – that provides a single platform for account visibility, reconciliation automation and payments transparency across transactions. One could compare it to a Facebook marketing manager handling multiple business pages with a single user ID,” he said. 

Banks also assume an advisory role where accounting compliance matters. They work closely with the virtual CFO team to ensure that regulatory reporting ticks all the necessary boxes. When a virtual CFO analyses a company’s financial health and discovers segments that need to be modified or restructured, banks need to step in and provide feasible solutions in the domain of their expertise. 

“We help startups in the areas of cost reduction by structuring and implementing future ready, scalable, new-age transaction banking solutions that have direct on- ground benefits, but is enabled by virtual CFOs. It’s a consultative role that we play alongside virtual CFOs in helping improve resource management, optimising working capital and cost reduction. It is both of us coming together and bringing an optimal growth solution” added Kanwar.

The tech-driven banking and services market is rapidly evolving, and so is the virtual CFO segment. Operations that are carried out today individually may end up becoming a part of a larger exercise in the future. It is vital for virtual CFOs and financial heads at-large to adapt with time and latch on to the latest tech that caters to the ever-changing market. 

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