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Why do you need a Virtual Finance Director?

Whether you call it a Finance Director (FD) or a Chief Finance Officer (CFO), you need someone doing this role in your business - here's why.

Most businesses have a bookkeeper or two, and have external accountants doing the annual accounts and your tax return. So why do you need a finance director? Afterall, you created your business. You're the one keeping an eye on the profitability of your company, and no-one knows it better than you.

Let's look at what bookkeepers and external accountants do. Bookkeepers are an essential admin role in the business: they process invoices, chase debt, pay suppliers, maybe do some payroll, the list goes on. Often times though, the amount that a bookkeeper can advise or analyse data is limited as they spend the bulk of their time performing administrative tasks. It's not really their job to provide robust analyses. The question for bookkeepers is whether or not something is accurate not if it is relevant.

External accountants primary purpose is to prepare year-end, or statutory, accounts. Their remit is not to comment on how well or not your company is doing, it is to make sure that you are compliant. Again, it is accuracy over relevance. Accountants have special wording in the accounts, that specifically states, they are only preparing the accounts for your benefit. They are not passing any judgement. A firm of accountants might make some observations about your accounts, but the relevance of that is likely to be low. If your company is like most others, the year-end accounts are filed several months after the year end. Which is far too late to do anything about it.

A finance director has a different skill set and can tell you how you can improve your company's performance. Whilst accuracy is important, relevance is given a lot more emphasis. Management accounts are "the production of timely and relevant information." A finance director can help guide your existing staff to create better accounts, quicker, and help you make better decisions. Companies exist only exist for one reason: to make money. Making money can be measured in different ways, but the most important is cash. If your cash is going up, that means that you're making money! A virtual finance director can help you make sure the cash keeps going up.

Try this out: take a look at your most recent accounts, preferably management accounts as these will be more detailed and up to date. Take your profit before interest, tax, and depreciation (EBITDA) - this is the amount of cash your business should have generated. Now take your cash and the start and cash at the end of the same period. Compare the two figures.

If your EBITDA is lower than the change in cash, then great! You've converted some of your balance sheet into cash.

If your EBITDA is higher than the change in cash, then there is some money being "lost" along the way. Maybe your debtors are up, that means you've made sales but not been paid. Creditors down? Then you've paid off suppliers. Stock up? You've been building stock levels. Some combination of all three? You might need to look at your credit terms with suppliers and customers, and look at why your stock is increasing.

A finance director can help you identify where the cash is going, and what you need to do about it. A full-time finance director is likely to be out of budget for you. That's where a Vitrual FD comes in. Having someone who understands how the different bits of finance interact, whilst still being able to pay for themselves. A Virtual FD should be seen as an investment not a business cost.