The silence in the nearly empty room was broken by a Skype call at 10.30 p.m. Bhairav Kothari, still at work in the first-floor office of an old 10-storey commercial building in the Mumbai suburb of Mulund, was surprised. The staff had gone home hours ago. "I found you on Google," began the hassled-sounding caller. He was calling from the Bahamas, oblivious to the 10-hour time difference. "He wanted to put together a business plan for a bank loan," says the 36-year-old Kothari, Founder and Managing Director of SuperCFO Services Ltd, who spent nearly a decade crunching numbers at CBay Systems, one of India's largest health care BPOs. The four-year-old SuperCFO offers a wide range of CFO services.
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A few months later, in Pune, 52-year-old Yogesh Satoskar, Chairman of Unicus Advisors, another firm that offers virtual CFO services, got a frantic call from a midsize multinational engineering company based in India. They wanted him to fill in immediately for their CFO, whose departure was closely followed by that of his deputy. Satoskar devoted a few hours to them daily. The company had good accounting systems in place, but Satoskar found its foreign exchange hedging weak. "I guess it was not on their priority list," he says. Over the next six months, Satoskar, who has more than 25 years of experience, created a system that would save the company money. He eventually left after recommending a full-time CFO to the company.
Kothari and Satoskar are among a new breed of finance professionals who call themselves virtual CFOs. Such services have mushroomed in the last four to five years, and offer high-quality assistance to help small and medium enterprises (SMEs) in India build robust accounting systems and processes. Global projects such as the Bahamian air ambulance service are rare.
"The job is something similar to Superman's: Clark Kent appears simple, but doubles as Superman," says Kothari with a laugh. It is obvious that the boss of SuperCFO is inspired by the Kryptonian superhero. Sudheendra Kumar, Chief Promoter at Intellex Corporate Services, points out: "We generally enter the picture when there is trouble." The trouble is not necessarily financial sickness, he adds.
"The need for a high-quality CFO was always there," adds Saurabh Agarwal, Director, Kennis Group. A CFO goes beyond accounts to build a sustainable business model, introduce robust controls, ensure regulatory compliance and raise resources. The advantages of having a full-time CFO are many, but SMEs are often constrained by limited budgets, a small scale of operations and a traditional family-run approach.
That is why chartered accountants or auditors often fill the gap, even when a more experienced hand is needed. "Small entrepreneurs never let go," says Kothari, referring to the accounting function.
Today, the accounts heads of small companies already have too much on their plate: accounting, compliance, investors, funding, board hygiene, cost, strategy, managing bank limits, use of surplus funds, mergers and acquisitions, investor relations. "It is natural for a fast-growing SME to hire or outsource professionals in a fast-changing operating environment," says Agarwal.
The economic downturn after September 2008 helped virtual CFOs. Small entrepreneurs were caught in a mire of overleveraging, ill-conceived expansion, and unrealistic bets in commodity derivatives and foreign exchange. Increasing regulatory and compliance requirements, and volatile commodity prices and interest rates have only made the role of the CFO more important.
Agarwal says the emergence of professional entrepreneurs is also responsible for the growing popularity of virtual CFOs. For example, in 2007/08, first-generation entrepreneur Surajit Chaudhuri, Managing Director and Founder of Kalpakaaru Retail Art, wanted to take advantage of the booming economy. "The in-house chartered accountants could not see beyond the balance sheet," says Delhi-based Chaudhuri, whose company provides contracting services for retail store interiors. He did not have the budget or enough work to justify a full-time CFO. Engaging a virtual CFO quickly changed the course of the company. The CFO not only helped with company valuation, but also helped structure the company by creating two verticals: manufacturing and contracting.
Even second-generation entrepreneurs who run family businesses are keen on improving governance, timely compliance and budgeting, and thus understand the importance of virtual CFOs. Also, such CFOs often have strong relationships with banks and financial institutions, which come in handy when the company negotiates a loan. Many virtual CFOs carry the company's visiting card. "It helps in negotiations with banks, clients, and vendors, with transactions, and to form joint ventures with international partners," says Kothari.
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A virtual CFO empowers the CEO with information. Kothari says a CEO should regularly get some kind of information from the accountant or finance manager - for example, a weekly list of debtors and the age of their debt, monthly reports on the profitability of new clients, and quarterly analysis of client revenues for early detection of a downtrend.
Satoskar of Unicus sets up alerts for CEOs. For an engineering client, he set up costing and cost follow-up systems to monitor the production cycle and identify gaps. Until then, costing had been manually done, based on a set of assumptions about raw materials and costs. "I introduced an automated system that would not only let them estimate the cost of each order in real time, but also follow up online," he says. This clarified cost goals for various departments, and enabled the CEO to analyse and allocate profits from individual projects.
Budgeting for the following year became easier. There was no software expense. "We used Microsoft Excel and downloads from Tally," says Satoskar. Private equity firms, which have been quite aggressive in the Indian market in the last five to six years, are also hiring virtual CFOs to help them assess companies before investing in them.
So, how does a virtual CFO function? When a company signs him up, he first makes an assessment of its compliance, systems and processes, controls, and other factors. "There are things like whether procurement policy is in place, a proper management information system, or a pricing policy," says Agarwal. Kothari adds that the virtual CFO also looks at general regulatory hygiene.
He may also get the company to change its software if it is using an outdated product. Agarwal says: "We decide on a particular day in a week or month for all clients."
Virtual CFOs charge about one-eighth to one-tenth the fee that their full-time counterparts would. Little wonder, then, that the concept is catching on.