Many Perth business owners recognise the benefits of using a CFO for their business operations. From forecasting cashflow to structuring deals in Perth, business accounting, managing tax compliance, and setting long-term strategy, an engaged smart business CFO helps drive the operations and success of a successful professional family business.
Using the Business CFO as a private CFO
Often, the family business and the family “office” share the same Chief Financial Officer (CFO). The business CFO often understands the company’s financial operations and their role in generating shareholder wealth. This expertise is partly transferrable to the family’s investment activities where accounting, finance, and tax decisions for business operations can also be applied to passive investments. This knowledge allows the business CFO to guide how the family investments and other decisions might impact the company’s financial assets and vice versa.
Additionally, a long-serving Perth business CFO may have established high trust with the family principals. The CFO can effectively manage the family’s financial affairs by understanding their risk tolerance, investment style, preferences, and personalities.
Sharing a finance professional between the Perth family business and the family office can also save costs by reducing the need for separate administrative expenses.
This arrangement tends to be most effective during the business’s growth phase when the family is actively building wealth. It is also best suited for families with relatively straightforward investment and tax strategies that do not require specialised expertise for evaluation or oversight.
The business CFO and private CFO are the same person across Perth family businesses, and the “family office” is an embedded family office. The finance team that runs the business activities also runs the family’s investment activities.
The drawbacks of an embedded family office
As families’ investment activities grow, more significant challenges can arise, making separating the company and family finances a smart approach.
Sometimes, the business CFO may be so deeply involved in the company’s financial matters that offering impartial advice to the family becomes challenging. For example, while it might be in the family’s best interest to diversify their investments by withdrawing cash assets from the business, the CFO could recommend against it if it would strain the company’s cash flow or create additional complexities.
Additionally, a business CFO may lack the time to adequately focus on the family’s financial needs, potentially leading to insufficient attention to their personal financial position. Classically, the business CFO will have KPIs, and performance targets linked to the success of the business operations, and managing the family’s investment activities and personal expenses can become an annoying distraction.
Additionally, while the CFO may possess considerable expertise in the company’s operations and industry, they may not have the same knowledge or experience with the proposed investments, making it challenging to provide well-informed advice on their suitability for the family.
Privacy
If times of personal difficuly, like a death or a divorce, your business CFO can quickly become conflicted. If the conflict is strong, the business CFO can either become distracted from their actual tasks, be forced to “take sides”, or potentially resign from the emotional stress of managing multiple personalities at once.
Further, as a family becomes wealthy, it is also important to culturally separate the business operations from the family’s wealth. Suppose the business CFO is instructed to reduce costs during a challenging economic climate (which often happens in Perth’s volatile mining sector), and the family’s investments continue to perform strongly. In that case, there is a temptation to view the overall operations as one or, more importantly, resent the family for reducing costs in the business.
A separate private CFO role from the business CFO role helps manage the conflict with privacy.
Taxation
The family CFO is responsible for managing a variety of tasks for the family investments and investment entities. In contrast, a trading entity typically employs the business CFO with no connection or nexus to the CFO’s actual activities of managing the investment portfolio.
If your CFO is providing a benefit to, say, an associated trust, and the work done has no connection to the business operations, and the trading company is not directly (or indirectly) generating taxable income from the work done, the CFO is providing you with a private benefit. So, fringe benefits tax can apply to the CFO’s wage.
To prevent this, many businesses employ the CFO across the family investment vehicle and the business trading vehicle. Alternatively, a labour-hire charge is created to recognise the different services across different structures.
Further, the tax considerations for the family CFO are a major driver of profits from the investment activities. So the family CFO will ordinarily have a significantly stronger knowledge and focus on taxation as a cost of operations. In contrast, a business CFO will view taxation as a compliance issue that needs to be monitored and maintained in a similar vein to say, occupational health and safety.
So, the resources and training dedicated to a family CFO are different from those dedicated to a business CFO. Suppose you need to double up on the training investment for a shared CFO. In that case, you inevitably end up with the worst of both worlds—your training cost is doubled, and the value generated from that training is diluted as your CFO must manage two separate and opposing drivers of their job.
Succession
Your business succession plan might include outside shareholders, such as an employee share loan. Alternatively, senior staff might have a KPI scheme linked to the company’s net profit.
If your business finance team is devoting resources to family investment activities, the business net profit and 3-way forecasts include a cost irrelevant to the business. So, the embedded CFO might create a point of contention with your succession plan that is not worth the conflict.
What does a private CFO do?
The work done by a private CFO will vary and should not be confused with that of a private CIO (Chief Investment Officer). A private CFO will typically:
- Manage the financial reporting of the family’s investment entities.
- Prepare the business activities statements for the entities.
- Forecast cashflow for the families’ investments and cash needs.
- Prepare annual income tax returns.
- Paying staff.
- Paying and raising invoices.
- Managing leases across properties.
- Engaging with banks on lending positions, covenants and loan interest rates.
- Manage relationships with insurance brokers on the family assets.
- Manage properties for the families.
- Assisted in project management of large deals and syndications.
- Engage with lawyers and accountants on transactions.
- Coordinate properties for the families.
In contrast, a Chief Investment Officer will typically focus on family portfolio allocations, identifying new investment opportunities, buying and selling shares, setting investment strategy, coordinating stockbrokers, managing bond portfolios, and managing term deposits across banks.
How much does a Private CFO cost?
The cost of professional labour in Perth is high. And the cost of CFO’s in Perth and their associated business accountants, who are engaged and create value, is even higher still. Classically, this person costs around $200k to $220k (give or take). So, the family investment portfolio needs to be considerable to manage this cost.
Ordinarily, Perth families do not have this level of wealth (some do, of course). So, engaging an outsourced private CFO like Westcourt is a relatively simple solution to cost-effectively enjoy the benefits of a private CFO while preserving the business operations separately.
Combining the Private CFO and the Chief Investment Officer
The skill sets of a Private CFO and a CIO are different and also partly complementary. And getting a person who can do half of the job of a CFO and half of the job of a CIO means you are compromised on both.
You are better placed to get a person focused on their job and skillset. No person and no firm exist that can do the best of everything or have the best of everything that is coincidentally all under one roof.
At Westcourt, we are committed to working collaboratively with advisors. Your advisors should be friendly but not friends. And you should be committed to getting the best person for you – not for your advisors.
Inevitably, your investment and finance teams will make mistakes, and part of their job is to hold each other accountable. If you combine all the services under one roof, you run the risk of the investment team covering up the finance team’s mistakes (and vice versa).
Conclusion
Using a private CFO to control and manage the family’s money is an important step forward to a business family’s long-term wealth strategy. And getting Westcourt to take on your private CFO role is a natural choice. With our commitment to value, single focus on families in business, proven leadership in taxation, an international network of firms to manage offshore tax exposure and independent conflict-free advice, we have a unique advantage when it comes to engaging a firm as your private CFO – so why not give us a call?
