The role of a Chief Financial Officer (CFO) is critical in any business operation. They are responsible for the financial planning, analysis, reporting, and overall management of a company’s finances. And as a CFO service provider, it is crucial to establish a clear and formal agreement with your clients before beginning any engagement. This is where an engagement letter comes in. 

An engagement letter is essentially a contract between you and your client that outlines the expectations and responsibilities between the client and CFO. It serves as a foundation for a successful and professional relationship.

In this post, we will explain why having a CFO engagement letter is important and what to include in it, so you never find yourself in a poor scenario where there are misconceptions about your clients due to a lack of documentation.

Why is it important to put together an engagement letter for virtual CFO services?

Having a CFO engagement letter protects both parties by setting clear boundaries. This ensures that there is no confusion regarding what services will be provided and how much they will cost.

There are several reasons why having an engagement letter is necessary when providing CFO services. 

Firstly, it helps to manage client expectations by clearly defining what services you will provide and what deliverables they can expect from you.

Secondly, it protects both parties by setting out the terms of payment and reducing the risk of disputes or misunderstandings down the line. 

Thirdly, it demonstrates your professionalism as a service provider by establishing clear boundaries and ensuring that everyone involved has agreed to them.

When should the engagement letter be sent and signed?

It’s important to send and sign an engagement letter before starting any work for a client. This not only protects your business interests but also demonstrates your professionalism and commitment to delivering quality services. Ideally, you should send out an engagement letter as soon as possible after agreeing on the scope of work or the proposal with your client.

In some cases, clients may be hesitant to sign an engagement letter, particularly if they’re unfamiliar with its purpose or legal implications. In such situations, it’s important to educate them about why this document is necessary and what benefits it offers both parties. Common mistakes while writing a Virtual CFO engagement letter:

Mistake #1: Using generic and vague terms

When it comes to writing a CFO engagement letter, one of the most common mistakes that accountants make is using generic and vague terms. This can often result in confusion and misunderstandings between the CFO and the client, which can ultimately lead to costly errors down the line. Therefore, it is essential to be specific about what you are offering in your engagement letter.

For example, saying that you will provide “financial planning services” is not very specific or informative. Instead, try to be more detailed by outlining exactly what financial planning services you will offer. This could include things like budgeting assistance, investment advice, or tax preparation services.

Mistake 2: Using engagement letters for marketing purposes

As a CFO, you need to ensure that your engagement letter is crafted carefully and accurately. It forms the foundation of your relationship with your clients; hence, it must be treated as an official legal document. However, some CFOs make the mistake of using their engagement letters for marketing purposes. This can lead to several unpleasant consequences.

Firstly, using your engagement letter as a marketing tool can confuse or mislead your clients about the nature and purpose of the document. An engagement letter should clearly state the terms and conditions of your professional services, such as fees, timelines, and deliverables. When you insert promotional language or sales pitches into this important document, it dilutes its clarity and focus.

Secondly, using an engagement letter to promote yourself or your company could create ethical issues.

What should be included in a CFO engagement letter?

 

Following are the things that must be included in an engagement letter:

Intro

Clearly identify who will be receiving your services, whether it will be for an individual or a business, and identify the business, yourself, and your position. To highlight your value and clarify the purpose of the engagement letter, you might include a brief company overview.

Period and purpose of engagement

Many clients and CFOs overlook one critical component of an engagement letter: including a period and purpose of engagement.

Including a period in your engagement letter clarifies how long you will provide your services to the client. Including this information ensures that both parties are aware of how long they will be working together and can plan accordingly.

In addition to specifying the length of time for the engagement, it’s also important to include a purpose section in your engagement letter. 

Identify the scope of work

The scope of work section should include specifics such as the services offered by the CFO, deliverables expected from them during their engagement period, and any limitations to their responsibilities. This may include 

• Financial forecasting and financial planning
• Compiling in-depth reports on key performance indicators, break-even points, unit economics, profitability, and more.
• Board presentations
• Accurately forecasting capital expenditure, cash flow, and more.
• Financial analysis
• Accounting advice
• A legal or regulatory advice on any of your company operations with respect to their appropriateness or legality; or
• Tax return preparation or tax advice

Write out the payment terms

When drafting an engagement letter, make sure to include detailed information on when payments are due, how they will be made (e.g., check, wire transfer), and what happens in case of late payments or non-payment. 

Be transparent about any upfront fees or deposits required before starting work. It is also a good idea to outline any potential additional costs such as travel expenses or overtime charges that may arise during the project. 

By including these details in your engagement letter, you can demonstrate transparency and professionalism with your clients while also protecting yourself financially. Remember that communication is key in any business relationship and laying out clear payment terms from the beginning can help build trust and ensure a successful partnership for both parties involved.

Include what you need from the client

Make sure you have everything you need before you begin working. For that, your engagement letter should define the documentation the client should provide the deadlines for providing it, and what happens if they fail to provide the information within said deadlines. 

This could include financial statements, tax returns, bank statements, insurance policies, or any other documents necessary for you to perform your duties effectively. By requesting this information upfront, you can prevent delays in the process and ensure that everything runs smoothly.

Standard terms

Consider including all of the following clauses in your engagement letter:

• • Retaining and accessing records policy
• Mention that the accuracy of the client’s information determines the work’s results
• Money laundering
• Limitation of liability
• Confidentiality agreement
• Privacy policy
• Arbitration
• Indemnification
• Dispute resolution
• Intellectual property rights
• Jurisdiction communication

Obtain Signatures from Both Parties

The client’s acceptance signature is a crucial aspect of any business agreement. It serves as proof that the client has read, understood, and agreed to the terms and conditions outlined in the agreement. In today’s fast-paced business world, contracts are often executed electronically, which makes it easier for clients to sign agreements quickly without taking the time to fully read them.

However, it is essential to remind our clients that their acceptance signature holds significant weight in any business transaction. By signing on the dotted line, they are acknowledging that they have reviewed all of the terms and conditions included in the agreement. The signature could either be a physical or electronic signature but must be authentic in all cases.

Conclusion

In conclusion, it is important for CFOs to take the necessary steps to ensure that their engagement letters are compliant with current laws and regulations. It is also essential for CFOs to maintain professional relationships with their stakeholders by staying up-to-date on best practices related to engagement letters. By following the guidance outlined in this article, CFOs can better protect themselves and their organizations. All of these measures will help create a successful, transparent business environment.