Fractional CFO: A Creative Solution to Managed Business Growth

At its most basic level, business is simple - invest human or financial resources into the creation of value (a product or service) that will earn the business new resources it can reinvest into the creation of value, and so on. The cycle is repeated on a micro and macro level, day in and day out, for as long as the business is open.

A startup business’s financial management needs may be basic at the outset, then grow in complexity as the business scales. Whether the business is new or old, small or big, in order to remain viable, its finances must be managed. Small businesses typically do not have the capital to hire a full-time Chief Financial Officer (CFO), and small startups might get by with a bookkeeper (alone) for months or even a year.

Then what? What happens when the business is ready for more advanced financial forecasting and management and does not have the means to support a CFO on a full-time basis?

Many small businesses hire fractional CFOs to bridge the gap in their financial needs as they grow from a small-to-medium size business, or from startup to growth stage.

What is a fractional CFO?

A fractional CFO is an experienced CFO who is under contract to provide financial management services for an organization on a part-time, retainer, or contract basis. In this model, a business gains the experience and expertise of a CFO without the overhead of a full-time CFO.

A fractional CFO differs from a full-time CFO in that a fractional CFO does not typically maintain the entirety of a business’s financial strategy. A fractional CFO should not be confused with an interim CFO who performs financial management responsibilities before, or between, full-time CFO hires. In contrast, a fractional CFO is typically contracted on a project basis with a focus on helping the organization achieve specific goals. Fractional CFOs are often under contract with more than one company at a time.

Why do small businesses hire fractional CFOs?

Small businesses often engage fractional CFOs as a cost-effective way of gaining professional finance and accounting insights without the burden and commitment associated with hiring a full-time employee. As is the case with fractional COOs, fractional CFOs are becoming increasingly prevalent among small businesses due to cloud-based bookkeeping and other financial services that can be performed remotely.

Benefits of hiring a fractional CFO include:

• Limited capacity - the small business owner is needed in other areas of the business, and the limited number of employees have other responsibilities to the business
• Limited capabilities - the business’s financial needs (e.g., forecasting) may have become too complex for the business owner’s capabilities
• Business expansion - the business is expanding into new industries or markets requiring additional funding and time dedicated to financial management
• Business transition - the business is in a period of transition (changing business strategy, business models, or otherwise) and dedicated oversight is needed
• Change in financing - the business is bringing on additional equity partners or raising outside equity capital, requiring financial management expertise not currently available
• Cash management - the business recently closed an investment round and now needs assistance managing cash
• Inventory or receivables management - business growth is being negatively impacted by the current levels of inventory and/or receivables; help is needed to relieve the burden
• Debt management - the business needs to acquire new debt or refinance old debt; the time commitment required to do so would over-extend the business owner
• Merger/acquisition management - the business is considering an opportunity to restructure itself and needs a financial manager to see the project through

What fractional CFO services do small businesses need?

Small businesses need help with the following services as they grow:

• Financial planning - a fractional CFO listens to the business owner’s growth strategy, then translates it into a viable financial plan that can support the business’s goals, whether over six to 12 months or three, five, or 10 years.
• Tasks include managing the budgeting process and financial projections; tracking the company’s expected Out of Cash date.
• Financial analysis - the fractional CFO can help the small business owner assess product/customer profitability, cash flow management strategy, or other big picture themes that the business’s financial information conveys.
• Tasks include developing a short-term, mid-term, and long-term view of the business to better prepare the company’s trajectory and cash position
• Legal and risk analysis - certain strategies and projects come with legal risk which could impact the business’s financial standing. A fractional CFO who specializes in a certain area can help a business mitigate risk.
• Tasks include contract negotiations for items; such as, new leases and large vendor contracts.
• Accounting - a fractional CFO can provide accounting oversight of a small business’s accounting systems and/or department.
• Tasks include managing the company’s cash burn, making recommendations around alternating the burn rate
• Systems - a fractional CFO can help a scaling business develop and implement systems that will support the business’s growth over time. Minimizing business risk and optimizing efficiency.
• Tasks include putting systems into place that support sustainable growth
• Raise capital - business expansion requires new capital, which requires an ability to place a value on the business, speak with investors, and effectively manage due diligence processes and the accompanying paperwork.
• Tasks include coordinating fundraising logistics and advice, supplying investors with due diligence materials, securing loans or investments, and anticipating future owner compensation.
• Reporting - a fractional CFO designs the financial metrics and key performance indicators (KPIs) that provide indicators of a business’s financial health and performance towards its goals.
• Tasks include closing the monthly books and managing financial reporting.
• Audit - whether an audit is mandatory by law or necessary for growth, audits take a significant amount of time and resources. The time commitment to complete an audit is so high, and the risk to the business so great, that hiring a fractional CFO to manage the responsibilities can be necessary and beneficial to the business.
• Tasks include walking outside parties through a business’s cash flow, purchasing systems, taxation, and transactions involving the exchange of money.

What are the benefits of hiring a fractional CFO?

Benefits of hiring a fractional CFO include:

• Outside perspective - in small business management, it is common for an owner to be “too close” to the business. A fractional CFO can provide industry standard means of measuring your business.
• Limited engagement - payments made to fractional CFOs are based on contract time and/or project scope, reducing employment risk and overhead.
• Reduced downtime - in the event of a sudden departure of a CFO from a small business, a fractional CFO can be engaged relatively quickly, reducing the downtime and risks associated with not having a CFO on staff.
• Staff retention - scaling a small business can add stress to a workforce that is already at capacity. Engaging a fractional CFO on a project basis can temporarily relieve a colleague’s workload, stimulating goodwill and increasing the likelihood of staff retention long-term.

How do I select a fractional CFO?

Selecting the right fractional CFO for your business is critical to maximizing the benefits. Here are some open-ended questions to consider asking fractional CFO candidates:

What is their specialization?

If your business is in a specialized and/or regulated industry (e.g., health care, international trade), your business may benefit from the specialized knowledge of a fractional CFO with extensive experience crafting financial strategies in this industry.
How do they manage their bandwidth?
Fractional CFOs are just that - fractional. They may be juggling a handful of clients at one time. They may have the ability to take you on as a client, but can they stay up to date on new reporting requirements for your industry? If all of their clients are in the same industry, this may not be an issue; however, the more complex and varied their portfolio, the more challenging this may become.
How does their management style complement yours?
While most business owners are in search of a fractional CFO who has skills they do not, it is important that the fractional CFO’s management, communication, and leadership style complements the business owner’s.
What referrals can they give you that are related to your specific business (industry, age, stage, or market)?
Ask to speak with three referrals, and prepare for these conversations as if each were a test. Set aside dedicated time to think about your concerns and formulate questions that will give you the insight you need to make a decision. Don’t “wing it”.
Ask to attend an upcoming workshop.
If the fractional CFO is conducting workshops, or has recordings of past workshops, ask to attend or view the recording. Seeing them work can provide you with valuable insight into how they operate and interact with others.

How much does it cost to hire a fractional CFO?

Fractional CFO costs depend on a variety of factors, such as business size, complexity of current balance sheet, the business’s short-term growth plan, and risk, not to mention the geographic location of the CFO themselves. A fractional CFO may cost between $150-$500 hour depending on the factors referenced here; alternatively, the fractional CFO may choose to quote work on a project basis depending on the team that may or may not be available to support their needs.

Engaging a fractional CFO can be a wise means of managing a business’s monetary limitations, while gaining the strategy and growth expertise of an experienced CFO. Whether a business is in the early stages of growth or is considering new, more complex means of financing, a fractional CFO can help bridge the gap between the expertise the business has on hand and the expertise it needs to thrive.

If you need help from a fractional CFO, or want to talk through what engaging a fractional CFO might look like for your company, one of our Expert Partners would love to speak with you. Contact info@openeye.email for more information!