What is a fractional CFO?

What is a fractional CFO?
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Running a startup takes grit, determination, and what seems like a never-ending skill set. Founders get used to overseeing every single business function without prior expertise. When you’ve been growing your own business from the beginning, it’s easy to wait too long to delegate responsibilities and start growing a team.

As businesses evolve or hit roadblocks, founders start to feel the pressure to find help. A fast-growing company needs strategic direction and funding to continue expanding. And companies facing challenges and needing to restructure or pivot, as many have in 2020, would benefit from CFO support. But this expertise comes at a price.

The gig economy has created an opportunity for companies to save costs by hiring part-time or fractional CFOs. Given that full-time CFOs are an expensive resource, startups often gravitate towards more affordable and flexible solutions.

Opting for a fractional CFO instead of a full-time employee may reduce costs, but assessing whether a fractional CFO suits your business is equally important.

What is a Fractional CFO?

A fractional CFO provides strategic, financial, and operational expertise that a small business may be desperately missing. Most fractional CFOs have at least 10-15 years of experience and started out as full-time CFOs. They are skilled professionals that inject new ideas, take on special projects, and provide strategic finance guidance.

Fractional CFOs work as outsourced hires, similar to a consultant or advisor. Their timely expertise usually comes at a fraction of the price of a full-time CFO. While bookkeepers and controllers focus on day-to-day operations, a CFO keeps an eye on a company’s future plans.

Take a startup trying to raise Series A funding, for example. Preparing the company for fundraising may simply be outside the scope of the existing team’s skill set. Raising funds requires specialized reporting and added compliance that many owners aren’t familiar with.

Fundraising might not be a full-time commitment — you may only need a CFO to represent the company at investor meetings, help with financial reporting, and perform due diligence on a part-time basis.

Incidentally, investors may be more willing to fund your company if you have a credible CFO on the team. A fractional CFO can play a key role in setting up your company for future success.

How much does an outsourced CFO cost?

With median full-time CFO salaries as high as $386,000, a small company may not be able to afford the hire. A typical CFO makes an hourly rate of $186, with most making between $146 and $231. Most CFOs end up costing between $380,000 and $770,000 a year including benefits and bonuses, according to Salary.com.

On an hourly basis, fractional CFOs generally charge a premium of $150 to $300 an hour. Monthly retainers can range from $500 a month to $10,000, depending on the level of service required and frequency needed.

The cost equation is fairly simple. If you only need 30 hours of CFO services a month, even at the high end of the hourly rate your monthly cost ends up being $9,000, which annualizes to $108,000. You don’t have to factor in employee benefits and bonuses. Typical spend for small and medium-size companies falls within the $5,000 to $7,000 range.

Overall the actual cost of hiring a fractional CFO depends on the ability of the current finance team, the state of the company’s financials, business complexity, and scope. A small business requiring significant reorganization would have to pay more than a company with efficient controls in place.

Part-time CFO engagements tend to require more hours and investment upfront. When you’re looking for a fractional CFO there might already be a few fires to put out. As you tackle the most pressing issues, you may be able to scale back on the hours required. Of course growing businesses may still require a consistent amount of attention.

Fractional CFO contracts are usually very customizable. You can hire for specific project timelines or negotiate a one to two year contract. Typically you’ll work with one person, though with larger virtual CFO services you may have access to a pool of CFOs. While this may decrease costs, you would need to be flexible about who you’re working with, even if you have to speak to different or less experienced CFOs.

Small businesses often retain their fractional CFO until the business is profitable enough to support a full-time CFO.

Common Fractional CFO Services

Whether you are a new business owner or seasoned CEO looking to explore growth or cost-saving opportunities, a fractional CFO brings specialized knowledge that may not exist in your team.

Managing cash flow

Cash flow is usually a major challenge for smaller businesses, and it continues to be a source of stress. Without relief from government stimulus, nearly a third of small businesses expect to exhaust their cash reserves by the end of this year.

Businesses need their owner or CEO to focus on revenue-generating activities. If financing is a distraction, it may be time to search for a CFO. In most cases, an experienced CFO will be better suited to solving cash flow problems.

Raising capital

To continue growing, you may need additional funding. But would it be better to borrow money or go for Series A funding? CFOs play a vital role in funding decisions and opening up their networks for better visibility during fundraising. Taking investor money also requires compliant financial reports that an experienced CFO can guide you through.

Budgeting and financial modeling

For most small businesses, the budgeting process is broken. Controllers and accountants rely on previous financials to budget, which can be slow or no longer relevant, particularly when comparing to pre-COVID periods. Instead, many businesses have had to switch to a zero-based budgeting method, which may require higher-level strategic insight. Strong forecasting and financial modeling skills are essential.

Pricing and profitability

Without a full handle on the numbers, businesses can’t fully understand their main drivers of profitability. Careful analysis may prompt changes in product pricing or strategy.

Outsider perspective

Since they are not stuck in the grind of daily operations, part-time CFOs can provide constructive advice and recommendations that aren’t as easy to spot from the inside. An independent CFO theoretically has the client’s best interests in mind or risks losing the engagement quickly.

Setting up operational systems

Fractional CFOs may come in to revamp accounting and finance-related systems and controls. Most small businesses have yet to adopt cutting edge solutions like software automation or spend management that give you real-time finance and accounting visibility. A fractional CFO who has worked across firms and industries may be able to implement better controls and systems.

Strategic M&A

A growing business may look for new opportunities via acquisition. Showing up to the negotiation table without experienced guidance could be a shot in the foot. Understanding how to value companies, perform due diligence, and structure deals allows CFOs to provide valuable insight that goes straight to the bottom line.

Experimental or project-based

For startups that have never had a CFO, a fractional CFO serves as an experiment and perhaps a stepping stone to hiring a full-time CFO. They can even help with vetting and hiring finance related staff. Any temporary scaling needs would be taken care of on a project basis.

For example, if your company wants to enter a new market overseas, a fractional CFO can help prepare financial forecasts and feasibility reports to decide if it makes sense. You could also leverage their expertise to assess marketing campaigns or even apply capital efficiently post-funding.

Looking forward

Controllers and accountants typically provide backward-looking support, creating financial reports at the end of a period. A CFO provides higher-level analysis and judgment to understand business activity and develop effective strategies guiding day-to-day operations.

For example, in a business without a CFO, the owner may receive financial statements from the bookkeeper, including cash balance reports every month. From this information, the owner sees a trend where cash balances tend to be in deficit during certain months but dismisses this data as normal for a seasonal business.

On the other hand, when a CFO sets eyes on the same report, the focus turns to KPI, profitability, and modeling different scenarios. A deeper dive into the numbers may reveal strategic changes necessary like re-pricing or tweaking products.

Dynamic businesses are more likely to succeed when reports include information that could guide decision makers. An experienced CFO can analyze and interpret financial data to help expand business operations.

Drawbacks of Hiring Fractional CFOs

While there are many advantages to having a fractional CFO, hiring one may not be the best fit for your business.

Priority and commitment

While using a fractional CFO on demand keeps costs down, you may not always have priority access to the CFO. Outsourced CFOs have other clients competing for their time and often choose their own working hours.

Availability

Before you hire, make sure you’re clear on the availability and access you get to your CFO. A part-time hire might not be present to guide management daily and answer ad-hoc questions right away.

Alternatively, you may choose to work with a company that provides a pool of CFOs. If you end up working with more than one CFO, you’ll have access to expertise when you need, but may not get the specialized attention or in-depth understanding of your business that you desire.

Turnover

At times with full-time hires, you experience inertia that keeps your hires in place even if they aren’t working out. With fractional CFOs you have more flexibility to hire and fire as appropriate, which is beneficial, though the turnover does add switching costs to the business.

Skill fit

As with any hire, you face the same challenges of finding a CFO with the skill set you actually need. Some CFOs may have more global product experience, while others may have fundraising or specific industry knowledge.

Finding the right financial fit

82% of businesses fail due to cash flow mismanagement, and a CFO can help when the door seems to be burning down. Senior finance leadership brings strategic forward planning, budgeting, special projects expertise, and perhaps even software automation to propel your

business forward.

Beyond being a pure cost decision, hiring a CFO depends on your need to tap into a different skill set. If your business is experiencing rapid change or undergoing immediate stress, it’s probably time to find help. Evaluating your overall ROI from hiring a CFO can help clarify which type of investment makes sense.

Even with limited resources as a startup or small business, consider whether a full-time expert or fractional CFO fits your business model. Investing in help is a sign that you are ready for change, which is what it takes to get to the next level.


About the Author: Anna Yen
Anna Yen, CFA, has nearly 2 decades of experience spanning financial markets, cryptocurrencies, and digital marketing. Currently she manages digital assets at FamilyFI, working to empower families with financial literacy.