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Fractional CFO: Who Are They and What Do They Do?

Fractional CFO: Who Are They and What Do They Do?

Contents

Small businesses, especially those with less than $10 million in annual revenues, may lack the resources to hire a full-time chief financial officer (CFO). Nevertheless, these companies often have plans and growth goals to reach that benchmark and may have growth-related problems and cash flow issues that need the supervision of a senior financial executive. However, they don’t require top-notch talent every day. That is the reason many companies contract part-time CFOs or fractional CFOs.

A fractional CFO is usually a seasoned CFO who offers their services for firms on a part-time, retainer, or contract basis. This gives a company the experience and knowledge of a high-end CFO minus the in-house cost—salary, benefits, and bonuses, etc.—of a full-time CFO. Companies often turn to fractional CFOs to assist on specific financial challenges such as cash flow issues, low gross margins, high expenses, an audit, and budget trimming. CFOs can also help small- or medium-size companies install automated accounting systems. In most cases, automating the accounting process is the best method to manage high volumes of data. 

Why Should You Hire Fractional CFO Services?

Hiring a fractional or part-time CFO can help a company focus on primary financial essentials and macro-financial strategies that are difficult to do when tending to daily operational minutia. A full-time CFO generally oversees and maintains all of a company’s general financial strategy. A fractional CFO’s duties are typically on a per-project basis and focused on a company’s specific challenges or goals. Part-time CFOs are economical and provide an outsider’s point of view that gives vital input and insight to help make strategic decisions.

  • Other incentives for a small business to hire a fractional CFO include:
  • The company is too busy to take care of bookkeeping and accounting functions.
  • The firm needs to hire a CFO to improve its finances by consulting with an expert who can provide strategic financial advice.
  • The owner wants to move into a new market or is interested in vertical integration.
  • Forecasting has become too difficult or too unwieldy.
  • The business owner wants to merge with or purchase another company.

What Fractional CFO Services do Small Businesses Need?

Fractional CFOs typically work with small- and mid-sized businesses to help resolve financial challenges, boost the company’s growth, improve strategy, install systems, raise capital, or help manage an audit or transaction.

Small businesses often require several fractional CFO services:

  • Performing routine bookkeeping and month-end accounting
  • Establishing forecasts for cash, revenue, expenses, and profit
  • Analyzing the monthly budget versus the actual revenues and expenditures
  • Helping management develop an enterprise-wide strategy and sharing financial expertise
  • Managing relationships with banks, lenders, and investors
  • Partnering with certified public accountants (CPAs) to complete annual tax filings
  • Taking care of due diligence and the valuation of business acquisitions

What Can a Fractional CFO do for your Company?

Companies often hire fractional CFOs to help resolve financial challenges that the company’s existing team can’t manage because they either lack the necessary skills or the manpower to manage the issue. In many instances, a small business does not even have an in-house CFO. Small companies are often founded by an entrepreneur and typically have a part-time bookkeeper and simple systems in the early stages. Later on, they discover that they cannot handle robust business growth and greater complexity without the aid of additional financial management. As a result, the company has to improve and upgrade its systems, resources, processes, and strategies as it grows.

Other times, the company employs a CFO. The fractional CFO adds value by partnering with other executives, advising staff, or leading projects such as creating financial forecasts, raising capital, or supervising an audit. However, internal financial and accounting staff may also be so preoccupied with the details of recording daily bookkeeping and historical data that they can not take care of strategic financial planning. Besides, many companies don’t have a financial advocate to weigh-in on key business decisions. A fractional CFO can also add value by working with the management team to understand what the numbers indicate and provide financial analysis.

Solve Your Financial Challenges

Many small businesses lack a financial advocate to weigh-in on crucial business decisions and help to solve problems such as cash flow issues or low gross margins. Fractional CFOs can offer a complete range of skills to their clients. They can offer diverse expertise in the details of financial management for companies in many different industries. Therefore, adding a finance expert to the management team who is focused on understanding what the numbers say, is forward-looking and brings the finance perspective to the table is where a fractional CFO can add a lot of value.

Create Essential Financial Infrastructure

After a small business hires a fractional CFO, they often develop into a dependable managing partner to the president or founder by assisting with financial management. The fractional CFO’s mission is to lead goal setting with a financial focus and to eliminate any disruptions associated with the budget. A well-developed infrastructure is essential to accomplish these goals. This helps with financial forecasting and reporting that provides the CEO or company president with a clear understanding of the future. Crucial aspects of the financial infrastructure include:

  • The crafting of internal and external reporting
  • Creating repeatable procedures
  • Developing efficient data-driven structures
  • Creating key performance indicators (KPIs)
  • Constructing comprehensive short-, mid-, and long-term financial forecasts and goals

Helping Achieve Goals

Small businesses typically contract with a fractional CFO to accomplish a specific goal, such as obtaining capital or readying the company for a sale, merger, or acquisition. The range of the work that the CFO will take on depends on the depth of a company’s teams in different departments, i.e., finance, information technology, etc., and the state of financial statements and processes. The fractional CFO can help determine which areas need the most support and time to obtain the greatest return on investment (ROI). Thus, a fractional CFO provides both executive and financial management to help give business leaders lucidity about corporate finances. A fractional CFO’s tasks usually begin with bringing the company’s books into proper shape and creating financial forecasts. Many fractional CFOs have also helped numerous companies raise millions of dollars in debt and equity funding and have partnered with companies to complete many mergers and acquisitions.

Helping Manage Growth

A fractional CFO’s leading role is to provide a company with strategic advice to improve procedures, aid with developing goals, and build the financial infrastructure that supports a small business’s growth capacity. Thus, the CFO aids the leader of the company improve financial management as he or she devises plans for future growth. The CFO is also responsible for monitoring the company’s evolution over time. Another vital role for a fractional CFO is to help an expanding company to ensure it continues to earn profits as the business increases its revenues while developing new products and expanding into new markets. During this time, the CFO can help transform a company’s tools, procedures, and vendor relationships as it improves its products and services to obtain new customers. A company can experience a decline in profit margins and deal with new challenges as its revenues climb past a certain level.

Five Reasons and Benefits of Hiring a Fractional CFO

Top expertise for lesser Price

A fractional CFO provides a company with a high-end CFO’s know-how and proficiency at a fraction of the cost. Because many small businesses do not require a full-time CFO, a company can hire a fractional CFO just for the required services and even for financial responsibilities, such as bookkeeping. A fractional CFO’s tasks and functions can range from solving one-off pressing issues to working for the firm as a vital long-term advisor.

Helping with transitions during periods of high growth or downturn

Companies often contract fractional CFOs when there are financial tasks that the company’s employees do not have the skills to manage or solve. In many cases, a small business may employ a full-time CFO, but the company still contracts a fractional CFO to help manage specific projects such as obtaining capital, supervising an audit, or coping with a decline in sales. Fractional CFOs are also helpful when a company’s business is expanding to ensure the company remains profitable during a period of robust growth.

Mentoring and Staff Development

Contracting a fractional CFO can help the entire finance department’s staff because part of the CFO’s responsibility is to impart updated knowledge about financial management to the in-house employees. The CFO acts as a mentor and helps to improve the staff’s skills and expertise so they can take over after the fractional CFO’s contract ends.

Expert Strategy and Guidance

Generally, CFOs can help set goals and priorities relating to the company’s financial strategy. A CFO can help improve processes, help set goals, and manage the financial infrastructure that improves a company’s ability to grow. For example, a fractional CFO can assist entrepreneurs who want to introduce new administrative and operational systems. A fractional CFO can coach the company’s finance and accounting team (both accounts receivable and accounts payable) and review crucial documents such as the balance sheet, the income statement, and the statement of cash flow.

How Much Does a Fractional CFO Cost?

Fractional CFOs bill clients either on an hourly or daily basis, which can add up to quite varying monthly charges. The costs of a fractional CFO also depend on how many services are required by a company. A company may decide to contract with a fractional CFO for just one project or perhaps establish a retainer agreement to obtain ongoing guidance and expertise. The average fractional CFO cost for a retainer agreement typically ranges between $3,000 and $10,000 per month. Most providers will create a custom quote based on your specific needs. Part-time CFO costs average about $1,200 to $2,500 per day, according to industry reports. Compare that to an annual salary for a full-time CFO that can be $300,000-$350,000 (that includes salary, benefits, and bonus). As a result, contracting a part-time or fractional CFO can translate to savings of more than 50% in total costs.

How to Find and Choose the Right Fractional CFO for Your Company?

Choosing the right fractional CFO for your company requires conducting the same extensive due diligence as when hiring a full-time CFO. As with any position, it is important to find the best person for the job who will get along with key employees such as the bookkeeper and accountant. The interview process is important to learn more about the candidates, and it is probably prudent for the CFO to meet with executives and staff members of the finance department. Companies should interview at least three candidates and try to learn more about their personality and operating style. For example, do they appear to work well with a team or seem to have a lone-wolf contractor personality? It is also crucial to determine if the candidate listens carefully to what you discuss about the job and the business and comprehends your company and its challenges and goals.

Along with being an expert in his areas of expertise, the CFO must be trustworthy and have a sterling reputation, which is crucial for a person who will manage the company’s finances. It is also important to search for a fractional or part-time CFO with wide-ranging experience with companies that are both recent launches and more established enterprises within your industry. Suppose your company is searching for a CFO to handle one goal or challenge. In that case, it is essential that the CFO is an expert in this area and can provide information about solving similar issues in his previous roles. Finally, it is important to ascertain if the fractional CFO will offer services custom-tailored to your needs and just offer a standard set of tasks.

Fractional CFO FAQ

How many hours do fractional CFOs typically work?

A: The number of hours that a fractional CFO may work can vary widely from four hours per month to two days a week.

When would be the best time for a seasonal business to bring in a fractional CFO?

A: A company may consider it to be advantageous to contract a fractional CFO during its busy season because he or she can be a great resource during its peak time. However, the small business may choose to hire a fractional CFO during a slower period because the CFO may be able to help with many different projects, including taking care of long-range planning, when there is more time to interact with executives and other employees.

What are the first few tasks a fractional CFO should complete during a cash crisis?

A: The first step is to set up cash management tools (weekly, six or 13-week flow predictions) to comprehend the extent of the problem and to develop a projected time to solve the issue. Pinpoint and recommend options to yield cash immediately, such as lengthening the time to pay bills.  The responsibilities will include setting up a list of the most important ways to preserve and generate cash. When the crisis is over, the fractional CFO can set up reporting to create a better warning system to help a company react quickly and avoid another crisis.

Is a COO higher than a CFO?

A: Not necessarily. The CFO manages a company’s financial operations and reports directly to the CEO. The COO, or Chief Operations Officer, supervises a company’s daily administrative and operational systems and functions and reports directly to the CEO.

To whom should the CFO report?

A: The CFO usually reports directly to the CEO.

Conclusion

A fractional CFO provides the expertise and technical abilities of a high-end, full-time CFO at a fraction of the expense, especially when considering outlays for salary, benefits, and bonuses. What is certain is that not all companies need the services of a full-time CFO throughout the year. The fractional CFO enables a company to hire a professional to resolve specific, pressing challenges or help to supervise major projects such as raising capital or an audit. Overall, CFOs can help a company establish goals and priorities relating to the company’s financial strategy. In short, a CFO can help improve a small business’ processes, help a company set revenue and growth goals, and manage and improve the financial infrastructure that can boost a company’s ability to grow.

About the Author

Tyler Barr, Director
Tyler Barr, Director

Tyler Barr is the director for Punch Financial and an outsourced controller who specializes in managing financial and accounting functions for various small businesses and startups.

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