What Is a Fractional CFO and Why You Need One in 2022?
Small businesses and startups, especially ones that are in early growth stages, often operate cost-efficiently by having their corporate leaders “wear several hats.”
This essentially means that while these organizational leaders have specific duties and responsibilities, they often have to also be in charge of other aspects of the business that might reside outside of their spheres of expertise.
For better or worse, one of the aspects of running a business that is often prescribed to someone who might not be an absolute expert in the field is running a company’s finances.
Especially in small, bootstrapped startups, CEOs or CMOs are often tasked with analyzing and planning the company’s financial strategy and monitoring cash flow issues, in addition to the main responsibilities that they may already have on their plates.
Not only are these processes of analyzing, planning, and forecasting company financials extremely time-consuming and challenging, they’re also, undeniably, incredibly important.
And for small businesses and young startups, one major financial mistake can cripple the company before it has even had a chance to take off.
But what if you don’t have the budget required to hire a dedicated, experienced, and highly-skilled Chief Financial Officer (CFO)?
In such a case, hiring what is called a “fractional CFO” is, very easily, the best option you may have.
What Is a Fractional CFO?
A fractional CFO is basically an outsourced CFO. That means that you’re hiring a part-time CFO to work with your business and solve all, or some, of your most pressing financial issues on a freelance basis.
The greatest benefit of hiring a fractional CFO is that you’re getting someone to help you with your finances who has expert knowledge at a fraction of the cost of what you would have to pay a full-time CFO. With a fractional CFO, you’re getting high-end financial services without having to pay the high salary, benefits, and bonuses that a full-time CFO demands.
Some companies hire a fractional CFO to help them with one-off situations (cash management issues or creating a financial forecast) or to serve as long-term advisors. Companies will often hire a fractional CFO if they don’t have the money to hire a full-time one, or if they are in between CFOs and need someone to keep the company’s financials on course while they look for a full-time financial officer.
Why Hire a Fractional CEO?
While a full-time CFO is usually responsible for long-term strategic initiatives, fractional CFOs are most commonly hired to help a company overcome one-off or specific financial issues. For example, a part-time CFO could be brought in on a retainer to help with an audit, provide advice and guidance in the fundraising process, or optimize growth strategies.
Part-time CFOs can also help navigate issues such as cash flow, managing expenses and making cost cuts, or establishing new financial systems when a business has outgrown its existing ones.
You’ll also commonly see companies with CFOs turn to a fractional CFO to act as a partner and offer assistance when a company is dealing with a complex financial project that’s either on a strict and short deadline or requires a fresh perspective to be solved effectively.
How Fractional CFOs Can Help Companies
Since a part-time CFO is not meant to be with your company for the long run, the main objective a good temporary financial officer will have is to make sure that your company is prepared for the future and on the right track for financial success.
A CFO does this by taking on a strategic role in order to help companies set and meet financial goals, streamline and improve processes and protocols, and great stability and structure within your company’s financial infrastructure that will enable your business to successfully grow and scale.
Now let’s take a closer and more specific look at some key processes that a temporary CFO could help your company implement and refine:
Planning a Company’s Financial Future
Even if they don’t have an active CFO on staff, most small businesses and startups will have financial staff members such as accountants and bookkeepers who organize and document the company’s financials. A fractional CFO doesn’t do these things. Companies hire bookkeepers and CPAs to keep track of the company’s past and current finances. An outsourced CFO usually focuses strictly on the company’s financial future and where the company wants to be.
The most common service that a fractional CFO provides is taking a lead role in putting together financial strategies and forecasts that will help put your company in a financial situation in which its growth and development goals will be achievable. An interim CFO puts your company in the right financial situation to succeed.
You could also ask them to determine if you need or could benefit from an investment or loan and, if so, help the company secure one. Or if your company would rather bootstrap its growth without looking for outside investors, the CFO could put together a lean strategy that enables the company to grow successfully despite a lack of outside funding.
Once the interim CFOs job is done at your company, you should have a financial roadmap to follow that should enable your company to grow, scale, and develop successfully within its preferred financial model.
Help Achieve Specific Goals
Many times a young company would rather wait to find a full-time CFO before putting together long-term strategies that are going to shape the future of the company. So it’s not uncommon to see small businesses and startups hire a temporary CFO to help achieve short-term, specific goals instead.
One of the most common examples is hiring a fractional CFO to help with raising capital. It’s also common to see more mature companies that have an experienced CFO in place enlist the services of a fractional CFO to help with big projects such as mergers or acquisitions. These types of complex projects can often benefit from having the perspective of another CFO with financial expertise acting as a consultant to your CFO.
Why Startups Often Need a Fractional CFO
According to a recent study on startup failure rates and the reasons behind their lack of success, 16% of the startups that were polled claimed that finance problems were at the root of their failure.
And the reason that many startups don’t sure-up their financial situation properly is, unsurprisingly, a lack of money. As we’ve already mentioned, early-stage growth startups often don’t have the money that’s needed to hire a dedicated CFO, which leads to other, less-knowledgeable organizational leaders taking on those responsibilities.
Hiring a fractional CFO presents a perfect solution for avoiding these issues without having to shell out large sums of money for a permanent CFO. Hiring an interim CFO saves startups time and money and allows its leadership to focus on the strategic initiatives they should be focusing on while gaining the peace of mind that comes with knowing that a seasoned financial expert is looking after your company’s money.
To get a better understanding of why startups hire fractional CFOs, you can read more about CFO services for startups
How to Find a Fractional CFO
`Finding not just a great fractional CFO, but one that is a perfect fit for your business and your particular business needs, is not easy. You could consult your peers and people within your business ecosystem who might be able to point you in the direction of someone with whom they have worked and can recommend.
But if you don’t have the contacts, but especially the time, needed to perform such a search, asking an experienced consulting and hiring agency like Shiny to find someone who offers the right fractional CFO services is certainly one of your best options.
We already have a deep network of experienced freelance CFOs who many startups and small businesses can vouch for and recommend. Before we make any recommendations, we learn about your organization and your specific needs as much as possible so that we can be certain that we are looking for and recommending fractional CFO candidates that fit exactly what you’re looking for in a financial advisor and leader.
But how can you vet your candidates and be sure that they are going to be a perfect fit for your company? Here are some important aspects to go over and consider during this process:
Just like with any other important hire, it’s best to find a fractional CFO that has experience working in your industry. Every industry has specialized financial requirements and considerations, which means it doesn’t make sense for a tech startup to hire a part-time CFO that has mostly worked with construction or real estate firms.
In the best-case scenario, you would be able to find a candidate that is both experienced in your industry and a number of other, even unrelated industries. Insights and experience gained from other industries can often give CFOs an edge when creative strategic financial planning and outside-the-box solutions are needed.
What expertise and skills are most important to you? If you’re hiring a CFO with the sole intention of finding someone to help you raise venture capital or equity funding, make sure that you short-list the candidates that specialize in fundraising.
If the CFO services you need entail the creation of a financial strategy and implementation of the right growth infrastructure, focus on fractional CFOs with that type of profile. Make sure that what they do aligns best with your goals.
While the process of starting to look for a part-time CFO can be daunting, it’s ultimately a necessary step that many young companies need to take in order to accelerate their growth properly.
If you’re hesitant about putting the bulk of your company’s financial future in the hands of a part-time financial expert, start slow. Get them involved in short-term, specific projects such as cash flow projects and mid-term financial modeling to first get a sense of how they work and build the proper rapport with them.
The best thing about hiring a fractional CFO is that it’s much less risky than finding a full-time hire. If it doesn’t work out, you can very easily end your cooperation and start looking for another freelance CFO that will better fit exactly what you’re looking to gain from a freelance financial advisor.