A common challenge for small business owners and entrepreneurs is the financial side of running a company. Analyzing your current financial situation and planning for future growth can consume a tremendous amount of valuable time, which could be better spent on your core business. It may not be cost-effective to hire a full-time CFO (chief financial officer), yet you need their insight to make sound business decisions.
A fractional CFO (aka outsourced CFO), much like the name implies, is a part-time CFO that works with organizations to solve financial problems. Unlike a full-time CFO, who oversees and manages all financial operations, the duties of a fractional CFO can range from solving one-off tactical issues to serving as a long-term strategic advisor.
A fractional CFO provides high-end knowledge and expertise at just a fraction of the cost, which is what makes this option so compelling.
What Does a Fractional CFO Do?
In simple terms, a fractional CFO performs the same function as a full-time CFO, just on a part-time basis. A CFO is accountable for the administrative, financial, and risk management operations of a company, which includes developing long-term financial and operational strategies and the metrics used to gauge progress. To prevent any surprises, a CFO also creates and maintains control systems designed to preserve a company’s assets and report accurate financial results.
For example, a fractional CFO can help raise capital to invest in product development or expansion. Or, they can help determine whether you can afford to hire more people or invest in a new line of business by working with your team to build a cash flow forecast. But that’s just a start. It’s important to understand a fractional CFO’s role before deciding whether you need one for your company.
The Strategic Role of a CFO
A CFO’s role is strategic, which means they can streamline processes, drive goal setting, and create the financial infrastructure that supports a company’s ability to grow and scale. In other words, a CFO helps the CEO plan for the future – whether it’s three months, six months, or one year – while keeping track of the firm’s progress over time.
Companies bring in a fractional CFO for this work because they either lack the resources and/or skills to tackle such financial challenges. Or, they want an outside, unbiased opinion.
It’s important to realize that a fractional CFO is not a CPA, controller, or bookkeeper. These financial roles focus on organizing past and current finances, which a good CFO could do and should understand well – but that would be an inefficient use of their time.
Solve Specific Financial Challenges
There will be moments where companies encounter financial challenges that require the technical savvy of a CPA and the strategic vision of a CFO. These typically arise as unique, one-off scenarios that are perfect opportunities to tap into a fractional CFO’s expertise, especially if the CFO has dealt with the issue before. Some examples include:
- Creating a package for prospective lenders
- Preparing a go-to-market strategy for equity funding stages
- Overhauling existing accounting systems
- Navigating an external audit
- Identifying cash flow issues
Create Essential Financial Infrastructure
For many small companies, a fractional CFO becomes a trusted partner to the CEO. Their role is to direct goal setting through a financial lens and eliminate any surprises associated with the budget. A robust financial infrastructure is critical. It drives the creation of financial forecasts and reports that guide a CFO’s understanding of the future. Key aspects of financial infrastructure include:
- Internal & external reporting
- The development of repeatable processes
- Efficient data-driven systems
- Key performance indicators (KPIs)
- Detailed short-, mid-, and long-term financial forecasts
Provide Clarity for Financially Sound Plans
A fractional CFO can build upon a proper financial infrastructure and provide clarity for sound financial planning. Their work can streamline decision making about:
- Short-term and long-term growth strategies
- Expanding the number of employees
- Determining the marketing budget
- Motivational employee compensation plans (stock options, equity)
- Potential investments in equipment and property
What Are the Benefits and Drawbacks of Fractional CFOs?
Given that a fractional CFO will become a key player on your executive team, it’s important to consider the positive and negative aspects of such an arrangement. For example, the long-term benefits of working with a fractional CFO include:
- Top-tier expertise for less.
A fractional CFO offers the knowledge and expertise of a high-end CFO at a portion of the cost. Not all companies need 2,000 hours from a full-time CFO each year. With a fractional CFO, you only pay for what you need, and (depending on who you use) they may also be able to provide fractional resources for other financial tasks, such as bookkeeping.
- Pick talent based on your needs.
You can use the expertise of fractional CFOs to tackle specific, one-off financial challenges. Invite them to share their outsider perspective so your team can come up with creative, outside-the-box solutions.
But, of course, there are some drawbacks to consider too:
- Potentially no skin in the game.
If the compensation package does not include equity, a fractional CFO’s incentives may conflict with the rest of your team. However, this is a small risk. A professional fractional CFO will have a business structure that ensures they receive appropriate compensation and can provide unbiased advice.
- Delays growth of in-house talent.
Leaning too heavily on a fractional CFO or an outsourced accounting team can eliminate the need to grow in-house talent. For some firms, this may cause the spread of financial knowledge to stagnate internally. Choose someone who can demonstrate a willingness to pass the baton when it’s time for your firm to bring this function in-house.
How Much Does a Fractional CFO Cost?
Most fractional CFOs charge by the hour or day, which results in different monthly costs depending on the level of engagement a company needs. You might hire a fractional CFO for a one-time project, or you may wish to set up a retainer arrangement so you can receive their advice on a regular basis. It’s completely up to you.
On average, an ongoing relationship with a fractional CFO will cost between $3,000 and $10,000 a month. Agreements with small to mid-sized companies typically fall between $5,000 and $7,000 a month.
As a comparison, A full-time CFO’s salary will vary depending on the industry and location, but averages at a base of $200,000 per year. When factoring in bonuses, benefits, equity, and overhead — you could be looking at over $300,000-$350,000 annually. This means hiring a CFO on a part-time basis can easily deliver over 50% in cost savings.
What is a Fractional CFO Service?
For some companies, hiring a fractional CFO would fulfill only a portion of their needs. They still need help managing their day-to-day finances and completing taxes, which is where bookkeepers and accountants can help. Delegating everything to an outsourced CFO would be an expensive and poor use of their talents.
A fractional CFO service can handle all of your finance and accounting needs, including the CFO. With a service, you gain an entire team of financial and accounting professionals, all of whom support the CFO role. This division of duties can make a fractional CFO service an affordable one-stop-shop for replacing an in-house accounting team.
How Can You Find the Right Fractional CFO for Your Company?
As with any position, it is important to find the right fit. A good fractional CFO will be qualified and trustworthy – two vital characteristics for the person handling your finances. Look for CFOs with extensive experience with companies in various development stages within your industry. If you’re looking to accomplish a specific goal, it is important that the CFO has done it before and can share the results.
At the end of the day, your fractional CFO will effectively become the financial voice of your company and (in some cases) possess the authority to make decisions. It’s critical to find someone with a strong professional reputation that you can trust implicitly. At The CEO’s Right Hand, our fractional CFOs have decades of experience across multiple industries. To speak to one of our CFOs, please contact us directly.
Mr. Lieberman is the founder and CEO of The CEO’s Right Hand, Inc., a New York-based consulting services firm that provides the full breadth of strategic, financial and operational advice to founders, CEOs and Executive Teams. As an experienced entrepreneur himself, he has served in various C-suite leadership and advisory roles across a wide spectrum of industries.
His first venture was CMR Technologies, a FinTech company based in San Francisco serving the investment management consulting space. From CMR, Mr. Lieberman formed Xtiva Financial Systems, a software company specializing in sales compensation solutions for the financial services industry. Mr. Lieberman served as Xtiva’s CEO, building the company to over $10 million in revenues and 100+ clients. He also served as the President and CFO for Interactive Donor, a New York-based Benefit Corporation which incentivizes charity through rewards.
Mr. Lieberman holds double Masters degrees, one in Business Administration and the other in Computer Science from the University of California at Los Angeles. He completed his Bachelors in Computer Engineering from the University of California at San Diego.