Finance insights 5 min read

What is a fractional CFO? Everything you need to know

Bryan Kesler

Every business is built on a simple model - invest, create, earn. Businesses invest capital and resources to create value-added products or provide services and receive payments in return. At its heart, every business is a simple cash-in, cash-out cycle. If one end of this cycle is affected, it's only a matter of time before the entire cycle is destabilized.

The CFO, or the Chief Financial Officer, can then be thought of as the very beating heart of every business that keeps the vital bloodline of finance flowing through the business' veins so that it can sprint, leap, and achieve great things. 

Startups, especially in their early phases, usually do not have full-time CFOs as they may not generate enough revenue to justify the cost of an additional C-suite member on the payroll. However, when things begin to look exciting - during a time of rapid scaling up or in case of a merger or acquisition - a CFO becomes inevitable.

Still, many startups might be hesitant to take on the additional cost of a C-suite colleague, especially when the situation necessitating the presence of a CFO is transitory. CFOs, after all, bring highly valuable skills to the table and expect reasonably commensurate compensation

Hiring a fractional CFO is an innovative solution to this conundrum that many startups face.

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What is a fractional CFO?

As the name suggests, a fractional CFO is someone who lends their financial expertise to a startup on a contractual basis. Fractional or part-time CFOs have extensive previous CFO-level experience, but generally help startups tide over on a temporary basis.

In most cases, fractional CFOs are involved with more than one startup. This is unlike full-time CFOs, who remain employees of the firm with all the associated benefits and responsibilities.

What does a fractional CFO do for growing businesses?

A fractional CFO handles a range of functions for a startup, including:

1. Finance

This is the CFO's bread-and-butter role. As startups expand, their financial processes become too complex for the founders to manage with the help of an accountant alone. They need someone capable of seeing the bigger picture through the nuts and bolts of financial reporting and accounting.

This is where a fractional CFO can step in and clear a path through the web of numbers and statistics.

2. Optimize strategy

Businesses run on money, which means that CFOs, as the financial gatekeepers, are essential to strategy formulation and optimization. A fractional CFO can weigh in on the financial side of strategy by bringing in a perspective based on the numbers.

In other words, your fractional CFO can test your strategy and tell you if it's financially viable. And if not, what can be done to optimize it.

3. Implement systems

As startups scale up, they need to put in place better systems to meet their changing requirements. This necessitates the supervision and guidance of someone who has implemented multiple systems in different scenarios.

Someone who's seen it all can predict the things that can go wrong and correct them before they do.

A fractional CFO can field his or her experience to ensure that the implementation of new systems is smooth and glitch-free and is done without any disruption to your existing workflow.

4. Raise capital

Business expansion requires the infusion of new capital. From valuing the company, to speaking with potential investors, to taking care of the post-deal paperwork and due diligence, a fractional CFO becomes indispensable to the process of raising capital

5. Navigate an audit or transaction

As businesses grow, internal audits become necessary to get a measure of the company's financial health. In many cases, audits may also be mandatory by law. An audit may involve a microscopic inspection of not just a company's cash flow but also procurement and purchasing systems, taxation, and every transaction involving the exchange of money.

Due to the complex and very minute nature of audits, founders - especially first-time entrepreneurs - may not have the experience to navigate their firm through it.

Having a fractional CFO on board means the founders can delegate all responsibilities related to the audit to someone who is experienced in the domain. 

Key advantages of hiring a fractional CFO

1. Cost

Unlike traditional businesses, startups need to remain conscious about paying only for what they absolutely cannot live without. Everything else is either in-house or done without. 

Fractional CFOs are the next step in this evolution of the scrappy, bare-knuckle startup. Think of a fractional CFO as a CFO on-demand. Your startup benefits from all the expertise of an experienced CFO when it is needed the most, without the additional cost of having an extra C-suite colleague on your payroll.  

2. Experience

A fractional CFO, by definition, isn't just a freelancing finance or accounting professional. They are a seasoned boardroom veteran who's spent years leading organizations through a multitude of business challenges. This means you get someone who has the vision and foresight to help you navigate not just that which lies immediately ahead, but also that which will eventually be inevitable.

Moreover, since a fractional CFO usually handles multiple companies, they provide a diversity of experience borne out of tackling a wide variety of challenges across different domains.

In other words, part-time CFOs offer professional experience that is valuable not only on account of its depth but also for its breadth.

3. Flexibility

A major bottleneck that stifles many startups is being stuck with people, especially those in leadership positions, whose vision, ethics, or business philosophy founders have major differences. Constant friction at the top can not just sap a startup's energy, but also disrupt its focus.

Parting of ways, as and when it comes, can often be bitter and financially ruinous. With a qualified fractional CFO, founders can move on easily if the relationship isn't a fit

4. Focus

A fractional CFO, like an external consultant, comes in to tide your startup over its immediate needs. This means that you can focus better on the task at hand - whether it be an audit, a merger or an acquisition, or a round of raising capital.

How to hire the right CFO for startups

Although a fractional CFO isn't just another freelancer or consultant, the dynamics of hiring one are similar. Begin by looking at CFOs who have worked in the same niche, and also helped companies the same size as yours achieve growth.

Additionally, you should find someone who is excited by what you do. Startups are built by people who are passionate about their work, and there is no reason you need to make an exception to this core value of startup culture when you hire a fractional CFO.

You could even consider partnering with a specialized human resources firm to find the right fit.

To sum up

A fractional CFO brings in a wealth of experience across different domains without burdening a startup with exorbitant costs. In fact, hiring a fractional CFO is perhaps the only way a young startup can get access to best-in-the-business expertise without having to pay through the nose for it.

Like all great business models, it's an arrangement that suits both sides.

Of course, once startups scale beyond a certain size, they may come to realize that having a full-time CFO makes better business sense. For those who are still finding their feet, though, there was never a better time to think about hiring a fractional CFO.

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Bryan Kesler

Bryan Kesler, CPA is a passionate CPA exam mentor with a mission of helping all CPA Candidates struggling to pass the CPA exam find success. As a business owner and licensed CPA, his first priority was to find a firm that could manage his own accounting and provide him with CFO services. He understood that if he was to stay focused on his singular goal of helping as many CPA candidates pass the CPA exam, he shouldn’t be the one to handle his own accounting or tax services.