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Do I Need a Fractional CFO with Industry Experience?

In some scenarios more than others, it is important to understand the background of a CFO and how they align with your objectives.

In some scenarios more than others, it is important to understand the background of a CFO and how they align with your objectives.

No matter how much formal education you have, there is usually no substitute for real-life experience. For instance, a recent study found that “CEOs with previous experience in the industry outperform industry outsiders in diversifying mergers and acquisitions. Their performance, measured as abnormal announcement returns, is two to three times higher. ”  

In a similar vein, when looking for a fractional CFO, how important is previous industry experience? In other words…

Does my fractional CFO need industry experience?

Like most things involving high-level executives, there is no one-size-fits-all answer. Instead, it depends on a few factors:

  1. The reason you’re bringing them in 
  2. The size and scale of your business 
  3. The industry within which you are operating
  4. The business model you’re relying on  

For instance, if your company operates in a highly regulated, complex space, like healthcare, then industry experience can be a big plus. But if you run a small start-up that’s struggling to balance its books, and you need an expert to help you get your ducks in a row, then most CFOs with strong accounting backgrounds should be able to do the trick. Understanding these factors will also help you determine the cost of your fractional CFO.

All that said, let’s take a look at each of the above factors more in-depth.

1. The reason you’re bringing in a fractional CFO

The first and most prominent factor is why you are bringing in a fractional expert in the first place. Are you certain you need a fractional CFO and not an interim CFO? If you need the CFO full-time for an interim period, then more than likely, you need an interim CFO. A Fractional CFO will support your business on a flexible, part-time basis.

On the one hand, you might be completely aware of why you need a fractional CFO at this time. Perhaps, your previous CFO left, and you need someone to temporarily fill that spot. Or, you might have a big project going on, such as an M&A or an installation of an ERP system, and you need an expert to help ferry you through this phase.

On the other hand, you might be unclear on the role your fractional CFO will play at your company. For example, you might have been talking to your banker when they pointed out a problem with your financials. Now, you weren’t 100% clear on what your banker was alluding to, let alone how that problem could be solved. As a result, you figured that the best solution was to bring in a fractional financial expert to find the problem and help you resolve it. 

You know exactly why you need a fractional CFO

According to Doug Hooper, a CFO and consultant with more than 20 years of experience under his belt, when a fractional CFO is being hired, they are brought in because they have the expertise on something. So, you want someone who's been there and done that multiple times, not just one time. 

For example, if you need a fractional CFO to help with the installation of an ERP system, then you want to find a professional who’s done something similar at least 2 or 3 times (doesn’t have to be the same exact system). Also, it would be good if they did it multiple times, at different scales, and in different industries.

In this case, industry experience is secondary to task-relevant experience.

Alternatively, you might be bringing in a fractional CFO because you need them to train your finance team and bring them up to speed. In this case, industry experience is secondary to how personable your fractional hire is and how much rapport they are able to build with your finance team. Additionally, this is one of the few cases where you might want to hire a fractional CFO near you rather than going for someone remote. 

You are not clear on what you need the fractional CFO to do

The other side of that coin is that you are unclear on what you need done. Again, you, as the business owner or CEO, know you have a financial problem of sorts but you are unsure of how to put words to it. So, you need someone who can both highlight the problem for you and solve it as well.

And, this is a very common problem among SMEs, one that is bound to show up time and again:

  • Your company was unable to finish an audit for some reason.
  • Your company’s banker asked for specific information, but you don’t know how to pass that information along
  • Your company is suffering from a cash management problem, but you are having a hard time identifying the leak. 

While you might not be able to define the problem, you should be able to classify it loosely. For instance, if it is something specific like a banking issue or an audit problem, then you want someone who’s solved similar problems 2 -3 times before, across different industries.    

Alternatively, if you don’t even know where the problem is coming from, such as the cash management issue mentioned above, then your best option is to at least try to guess whether the problem is strategic or operational. 

If you need a strategic partner, then it might be better to get a fractional CFO with some industry expertise. For example, if you’re concerned that the heads of your other departments aren’t managing their budgets well, then a CFO who understands the ins and outs of the industry can help your other department heads better manage their budgets.

Alternatively, if the problem is more operational, such as your books aren’t balanced, then having a strong accounting background is more important than having industry experience. 

2. The size and scale of your business

Gary Brooks, long-time CFO and financial advisor, believes that the size and scale of a business can play a huge role in how a fractional hire is able to fit in.

For instance, a CFO who is used to working with Fortune 500 companies is accustomed to having different departments to which he can delegate different tasks. So, if they need a particular report or document, they have numerous employees at their beck and call.

Conversely, when a CFO works with SMEs, they develop a do-it-yourself mentality. They don’t have the required human resources to whom they can delegate tasks, so these financial professionals have to roll up their sleeves and do the hard work. 

As a result, a CFO who’s only worked with large companies might struggle a bit if they were to become a fractional hire for an SME. Similarly, a CFO who has never served a public enterprise may struggle if they are thrown into one.

Another major difference relates to the developed mindset. A CFO who has worked with public companies learns to always keep the shareholders front of mind, and in every decision they make, they always need to ask themselves, “How will this affect the stock price?”

Alternatively, fractional CFOs working with smaller companies tend to worry more about operational efficiency and making sure that the company is set up for success. Over and above, many of these CFOs work with the business owners, preparing them to sell their business somewhere down the road. 

Because of all of this, it is fair to say that business size not only dictates how comfortable your fractional hire will be at doing their jobs, but it will also play a huge role in whether they are able to ask the right questions.

3. The industry within which you are operating

From an industry perspective, the necessity of expertise is going to depend on the following elements:

  • The degree of regulation
  • The complexity and nature of the industry

The degree of regulation

A very regulated industry might need someone with industry-specific experience just to understand some of the vocabulary and expectations. This becomes all the more important when you are bringing them in because you need help being compliant, reporting to the SEC, or just helping with general governance issues.

Bearing that in mind, healthcare and financial institutions are some of the most highly regulated. 

Even though the above image is almost ten years old, it goes to show how some industries can be far more regulated than others. For instance, petroleum and coal products manufacturing has almost 25x more restrictions in comparison to the median industry. (Caption for the above image)

The complexity and nature of the industry

The complexity of an industry involves the different risks and reporting issues a CFO has to contend with inside that industry. 

Some industries have their own nuances, and if your fractional CFO isn’t aware of them, they might struggle when creating forecasts or budgets. 

For example, Doug Hooper explains that in the pharmaceutical industry, timing is a big factor. Whereas a tech company can release a new piece of software in a matter of months, it can take decades for a pharmaceutical company to release a new drug and to recognize any profit from that. 

As a result, a fractional expert coming in from the tech scene might struggle to get up to speed in the pharmaceutical space. They will need to learn to adjust their forecasts according to the different industry cycles. They will also need to account for the costs that are being expended over long periods of time to develop a single drug. 

That said, a fractional CFO can have near-industry exposure, and that can still be enough. For example, going back to pharmaceuticals, you don't need the experience of a specific class of drugs so long as you have experience in pharmaceuticals, in general, to be effective.

4. The Business Model You Are Relying On 

Doug Hooper points out that regarding business models, the office of the CFO needs to have some knowledge pertaining to revenue recognition. In some cases, industry exposure is less important than having experience with different business models such as a subscription SaaS model. 

For instance, in a retail model, revenue recognition happens the instance the customer makes the purchase, i.e. hands over the cash to the cashier. But, in a subscription-based model, even though a customer may pay for a year-long subscription, revenue recognition only happens way later.

When it comes to profit vs non-profit, experience is a factor there as well. The reason is that some of the requirements, e.g. tax returns, are a little bit different. Fractional CFOs also have to know how to do some fund accounting, which is a special type of accounting used with non-profits and governmental institutions but not with for-profit organizations. 

A non-profit can be a little bit tougher, but it still wouldn't be too difficult. However, as the non-profit grows in size, things get more complicated, and it becomes harder for any CFO off of the street to make things work. But, any CFO can comfortably work at a small non-profit.

The elements that truly matter when hiring a fractional CFO

As you can see, there are several instances where you need a financial professional with particular experience. Sometimes, you need that experience to be industry-relates, other times you need it to be task-related. And, there are times when it is just about the size of the company.

However, as important as these factors may be, there are some non-negotiables that you want to see in any fractional CFO you bring in.

Being forward-looking rather than backward-looking

Even though we have highlighted several times throughout this piece that a fractional CFO needs a solid accounting background, it is worth remembering that around 95% of the accountants walking around look backwards: They're looking at what transactions happened yesterday.

However, you want your fractional expert to be forward-looking. As Gary Brooks succinctly puts it, “A CFOs job is to figure out what is going to happen next and deal with the problem you encounter tomorrow. So, when recording an accounting transaction, you want to ask yourself what impact this transaction will have on your bank accounts three years from now as well as whatever is happening today. CFOs need to have this kind of a mindset.”

Knowing how to ask the right questions

When a new fractional CFO walks into a company, their first job is to understand how the company works, how the people there think, and how they manage the company.

Accordingly, the CFO needs to know how to ask the right questions, which can sometimes also be hard questions, hence challenging the status quo and helping the company grow. 

For example, when Gary walks into a new company, here are some of the questions that he fires straight away to the business owner: 

  • How do you know that your bills are going out?
  • How do you know that your revenues are right?
  • How do you know what’s missing from your revenues?

And, a lot of times, the answer he gets to one or more of these questions is “I don’t know.” 

So, if you want to get the most value possible from your fractional hire, then you need to be comfortable with them challenging you and lobbing hard questions your way. 

Putting it all together…

When you bring in a new full-time CFO, you might have the luxury of giving them some time to figure things out and get better acquainted with your industry. This is a blessing, especially when the CFO is a collaborative individual who will be a true asset to your entire team.

However, if you’re bringing in a fractional CFO, more often than not, you’re bringing them in because you have an urgent matter that needs attending, and your existing staff is unable to tackle the issue.

As a result, when it comes to fractional CFOs, they are always required to achieve results quickly. They don't have a year to figure things out.

So, to be fair to your fractional hire when evaluating their performance, you want to set them up for success from the get-go. There are some cases where you need them to have specific experience and other cases where experience isn’t that important. To figure out where your business lies, here are a few questions to ask yourself:

  • Why are you bringing in a fractional CFO? Do you need someone to help streamline your operations, or are you bringing in someone to solve a specific problem? 
  • Is it more important for the fractional hire to have task-relevant experience?
  • How aware are you of the financial problem you are trying to solve?
  • How big is your business? Will the fractional CFO have a team to lead, or will they have to do a lot of the leg work themselves?
  • How regulated is your industry?
  • Are there specific nuances and quirks about your industry that might affect the accounting processes?
  • What business model are you relying on? 

And, while it might be difficult to find a financial professional who ticks all your boxes, there are some criteria that are mission-critical: being forward-looking and knowing how to ask the right questions.

Obviously, each company will have its own specific criteria that will dictate the type of fractional CFO who will best suit it. And if you would like help figuring out the ideal background for your fractional hire, then please don’t hesitate to reach out to us for a free consultation. We would love to help you find the best candidate for your particular circumstances. 

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