Understanding these factors can help you estimate the needed involvement and cost of a fractional CFO with your company.
Understanding these factors can help you estimate the needed involvement and cost of a fractional CFO with your company.
A fractional CFO is an investment. You pay for a seasoned expert’s time, and in return, you acquire a strategic partner who protects your assets, points out where you can be more efficient, and explores areas where you can be capturing more value.
However, like any investment, you need to know the costs upfront as well as the factors that could impact what you end up paying.
Seeing as the average fractional CFO costs somewhere between, $175/ hour to $350/ hour, you can expect to pay around $5,000 - $12,000 per month. This is assuming that your fractional CFO works 8 hours every week.
Alternatively, a full-time CFO makes $393,377 annually, which comes down to almost $33,000 per month. Even CFOs who are in the lowest 25th percentile still earn around $300,000 annually, costing you $25,000 every month.
So, for many small companies, hiring a full-time CFO doesn’t make a lot of sense. Not only can the company not afford it, but it also doesn’t have the necessary work on hand to justify paying for the full 40 hours a week.
As a result, fractional CFOs become a cost-effective solution for companies in need of guidance…
When budgeting for a new fractional executive, you want more information than what the average hourly rate may be. You want to know the different factors that affect your overall cost as well as a rough estimate of the total amount of money you may have to pay in the end.
The cost of your fractional hire depends on two things: their rate per hour and the number of hours they end up working. So, the following factors will either determine how much you are charged or how long your engagement with the CFO will be:
Let’s explore each of these factors individually.
As seen above, fractional CFOs may range in price from $175/hour to $350/hour. What accounts for this large variance?
The more experienced and specialized they are, the more likely they are to command a higher price than the rest of the market. So, if you are looking for an M&A expert to help ferry your company through a tricky time, this will cost you more than hiring a fractional CFO with a solid accounting background but little transactional experience.
Another major consideration is the number of hours you need from the fractional CFO. You will have an easier time negotiating with a fractional CFO if you have ample hours they can work. If you only have a few hours a month for them, that may come with a small premium.
Before exploring the different types of jobs for which you might bring in a financial expert, let’s talk about how most fractional CFO journeys look regardless of the actual job:
All this said, the above three steps can look very different depending on whether you know what you need your fractional CFO hire to do.
There are cases when you are very clear on why you are hiring a fractional CFO. Perhaps, you need someone to help train your current finance team. Or, maybe, you need help installing a new ERP system. Whatever the case, you have a clear idea of what your fractional CFO’s job description will look like.
On the other hand, you might not be clear on why you are hiring a fractional CFO. All you know is that your company has a problem, but you are uncertain about the source of the problem. For example, your company might have failed to pay payroll taxes, putting you in hot water with the IRS. And while you need a financial expert, like an accountant or a controller, to extricate you from this financial crisis, you also need a fractional CFO to pinpoint the source of the problem, i.e. why your company failed to pay those taxes in the first place, and to ensure that you avoid making the same mistakes again.
If you know what you need your fractional CFO to do, it becomes a bit easier to figure out how much you might have to pay.
To begin with, some CFOs will charge differently depending on the tasks required of them. A case in point is Doug Hooper, a financial veteran with more than 20 years of experience, who has two tiers of pricing: The first tier is for accounting finance, and the second is for coaching and mentoring finance teams. Now, Doug charges more for the first tier, the accounting and finance work, than he does for the second. And if both are required of him, then he will find a way to come up with a blended rate to represent both responsibilities.
Additionally, the discovery phase becomes somewhat straightforward as the fractional CFO is clear on what is expected of them. They know whether they need to show up to the office or not, they know the tasks they need to tackle, and they know how much time, on average, a task like yours should take.
To better appreciate how understanding the required responsibilities can influence time estimates, let’s look at a few examples:
In all cases, a solid time estimate will give you a ballpark figure of how much you can expect to pay.
This part is marked with ambiguity, and you need to remember that a big reason you are paying that fractional CFO is to lift the shroud surrounding your problems and to provide some clarity.
As a result, a lot of fractional CFOs may spend a big portion of their time in the discovery phase, looking for the source of your problem. For example, whenever Gary Brooks, the former CFO of the Houston Sports Association, took on a fractional CFO role, he would ask his client for a list of documents to help him assess the financial health of his new client. These documents would include the current financials, the description of current banking relationships, and so on.
So, to start off, Gary would let his clients know upfront that he would perform a preliminary financial assessment that would take anywhere between 50 hours to 100 hours while charging his clients $200 per hour. In some cases, if the company is complicated or its financial statements aren’t in order, Gary’s assessment may even take more than the expected 100 hours.
As he puts it, “You want the owners to have quick access to these financial statements. And, if they have a hard time finding them, then that is a red flag.”
Out of the 50-100 hour assessment, the client will get a 5 or 6 page report highlighting the biggest issues to tackle, and these issues are prioritized. More importantly, the report highlights how these issues can be fixed and what it would take to fix them. From there, it becomes possible to develop a long-term plan and put it in motion- stages two and three of the fractional CFO journey.
In fact, after the initial assessment, Gary prefers to share with his clients the estimated time required to complete the project. However, he also cautions that the estimate is just that: an estimate. In other words, it is very easy for the project to exceed the expected number of hours. But when Gary notices that this is about to happen, he warns his clients ahead of time.
When a fractional CFO comes into your company, there are several elements that can either slow them down or help them get the job done quicker:
The complexity of the business is a big factor that can derail your fractional hire. What exactly makes a business complex? Here are a few things: Selling numerous products and product categories, having multiple bank accounts, and relying on several lines of credit.
This is not to mention how your industry can add to the business’s complexity. For instance, companies working in the healthcare sector need to deal with plenty of red tape, requiring the CFO to spend more time ensuring compliance.
When talking about the type of required work, we mentioned that Gary Brooks tends to take around 50-100 hours for the initial assessment, especially when a company is unaware of all its financial problems.
Part of the reason the 50-100 hour range is so wide is that Gary is never clear on how quickly his clients can come up with the data. Gary wants to talk to the company's bankers, auditors, a lot of their operating people and their finance people, and maybe even the insurance agent.
The faster you can set this all up, the quicker your fractional CFO will be at getting results.
The cleanliness of your accounting and books can play a huge role in the amount of time your fractional CFO needs to get things up and running. If your books are in order, your CFO can start their analysis right away. But, if the CFO needs to set your company’s ducks in a row first, then that is added cost that you will need to shoulder.
As a case in point, remember the story of the company that hadn’t paid their payroll taxes from above? Well, Doug, our fractional CFO from before, had to wade through 3 years of disorganized financial statements before he could fix the whole thing. It took him 9 months.
As companies grow in size, the systems that used to work tend to become obsolete. So, plenty of times, a fractional CFO needs to come into a company and place a new system to keep up with the ever-changing needs of the company.
Having an existing finance team can help carry a huge load off of the fractional CFO’s back. For one thing, when a CFO is the only financial expert at a company, they have to do a lot of the legwork, hunting down the numbers and building the models themselves. A lot of the time, this is not the best use of the CFO’s time.
Alternatively, when a company has a finance team in place, the fractional CFO is able to delegate a lot of the tasks, leaving them free to focus on the areas where they can have the most impact.
When engaging with a fractional CFO, the agreement will be either one of two things:
Here is what each entails:
For many fractional CFOs, it makes much more sense to work through hourly rates because this protects them against the risk of the project taking longer than anticipated.
However, the other side of that coin is that many fractional CFOs will agree to use an hourly rate but add a clause that states “not to exceed X number of hours.” This way, they protect the company as well and ensure that the project doesn’t run away from them. Obviously, this requires agreement beforehand.
On the other hand, many fractional CFOs will charge a small monthly retainer. This retainer guarantees that the CFO will devote a set number of hours to the company every week. However, if those hours are exceeded, some CFOs will stipulate that they need to be compensated for their extra time.
This arrangement is best when the company doesn’t need the fractional CFO to be consistently present but rather available should the need arise. So, the CFO will be lying in wait until the company calls on their financial expertise.
Having gone over the main factors that will affect the cost of your CFO, you are in a much better position to judge how much you might end up paying a fractional hire. Yet, there are still a few extra points you need to have in the back of your head:
Depending on the location of the outsourced CFO, the company may need to reimburse the consulting CFO for their travel expenses. Outside of travel, there are not many additional expenses. In some scenarios, a company may incentivize the CFO based on the results of their engagement. For example, it is not uncommon for a CFO to secure a bonus for achieving a high sale price in a transaction.
If you have a long-term commitment, it might not be a good idea to bring in a fractional CFO. The reason is that it can be very hard to convince someone to stay at your company for 3 years.
So, if you know something is going to be a 3-year deal, then you might want to bring in a full-time person. Remember, things change with fractional CFOs, and with long-term engagements, you want to maintain that continuity for as long as you can.
Even though fractional CFOs are cheaper than full-time hires, there is a breakeven point beyond which you might as well just get a full-time c-level financial executive.
According to Doug Hooper, if a fractional CFO is spending more than half of their time at a single client, around 20 hours, then perhaps it would make more sense for that company to hire a full-time CFO rather than just a fractional one. That way, a full-time hire will be able to get to different parts of the job, even the ones a fractional CFO might be overlooking.
This is assuming that the CFO is coming into a company that has never had a CFO before and is going through growing pains. And, this decision to go full-time becomes all the more relevant when the company in question has a steady bandwidth and not just a peak, such as a special project or taxes.
At the end of the day, you need to treat hiring a fractional CFO as any other investment and ask yourself how you can maximize the returns from this investment.
We have spent a lot of time talking about the costs of a fractional CFO, but to contextualize this conversation, we also need to consider what you would be getting in return for the money you are paying.
As Gary Brooks puts it, a CFO has two main jobs at the end of the day that are consistent across company sizes and industries:
So, for what you pay a fractional CFO, you get a strategic partner who not only preserves what you have built so far but who also provides clarity on your operations, shining a light on the way forward.
Even though you can expect to pay somewhere between $5,000 and $12,000 every month for a fractional CFO, there is a lot that goes into the chasm separating those two numbers. For one thing, the CFO and their experience is a large factor. Also, the kind of work you need done has a huge impact. Beyond that, the state of your company and its financial health can either stall or expedite the entire process.
Bearing all of this in mind, you still might want some clarity to better budget yourself. In that case, do not hesitate to reach out, and we would love to offer you a free consultation and help you better estimate how much a fractional CFO will cost you.
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