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When is the right time to bring a fractional CFO for your startup?

When should you get a fractional CFO? As soon as you can afford one, even if they only work a couple of hours every week.

When should you get a fractional CFO? As soon as you can afford one, even if they only work a couple of hours every week.

Often, startups leave CFOs as the last addition to an executive team. In fact, most companies used to wait until they brought in an annual revenue of over $50 million before even considering searching for a CFO.

However, with fractional CFOs, it is a whole different matter. Given the flexibility these part-time professionals offer, you can hire a seasoned CFO anywhere from a couple of hours a week to a full-time schedule. So, rather than waiting till the company is large enough, you can bring in a fractional CFO as early as you’d like. The only question you want to answer is…  

When should you get a fractional CFO? 

The answer is as soon as you can afford one. 

It is better to bring in a fractional CFO and have them work a few hours a week than to not have anyone at all. A big reason is that you don’t know what you don’t know, but a fractional CFO can be an extra pair of eyes, helping you hone your strategy and keep your eyes peeled for any lurking danger. 

As your company grows, so too does your need for a fractional CFO

The value a fractional CFO brings to the table is directly related to your company's size and maturity stage. Accordingly, the cost you can expect to pay for your fractional CFO will also be directly correlated to the size and maturity of your business. 

For instance, when your company is small and the books are relatively simple, the fractional CFO can be a strategic partner, helping you expand. At this stage, you might have some bookkeeping talent within your team, and the CFO is acting as a member of the board of your company, working less than 1 day a week with you. They will ask questions such as the following:

  • What does the business need today? 
  • How can we financially model this quarter’s cash flow and minimize the variance in our predictions?
  • What is the best way to structure the business so that it is future-proof?

At this early stage, you can expect to pay around $3000-$5,000 per month.

Then, as the company grows and matures, it will bring on a senior accountant, accounting manager, or even a controller. At this stage, the fractional CFO will be integral to writing contracts with customers and modeling their impact on the business. The CFO will also be key in rolling out new software solutions, such as ERP systems. To manage this, your fractional hire will probably devote 2 to 3 days to your company.

Here, your average monthly bill can go up to $15,000 per month. 

Eventually, your company will assign so many roles and responsibilities to the fractional CFO that bringing in a permanent financial executive will make more sense. Yet, the most important role your full-time CFO will still play is offering the CEO excellent, strategic counsel.  

And regardless of how many days they are committed to your company, a good fractional CFO will always make themselves available if your company is having an emergency of sorts. At the end of the day, they are your partners, and they want to see you succeed just as much as you want it. 

The rate of growth of your company is another factor to consider

We have just seen how, as the company grows, it will require more and more of a fractional CFO until a full one is needed. However, just as important as the company's size is its growth rate, aka its acceleration.

In other words, different types of businesses tend to grow at different rates. Some tech companies can scale into billion-dollar businesses over a few years, if not less.

Several startups have achieved unicorn status within a year or two of receiving equity financing.

The faster a company is growing, the more critical a fractional CFO becomes. The reason is that when the acceleration is high, it won’t be long before the finance team starts lagging behind, struggling to keep up with all the work put out by the other departments. 

Moreover, this high growth rate introduces a layer of complexity that most nascent finance teams might struggle to deal with. For instance, they might be unable to negotiate the terms offered by the suppliers and the rates given to them by the business’s creditors.

Without a fractional CFO to help, the best-case scenario might be having a finance team that manages to put together all the necessary information for the auditors, the tax authorities, and the general ledger. However, a lot of the strategic planning and analysis, the negotiation, and the cross-functional work will fall by the wayside.

Simply put, one of the key figures who can help a fast-growing business scale efficiently is a seasoned CFO. They understand the unit economics and know how the explosive growth will impact those numbers. A good CFO will make sure that the business is operating in accordance with the stakeholders’ demands, particularly the investors, the board, and, most importantly, the CEO. 

But still, what can a fractional CFO do for my startup?

So far, we have tied the need for a fractional CFO with the size of your company and its rate of growth. However, let’s get even more granular and look at how a fractional CFO can be a critical component of your team. 

The fractional CFO can help you fundraise

As any seasoned founder will attest, fundraising is a full-time job, one that could drain 80% of your day. And, given the large number of startups, it is also a very competitive job. And to make matters worse, as of this writing, VC funding has been drying up as a result of the current economic climate. 

With VC funding shrinking, startups could use the help of fractional CFOs when it comes to raising funds.

Fortunately, a good fractional CFO can help you raise funds for your company. For starters, they will give you a realistic valuation of your company, preparing you for your meeting with investors. They will also work on your pitch deck, honing your KPIs and ensuring you are shining the best financial spotlight on your company. 

Interestingly, if you are a startup funded by a venture capital firm or any sophisticated money and you don’t have a financial veteran on your team, your investors will most likely request that you bring in a CFO, even if it is in a fractional capacity.     

The fractional CFO can be a liaison between you and the board

As mentioned earlier, most sophisticated investors will ask you to bring in a fractional CFO if you don’t already have one. And if these investors take a seat on your board, then they might insist on this, especially if they feel that you, the CEO, are too busy to communicate with them regularly and update them on the financial situation of the company. 

As a result, one of the primary responsibilities of a fractional CFO becomes communicating with the board and the investors regularly. The CFO updates them on all the significant happenings at the company, including changes in suppliers, problems with clients, and tweaks in compensation policies. 

This consistent line of communication is necessary to keep the board happy, and to maintain it, your fractional CFO must be an excellent communicator and a calm professional who can exhibit grace under fire.

The fractional CFO can help you manage your cash flow

Armed with an infusion of capital, it is easy to get overzealous and start spending aggressively. However, a fractional CFO can manage your cash flow, making sure that you always have working capital and are never subject to a liquidity crunch.

For instance, one of the biggest issues facing small companies is that they can lose a lot of money without realizing it. Most of these companies will have plenty of missing revenues, and they won’t even be aware of the problem. These companies might have a high degree of churn or a problem with their collections.

Regardless, these are all problems a seasoned CFO has solved time and again. 

The fractional CFO can lead your finance team

A fractional CFO can steer your finance function and ensure it's on course rather than wait until the entire finance team finds themselves at the edge of a cliff. 

Moreover, if you have a fractional CFO early on, they can help direct all your other financial hires later. In other words, as the level of complexity increases, a good financial executive will tell you which roles and team members are necessary to meet this level of complexity.

The fractional CFO can optimize your employee compensation plans

Fractional CFOs always start by trying to understand the ramifications of changing your company’s compensation plans. They ask the following questions:

  • How will the new compensation plan affect the company financially? Do the economics make sense?
  • How will the plan affect the company morally? Will everybody be happy about it, or will the reception be tepid, if not hostile?
  • How feasible is it to implement this plan? And how would the executive team communicate these changes to the rest of the company as well as to the relevant stakeholders?

Once they have answered these questions, a fractional CFO will start working with the necessary individuals to make the plan a reality. For example, they might have to work with lawyers and comp consultants. Additionally, if your company has an accounting firm that helps with the audit, the fractional CFO will have to explain to them what is going on.

How to calculate the ROI from your fractional CFO

While there is no hard and true way to calculate the projected ROI of hiring a fractional CFO ahead of time, you can use a simple estimate: the opportunity cost of not hiring them divided by their compensation.

Simply put, rather than asking what you have to gain from a fractional CFO, ask yourself what you are missing out on. 

When talking about the expected ROI from a fractional CFO, Ed Schultz, a seasoned CFO in his own right, one who has worked with Fortune 100’s, likes to think of it as follows:

“To understand the return a good CFO can bring, a great example is what about rather than putting in a fractional CFO, putting in a new IT system? How much will that save you? What's the return on that investment of implementing that new system? How much can you grow the company and what portion, what share of that growth can be attributed to that new system? So definitely a lot, but not all of it, will be attributable to that new system.  
The same thing with a CFO, but the CFO will not only help your processes be more efficient just like the IT system, but they will also act as a catalyst for growth. After all, a seasoned CFO will have been there and done that multiple times, especially on the administrative and financial sides, and they understand how to acquire different resources, particularly funding. ” 

Ergo, when bringing in a fractional CFO, you want to perform a similar calculation. It is a very soft calculation, but the critical aspect is shifting your mentality from what I gain from hiring the fractional CFO to what I am losing by not bringing them in as early as possible.

To get a clearer idea of the opportunity cost, you want to ask yourself the following questions:

  • What can you do at your company without a CFO?
  • How comfortable are you getting financing for your business?
  • Do you have the networks and relationships to get bank credit if need be?
  • Can you implement IT systems such as an ERP?
  • How can you create HR systems and employee compensation plans to ensure your best employees stay with you for as long as possible?

The answers to these questions will determine the value a fractional CFO can add to your company. The trick is to ask yourself what valuation you wish to achieve and then determine the costs necessary to achieve those numbers.

However, there is one thing you shouldn’t let your fractional CFO do: balance your books or do controllership work in general. While most CFOs have the accounting skills required, balancing the books wouldn’t be the best use of their time. Put differently, if you let your fractional CFO do accounting work, you wouldn’t be getting the best ROI on the money you would be paying them. 

Some more questions founders should ask themselves when considering hiring a fractional CFO

If you are still on the fence about whether you should engage the services of a fractional CFO or not, even for a couple of hours every week, then here are a few questions you should ask yourself:

  • Are you willing to do the financial function yourself? Or do you have others currently on your staff who can perform it?
  • And if someone from your staff will be doing the financial work, what will they not be doing as a result? Similarly, is there any work whose efficiency will suffer due to your staff wearing multiple hats?
  • How comfortable are you or your staff with working with financial institutions, including banks, CPAs, and investors?  
  • Also, if you were to hire a fractional CFO, what kind of financial leader do you expect? Are you just looking for a consigliere, someone to dispense strategic advice, or do you want someone more involved, managing your finance team and even coaching them?

The above questions, combined with the opportunity cost questions, should give you a good sense of the business case behind engaging the services of a fractional CFO.

Putting it all together…

Fractional CFOs can help drive efficiencies at your startup while making you a more strategic thinker. As a result, you should get a fractional CFO as soon as you can afford one, even if you have them working a couple of hours every week. And as your business grows, you can give them more responsibilities, including helping you with fundraising, communicating with your board and investors, and managing your cash flow. 

Ultimately, so long as the opportunity cost of not hiring a fractional CFO is larger than their cost, then there is a business case for bringing them on. However, if you still feel apprehensive or have more questions, please do not hesitate to reach out. We would love to help you find the solution that best fits your needs. 

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