Looking for support for your finance function? Book a time with an expert.
Follow us on LinkedIn
Corporate Finance
Minute Read

How to Evaluate the Job of a Fractional CFO

Fractional CFOs cover critical areas for your finance function, making your evaluation of their capabilities highly important.

Fractional CFOs cover critical areas for your finance function, making your evaluation of their capabilities highly important.

When a company brings in a CFO, it expects them to fulfill multiple roles, including operator, steward, catalyst, and strategist. And assuming that a company with an annual EBITDA of $20M pays its CFO $200,000 annually, then said CFO needs to help the company increase its EBITDA by 1% at least to justify their salary.

To achieve that 1% increase, a CFO must be skilled in leadership, analysis, and modeling. Different CFOs excel in various areas of the job, but the end result should be a boost in the company’s bottom line. One CFO might help their employer by setting up accounting processes that protect the company from liability. Another might be excellent at inter-departmental cooperation.

However, fractional CFOs are a different story because companies bring them in for a particular purpose. So, either a fractional CFO achieves their objective, or they don’t.

Consequently, while having KPIs and measurements in place to gauge the performance of a CFO is essential, it is ever more critical in the case of a fractional CFO.

How to evaluate the job of a fractional CFO?

It all depends on why you hired the fractional CFO in the first place. For the most part, companies bring in a fractional CFO because they either need help with the operational part of managing their finances or are looking for a seasoned executive who can be a strategic member of the leadership team. If you need support on a full-time basis for an interim period, then an interim CFO will likely be a better fir for your company.

Accordingly, if your company needs operational help and you want to see how the fractional CFO is doing, then ask yourself questions such as the following:

  • How consistently are your books being closed on time?
  • How is the fractional CFO helping you understand any changes in your company’s profitability or expenses?
  • How proficient are they in story-telling and making the opaque clear? 
  • How do the other finance team members feel about their experience with your fractional hire?

Alternatively, if you’re hoping for a strategic partner, then here are some things you can use to gauge the fractional CFO’s performance:

  • How active is your fractional executive in engaging with other departments and helping them achieve their respective objectives?
  • Does the fractional CFO approach every strategic conversation armed with data, financial analysis, and forecasting models, all of which hone the discussion and provide visibility into the possible consequences of each decision?
  • How well-networked is the fractional CFO? The better rapport they have with the company’s ecosystem, the more of a strategic partner they become.
  • When going through a tectonic shift, such as an M&A, can the fractional CFO present the company in the best light possible, buoying the sale price?

While the above questions can give you a rough sense of how the CFO is doing, we suggest that you be more scientific and deliberate with your approach so that you can even realize areas of improvement.

A KPI-based assessment of your fractional CFO

When asking yourself how successful your fractional CFO has been, the first question I would fire back is, “Successful relative to what? What is the benchmark or metric against which we are assessing your fractional CFO?”

This is where key performance indicators, also known as KPIs, come in. They crystallize your expectations and help the fractional CFO understand what is demanded of them. With clear KPIs, the conversation about performance becomes smooth, and you will have a way of holding the CFO accountable. Understanding the costs of a fractional CFO will help you measure the return of their efforts.

So, before we can talk about assessing the performance of your fractional CFO, we need to discuss how you will set clear KPIs for them.

Setting KPIs

To set clear KPIs, you need to know what services and tasks you need handled. This will differ from company to company and even depend on your business's maturity stage. And, if you are unclear about the financial services that can best help your business, you might want to reach out to a financial expert who can help you chart a path forward.

Assuming that you are clear on what you need done, you are now in a perfect position to clarify the fractional CFO’s job description and to set clear KPIs for them.

The KPIs will usually come in one of two flavors: quantitative and qualitative.

Quantitative KPIs are purely numerical:

  • How have the net margins and key financial ratios changed over the past quarter?
  • Are your overhead costs within the industry average, or are you mismanaging your expenses?
  • How are you managing your financing and loans, and are you receiving attractive interest rates?

Alternatively, qualitative KPIs are subjective:

  • How much of a strategic partner is the fractional CFO?
  • How confident do you feel as the CEO/ business owner about the budgets and financial plans presented by the CFO?
  • How involved is the fractional CFO with other team members and departments?

Even though qualitative KPIs are opinion-based, you still want to find a way to quantify them. So, one way to achieve this is to answer each qualitative question with a grade from 1 to 10, depending on how strongly you feel the answer is yes or no. Accordingly, you will have a much more tangible response, such as a 6 or 7, rather than just responding to the above question with “My fractional CFO is kind of a strategic partner, but there is still room for improvement.”

Using the Ten Pillars of Finance framework when setting up your KPIs

One framework you can use to help you hone your expectations of your fractional CFO is McCracken’s 10 pillars of finance. Even though the pillars can be split between a CFO’s two primary responsibilities (i.e. operations and strategy), it is still worth remembering that there is plenty of intersection, and one pillar that might be operational in nature might also have some strategic dimensions. 

Operational pillars:

  1. Controllership
  2. Business Model and Industry
  3. Enterprise Management & Optimization
  4. Enterprise Governance
  5. Information Technology

Strategic pillars:

  1. Executive Leadership
  2. Treasury and risk
  3. Strategic Transaction
  4. Financial planning and analysis
  5. Cross-functional engagements

Let’s explore each pillar separately along with the different KPIs you might set up for them.

1. Controllership

While you already may have a controller on your finance team, you may need a fractional CFO to pitch in and help right the ship if things have been astray for a while.

Some responsibilities under this pillar include setting up accounting processes, managing financial reporting, and ensuring tax compliance.

Some KPIs that you can use here are as follows:

  • Are the books closed on time every time?
  • How aligned are the consolidated financial statements and closing processes with your business’s needs?
  • How well-suited are your accounting processes and internal controls to meet your financial reporting needs?

2. Business Model & Industry

This pillar examines how familiar your fractional CFO is with your business and industry. So, this pillar looks at things like operational experience, industry and business knowledge, and commercial insight.

Now, while any business needs a fractional CFO who understands them inside and out, you don’t necessarily need your CFO to know this information at the outset. In other words, for most industries, any experienced fractional CFO can get the job done and learn about your business along the way.

Nevertheless, there are specific cases where the business operates in a nuanced industry, and the fractional CFO needs to be experienced in that industry before they can perform their job. 

That being said, if you care about your CFO knowing the business, then here are some KPIs to look into:

  • How well does the fractional CFO understand your company’s business model and your competitive positioning within the industry?
  • Does your CFO participate in setting and monitoring KPIs for other departments and teams?
  • How familiar is your fractional CFO with your supply chain? Can they identify opportunities for growth and expansion? 

3. Enterprise Management and Optimization

While it’s vital for your fractional CFO to learn about your business and industry, it is just as essential to be able to analyze your business’s performance and spot unique opportunities for optimization.

For starters, this will require analytical skills, such as data analysis and mining insights from that data. Your fractional CFO should also be comfortable with things like standardization analysis and simplification analysis.

Once your CFO has analyzed the data, you want them to be able to recognize opportunities. Hence, they need to be able to identify cost and revenue drivers. 

Then, when it comes to capitalizing on these opportunities, the fractional CFO needs to be comfortable with several requisite skills, including restructuring and reorganizing a company if need be. They should also know how to manage different departments on some level to be able to have intelligent conversations with their respective heads and help them optimize their processes.

As a result, here are some of the KPIs that belong to this pillar:

  • How often does your fractional CFO perform optimization and evaluation reviews? Do they try to simplify, automate, standardize, or outsource your processes, helping you cut costs?
  • Has the fractional CFO established a process to gather and evaluate data, harnessing the power of data analytics and data mining?

4. Enterprise Governance

Whereas the previous pillar was about ensuring that the company was operationally efficient, this pillar is all about ensuring compliance. So, it includes elements such as ethics and reporting, dealing with the audit committee, and managing the relationship with various governmental agencies.

And, regarding the KPIs for enterprise governance, there is really one question to ask yourself:

How good is the fractional CFO at planning, preparing, and delivering pertinent information to the parties that need them, including the board, the audit committee, the investors, and the regulators?

5. Information Technology

This pillar walks the line between a company’s operational needs and its strategic ones. On the one hand, it demands that a CFO use technology to automate processes and increase the finance team’s overall efficiency. On the other hand, it also asks that a CFO be a strategic voice, highlighting the expected ROI of buying different technological solutions.

As a result, for a CFO to succeed in this pillar, they need to excel at IT operations, IT planning, and IT security. The reason IT security is important is that part of the cost of buying any tech solution is the associated risks that come with it, cyber security being at the top of that list. Additionally, a good, tech-savvy CFO will be able to balance cyber security costs with the benefits, finding that perfect return on security investment.

The balance between risk costs and benefits is delicate. Source: “Cybersecurity Cost of Quality: Managing the Costs of Cybersecurity Risk Management” by Nicole Radziwill and Morgan Benton

Here are some KPIs to look into for information technology:

  • How contributive is the fractional CFO to the process of planning, operating, and managing the costs and risks of your IT infrastructure?
  • How has the fractional CFO helped your company evaluate and utilize new and emerging technologies?

6. Executive Leadership

Today, CFOs are needed to take on leadership roles within an organization. And this can range from guiding other departments to leading and coaching a full-fledged finance team and introducing them to best operational practices. Additionally, this leadership role includes acting as a strategic partner to the CEO, helping them divine the best path forwards when faced with a fork in the road.

So, this pillar also straddles the line between a company’s operational needs and its strategic ones. 

That said, if you need a fractional CFO to play a leadership role, you must be clear on what that entails. If you need a coach, then you need to choose someone who loves coaching other members. After all, as a recent Netsuite survey found, for most CFOs, coaching is the least favorite part of the job. 

The survey also found that when it comes to strategy, many CFOs are torn. On the one hand, they enjoy keeping an eye on the market and looking out for new product opportunities. But they don’t enjoy having to manage the financing for expansion.

Here are some KPIs you could use to assess your fractional CFO’s performance along this pillar:

  • Is your fractional CFO a strategic partner?
  • Do they take part in the building of your company’s strategy?
  • How do they participate in the growth and progression of the finance team members?
  • What does employee churn look like in their department?

7. Treasury and Risk

This pillar examines how your fractional CFO helps your company mitigate risk and prepare for a rainy day. It encompasses various tasks, from managing investor relations to setting a solid tax strategy.

A CFO who excels at this pillar can help your company plan for contingencies, making your company more resilient to future shocks.

Some KPIs you can use to gauge the effectiveness of your fractional CFO at this pillar include the following:

  • How effective is the fractional CFO at presentations, be it to the board, to investors, or to lenders?
  • How are they when it comes to tax planning strategies?
  • How confident are you in your company’s capital structure as well as its short and long-term capital plan? 

8. Strategic Transaction

There are many situations where it is necessary to have a strategic partner such as a CFO or even a fractional CFO. For instance, when raising, undergoing corporate restructuring, or being part of an M&A deal, a good fractional CFO can ferry you and make sure you come out with the best deal possible. 

And part of the CFO’s role here will revolve around their ability to put your business in the best light. The other part will rely on your CFO’s personal network and whether they can pull the necessary strings to get you the deal you want.

Again, similar to the pillar of enterprise governance, you only need to ask one question to assess how your fractional CFO is performing:

How integral is your fractional CFO to the transaction going on?

9. Financial Planning & Analysis

This pillar is not only integral for capital allocation, but it also plays a critical role in any strategic decision you and your company make. For example, suppose you are considering expanding into a new geography. In that case, your decision can be aided by a solid scenario analysis that highlights how that expansion could go, bearing in mind the best and worst-case scenarios.    

Consequently, to satisfy this pillar, you need a CFO comfortable with forecasting, budgeting, and trend analysis. 

And when setting KPIs for this pillar, you can simply ask yourself this one question:

How confident do you feel about the budgets, forecasts, and trend analyses produced by your fractional CFO?

10. Cross Functional Engagement

Finally, this last pillar is all about how well your CFO plays with the rest of your departments and teams. 

So, you want a fractional CFO who helps other departments optimize their operations. For instance, do they interact with the supply chain department, pointing out areas where they can cut costs?

But you also want your CFO to play a more strategic role, enabling different departments to achieve their respective objectives. Accordingly, you want your CFO involved with new product projects and expansion plans.

To that end, you want to set KPIs to measure both parts of this pillar:

  • Does your fractional CFO work with other operational managers to find ways to optimize their operations and to assess their functional requirements?
  • How active are your fractional CFO and their team in participating in cross functional projects, which can range from product launches to marketing campaigns?

Putting it all together…

Gauging the effectiveness of your fractional CFO starts with being clear on what you want them to do. To that end, the 10 pillars framework can be an excellent guide to help you define your needs and write an effective job description for a fractional CFO.

After setting the KPIs and communicating them, you can start measuring how your CFO is performing relative to your clearly defined expectations. And, in case your fractional executive comes up short, you need to carry out a root cause analysis to get at the heart of this underperformance:

  • Is your fractional CFO juggling too many responsibilities?
  • Is their time being too cannibalized by other team members, preventing them from getting some deep work done?  
  • Do they need some more time to improve their KPIs?
  • Or is there another problem that needs to be addressed?

If you need help assessing the performance of your fractional CFO, feel free to contact us, and we would be happy to assist you. 

Finance and leadership insights to help you lead.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Suggested Articles
Speak to an expert about your challenges.
Start The Conversation
Speak to an expert about your challenges.
Start The Conversation