What, why, and when
Why should I hire a fractional CFO for my startup? What value will they bring? What would they do that I can’t do myself?
If these questions are running through your head, you’ve come to the right place. The answer is simple: YOU DON’T HAVE TO REINVENT THE WHEEL.
As a start-up owner, you’ve probably come across the term “fractional CFO.” You might even have an idea of some salt-and-pepper-haired wall street type who “works in finance.” Or you might have worked with a financial consultant in the past. In this post, we’ll try and answer the questions above and give you a clear idea of what a Fractional CFO is, what they do, and where they’re helpful.
We’ll try to isolate the costs and benefits of a fractional CFO so that you can make an informed decision for yourself and your start-up.
Let’s start with a story;
John was a recent computer science graduate working for a large tech firm. He liked his work but had ideas he hoped to develop. After multiple failures and a few lessons learned, one of his ideas has taken off. Now he’s making money, and he’s making other people money. He’s hiring people. He’s finally doing it!
This is the story of the most successful tech giants we know today. Think AirBnB, Instagram, Pinterest, and Uber.
John gets the sense that he’s actually on to something. He’s making it. But growth has its pains. He’s already working around the clock to keep solid relationships with clients, communicate effectively with employees, and re-invest in growth. Now he has to deal with payroll, new tax obligations, and investment strategy. Additionally, he’s grown to a size where his decisions have serious consequences. Employee welfare depends on his choices.
Faced with new challenges, John has two paths:
- Continue to do everything himself
- Find competent people to take care of problems where he has no expertise.
A fractional CFO is path 2.
What is a fractional CFO?
A fractional CFO is a financial professional. In the story above, a fractional CFO would bring the expertise to navigate the inevitable financial issues of start-up growth.
A fractional CFO is someone with financial experience who can advise and even implement financial procedures at your start-up without you having to pay them a full-time wage.
This could be payroll automation or tax optimization, but it’s also financial insights and guidance.
Outsourcing means that financial tasks get wiped off your schedule and the task starts running autonomously in the hands of a competent finance professional. It means management and owners can focus on other higher value tasks, which they might not have had the time or resources to focus on before.
Optimization. As companies start to experience growth, they may run into issues with growth that can result from a misalignment of resources and equity.
Some start-up founders/CEOs feel that they’re doing well and start spending carelessly or badly investing profits. This leads to problems down the road with growth and equity. A fractional CFO has the tools to assess your company’s financial situation and will be able to help your business make the right decisions in terms of allocating your financial resources
Financial consulting and analysis means helping your company find the right path to success. There will always be questions that only you can answer. As the Owner or CEO, the buck finally stops with you. You’ve probably already come to understand that if you do something well, then this is what makes your company successful.
Still, you also know that some decisions can bring significant financial risk to your company. This is where a fractional CFO comes in. They’ve been there before and know the road to travel. They have the systems in place to help your company channel resources where you need to go.
A fractional CFO has the financial experience to make sure you don’t reinvent the wheel.
Why a fractional CFO?
Start-up founders are up-and-comers. They’ve worked hard and are starting to reap the benefits of their work. Start-up founders/CEOs understand that success relies on relationships. Relationships with clients, suppliers, contractors, and with employees. Successful start-ups also understand that interactions with competent actors are a force multiplier for success.
If you don’t have financial experience, outsource that element to someone who does. A fractional CFO can deal with payroll and tax questions but they’re more than a glorified accountant. First off, a fractional CFO has the analytical tools to understand your business structure and your cash flow tendencies. But more importantly, a fractional CFO has the experience to optimize your financial situation and put your company on the right financial path.
Why a fractional CFO for your start-up? Because money moves when competent people focus on their competencies.
When do you need a fractional CFO?
The next question that naturally arises is when to hire a fractional CFO. At the very outset, the costs likely outweigh the benefits of hiring a fractional CFO. First, you have to make sure your idea is viable and marketable. Once your startup starts to make money and you start to hire more employees, you will probably start thinking about seeking financial guidance.
Since fractional CFOs (as the name implies) handle multiple clients at the same time, they don’t have the hefty price tag attached to a full-time CFO. A fractional CFO offers high-end financial consultation on a part-time basis. Most offer several packages geared towards multiple business sizes and multiple stages of evolution.
When to bring in a fractional CFO depends on the business sector and the past experiences of the owner CEO. It comes back to problems and the ability to solve them effectively. Some sectors require less overhead, fewer employees and less office space. These businesses might wait longer in the growth process before bringing on a fractional CFO. Other businesses have to make big financial decisions right off the bat. A fractional CFO would help with this.
When should you hire a fractional CFO? Usually during a period of growth. Some sources suggest companies onboard these services after hitting the 5+ employee mark, but this number is ballpark at best. The costs of a fractional CFO are clear. What needs consideration is the benefits for your start-up. If you’re growing or facing investment decisions, or you’re looking to optimize financial flow through the company, it’s likely a good time to bring in a fractional CFO.
Overview
The overarching thread in this guide is clear; don’t reinvent the wheel. When it comes to financial decision making you have access to valuable experiential knowledge and statistical insights. True these are held behind the paywall of your preferred fractional CFO, but they are available to you as one potential investment.
Don’t reinvent the wheel means that not all success comes from creative problem-solving. As a start-up, you likely already possess the creative problem-solving element of a successful business. Now it’s time to navigate the knowns.
A fractional CFO is a way for small and medium-sized enterprises to benefit from the mechanisms that make larger firms successful. You have access to the knowledge. You know the costs. If you like the benefits, it’s time to onboard a fractional CFO.