For many startups and small- to mid-sized companies, hiring a full-time CFO is out of reach. Generally accepted guidelines advocate for bringing on a CFO at around $10 million in annual sales, and many companies with low-complexity operations find that they're able to go higher without one.
Yet understanding where your venture is in terms of financials is key to facilitating growth. Without a comprehensive understanding of your cash flow, KPIs (key performance indicators), margins and profit potential, you open yourself up to risk. Without a deep understanding of these factors you could be making decisions that are not supported by your cash flow or your overall financial forecasts.
It can spell disaster for any business.
On the other hand, the hallmark of any new venture or startup is the all-hands-on-deck mentality. During the early stages, so much is riding on marketing the product, driving adoption, attaining product-market fit and other activities that are key in the initial stages.
When deciding on allocation of resources, the startup that is focusing massive effort on sorting financials is taking focus away from these key growth activities. Add that to the fact that personnel is often untrained in financials and the situation becomes riskier. The case for hiring a CFO is strong but often cost prohibitive at this stage.
While larger and more established businesses often have the resources to hire a CFO, there can be a different set of issues. For example, situations do arise where financial upheaval is an issue, and often the current CFO is not an appropriate choice to help the company through it.
Or a CFO leaves his or her position with little to no notice. Whether the company is in a place of stability or not, this can give rise to significant issues. During situations such as this, there are options. The first is to hire a part-time, or fractional, CFO. The second, to bring on an interim, or temporary, CFO.
So what's the difference?
Fractional (Part-Time) vs. Interim (Temporary) CFOs
Interim CFOs are hired on to work with a company full-time, normally for a short period of time. A typical period could be anywhere from one to three months. This type of CFO may specialize in guiding companies through financial crisis or change. They may be instrumental in keeping things stable during a sale or they may provide a bridge between permanent CFOs.
A fractional, or part-time, CFO often has an ongoing commitment to working with a company. While they may only work a few hours per week, they are considered a permanent team member. Part-time CFOs often have several clients they do part time work for.
Fractional CFOs- What You Should Know
If your startup is in a place where sales are consistent and you're gaining traction in the market, it's time to tighten up on financial processes. Many businesses, particularly startups, begin on a wing and a prayer and don't hire a bookkeeper right away. Once the business progresses, things can get messy. From tax returns to accounts payable and receivable, payroll and more, the demands tend to mount.
Taking on a bookkeeper is an essential step as far as staying organized. But for setting up permanent accounting systems and tracking procedures, a part-time CFO is a good bet. A CFO will have specialized knowledge that many bookkeepers don't require, and that knowledge can be invaluable as far as growth. From insights on current performance to complete and accurate forecasting, the insights a part-time CFO can give you are worth it.
During continued growth, fractional CFOs offer further essential services. They can be instrumental in optimizing your payables and receivables, setting up cash-flow models and imparting advice on capital-market activities to name a few. A fractional CFO will also have the knowledge to advise on facilitating further growth by strategically reinvesting profits.
As you continue to hire, a fractional CFO can implement training procedures. They can analyze KPIs by using your financial data and advise your management team in terms of solid growth decisions.
A great fractional CFO will act in the capacity of coach, helping to grow the business according to the numbers. Basing decisions on set financials and KPIs means working with the facts, and eliminates or at least reduces the chance of error.
Part-time CFOs can also assist with sourcing investors and putting together a pitch deck. They can ensure that all key marketing materials are up-to-date and ready to present to investors. They can ensure that ownership percentages and capitalization tables are accurate.
Whether you're bringing on a new investor or going after a bank loan, you need to get it right the first time, and a fractional CFO can make sure you get things right the first time.
About Interim CFOs
Interim CFOs are more suited to middle-market businesses, where they're required for short periods of time. The situations that necessitate hiring an interim CFO are often at least somewhat urgent. This type of CFO is often called upon to fix or stabilize a situation that has arisen within the company.
For example, if the company is currently undergoing a merger or acquisition, there may be specialized knowledge required on the part of the CFO. If the current CFO is not experienced with this, the company may call in outside CFO talent to assist for a defined period of time.
Interim CFOs help to assure that the company has done its due diligence on all fronts in critical situations. Interim CFOs will also help ensure that all financials are ready to present in the most positive light.
Temporary CFOs may also be hired when the company is between permanent CFOs. Situations do arise where CFOs vacate their post without notice. Whether due to being fired, death or other extenuating circumstances, this can leave the company in a dire situation.
These CFOs may also have specific expertise that your company requires, such as systems implementation, restructuring or bankruptcy situations. Some specialize in specific industries, such as software or healthcare.
Once an interim CFO has completed the job they were hired to do, they most often part ways with the company. Many interim CFOs base their career on moving from venture to venture, helping to fix issues. Once they're through with the duration of their contract (often between one and three months) they move on to positions elsewhere.
So Which CFO is Right For You?
It's vital to clarify the different types of CFOs as businesses often get them confused. It's also important to understand the roles they fill in order to know which type of CFO is right for you.
Before deciding which type of CFO you need, you must take the time to define the issue and understand the role you need to fill. Are you looking for someone to approve contracts or finalize business agreements? You probably don't need a CFO at all, a lawyer can do these things for you. And if you're looking for a part-time bookkeeper, a fractional CFO is serious overkill.
Once you've decided on which type of CFO to hire, make sure you do your due diligence. Make sure their past experience and skillset are right for you. Check out any references and be sure to assess them to make sure they're a good fit for your organization.
Ultimately, any CFO will work to present the company in the best financial light while ensuring that both front-line staff and the management team have the time and resources needed to work on growing the venture.
With the right person, it can be a profitable partnership.