Is a Fractional CFO Worth It?

Fractional CFO services provide an alternative to the traditional full-time CFO role for growing businesses. These services offer access to a part-time or project-based CFO who can provide specialized financial expertise and guidance, without the cost of a full-time executive.

This approach can be particularly beneficial to small to medium-sized businesses that may not have the resources or need for a full-time CFO, but still require the expertise of a financial professional. Additionally, companies in transition or experiencing growth can benefit from the flexibility that fractional CFO services offer, allowing them to scale their financial management resources up or down as needed.

Fractional CFO services can provide cost savings for businesses, as well as access to specialized expertise in areas such as fundraising, financial planning, and cash flow management. This can result in better financial management for businesses and ultimately lead to improved profitability and growth.

However, it’s important to note that there are some drawbacks to using fractional CFO services. For example, there may be limitations to the level of knowledge and depth of understanding of the business that a fractional CFO can provide. Additionally, there may be potential conflicts of interest if the fractional CFO is working with multiple companies in the same industry.

Overall, fractional CFO services can be a valuable resource for businesses seeking financial expertise on a part-time or project basis. By carefully evaluating the needs of the business and considering the benefits and drawbacks of this approach, business owners can determine whether fractional CFO services are a worthwhile investment for their company. That’s what we explore below.

What are Fractional CFO Services?

Fractional CFO services have become a popular option for growing businesses seeking financial guidance and expertise without the commitment and cost of hiring a full-time CFO. Let’s break down what these services are and how they differ from full-time CFO services.

Fractional CFO services provide access to a part-time or project-based CFO who can offer financial management services to businesses on an as-needed basis. This can include a wide range of services such as financial reporting, forecasting, budgeting, cash flow management, fundraising, and more. The CFO may work remotely or on-site, depending on the needs of the business.

Compared to full-time CFO services, fractional CFO services offer more flexibility and cost savings for businesses. Full-time CFOs typically require a large salary, benefits, and other overhead costs, which can be a significant financial burden for small to medium-sized businesses. Fractional CFO services, on the other hand, offer a more affordable option, allowing businesses to access the expertise of a CFO without incurring the full-time cost.

Additionally, fractional CFO services can provide specialized expertise in areas such as fundraising or financial planning, which may not be available through a full-time CFO. Fractional CFOs typically have experience working with multiple businesses in different industries, providing them with a wider range of knowledge and expertise. However, this highlights some of the obvious downsides of a fractional CFO, including a finance professional who may be less committed to each business and who may have less expert knowledge and experience in the particular industries or niches that he or she works (this is not to say that there are not hyper-specialized fractional CFOs, however).

Some primary responsibilities of a fractional CFO may include:

Financial planning and analysis (FP&A)
Financial reporting
Growth and financial strategy
Cash flow management, including funding and financing
Financial and accounting operations, including payable and receivable management
Performance and cost analysis
Financial system and procedure implementation
Stakeholder and audit management
Regulatory compliance, contract, and legal management
Establishing the finance function and key responsibilities; read our article on structuring the finance function here
Teaching the existing finance and accounting team best practices
Payroll and HR compliance and management

One of the largest providers is B2B CFO, which offers part-time CFO services to businesses of all sizes. Another popular provider is the CFO Centre, which provides fractional CFO services to small and medium-sized businesses. In addition, there are several industry-specific fractional CFO service providers.

In conclusion, fractional CFO services can be a valuable resource for growing businesses seeking financial expertise and guidance. By offering flexibility, cost savings, and access to specialized expertise, these services have become a popular alternative to full-time CFO services. With several popular service providers to choose from, businesses can find the right fit for their needs and budget.

Benefits of Fractional CFO Services

Hiring a full-time CFO can be costly, with salaries ranging anywhere from $100,000 to $250,000 or more. And that’s not including the cost of benefits, bonuses, and other overhead expenses. For many small to medium-sized businesses, this kind of expense simply isn’t feasible.

That’s where fractional CFO services come in. With these services, you can access the expertise of a CFO on an as-needed basis, without the cost of a full-time executive. This can provide significant cost savings for businesses, allowing them to allocate their resources more effectively and focus on growth.

Today, most fractional CFOs cost $4,000 to $10,000 per month, although this cost varies significantly based on scope of work required and the experience level of the fractional finance professional. Many fractional CFOs, especially those working with startups, are also compensated in equity (subject to a vesting schedule), ranging from 1% to 5%.

Even though many fractional CFOs can cost about the same or more per hour than full-time CFOs, with careful prioritization, fractional CFOs often provide a significantly higher ROI for growing small businesses and startups.

In addition, like a full-time CFO, fractional CFOs can help identify areas where cost savings can be achieved within the business itself. By analyzing financial data and providing recommendations, a fractional CFO can help optimize financial performance and drive profitability.

Flexibility

Flexibility is one of the key advantages of hiring a fractional CFO for your growing business. First of all, as a growing business, your financial management needs can vary widely depending on the stage of growth you’re in. One month you might need help with fundraising, the next you might need assistance with financial reporting. With a fractional CFO, you can access the expertise you need, when you need it, without having to pay for a full-time executive.

In addition to the flexibility that fractional CFOs may offer growing businesses, many fractional CFOs are specialized in operational growth finance, having vast experience in scaling the finance function to enable long-term growth. Whether you need help with fundraising, financial planning, cash flow management, payroll management, or even more complex problems, a fractional CFO can offer the expertise you need on an as-needed basis.

Let’s take a look at some real-world examples of how this flexibility and expertise can benefit growing businesses. Say you’re a startup that’s just secured a round of funding. You need to hire a fractional CFO to help you manage your cash flow and create financial projections for your investors. Once the funding is secured and the projections are complete, you may not need a CFO on a full-time basis anymore. With a fractional CFO, you can scale their services up or down as needed, depending on your changing financial management needs.

Another example might be a small business that’s experiencing rapid growth and needs to scale systems to support further growth. You need help managing your cash flow, developing a financial strategy to keep up with demand, scaling your accounting systems, and implementing new payroll processes to support an expanding team of employees and contractors, many of which are located outside of the country. A fractional CFO can help you navigate this complicated growth period, providing the expertise to lead the various initiatives necessary to take your business to the next level.

Note: A business hiring a new fractional CFO must find a match that fits its current stage, culture, structure, and painpoints. For instance, if the business needs help with investor communications and fundraising, the fractional CFO should be experienced with this.

Similarly, a fractional CFO should be capable of working with the existing finance and accounting team (e.g. bookkeeper, financial controller) as well as the current systems (e.g., accounting software), while offering a vision of how the finance function and systems should transform as the business progresses.

Drawbacks of Fractional CFO Services

It’s important to acknowledge that fractional CFOs are not without their drawbacks. While they offer many benefits to growing businesses, there are some potential downsides to consider.

One potential issue is the lack of in-depth knowledge that a fractional CFO may have about your business. Unlike a full-time CFO who is fully immersed in the day-to-day operations of your business, a fractional CFO may not have the same level of understanding of your business and its unique challenges. This can limit their ability to provide strategic financial guidance that’s tailored to your specific needs.

Another drawback is limited availability. A fractional CFO may be working with multiple clients at the same time, which can limit their availability to you. This can be especially problematic if you need immediate assistance with a pressing financial issue.

There is also the potential for conflicts of interest, as a fractional CFO may be working with multiple clients in the same industry. This can create ethical issues around confidentiality and conflict resolution.

Finally, there is the issue of limited interaction with other departments within your business. A fractional CFO may not have the same level of visibility into other areas of your business, which can limit their ability to provide comprehensive financial advice that takes into account all aspects of your operations.

When Not to Hire a Fractional CFO:

Let’s start by looking at a few examples of small businesses that may not yet benefit from hiring a fractional CFO:

Startups in the pre-revenue stage: If your business is just starting out and you haven’t yet generated any revenue, it may not make sense to hire a fractional CFO. You may not have the financial resources to justify the cost of a CFO, and you may not have enough financial data to make use of their expertise.

Businesses with very simple financial structures or operating models: If your business has a very simple financial and operating structure with limited transactions and transaction types each month, you may not need the services of a fractional CFO. You may be able to handle your financial reporting and analysis on your own or with the help of a bookkeeper or accountant, especially if you are not rapidly growing.

Now let’s take a look at scenarios where a business may be better off hiring a full-time CFO:

Businesses in industries with strict regulations: If your business operates in an industry with strict regulatory requirements, such as healthcare or finance, you may need a full-time CFO with specific expertise in those areas. Depending on the industry, it may be difficult to find a fractional CFO with the in-depth knowledge needed to navigate complex regulatory issues.

Medium-sized businesses experiencing rapid growth: If your business is experiencing significant growth and is already at the point where a full-time finance executive can be justified (are there enough value-add projects available for a fractional CFO and is there the budget?), you may need a full-time CFO to help you manage the complexity of your finances. A fractional CFO may not have the bandwidth to handle the increasing demands of your business, and a full-time CFO can provide the consistency and continuity you need.

Businesses with complex financial structures: Even if your business is not as large as many other businesses when they first hire a full-time CFO, if your business has a very complex financial and operating structure (e.g., multiple subsidiaries, international operations, many investors), you may need the expertise of a full-time CFO to be fully available to manage these complexities.

In conclusion, while fractional CFOs can provide significant benefits to many growing businesses, there are certain scenarios where a full-time CFO may be a better fit. It’s important for businesses to evaluate their unique financial management needs and consider the pros and cons of both options before making a decision.

Conclusion

Although a fractional CFO may not be a fit for all growing businesses, a fractional CFO can often provide significant benefits to growing businesses, particularly in terms of cost savings, flexibility, and access to high-level financial expertise. By hiring a fractional CFO, businesses can tap into the expertise of a seasoned finance professional without the high cost of a full-time CFO. Additionally, a fractional CFO can provide the flexibility that growing businesses need to scale up or down their financial operations as needed.

They can also help businesses access a range of financial expertise that they may not have in-house, heading certain financial projects and initiatives, such as fundraising, improved FP&A processes, heading audits, improving strategic planning, and revamping working capital management systems. Ultimately, a fractional CFO can be a valuable asset to any growing business looking to improve its financial operations and achieve long-term success.