If you’re a business owner, then you know that there are a lot of moving parts that go into making your company successful. From sales and marketing to operations and finance, keeping track of everything can be challenging, especially if you’re unfamiliar with all aspects of running a business.
That’s where a fractional CFO comes in. Fractional CFOs are experts in financial management, and they can help your business make the most of its money. From my interview with Nelson Tepfer, the managing partner at ProCFO Partners, which provides fractional CFOs across New York state and Chicago, I have compiled the following on what fractional CFOs are and how they can help your business grow. I’ll also give you tips on deciding if hiring a fractional CFO is the right move for you.
What is a Fractional CFO?
A Fractional CFO is a Chief Financial Officer who works part-time, usually for small to mid-sized businesses. This type of CFO can be an excellent option for companies that can’t afford a full-time CFO or only need someone to handle financial matters part-time.
The CFO is the strategic and managerial head of finance, and they can be critical allies for founders without a financial background. The CFO can set and review financial key performance indicators (KPIs), implement best practices, create budgets and forecasts, and assist the board and potential investors in understanding the company’s financial status.
Many startups are unable to afford a full-time CFO. An outsourced CFO service might assist you in understanding your company’s finances, producing customized forecasts, or formulating a fundraising approach for a short or one-time engagement.
What is the Difference Between a Fractional CFO and an Interim CFO?
According to Nelson Tepfer, a temporary CFO differs from a fractional CFO (part-time CFO) because the interim job is short-term. An interim CFO fulfills an area between a company losing its full-time CFO and filling the vacant position. A fractional CFOs’ services are continual, but their weekly hours are limited to part-time.
Fractional CFOs are often considered more strategic, while Interim CFOs are more operational. Fractional CFOs work with a company to help them grow and scale, whereas Interim CFOs help to keep the company running smoothly on a day-to-day basis.
Another key difference is that Fractional CFOs are usually brought in when a company is doing well and looking to take things to the next level. In contrast, Interim CFOs are typically brought in during times of crisis or transition.
What does a fractional CFO do for Growing Businesses?
A fractional CFO is a crucial functionary who serves many responsibilities in a business, including:
Ensure a Proper Financial Foundation is in Place
As a company grows, its financial processes grow increasingly complicated for the founders to manage. They need someone who can see the whole picture through the nuts and bolts of financial reporting and accounting to maintain their economic health.
This is where a fractional CFO comes in to clear a path through the web of numbers and statistics.
Nelson shares that “as the lifeblood of every small business, cash flow can be a big issue. Small businesses may struggle with getting funding, building their company strategy, and figuring out why their profit margins are shrinking. These are all symptoms of bigger problems that a fractional CFO can help with. A fractional CFO brings experience and expertise to recognize symptoms and build a financial function that will support the business’s goals. This can help small businesses get back on track and be successful.”
A fractional CFO is vital for small businesses, as they provide the financial stability and foresight required to maintain a company’s health and growth.
Help Manage Growth
One of the main benefits of having a fractional CFO on your team is that they can help manage growth. If you’re seeing consistent growth in your business, it’s essential to have someone on your team who knows how to handle that growth and ensure it’s sustainable. A fractional CFO can help you do just that.
For instance, when looking at a potential acquisition, it’s essential to look at more than just the numbers on paper. It would be best to consider how the company would fit with your existing business. Would the acquisition help you to achieve economies of scale? Would it give you access to new markets or technology? What would be the impact on your existing employees? These are all important factors to consider before making an offer. Of course, you also need to ensure that the company is a good financial fit for your business. But by taking a holistic view of the acquisition, you can avoid making a mistake that could cost your business dearly in the long run.
These are the considerations a Fractional CFO can bring to the table to ensure that you make the best decision for your business.
Implement Systems and Controls
When businesses grow, they must create more effective procedures to address their fluctuating needs. This necessitates the oversight and direction of someone who has implemented numerous systems in various situations. Someone who’s seen it all can anticipate what might go wrong and how to address it before it happens. A fractional CFO may draw on their experience to guarantee that the business is always moving forward, even when changes occur.
For example, there was a company whose invoicing process was inefficient. It would often take them four to six weeks to send out an invoice after completing a project. Nelson recognized this was a legacy issue from when the company was much smaller. At that time, a single person was responsible for a checklist of six items that needed to be completed before an invoice could be sent out. As the company grew, those six items became the responsibility of six different people or teams. However, no one took the time to reassess whether this was still the most efficient way to do things. As a result, being a fractional CFO, Nelson helped them implement systems to streamline their process so that invoices could be sent out within five days. This helped improve their efficiency and better meet the needs of their clients.
To Sum Up
A fractional CFO is a financial expert with an extensive background in many areas who works part-time and relieves startups of high expenses. Hiring a fractional CFO is the only way for a young business to gain access to best-in-industry knowledge without having to pay through the nose for it.
It’s a win-win situation like all great business models.
Of course, once startups grow large enough, they may find that having a full-time CFO makes good business sense. Those who are still learning the ropes, on the other hand, should think about employing a fractional CFO at any time.
Is your company suffering from lack of a clear financial strategy or your revenue isn’t where you want it to be despite having strong marketing and sales and operations leadership? It might be time to consider a Fractional Chief Financial Officer (FCFO).
Generally, there are two main scenarios that could cause you to consider engaging the help of an FCFO.
The first is simply that the person who grew up with the company handling finance is somewhat out of their element at your current scale. Your head of finance is someone who’s not a professional CFO with experience advising and analyzing the needs and unique decision points of a multimillion-dollar venture. They may have learned finance through taking courses, bookkeeping training, YouTube videos, or perhaps they’re a certified public accountant (CPA) or have experience as a controller.
The second scenario is that you’re facing a specific finance-related crisis, challenge, or transaction, such as facing a cash crunch, experiencing low or negative profit margin, suffering from high expenses, outgrowing your finance systems, navigating an audit, raising capital, or preparing for a sale or acquisition.
In either case, your revenue might be between $2 million and $50 million and you recognize that your leadership team lacks the financial experience and expertise you need at this stage.
Do You Need an Accountant or FCFO?
It’s sometimes unclear to small business owners when they need CPA or a Fractional CFO. The first thing to do before moving forward to improve your finance team is to be clear about whether it’s tax and financial advice your business needs or execution of an internal financial overhaul or strategy under experienced leadership to help your company earn or increase its profits.
If the former, an accountant is your best bet. If the latter, it’s an FCFO.
What Does FCFO Engagement Look Like?
Depending on the mandate you agree upon, the Fractional CFO will likely oversee all finance operations, including your bookkeeping, accounting, insurance, banking, tax, and legal functions to ensure that you’re managing your risk and that you’re covered from all angles. However, they’re leadership role is often required to go deeper:
- They will ensure that the appropriate financial staff and technology systems are In place and integrated with marketing, sales, and operations.
- They will overseeing financial reporting, so you and the other members of the leadership team have the data you need to make great decisions. This includes the all-important budgeting process. Approximately 50 percent of businesses close within their first five years of existence. You don’t want to become one of those because you spent more than you could afford, ran out of cash, and couldn’t make payroll.
- Once your organization is healthier and has the tools and practices it needs to scale successfully, they will stay with you until you’re ready for them to help level up someone internally to take on the CFO or Head of Finance role or to help you hire a full-time CFO.
What to Ask When Hiring a FCFO
As with any Fractional Leader (FL), it’s critical that you communicate your desired outcomes and deliverables when hiring an FCFO. By doing so, you can ensure that you both are on the same page. Consider the following when interviewing candidates:
- If you’re retaining an FCFO because of a specific transactional need or type of crisis like an M&A transaction, due diligence, bankruptcy, restructuring, or cash crisis, you definitely want to ensure they have proven experience with that kind of scenario.
- Ensure they have full-time CFO experience before they “went fractional.” Like other kinds of FLs, people must have first gone through the gauntlet of deep CFO service with an organization to earn the chops necessary to spot issues quickly and find solutions in a fractional scenario.
- If the learning curve for your business model is great, ensure that they have industry experience. For example, if you have a home care business that bills Medicaid payors and you need someone who understands that industry so they’re not starting from scratch, make sure that background is there before either of you waste your time.
Like other Fractional leaders, most FCFOs do not want to permanently embed themselves into your organization. They want to get your ducks in a row, financially speaking, so your business can become healthier, and you can thrive and focus on what your business really does for its customers or clients.
This blog is part of a series that outlines some high-level considerations and offers insight into the five major types of Fractional Leadership: marketing, sales, operations, finance, and technology.
The information is a consolidation of my personal experience as a Fractional Leader (FL), retaining other FLs in businesses I managed or manage, interviews with FLs on my podcast, Win-Win—An Entrepreneurial Community, and my network and relationships with other FLs.
My experience in operations and being a Fractional Leader in companies running on EOS certainly contribute to my knowledge of operations. I am not, however, a subject matter expert in marketing, sales, finance, or technology. I’ve written these topics with reliance on business owners and FLs in those fields — from a 30,000-foot perspective.
If your company’s marketing or sales efforts aren’t generating the level of performance you need, check out my blogs discussing the Fractional Chief Marketing Officer (FCMO), Fractional Chief Sales Officer (FCSO) and Fractional Chief Operating Officer (FCOO).
We’ve seen a significant uptick in inflationary pressure across the country, with no signs of it abating. Labor increases are driving all costs up, so now is the time to manage your margins diligently — and to determine if you’re increasing your prices enough.
Gross Margin and Labor Efficiency
Gross profit is revenue less any direct material costs, including subcontracted work. For a construction company, for example, direct material costs would be sticks and bricks as well as subcontractors. The remainder is your gross profit.
I’m a subscriber to Greg Crabtree’s Simple Numbers concept, which relies heavily on maximizing labor efficiency. Most small- and medium-sized businesses do not track or monitor this number, but it is a simple concept. Direct Labor Efficiency (as opposed to administrative or marketing labor) is your gross profit divided by your total labor costs (including benefits and taxes). For example, if your gross profit for the period is $3MM and your direct labor costs are $1.5MM, your labor efficiency ratio would be 2.0.
A good target for Direct Labor Efficiency is 2.75, but that will vary by industry. Consider benchmarking your numbers against industry averages to start.
Gross Margin is a related metric that is the percentage of your direct materials and direct labor to revenue. For instance, if your revenue for a period was $4MM and your direct materials plus direct labor is $2.5MM, then your Gross Margin Percentage is 37.5%. Although gross margin is important to monitor, normally, you don’t have as much control over your vendor pricing as you do with maximizing your labor. That is why we recommend focusing on maximizing Labor Efficiency.
How to Maximize Labor Efficiency
There are a number of strategies to maximize labor efficiency. However, my experience leans towards involving your operations/production team in solving the problem and incentivizing them based upon the results. Top-down approaches don’t usually work as well as letting people solve the problem themselves.
Give them a clear understanding of the problem they’re trying to solve. In these instances, I recommend breaking the problem down to an as granular level as possible. For instance, don’t simply identify one location that has better labor efficiency than another and say fix it. Go to the shop floor, find the differences, and solve those problems.
Pricing As a Strategy
More than likely, you have some discretion in increasing your prices immediately. Analyze your customers by gross margin and unload the bottom 10-20% of them. Most of the time, you will find that you have large volume customers that aren’t contributing much margin.
Reciprocally, you have the top 10-20% of your customers that will pay you more. Have conversations with them to determine if there are any revenue opportunities (e.g., items/services that are ancillary but you don’t currently offer). Combining those two actions will have a tremendous impact on your gross profit and bottom line.
Should you need help in executing your financial growth, consider outsourcing a fractional CFO to guide your team through the business growth process. Learn more about fractional leadership here.
About the Author
As CEO of Core Group, a profit-first business and financial services firm, and a Forbes Business Council member, Christian Brim and his team help companies grow their business while saving taxes. To learn more, contact Christian on LinkedIn or visit coregroupus.com.
Your fiercest competitor has just submitted a letter of intent to acquire your business. How do you respond? Is the offer a good one? Is it the right time to sell? What are customary terms and deal processes? If you’re like approximately 90 percent of business owners out there, you’ve never been involved with the sale of a business (particularly your own). You would likely have a host of questions similar to these.
Business sale or sell-side mergers and acquisitions (M&A) transactions are “unique beasts,” and the stakes are too high to go it alone or enter the fray without the proper advisors.
If you’re prudent and well prepared for a sale, you can avoid the mistakes that befall many an unsuspecting seller. These can include an outsized strain on your day-to-day operations, suboptimal deal terms and value (i.e., lower sales price and unattractive terms), and an inefficient deal process. Remember that it is critical to communicate — whether orally, in writing, or through the sharing of company information — with intention and that “time kills deals.”
Hiring a Fractional Leader Can Optimize Your Business for Sale
Working with experienced fractional leadership (CMO, CSO, COO, etc.) months or years ahead of a prospective transaction — whether vaguely conceptual or immediately actionable — can supplement your core team. Domain experts can supercharge your operations and optimize the value and attractiveness of your business.
Additionally, a Fractional CFO experienced in M&A can provide transaction-related guidance alongside ongoing strategic financial oversight. When the time comes to “go to market” (proactively pursue a sales process) or respond to the unsolicited acquisition offer, you’ll have experienced advisors on hand. And you will be prepared with financial results and operating data tailored to your audience of third-party investors and acquirers.
Regardless of whether a transaction is ultimately pursued or consummated, by going through the process, you’ll likely have received outsized value in the form of a more sustainably profitable and well-run business.
About the Author
Landon Mizuguchi has over 15 years of experience encompassing M&A, general management, corporate finance, and valuation, with preeminent professional services firms such as Goldman, Sachs & Co. and EY (formerly Ernst & Young). As principal of Malama Capital Advisory, he provides Fractional CFO and M&A advisory services to West Coast-based SMBs and hyper-growth startups. Contact Landon here.