“Efficient use of resources” is a golden rule for successful startups. When you hire a fractional CFO for a startup you’re satisfying that rule in a number of ways. Outsourced CFOs are a fraction of the cost when compared to a full-time CFO. They’re also a knowledgeable advisor who provides the team with broad financial expertise and efficiency across multiple departments.
Early on, founders usually fill multiple roles in addition to President and CEO including HR, COO, and CFO. Yet, most founders are visionaries, not financial experts. They lack the necessary skills or financial expertise to accurately and effectively manage the books, ensure compliance or create necessary financials to acquire funding or properly forecast profitability.
One of the biggest challenges businesses face during the startup period is the need for financial expertise without the funding or income to support or justify a full-time CFO. The other is that a startup simply doesn’t yet need a CFO full-time because there aren’t 40 hours a week of work available.
Fortunately, hiring a fractional CFO during the startup phase provides the needed flexibility and affordability most startups require.
So when should startups hire a CFO?
Hiring a fractional CFO for startups early on helps founders be more financially focused from the onset. It also allows them to focus on other aspects of the business for growth.
In fact, a fractional or “outsourced” CFO may be one of your most important initial hires if you’re a startup seeking expertise to help you create better financial plans, goals, and implement financial accounting systems and processes.
How is a Fractional CFO Different from a CFO?
An outsourced CFO, or fractional CFO, is a chief financial officer that doesn’t offer full-time CFO services to an organization. Instead, they leverage their expert knowledge with multiple organizations and businesses on a part-time basis or work for companies on a contractual or per-hour basis. It’s similar to financial consultancy, but the difference is that fractional CFOs actually assume an “insider” role in the business and are privy to more in-depth information (financial records, funding prospects, etc.) than a consultant would be.
You can hire a fractional CFO for a limited and specific time frame or for individual projects. During this time they may assume the responsibilities akin to a full-time CFO or may have a limited set of duties such as financial planning, or creating or modifying a startup pro forma.
Generally, a fractional CFO is a fraction of the cost of an in-house CFO.
A full-time CFO can cost a startup more than $130,000 a year. That’s almost 6% of the average seed money amount startups received in 2020.
Since most startups can’t fully support a CFO full-time, it’s not a smart expense. However, a startup does need the financial expertise, insights, and potential connections (for fundraising) that a CFO can offer. They can be contracted for a specific period or project and only for tasks most crucial to the startup. This way, they will be optimally utilized while saving you money that you would have spent on an underutilized full-time CFO.
What are the Responsibilities of a Startup CFO?
A startup CFO’s main responsibility is to support a founder’s vision by making it possible financially. This may include managing the financial reporting, handling negotiations, determining budgets and projections and adhering to them.
When you hire a startup CFO they’re providing financial insight that other members of senior leadership can act upon to help grow the company. These insights can determine if the company can or should hire additional team members, whether certain partnerships are lucrative, and when best to develop or launch additional products or services, or when to increase sales or marketing budgets.
CFO services for startups may include:
- Financial reporting
- Pro forma financial statements
- Financial planning and analysis
- Cash management
- Forecasting and profitability projections
- Exit planning
- Equity and debt planning
- Business plan development
The Benefits of Fractional CFO for Startups
According to a study, the most cited reason why funded startups failed was that they ran out of cash. This is often because entrepreneurs prioritize launching their business and funding production and/or sales and marketing initiatives that are often at odds with smart financial decision-making or accumulating resources. They also often lack the ability to see the bigger financial picture, especially over longer periods of time.
When startup founders begin working with a fractional CFO they begin to view things more from a financial perspective and often make smarter business decisions.
Simply put, fractional CFOs can help startups stay in the game long enough to gain adequate traction (by efficiently managing their financial resources), and that can be the difference between a successful startup and a failure.
Fractional CFOs also often add value in other ways, including:
Your investors are investing in your concept, product, or service but they’re also investing in the startup team. Hiring a fractional CFO can help them feel safe with their investment.
The presence of a reputable fractional CFO adds more credibility to a startup. Investors become more confident about how their capital will be spent and know they will receive a “cleaner” picture of their investment when a fractional CFO is taking care of the accounts. Remember, your investors are investing in your concept, product, or service but they’re also investing in the leadership.
Strategic Growth Decisions
Fractional CFOs bring the best practices and broad-market knowledge to the table. This knowledge helps startups beyond the creation of a sound business model. It can also be used to properly “time” product launches, schedule funding rounds, and even determine effective pricing of products or services.
Forecasting and Budgeting
Fractional CFOs can help startups with accurate financial forecasting and budgeting. This can help acquire new investors, secure additional funding, and allow for better expense management. Forecasting and following a budget can also help startups prepare for “dry periods” in the case of cyclical businesses or industries.
Cash Flow Maintenance
Fractional CFOs can ensure startup founders have access to enough cash for all their necessary expenses by maintaining the cash flow effectively. This helps prevent startup entrepreneurs from taking on unnecessary debt.
Fractional CFO for startups don’t just focus on sustaining the startup, they’re also valuable for its growth. Their insights and reporting can help create financially realistic growth strategies and projections regarding the future of the business model that would sustain that growth.
How to Find the Right Fractional CFO
The right fractional CFO for startups depends on the startup and the founder or CEO. Here are a few things to consider:
- Do they have industry-specific experience?
While it’s not necessary, it definitely helps if the fractional CFO you are considering has already worked with a few startups in your industry and is familiar with industry-specific financial challenges.
- Where are they located?
Inquire about where they’re located especially if you want someone based in the US.
- Do they share your business values and work ethic?
Even if they are not “in-house,” fractional CFOs still tend to be on the inside. You can’t have someone in such a crucial decision-making position that doesn’t share your values. An outsourced CFO is an extension of the team.
- Does the contract meet both of your needs?
For instance, how flexible is their support? If you’re looking for a CFO that can work three days a week for you and they are not willing to commit to three days each week, then it’s not likely the relationship will work out long term.
- Are your expectations aligned?
Be open and transparent about your expectations and the responsibilities they’ll be accountable to meet. Just remember to be reasonable with your expectations. If you’re only hiring a fractional CFO for one week each month and you want them to manage the equivalent of a month’s worth of work during that week, you might turn a potential resource into a liability.
- Do they offer a flexible cost structure with custom pricing to meet your specific needs?
Inquire about hourly fees or if they offer monthly retainer packages.
- How do they like to communicate?
One of the most important aspects of an outsourced arrangement is to ensure their communication style matches your own so you get the quality support you need.
- What will retaining their services cost?
The cost of a fractional CFO is an essential factor to consider because they are a resource. And if a resource is costing you more than their value they provide your startup, it’s a financial liability.
There is no “perfect” or “right” time to hire a fractional CFO, but in many instances bringing them on earlier is better. Many believe a good time is approximately a quarter before a fundraising stage. That’s usually true for stage A, B, and C funding. If you’re interested in finding out if your business is at a good stage and can benefit from a fractional CFO request a free consultation.