5 Benefits Of Hiring A Fractional CFO
Eric here. We’re doing something a little different.
Today’s article is excerpted from an academic paper written by Maggie So, one of our Growth Consultants. In addition to her consulting experience, Maggie has served as fractional CFO for many companies. In this article for Journal of Business Strategy, she and her co-author break down the key benefits of making a fractional finance hire.
With the current trend of companies opting to operate lean and agile, the marketplace for expert support in non-full-time equivalent roles in startup and small to medium businesses have been growing quickly. Coupled with the rise in the number of individuals choosing to be self-employed, and technological advancements that improve task efficiency, companies can now access targeted professional help at a fraction of the usual cost.
Areas where companies commonly engage with fractional service providers include Human Resources, IT, Finance and Accounting, and Marketing. Working with a fractional service provider can be especially beneficial for businesses with limited resources and capital (e.g. startups and small businesses). The ability to access a deeper knowledge base and experience without the added costs of employment or needing to intensely manage the positions is critical for growing companies that are looking to invest heavily in core functions such as operations and sales, while simultaneously getting the support needed in other administrative areas of the business.
There are five common ways in which companies address the finance and accounting void.
- First, the founders and business owners perform the duties themselves.
- Second, the company hires an external bookkeeper.
- Third, the company hires an office manager or administrative assistant who also performs tasks associated with bookkeeping, payroll, accounts payable and accounts receivable.
- Fourth, the company outsources the accounting function to a CPA firm that produces the financial reports and handles tax return filings on their behalf.
- Fifth, the company uses software-based platforms that produce financial statements and perform basic accounting duties in an automated manner.
All of these strategies address only a small portion of the activities that a finance and accounting department should be performing – many of which are essential to the success of the company and need to be actively managed (e.g. financial modeling, forecasting, developing and maintaining relationships with banks and investors, stock option planning).
As such, these solutions quickly become insufficient in supporting all of the company’s needs and become bottlenecks for growth.
Why using a fractional CFO or controller is often the better option
With fractional CFO or Controller services, the individual or firm can likely perform all the duties that an accounting and finance department needs, at the correct doses and consistency, in a manner that conveys a number of specific advantages.
Advantage #1: it puts a focus on the company’s financial health
As companies grow and become increasingly more laser-focused on their products, delivery of services, sales and marketing and customer service, oftentimes it comes at the cost of their financial health. Having that counterbalance and voice from a financial perspective allows the company to operate and grow from a more balanced and mindful place. Important responsibilities that are suited to an executive can be shifted to the fractional CFO or Controller’s authority.
A key reason to engage with a fractional CFO or Controller is that in startups and small businesses, the founders and owners are often experts in the product or service they are selling, but rarely have the in-depth knowledge to effectively manage the accounting and finance function efficiently. In other words, sometimes, business owners are blinded to what they do not know but need to know. Often, managing the accounting and finances is also the area of least interest to a founder or business owner who would rather spend their time and energy engaging with customers or helping design and build their company’s products or services.
As the company’s needs grow, the bookkeeper who can produce financial statements may not be skilled enough to produce a finance model or cash flow forecast. The software platform that specializes in accounting has limitations on how well it can do variance analysis on budgets to actual deviances. The CPA firm can help file tax returns in a timely fashion and help the company within the boundaries of taxation but may be limited on the guidance they can provide when it comes time to discuss the company’s long-term strategic vision. As a result of these gaps, it is quite common for fractional CFO or Controller to also play the role of strategic advisor to business owners and founders.
Advantage #2: it brings in a wide range of finance and accounting knowledge and skills into the company
In addition, with fractional CFOs and Controllers, the benefit of them splitting their time across multiple businesses and oftentimes industries mean there can be a wider breadth of knowledge through their experience working with a large range of clientele or industries. The benefit of hiring a CFO or Controller that has experience in the company’s industry is that there is an innate assumption that they are familiar with the nuances of the industry and the training requirements would be minimal.
On the flip side, the benefit of engaging with a fractional CFO or Controller with a wider range of experience means additional perspectives from additional angles. Executive management teams can benefit from seeking strategic and key guidance from a seasoned fractional CFO. Furthermore, this guidance will be available throughout the company as it is much more natural to have the fractional CFO or Controller join in on company-wide meetings or cross-departmental meetings on a consistent basis, whereas a consulting or outsourced provider would likely not take part in these meetings.
Advantage #3: fractional CFOs/controllers require little direct management
Similar to a consultant or outsourced professional, the fractional CFO or Controller will typically require less direct supervision or management from the company. Because they bring in a set of expert skills and knowledge, the activities usually can be conducted with minimal guidance from the company’s executive team. In fact, those in the fractional CFO or Controller position oftentimes find themselves helping to manage other departments and setting infrastructure on behalf of the company.
In any company, especially those in hypergrowth mode, managing teams and personnel can quickly become convoluted and time-consuming and having an experienced leader that requires less direct management can relieve the management team from additional responsibilities.
Advantage #4: it can lower costs
Fractional CFO and Controller relationships are similar to outsourced or consulting-based relationships where they are not entitled to the same benefits and compensation plans as employees. Typical fractional engagements incur a specified fee, whether it is a flat rate or hourly rate, with no additional compensation entitlements such as health insurance coverage, eligibility in the company-sponsored retirement plans, paid time off or other benefits employees enjoy. There are also significant payroll tax savings. The fees associated with bringing in a fractional CFO or Controller is usually less than the costs involved in hiring for the finance and accounting function on a full-time basis.
Advantage #5: the relationship can be easily modified to support the needs of the firm
In a fractional CFO and Controller arrangement, the terms in the engagement tend to be more flexible than that of an employer-employee relationship. With an employment relationship, reasons for terminating an employee can be subject to legal scrutiny and have adverse consequences if not handled properly. The wages of the employee are also much more sensitive to adjustments. However, because typical fractional CFO and Controller arrangements are open-ended, parties can decide whether to re-engage in the relationship or not.
In addition, the scope of work can expand or shrink, along with the cost of services. As such, the scope of services provided by a fractional CFO or Controller can be defined to match the exact needs of the company at a certain stage or the company’s budget and can usually be expanded or restricted with more flexibility than an employment relationship allows. For example, if the finance and accounting function requires more resources, the arrangement can be modified to allow the fractional CFO or Controller to bring in a team of their own accounting and finance specialists to fulfill the work.
Using a fractional CFO and Controller allows the company to have its finance and accounting needs appropriately met at a fraction of the cost of employing a full-time person to be in the position. The fractional CFO or Controller adopts the identity of the company and can alleviate most if not all of the pain points associated with having fragmented accountability in the accounting and finance activities. A fractional CFO or Controller brings forward-thinking, strategic insights and pulls from their experience across multiple businesses and industries and can often bring in their own network of experts to support the company’s plans and needs.
A fractional CFO or Controller – along with the team of finance and accounting specialists they bring – can be an excellent bridge between an ineffective finance and accounting function and creating such a function staffed by full-time employees. With a constantly growing number of fractional CFOs and Controllers available in the marketplace, they can be a great way to facilitate the company’s growth in an agile and cost-efficient manner.
Many thanks to Maggie for sharing these insights with us! If you’d like a copy of the entire article, please hit reply to let us know, and we’ll send it over to you ASAP.
For all of the reasons described in this piece, Crews & co. is proud to offer fractional financial support through its Finance Services division. If you’d like to learn more about how we can help your organization, get in touch with us today.