Does Your Business Need a Fractional CFO? | Erin Armstrong

Does Your Business Need a Fractional CFO?

by | Feb 8, 2023 | Accounting & Logistics, Leading Your Business, Small Business

You might be thinking about bringing on someone to help with the financial side of your business. If you run a large company, your go-to option would a full-time Chief Financial Officer (CFO). This person would help you grow your revenue, manage business cash flow, provide calculations of ROI for different products or services, create financial models and forecasts for different future scenarios, and generally help guide your company’s decision-making with a financial perspective in mind.

However, if you run a small business, a full-time CFO probably isn’t a great option for you. The average salary of a CFO in the United States is almost $400k/year, putting a full-time CFO well out of reach of most businesses.

But this is where a fractional CFO can really save the day! A fractional CFO is a Chief Financial Officer who works remotely (and typically part-time) on a contractual basis for your business. A fractional CFO should generally give you the same benefits you would get from hiring a traditional CFO—but at a much lower cost.

What are the Advantages of a Fractional CFO?

Small business owners have traditionally relied on their tax filer or their bookkeeper to support the financial side of their business. This approach has limitations, because typically, the people in these roles either don’t have the required expertise, or they’re not in a position to provide ongoing support.

Bookkeepers don’t typically have the technical expertise that you would need to get a full picture of your business finances. While they can usually handle basic accounting tasks, they won’t be able to do things like tracking revenue stream profitability, calculating ROI for different investments, implementing procedures for your business to qualify for different tax deductions, improving your cash flow, etc. They just don’t have the expertise.

So, if you can’t rely on your bookkeeper to fully support the financial side of your business, then how about your tax filer? Your tax filer probably has the background and training to help you understand your financial statements, and they could also help you do things like tracking your profit and your cash flow as well as calculating ROI for different investments. But your tax filer does not have the time or the incentive to learn the ins and outs of your business and provide you with ongoing support—it’s not their job. Perhaps most importantly, while your tax filer has expertise in taxes and tax law, that does not mean that they know anything about growing a small business or increasing profitability.

A fractional CFO, on the other hand, has both the expertise you need as well as the ability to learn the ins and outs of your business—they will have the time and the incentive to learn the details of how your business works. A fractional CFO will also do research on your industry and on your direct competitors, so you have the most complete financial picture possible. A fractional CFO will also be able to build financial models and projections for the different business paths you might be considering, such as opening a new location, expanding your staff, or adding new services. And there are many other specific tasks that a fractional CFO can handle, including financial reporting, operational & financial analysis, increasing profitability, risk mitigation, staffing concerns, scaling your business, etc. In short, a fractional CFO has the experience and the expertise you need so you can make the best decisions for your business.

In addition, a fractional CFO will help you approach your business finances from a proactive standpoint. Many business owners tend to operate in “crisis mode,” and they are only able to focus on the immediate problems right in front of them. This puts them in position of responding to problems rather than proactively preventing them. On the other hand, business owners who employ fractional CFOs can make proactive decisions that take future concerns into account. Here’s an example: if you work with a fractional CFO, you won’t just be talking about how much to pay yourself now, but also what your long-term compensation plan should look like.

What Businesses Benefit Most from a Fractional CFO?

Looking back over the many businesses I’ve worked with as a fractional CFO, I can give you some insights about the type of business that experiences the most success in this working relationship.

Let’s start the length of time that a business has been in operation. I have seen the most success with businesses that have been in operation for at least two years. This is because it often takes this long for a business to become fully established in terms of the specific products or services it offers, its target clientele, its pricing, its messaging/positioning, and its marketing. All these different business elements develop over years through the process of trial and error. For a fractional CFO to be able to help your business, it’s most effective when your business already has those different elements established and in place. Of course, these business elements will all continue to change (if you work with a fractional CFO, this person will probably recommend many changes). And it’s easier for a fractional CFO to know what changes to recommend when they can look at metrics to see how these different business elements have worked over time.

Now, let’s talk about how much yearly revenue your business should be bringing in before you start working with a fractional CFO. The good news is, a fractional CFO can be a good option for your small business, even when you’re not bringing in a massive amount of revenue. At the same time, I have seen the most success with businesses that have a yearly gross revenue of at least $400k. This is because hiring a fractional CFO can be a substantial investment, and businesses need to have the revenue to be able to afford that investment (additionally, businesses tend to benefit more from hiring a fractional CFO if they already have lucrative streams of revenue to build on.)

So, bottom line, if you recently started your business, and it’s not yet bringing in significant revenue, it might be not the right time for you to hire a fractional CFO. If you’re in this situation, don’t get discouraged, because there are other resources out there that can give you the financial support you’re looking for, such as business financial courses or business coaching with a specific focus.

Hiring the Right Fractional CFO for Your Business

Here’s where you need to use some discernment and do your due diligence. There are many very good, experienced fractional CFOs who have the skills and the experience to help your business succeed. However, there is also a growing number of bookkeepers who advertise themselves as fractional CFOs, but who can’t do the job of a real CFO.

So, it’s your job, as the business to owner, to look closely at prospective candidates, and to ask the right questions. Here are some of the qualities you should be looking for in a qualified fractional CFO:

Certification. For someone to call themselves a fractional CFO, they need some type of financial degree or certification. Whether it’s a degree in accounting, a CPA or EA licensure, or an MBA, they need something to indicate that they have training and expertise in business finances. And in addition to whatever general credentials they have, it’s helpful for a fractional CFO to have specific training and expertise in taxes and tax law. If they don’t have tax expertise, it will be more difficult for them to understand the full financial picture for your business.

Experience. Business experience comes in many different forms. In order to trust that someone has the skills to help your business thrive and succeed, you need to verify that they have experience working with small and medium sized businesses. Working directly with a small business owner to improve their business is very different than working in the accounting department of a large corporation, and those skills won’t necessarily translate. Ideally, the fractional CFO you hire will have experience working directly with many different businesses in a wide range of different industries. This will give them plenty of real-world experience to draw on.

Reviews. A qualified fractional CFO should be able to point to reviews from identifiable business owners sharing their success stories. If there aren’t any publicly viewable reviews, the fractional CFO should at least be able to provide you with business owner references. You should be skeptical of any “fractional CFO” who doesn’t have reviews or references available.

How Much Does a Fractional CFO Cost?

Let’s talk cost. As I mentioned earlier, the average full-time CFO in the United States earns nearly $400k/year in addition to vacation and benefits. For most small business owners (even those with businesses bringing in several million each year) paying a full-time CFO is too large of an investment.

As you might imagine, fractional CFOs charge much less than full-time CFOs. However, a fractional CFO will still be a significant investment for your business. In general, you should expect to pay a fractional CFO at least $30k/year, but that amount might increase significantly depending on the scope of the service, the complexity of your business(es), the frequency of scheduled meetings, etc. Also, I should mention that some Fractional CFOs (like me!) offer short-term engagement opportunities such as CFO Lite services or VIP daysthat while still a significant expenditure, might a better entry point for some businesses.

So, clearly a fractional CFO costs far less than a full-time CFO, but we’re still talking about a substantial investment. So, what kind of return can you expect on your investment? The answer to this question will vary based on which fractional CFO you choose to work with. But I can give you some results for the fractional CFO clients I’ve worked with over the past two years. (For those clients, I looked at metrics from the 12 months prior to working with me, and compared these to the metrics from our first 12 months working together.) For my clients, the average year-over-year increase in gross revenue was 194%. The average year-over-year increase in profit was 399%. And the average year-over-year increase in owner compensation was 388%. (And to read some of the case studies, click here.)

The Downside of Waiting to Hire a Fractional CFO

When should you start looking for a fractional CFO for your business? If your business already meets the criteria I laid out earlier (you’ve been operating for at least 2 years, and you’re bringing in at least $400k/year in revenue), and you’re actively looking to grow your company further, then you shouldn’t wait to start looking for a fractional CFO. As an established business with lucrative revenue streams, your business is primed for improvement and growth. On the other hand, if you decide to wait to hire a fractional CFO, you can run into major problems down the road.

For example, business owners frequently get themselves into trouble when they try to scale or expand their business—without having insightful support from someone who can anticipate future problems. Expanding or scaling a business involves a delicate dance between maintaining current profitability while also investing in infrastructure that lays the foundation for future growth. Business owners who try to negotiate this transition themselves sometimes make expensive mistakes that are difficult to recover from.

Another area where business owners can get into trouble involves taxes. Without comprehensive support from someone with tax expertise, business owners can unexpectedly find themselves in a position where they owe an enormous amount of back taxes. This can be a scary realization, and it can even put business owners in legal jeopardy. In addition, when business owners operate for years without a proactive tax strategy, they pay more each year in taxes than they should. And this is money that they will never get back.

Finally, we should talk the importance of general financial clarity in your business. One of the principal reasons that business owners hire a fractional CFO in the first place is to make sense of their business finances. This includes their accounting records, their cash flow, the profitability (or lack thereof) of their different revenue streams, their return on investment for different staff members, etc. Financial clarity is what allows business owners to make good decisions for their business (and to avoid bad decisions). If you are operating your business right now without the benefit of financial clarity, then it doesn’t make sense to delay hiring a fractional CFO.

Over to You…

I hope this article has helped you determine whether a fractional CFO is right for your business. If you’re ready to explore getting professional help, check out my  Fractional CFO Services for more information.

 

Wishing you fulfillment & financial success,

Erin Armstrong

Erin Armstrong is a Business Advisor, Chief Financial Officer, Tax Strategist and licensed Enrolled Agent who’s on a mission to financially empower business owners. Her unique, comprehensive approach integrates all the financial aspects of your business (such as accounting practices, tax strategy, profitability, budgeting, & cash flow) with an emphasis on developing a positive money mindset so you can move forward in a confident, proactive and empowered way. Find out more about Erin here.

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