The Why, What and How of Working with a Fractional CFO

On By sdcountybar

By James Wheeler

According to California’s Employment Development Department, San Diego is home to more than thirty thousand small businesses of between five and fifty employees.[1] As a trusted advisor to these growing businesses, you may have observed that one of your clients would benefit from a level of financial expertise beyond the capabilities or capacity of their existing leadership.  Most of these small to medium-sized companies are not large enough to justify a senior financial leader on a full-time basis and may not have considered retaining with a fractional CFO (“fCFO”).  As an attorney and advisor, you may want to learn about what a fractional CFO can do to help their business.

A fractional CFO is a Chief Financial Officer who is contracted to provide financial leadership and oversight in a part-time capacity. The fractional CFO is also known as part-time CFO, outsourced CFO or virtual CFO.

Once on board, a fractional CFO can:

  • Create additional alignment—the fractional CFO will often be an important advocate for your point of view, particularly where risk mitigation is concerned. This alignment particularly relevant as fractional CFOs are often more closely integrated into the business than the CPA or outside counsel.
  • Call for additional counsel—like their full-time counterparts, fractional CFOs often work closely with outside counsel on transactional work, litigation and even labor issues.
  • Cement your relationship and expand your influence—you may not be McKinsey & Co., but you can still develop your business like them by effectively placing senior leadership.

What does a fractional CFO do?

The fCFO operates similarly to a full-time CFO by providing financial leadership, financial expertise, and financial credibility.

  1. Financial leadership – Working with the CEO
  • Strategic ‘north star’ – Ensures that financial statements are actionable at a strategic level. E.g. Articulate what the balance sheet needs to look like if the CEO wants to acquire another company, and plan the best way to ‘get there’.
  • Sophisticated analysis – Provides forward-looking analysis beyond the capability of existing staff. E.g. Forecasting cash flow to help the business plan for and avoid cash shortfalls.
  • Best practices, process and oversight – Bring best practices to the various financial functional areas and incorporate internal checks for current processes. E.g. Establish appropriate controls over disbursements and payables reducing the risk of fraud and error.
  • Strengthen skill set of existing resources– Mentors the internal team. E.g. Develop the controller; increasing their productivity and value to the organization.
  1. Financial expertise – Working with Banks
  • Product selection –Select the optimal mix of treasury management, deposit, and debt products (an esoteric exercise with hundreds of institutions each offering different products). E.g. Access debt for the business without the owner/operator pledging their personal assets to secure it, resulting in reduced risk for the owner and potentially better credit for the business.
  • Process navigation – Navigate the unique language, regulations, and process under which most banks and financial institutions labor. E.g. Knowing when to negotiate with the credit department vs the legal department, or the company size at which different institutions move a relationship out of the retail or deposit office.
  • Relationship management – Maintain relationships with the right financial institutions to advocate for the business. E.g. Ensure lenders are messaged appropriately regarding any business changes to maintain or extend existing credit terms.
  1. Financial credibility – Working with investors
  • Curating financial data – Set policy and infrastructure to yield the quality and presentation of financial data investors are accustomed to seeing. E.g. Guiding the organization of the chart of accounts to support the company’s financial objectives.
  • Crafting financial narrative – Assist the CEO to craft an appropriate financial narrative for investors. E.g. Crafting communication to show how different sources of capital are being used to generate a return for investors

Limitations of the fractional CFO

Fractional CFOs are, by their very definition, limited in their ability to engage with an organization. Understanding this and working closely with an fCFO to ensure their limited time is utilized on the highest-value activities will yield the best outcome for the client. Clients who ask fractional CFOs to take on too many tactical activities or operational responsibilities may not get the value they’re paying for and end up frustrated.  The CEO and fCFO should engage in an ongoing dialogue to review initiatives and priorities to ensure alignment.

Working with your client to select an optimal fractional CFO

Companies have numerous options in selecting a fractional CFO, and a client’s expectations, needs, and style should be discussed early in the fCFO selection process. It’s helpful to consider how they want to work with their fCFO, and have a clear picture of what they want that individual to accomplish through the engagement.  The areas below are additional considerations to ensure the best fit.

  • Aligned experience – While an outside perspective can yield tremendous benefits, a lack of familiarity with an industry can be a source of inefficiency. Companies considering an fCFO should consider someone with experience in their space or an adjacent one.
  • Business model options – There are different models for delivering fCFO services, each with their own strengths and weakness depending on the needs and style of your client.
    • Team based – many fCFO offerings are part of a service provider that includes an outsourced accounting team and has multiple teams. The advantages of this type of delivery, as you might imagine, may include greater bench depth and service continuity that is less dependent on individuals. The downside may be higher client load resulting in less mindshare per client, and can be more complex by design to increase client retention. This model will also offer a different feel relative to the next model.
    • Individual practice – The individual practitioner may work with an internal accounting team or a different outsourced provider. The advantages of this type of delivery is that discrete segments of a client’s finance ‘stack’ can be individually changed out with less disruption and there is often greater mindshare per client. The downside may be less redundancy or bench depth than with a larger provider.
  • Style/fit – fCFOs will be a strategic partner to the CEO, offering a uniquely valuable perspective. It’s a close working relationship and if stylistic differences, or a lack of shared values, erode trust or make communication too costly between the CEO and fCFO, it may not work.
  • Fee structure – Some engagements provide for an fCFO to spend fixed day(s)/week in a client’s office. Other engagements are virtual. Some are fixed fee, some hourly. Some are stand-alone, some are bundled with other team members. Some fCFOs do project work or interim roles, others do not.

Selecting a fCFO is not unlike hiring a full-time CFO, although it does offer the unique benefit of allowing both parties to get to know each other with reduced economic risk to the company if the selected individual isn’t a good fit.

Final thoughts- the benefits of fCFOs for Outside Counsel

Deciding to utilize a fractional CFO allows senior leaders to focus on their business and can fill both known and unrealized gaps in the leadership team. Even in a limited capacity, this role can bring tremendous value to the small business and to its working relationship with outside counsel.

James Wheeler is CFO at Narrative Financial Management.

[1] http://www.labormarketinfo.edd.ca.gov/LMID/Size_of_Business_Data.html accessed July 23, 2018