Successful business owners recognize the importance of professional assistance, particularly in matters of growth and expansion. Revenue is variable. Economic conditions shift. Consumer demand is fickle. Adjusting to these factors requires professional expertise. That’s what a fractional chief financial officer (CFO) can offer. This article will explain what that means. Some key takeaways:
- CFOs are not bookkeepers who record transactions or controllers overseeing compliance and accounting standards.
- A CFO is a strategic partner who helps develop detailed financial forecasts, cash flow projections, and scenario models for major business decisions.
- Some key inflection points for bringing on a CFO include unpredictable cash flow, rapid growth, preparation for funding rounds, and major strategic decisions.
Throughout this article, I’m going to use the term “Fractional CFO,” though our firm typically uses the broader term “CFO services.” I am choosing to use standard terminology because, as a first-time reader, you may be more familiar with transactional relationships (“CFO for hire”) than the partnership approach I prefer (“Your working CFO”).
That being said, let’s dive in.
How does a CFO’s role compare to the roles of bookkeepers and controllers?
The role of a fractional CFO is often misunderstood. We’re not bookkeepers who record transactions or controllers overseeing compliance and accounting standards. A CFO’s job is to take data compiled by those experts and turn it into strategic insights that fuel growth. A good example is using accounting records or pro forma financial reports for revenue projections.
Another way to look at this is that bookkeepers and controllers focus on the past, while CFOs look to the future. We do more than simply report numbers. A fractional CFO interprets reports to assess future financial landscapes. This can help your company identify opportunities, mitigate risks, and avoid critical mistakes. It’s difficult to do any of that without professional help.
What does a fractional CFO actually do?
As a long-time accounting and financial professional, I’ve served as a fractional CFO for many developing and established companies. Each of them had industry-specific objectives, but certain tasks are constant for all clients. My role is to be a strategic partner, not a consultant who provides one-off reports. In that role, I’ve been asked to:
- Develop detailed financial forecasts and cash flow projections
- Create scenario models for major business decisions
- Implement financial controls and reporting systems
- Analyze pricing strategy and unit economics
- Prepare your business for funding or investment opportunities
- Build KPI dashboards that focus on leading indicators
Bookkeepers are paid to tell you how much cash you have. Controllers explain where that cash came from. Fractional CFOs can tell you how much cash you’ll need to cover expenses six months from now. We can also help you develop or enhance revenue streams to increase that cash flow. That’s where the “strategic” part of our job description becomes relevant.
When should you consider bringing in a CFO?
Entrepreneurs with small startup teams and limited funding are understandably reluctant to bring in a CFO, but that’s precisely when seeking professional help is most crucial. Unfortunately, many small business owners wait until they’re under financial duress. Some of the inflection points when you can avoid that include:
- Unpredictable Cash Flow: This issue should be apparent from the outset. Variable revenue streams can create major headaches for bookkeepers and controllers. A fractional CFO can implement forecasting systems to make budgeting and planning more manageable. This is essential for making decisions on growth and scale, particularly in times of uncertainty.
- Rapid Growth: Increasing the size of your company takes significant resources. Doing it rapidly can create cash flow problems, particularly if it happens unexpectedly. This is another area where a fractional CFO can help. Growth won’t do you any good if it’s not sustainable. Our job is to ensure that happens.
- Funding or Investment Preparation: Preparing for a fundraising round or major investment takes careful financial planning. Equity financing is complicated. You’ll need a cap table and pro forma financial reports. Our team can do those for you. Investments can appear attractive on paper, but a comprehensive analysis may reveal underlying flaws.
- Operational Complexity: Startups often mature into small businesses. Each stage along that road adds another layer of complexity. Product lines become more diverse. You might open a new location or open an additional sales channel. Each of these actions changes the company’s financial picture.
- Major Strategic Decisions: Having a fractional CFO on your team gives your company a significant advantage when making strategic decisions. The data we can provide goes far beyond simple debits and credits. Our team conducts financial analysis, prepares pro forma financial reports, and generates cash flow projections.
Don’t wait too long before bringing in professional help. The right time to bring in a CFO is before you need one. By the time financial problems become obvious, you’ve already missed opportunities and potentially created long-term challenges. Financial planning and analysis (FP&A) and cash flow forecasting can help prevent that.
There’s a lot of talk about strategy, but it takes integrated data and functions—financial, tax, and accounting—to actually create them.
As part of our CFO services, we advocate for an integrated approach that combines the services of a fractional CFO with those of accounting and tax professionals.
This is simple: It’s difficult to make informed financial decisions without understanding your firm’s tax situation. By combining the two, we can make informed strategic recommendations that facilitate growth and scale.
Revenue recognition is a good example: A traditional CFO might recommend it to improve your financial position, which is reasonable on its face.
But because we have a deeper understanding of your tax situation, we might suggest deferring that revenue to take advantage of more substantial tax savings. Integration provides a comprehensive view of what you need to maintain the financial health of your business and take steps to drive growth.
Get started with CFO services in Fort Worth.
Adding a fractional CFO to your team should not be viewed as an expense; it should be seen as an investment. It’s an investment with a measurable return. In other words, you will see ROI. I am confident in that statement based on my experience and the competence of my team.
Schedule a discovery call today. It’s time to move to the next level.
Talk soon,
Jeremy A. Johnson, CPA