This is a tough question because the term “fractional CFO” is not clearly defined or agreed upon. It can mean different things depending on which consultant or accounting firm you ask. For this reason, it is also not clear when a particular company might need a fractional CFO.
Here’s my definition of a fractional CFO:
A highly experienced financial resource that will be ongoing and integrated into your team. A true part-time employee (although contracted), that will get to know your company’s day-to-day operations and will work with you to manage and grow your business. As a business matures, grows, and gets more sophisticated, a fractional CFO is replaced by a full-time person.
If this definition largely meets your expectations, read on!
When is the best time to hire a fractional CFO?
This answer isn’t as simple as it sounds. The most important aspect of this question is to determine what type of business you have. For example, a pre-revenue start-up company will have different needs than a more established small business that has operated for 5 to 10 years. However, if I had to answer this question on a general basis, my rule of thumb on when to hire a fractional CFO is when a business at minimum has around 5 to 10 employees or at least $1M in annual revenues. There are 2 different general categories of businesses that can benefit from a fractional CFO, and below are some important things to consider for each:
Start-Up Companies
I would suggest you start thinking about a fractional CFO, 6 months to 1 year from when you think you will be able to commercialize whatever product or service you are creating. This timing is based on the fact that you should raise your own initial capital and you will need to get your own company past the initial incubation stage. There are plenty of early-stage company resources out there so there’s not much point trying to hire a fractional CFO, and at this stage, cash can be quite tight. Getting past this very early stage is also critical to see if you even have what it takes to create a successful start-up.
For start-up companies, a fractional CFO’s focus is on setting up right-sized accounting and finance systems, helping with planning and strategy, providing financial oversight, supporting capital raises or lending efforts, grant applications, helping with agreements, human resources, and any other support the business might need.
Minimum Metrics for When a Start-Up Can Consider Hiring a Fractional CFO:
You have a small team of around 5 to 10 people.
You need help setting up right-sized financial systems.
You are 6 months to 1 year away from commercializing your product or service.
You have raised some capital, or used personal funds, and you need support raising more significant growth capital.
Established Small and Medium Businesses
For small and medium-sized businesses that have been operating for 3 to 10+ years, I suggest you start thinking about hiring a fractional CFO to help you manage and grow your business at around the $1M in annual revenue mark. For established businesses, the focus is on growing revenues, improving cash flow, seizing opportunity, capital structure and adequacy, budgeting, business profitability, scaling and strategy, ensuring good financial controls, tax compliance and planning, accounting processes, and financial oversight.
Minimum Metrics for When an Established Business Can Consider Hiring a Fractional CFO:
You have been operating for 3 to 10+ years and you have around $1M in annual revenues.
You have an established bookkeeping/accounting system and team. It doesn’t have to be perfect, but you have something in place.
You already work with an accountant to file your corporate taxes and handle other compliance work.
You are looking to grow your business or you have pain points and you want help.
Hire a fractional CFO when your business is in decent shape.
I can’t stress this enough, but many prospective CFO clients come to me when things are already not going well. Like anything in life, it is way harder to fix something that is already broken than to prevent something from breaking in the first place. There are always some pain points that act as catalysts before businesses consider a fractional CFO, for example, the desire to grow, the finance department not providing adequate support, or seizing opportunities. These things are perfectly fine, however, if your business is experiencing significant cash flow problems, you are in trouble with tax authorities, or you have recently lost a lot of revenue, it may already be too late. I recommend hiring a fractional CFO when things are in decent shape and not waiting until you are at the brink. Fractional CFOs can sometimes help in these situations but we aren’t miracle workers either.
How much time will a fractional CFO spend on my business?
As a business matures, grows, and gets more sophisticated, a fractional CFO is replaced by a full-time person. This is the natural way for a fractional CFO since by definition, they can’t be full-time. Above, I noted the minimum business metrics your start-up or established business should have before considering a fractional CFO. At the minimum, you might be looking at 10 to 20 hours per month that will scale with business growth. As a company scales to 50+ employees or $30M+ in revenues, the time commitment from a fractional CFO will naturally increase to point to where fractional no longer works. At this time, this is when a transition to a full-time CFO should start to occur.
Remember that the transition to a full-time CFO doesn’t need to mean a cold turkey end to your fractional CFO relationship, a transitional period should be implemented, and you might also want to retain the fractional CFO as an ongoing, occasional advisor as well.
What does a fractional CFO cost?
As a start-up or established business, you want an ongoing, integrated fractional CFO to join your team. A true part-time employee (although contracted), that will get to know your company’s day-to-day operations and will work with you to manage and grow your business. A fractional CFO like that will run you around $150 per hour but there’s more to consider here. Key cost considerations when hiring a fractional CFO:
Fractional CFOs from some accounting firms, especially larger ones, will be more expensive. In addition:
You may not get the personalized, ongoing, integrated service your business needs.
Your assigned fractional CFO probably won’t be as experienced as a direct consultant or someone from a smaller firm. This is because the really experienced fractional CFOs within these firms are managing the less experienced ones.
Fractional CFOs can cost more if you are in a larger center. I have seen rates of $250+ per hour.
If you are a start-up and you want a fractional CFO, you should consider offering an equity component to help bring down the cash cost. The equity component will also help align the CFO’s goals with yours and make them a bit stickier.
If your business is on the larger, more complex side, the hourly rate charged could be higher.
A typical cost arrangement with a fractional CFO will look like this:
Variable monthly hours billed each month depending on hours used.
A set monthly retainer that includes an undefined amount of support. I would recommend avoiding such agreements.
A set monthly retainer that includes a block of guaranteed hours. Hours needed above and beyond the retained monthly hours are billed monthly on top of the retainer.