Often, big-picture and strategic financial concerns are left aside as startups begin and develop into pre-seed companies. Beyond the basics of P&L, balance sheets, and similar, most founders forget that a complex web of financial instrumentation and infrastructure is needed to take a company into the deal flow process. This applies especially to the startup looking for a liquidity event like IPO or M&A.
To move into deal sourcing, firms must have a detailed budget, robust modeling and forecasting, and critical financial reviews. Still, many startups also lack the funds pre-seed to hire a full-time CFO to manage these and other details.
For those needing a cost-effective solution, fractional CFOs abound and can be the much-needed reprieve to take your firm to the next level.
What’s a Fractional CFO?
Executive positions are often filled by founders, which makes sense. Chief Executives and Operations Officers fulfill founders’ day-to-day functions, so the titling is appropriate. Chief Financial Officers, or CFOs, are very different. The position entails formal experience or education in financial management and typically cannot be done by a layperson.
A fractional CFO is a part-time CFO that assists the startup in managing strategic finances. Since startups also typically aren’t too complex, the CFO doesn’t need to be full-time. Once the foundation is set, the CFO can manage financial operations easily.
Fractional CFOs differ from consultants because they’re employees in ways that consultants aren’t. That implies a personal stake and commitment to your success, and they can better understand and digest the full depth of your financial data.
How Do You Know if You Need a Fractional CFO?
In practice, if you’re even slightly past the conceptual phase or considering external funding, you likely need a fractional CFO. If you need convincing, though, these are indicators that you need a fractional CFO today.
Budgeting, Forecasting, and Modeling
Budgeting is far more complicated for startups than managing a household’s grocery expenses. Your budget can make or break success, and tracking leaky parts of the business bleeding cash is just one advantage of a comprehensive budget review by an experienced fractional CFO.
But venture capital and creditors need to see a comprehensive budget plan to ensure their money will be well-spent and, more importantly, a projection or forecast of future spending. Financial modeling is complex and as much art as science.
A practical and helpful model is far more than simply plugging in ballpark revenue and expenses into Excel. An experienced fractional CFO will help build forecasting products that both guide operational success and satisfy investors.
A fractional CFO can also help calculate and assess critical metrics of your startup. Not only will these metrics and ratios give you, as founders, an idea of your financial health, but they are also needed by venture capital when considering an investment.
Keeping tabs on the finances through periodic reviews will also help identify areas of improvement, much like budget management does. The review process is more exhaustive and can mean success or failure for the firm. For example, you can quickly fix a quarter's worth of budgeting too much for marketing.
But if you aren't reviewing cash flow and your runway, you may exhaust your money reserves faster than expected and collapse. To keep the ship on the right path, a good CFO will monitor that cash flow, projecting and advising when new capital is needed.
Bookkeeping and Payroll
If the latter two, or any of the many other reasons, weren't enough to show that you need a fractional CFO, chances are that your bookkeeping and payroll processes could be better. Just because you can manage bookkeeping in Excel and payroll through some SaaS doesn't mean you should.
These are both considerable barriers to success, as (best case) poor accounting practices can mean that you're denied access to venture capital and (worst case) can lead to stiff fines or even jail time. The bottom line is that, unless you or another founder are CPAs yourself, you need a fractional CFO to at least audit and monitor your bookkeeping and payroll systems.
Whether you need a fractional CFO isn’t a question of if but when. And in most cases, the sooner, the better. It’s preferable to get ahead of the curve by proactively managing finances at a CFO level, and it will ultimately cost less than hiring one to come in and fix problems or put out fires.
The best fractional CFO depends on many factors, including industry and complexity of finances, but in general, you should look for a fractional CFO that:
- Shares similar values and ethos.
- Understand and aligns themselves with your needs and expectations.
- It is honest and tells you what you need to hear rather than what’s convenient.
- Is within your budget, although you shouldn’t let cost alone be the final barrier to hiring. An excellent fractional CFO often pays for themselves many times over in cost savings and increased revenue.