The 10 Signs It’s Time to Hire a Fractional CFO

By Kyle Carney

Businesses typically progress across four life cycles: From launch or startup to growth, maturity, and renewal/rebirth or decline. At each stage of the business life cycle, a company’s financial needs and corresponding business operations evolve. These stages come with new challenges and targets, requiring various skill sets, talents, experience, and expertise to handle your company’s financial needs

During these life cycles, the quality of the financial decisions at crucial stages contributes to the company’s development. Most startups don’t launch with finance or accounting teams. Several times, one of the founders assumes the accounting or financial planning positions. However, as the company expands, the need for a specialized finance expert, a full-time CFO, or a team to oversee financial functions becomes increasingly crucial. Bringing in a CFO during the early stages can significantly influence a company’s initial profitability strategy. However, the feasibility of hiring one can be a challenging task for startups with limited financial resources. This is where the expertise of a fractional CFO can be engaged, and when supported by an accounting staff and a part-time finance controller, can provide adequate support for a business that cannot afford to build a full-time team but requires financial expertise.

If you are new to Fractional CFOs, our blog on How can a fractional CFO contribute to Business Growth and Profitability provides a background on the importance of a skilled fractional CFO and areas where your company can see a long-lasting value in growth and profitability.

When to Consider a Fractional CFO

Here are Ten signs that it is time to hire a fractional CFO.

Rapid business growth and expansion

As a startup, going through a phase of swift business growth and expansion brings excitement to the company, usually when revenues are high, net profits are positive, customer retention is impressive, and the business is gaining recognition in its respective industry. However, effectively managing business growth and the company’s finances can become increasingly intricate. Startups experiencing rapid growth and expansion can employ the services of a fractional CFO to navigate through the growth stage while ensuring that the cost and capital structure is optimized to support the business operations.

Raising capital

There is a sense of fulfillment and validation that comes from raising venture capital. Founders and business owners consider this phase a fulfilling one. However, the pitching and fundraising process can be tedious and sometimes unpredictable. The requirements of each funding round change, and a business can leverage the services of a Fractional CFO to manage the requirements of these rounds. In addition, not only can the Fractional CFO function in the fundraising process, but they can advise on the timing of the fundraising and the percentage of debt and equity that is best for the company at each round.

It is also important to note that in the series A or seed funding stages, what investors value most is the idea, management, and scalability of the business. When you are heading towards series B or later stages, the key value driver becomes the financial metrics, profitability, and revenues. Therefore, if you are in the series B or later rounds of your fundraising, this can be a perfect time to have a fractional CFO on your team.

Navigating an audit or transaction

Organizational audit periods can be one of the busiest periods in a company’s calendar year. While internal audits can help a company understand the status of its financial health, there are other cases where the government, investors, or shareholders demand an audit report before making relevant decisions. Audit requests may come last minute, and the complexity of this activity can seem difficult for first-time founders and entrepreneurs. Audit tasks can be contracted to fractional CFOs, who can ensure that the company’s financial statements are accurate against other financial documents and credit card statements.

When it’s time to scale

“Growth” and “Scale” are words often used interchangeably in business. However, growth involves increasing top-line revenues without significant concern for expenses, whereas scaling a business focuses on optimizing revenues while efficiently managing costs to improve profit margin. This concept is known as the “economies of scale.”

Popular approach companies adopt for scaling involves incorporating new software into their manual operational procedures. For instance, they might utilize Zuora for invoicing and Salesforce for managing customer relationships. When a company opts to scale, it can be a smart move to bring on board an experienced fractional CFO. This helps guarantee smooth and problem-free integrations, all while maintaining the company’s workflow undisturbed.

Cash flow issues

One specific challenge that startups encounter is dealing with cash flow issues. These issues can arise due to uneven cash inflows and outflows, unexpected expenses, or delays in receiving payments from customers. In some cases, startups may struggle to determine the average number of days it takes for customers to pay their invoices, which is known as the accounts receivable turnover. A lack of clarity regarding this metric can lead to uncertainty in predicting when cash will be available. A fractional CFO can play a crucial role in addressing cash flow challenges by devising a fresh billing strategy. This strategy may involve setting clear payment terms, offering incentives for early payments, or implementing efficient invoicing and collection processes. Furthermore, a fractional CFO can work with the startup’s management team to negotiate improved payment timelines with customers. This negotiation process may involve finding ways to align payment schedules with the company’s own cash needs, smoothing out the variability in cash inflows. By securing more favorable payment terms, the startup can enhance its ability to maintain a steady cash balance and navigate cash flow fluctuations more effectively.

Optimizing employee compensation and benefits

If you are considering improving your employees’ benefits, payroll, and workers’ compensation, outsourcing these tasks to a Fractional CFO can significantly help companies to reduce their non-operating expenses. For example, the cost of employee benefits, particularly in healthcare, is constantly increasing. In 2022, a McKinsey article reported that the average employer saw a 5% increase in cost of employee healthcare benefits, and will increase by an additional 10% throughout 2023 according to Willis Tower Watson. An experienced fractional CFO is always attuned to emerging economic alternatives and should be capable of suggesting strategies to reduce costs while upholding or elevating employee benefits.

Frequent industry regulatory changes

Some industries experience frequent regulatory changes. If you are a multinational company or have a diverse supply chain, you need to pay attention to the changes in relevant regulations in the countries you operate. These regulations could be reporting, disclosure obligations, or compliance, and therefore require individuals with related experience or professional skills, as the implications of misinterpreting regulations can be reputationally and financially disastrous.

Given that fractional CFOs often possess experience spanning multiple industries, their wide-ranging expertise and understanding of various regulatory demands can facilitate the transfer of knowledge within existing teams, as well as provide adequate insights to the CEO and management teams.

Management restructuring

Management structures often change, particularly after the completion of a merger and acquisition (M&A) or a leveraged buyout (LBO). If investors are not looking to appoint their CFO, some incumbent CFOs and staff resign at this stage, leaving the business without a financial decision-maker to implement new strategies. Moreso, it takes an average of 6 months to a year to hire a CFO, compared to the swift onboarding process of an experienced fractional CFO who can fit into the role on an interim basis.

Influencing the board of directors

Venture or private equity (PE) funded companies end up with diverse board members that hold significant influence over decisions and future trajectories of the company. Introducing a fractional CFO to participate in board meetings and contribute fresh perspectives to business decisions can be beneficial to the company.

In addition, larger companies typically have a more complex board of directors, including independent board members with no significant financial, business, or familial ties to the company and whose decisions should not be influenced by internal interests or conflicts of interest. Occasionally, specific corporate actions may place an independent board member in a potentially conflicted position. During such instances, a fractional CFO can step in as a temporary board member, ensuring unbiased oversight of the matter without any personal conflicts.

Decision-making on budget allocation

High-growth companies expand rapidly with increasing operational demand and often need to make decisions around the strategic allocation of funds. One notable aspect of their decision-making process is determining where to invest their financial resources to achieve high returns for their shareholders. For example, decisions made during Mergers and Acquisitions (M&A) can significantly impact a company’s trajectory, market positioning, and competitive advantage. In the absence of a dedicated full-time CFO, which is not uncommon for many evolving companies, the option of engaging a fractional CFO becomes particularly valuable. In situations where complex and impactful decisions must be made swiftly, often referred to as intensive, time-sensitive sprints, the fractional CFO can step in to provide insightful project evaluation.

In the dynamic landscape of business growth and financial management, recognizing the pivotal moments to engage expertise is key. The ten signs elucidated here underscore the critical junctures when a fractional CFO can be your strategic partner. From steering through rapid growth and complex scaling transitions to deftly navigating audits, regulatory changes, and budget allocations, the insights and expertise of a skilled fractional CFO can guide your company to enhanced profitability and sustainable success. As you assess your company’s trajectory, remember that these pivotal moments are opportunities for transformation. To ensure that your financial decisions align with your growth ambitions, contact Canopy Advisory Group for Fractional CFOs today. Let our seasoned professionals empower your journey, ushering you through these crucial phases with expertise, insight, and a commitment to your company’s financial excellence.