What is a fractional CFO?
A fractional CFO is an experienced financial strategist that businesses hire on a part-time or contract basis to oversee roles and responsibilities typically managed by a full-time, in-house CFO but tailored to the unique requirements and limitations of the business.
In other words, it’s an outsourced CFO service.
Whereas accountants and bookkeepers help businesses maintain accurate financial reporting and follow accounting standards, a fractional CFO is focused on the future, helping business owners answer critical, strategic questions like:
- Can I afford to hire someone full-time?
- Should I hire a contractor or an employee?
- Are we measuring business performance with the right KPIs?
- How would a pricing change impact my business?
- What’s the potential ROI on a new LinkedIn video ad campaign?
- When should I increase my marketing budget?
- Where should I invest my excess cash?
- What’s wrong with my current cash flow management?
With the right fractional CFO, small businesses gain access to top-tier financial expertise from a financial professional without incurring the costs of a full-time hire.
Coming in with a fresh perspective, an experienced CFO can provide unique insights into your company's financial dynamics, drawing upon their wide-ranging experience working with similar businesses.
Their role also allows for real accountability, ensuring objective and unbiased financial business decisions uncoupled from job security worries.
Lastly, the selected CFO can leverage their vast knowledge of the latest FinTech platforms and automation solutions, ensuring your organization stays at the leading edge of financial technology.
Fractional CFO vs. traditional CFO
A fractional CFO is typically engaged on a part-time, contract basis. This makes them a cost-effective choice for small to mid-sized businesses that need high-level financial expertise but don’t quite have the budget or need to hire a full-time CFO.
While a traditional CFO role would oversee all finance-related tasks and other organizational priorities like people and stakeholder management within a company, a fractional CFO’s focus is narrower.
Instead, they focus on strategic tasks such as financial planning, strategic planning, fundraising, value extraction, and guiding the growth trajectory.
Fractional CFO vs. bookkeeper
Bookkeepers look backward, fractional CFOs look forward, bookkeepers tell you what’s happened, and fractional CFOs advise on what can happen.
Compared to a bookkeeper, a fractional CFO plays a strategic role in shaping the company's future.
Where a bookkeeper's role is retrospective, managing transactions and ensuring financial statements and data are accurately recorded, a fractional CFO offers a forward perspective to the finance team.
Fractional CFOs focus on financial planning, analyzing trends, financial operations, and forecasting to drive the business strategy based on informed insights.
Unlike a bookkeeper who overviews economic events, a fractional CFO leverages this historical data to advise on potential financial outcomes, mitigating risks and harnessing opportunities to foster future business growth.
Who needs a fractional CFO?
The most common businesses that use fractional CFO services are SMBs and early-stage, venture-backed startups.
They primarily hire fractional CFOs because they gain access to an experienced strategic finance professional at a fraction of the cost of a full-time CFO.
This allows them to add the strategic finance muscle they need for growth while maintaining lean operations and not overpaying for something more than they need at that stage.
They often aren’t at a scale or level of complexity to warrant a full-time CFO, but they face financial challenges due to their lack of financial leadership and insights. They realize that their time is better spent on product and sales than on the intricacies of the balance sheet.
When should I hire a Fractional CFO?
While every ambitious organization can benefit from expert financial advice, a Fractional CFO often becomes crucial when a company crosses a certain threshold. That threshold is usually around $1M in annual revenues.
At that stage, strategic financial planning and financial management become critical. Company leaders and management teams need more financial expertise and find that complex financial issues are sidetracking them from focusing on their primary responsibilities.
They also lack the critical financial insights to make informed decisions to grow their business.
When that starts to happen, it’s likely time to consider a part-time CFO to help with your strategy and financial processes.
We recently helped a client set their 2024 budget. Before doing so, we modeled a worst-case scenario, a base-case scenario, and a best-case scenario.
Because they have limited resources, we helped them narrow their focus for the year on revenue with healthy economics centered around their long-term vision. Intelligent, strategic decisions like this are easy to make with the correct data but impossible without it.
A fractional CFO is instrumental during the fundraising stages. They add credibility and professionalism in handling financial discussions with potential investors when raising capital.
Moreover, they are skilled at preparing compelling financial projections and narratives that favorably position your company for increased investment appeal.
A fractional CFO is also critical for those business owners wishing to optimize operations to extract more value.
A fractional CFO helps identify areas where efficiencies can be improved, costs minimized, and profits maximized, all without necessarily growing the top-line revenue.
If you run a business long enough, you’ll inevitably get distracted by new, shiny objects. But, more often than not, chasing those shiny objects does more harm than good.
For example, our firm provides CFO services to a VC-backed SaaS company. Before engaging us, they felt like they needed to go upmarket because “that’s where the biggest opportunities are.”
Objectively, that’s very true. There’s a massive opportunity for them in the enterprise space. Where their gut feeling was wrong, though, was in the assumption that their current customer segment was a loser.
We came in and did some financial modeling and financial analysis and demonstrated that their current segment was very profitable to them. Not only did it have a respectable LTV:CAC, but it also had a positive contribution margin, with plenty of room for growth and improvement.
When working with a limited cash runway, deciding to put your current, primary customer segment on autopilot and go upmarket should never be taken lightly.
Making that change is way more complex (and expensive) than deciding to go after more significant accounts. Not only does it require a shift in strategy, but it requires more investment in product, different marketing collateral, a different sales team, etc.
Ultimately, I guided them to lean more into their current segment because there was still a lot of opportunity there, AND it was already profitable.
The positive contribution margin from that segment could then be reinvested into the enterprise segment.
The main point is to be careful when facing an opportunity to go after something new. Do your research and make sure you model everything out to ensure the economics make sense.
They can and should invest in the enterprise segment, but their strategy needs refinement. Making informed decisions is always better than making decisions based on gut.
How much does a fractional CFO cost?
It entirely depends on your needs and the size and complexity of your business. It can be $2,500 at the low end and up to $10k/month at the high end. Some may choose to be hired and paid on a project basis, which can vary in cost.
Measuring the ROI of a Fractional CFO
As I wrote recently on X, the short answer is that some companies won’t be there yet.
You need to get to a certain level for it to make sense, especially for traditional SMBs rather than early-stage startups.
At an early-stage startup, you’ll need someone in a CFO capacity at a lower revenue range than in the SMB world because of the added complexity that a venture-backed business brings. That includes managing investors, operations, reporting, and more.
Measuring the ROI of a fractional CFO isn’t like measuring the success of marketing spend, where you could pinpoint a healthy LTV to CAC and other metrics with good attribution reporting.
Part of answering this question starts with looking at the opportunity cost of your founder or entrepreneur spending their time on finances instead of product and sales. This is amplified further if they don’t have a finance background and are comfortable with steps like cash forecasting based on YTD revenues, for example.
The second way to measure the ROI of a fractional CFO is how long you can extend the finance function to operate with the same amount of headcount as the company adds a full-time employee headcount.
One company we work with is growing headcount thanks to the success of their product line, but they can keep the finance org size stable with the help of our fractional CFO services.
Up until around the $20M revenue benchmark, you can save significant money outsourcing the finance function to a fractional CFO instead of investing substantial sums to bring on a full-time finance hire.
As a general rule of thumb, non-venture-backed businesses would benefit from bringing on a fractional CFO once they hit the $1M revenue mark.
Early-stage startups going the venture route would likely benefit from doing so earlier, but this is a practical rule of thumb for SMB owners focused on scaling their businesses.
Wrap-up: Choose the right fractional CFO for your business
When evaluating a fractional CFO, you want to ensure they have the right experience and industry knowledge to bring value to your business and support your strategic objectives.
However, it’s also essential to nurture the relationship and, where necessary, evaluate if your fractional CFO drives the ROI you expect from them.
Matt is a CPA and the Founder of Margin CFO & Bookkeeping. Prior to Margin, he spent over a decade doing corporate finance and accounting for high growth startups in Austin, TX. During that time, he built the financial infrastructure and teams to support rapid growth, and helped multiple companies grow and scale from early stage startups to publicly traded companies. He founded Margin with the goal of using his experience in corporate finance to provide best-in-class finance and accounting solutions to small businesses and startups on a fractional basis.
Editor's note: Are you a fractional CFO interested in partnering with Rho? Check out our partner page today!