When and How to Hire a Fractional CFO

If you’re leading a startup, you already know how strapped you are for resources. Yet, you still have various obligations that you need to fulfill beyond developing a service or product and entering it into the market. One obligation you can’t overlook is the financial requirements you need to meet.

However, with limited resources, it can be difficult to justify the cost of bringing in a full-time chief financial officer. What’s more, you — as a founder — don’t want to be spending nights and weekends on bookkeeping, especially if your experience is limited and your efforts could be prone to mistakes.

That said, a fractional CFO could be the answer. Generally, once your startup’s revenue starts to climb and its financial complexity begins to increase, is when you want to explore fractional CFO services. You’ll save a significant amount of money compared to bringing a professional in-house and fractional CFO services can grow and scale as your startup does. For example, Graphite Financial’s CFO services start at $1,250 per month.

Understanding the Role of a Fractional CFO

A fractional CFO does all the same things as a full-time CFO — bookkeeping, financial reporting, invoicing, investor relations, expense reports, revenue recognition, etc. — but serves as an external partner and only works part-time for your startup.

Unlike a controller who only focuses on the day-to-day operations of your startup, fractional CFOs can perform day-to-day tasks and more big-picture ones as well. What’s more, a fractional CFO can serve as a long-term partner for a startup and scale their services as your startup grows and evolves.

Signs Your Startup Needs a Fractional CFO

So how do you know when your startup could benefit from a fractional CFO? There are a few situations you should be aware of that could indicate you’re ready. One situation is if you’re not comfortable or willing to handle basic bookkeeping yourself any longer. Putting more effort into bookkeeping can take you away from other parts of your startup that you’re likely more qualified to manage.

Another situation is when your startup’s finances become more complicated. This tends to happen when you start to earn revenue as your startup gains market share. A looming fundraising round, increased attention from investors and budget variances are some signs that it could be time to start working with a professional.

Operational vs. Strategic Pressure Points

As your finances become more complicated, you’re likely going to have to manage various operational and strategic obligations to keep up your momentum. Things like a bookkeeping backlog, scenario planning, revenue modeling and more all help justify the need to consider a fractional CFO.

Fractional CFOs are financial experts and can dig far deeper than a startup founder as it pertains to advanced financial analytics. These may include ROI on marketing channels, cash flow management and forecasting, MRR churn analysis and more. When you combine this with the potential for complex deals and rapid expansion, it’s important to have someone you can turn to that has the experience and expertise to navigate such situations.

Structuring Compensation and Aligning Incentives

There are several ways to structure fractional CFO compensation. Some of the more common options include retainer agreements or success-based ones. In a retainer agreement fractional CFO relationship, you can expect to pay a monthly rate for a select amount of hours. Hourly billing is another option, where you’re billed for however many hours your fractional CFO is servicing your startup. Success-based or equity compensation relationships are designed to align with your startup’s growth objectives and financial strategy.

Regardless of the compensation agreement you agree to, it’s important to have one that ensures both parties – your startup and the fractional CFO — are motivated to drive your efforts forward.

Pros and Cons of Common Models

Here’s a look at the pros and cons of the common models so you can decide which one works best for your startup:

• Retainer: Monthly retainers offer cost certainty and can help your startup better budget for the cost. However, you also run the risk of not using the total number of budgeted hours covered by the retainer. Additionally, there may be some months when you require more hours than what you’re budgeted for.
• Hourly: The nice thing about a fractional CFO service that bills hourly is you know you’re only going to be paying for the services that you need as you need them. This can also make it easier to scale. However, your startup may run into budgeting challenges if you require more services than during a normal week.
• Equity-based: The biggest benefit of equity-based compensation is that it serves as a motivator for the fractional CFO to help grow the startup, as it ties payment to it. However, this method of compensation tends to be more complex and is also based on external factors.

How to Evaluate and Onboard a Fractional CFO

How can you find the right fractional CFO for your business? You should go through a process that’s similar to finding any other key partner. For instance:

• Consider starting by interviewing various CFOs who have experience managing startups or experience working within a startup business model. This can help get a feel of how experienced they are and allow you to get to know them.
• Check references and view each of their portfolios to help narrow down your search.
• Be transparent with your finalists. Set clear expectations of what you need. Also, make sure you learn about their communication preferences. If necessary, you can introduce them to other members of your startup.
• Once you’ve gone through this process, select your top candidate.

Onboarding Best Practices

To ensure a smooth integration with your fractional CFO, it’s important to be transparent. Establish processes and communication channels. Make sure you allow access to any software or programs you use and gain access to any financial planning tools that your fractional CFO uses as well. Additionally, we suggest scheduling weekly or monthly check-ins with your fractional CFO to ensure alignment.

Balancing Cost and Value

When it comes to fractional CFO cost, this option is a way to access high-level financial expertise without having to commit to paying a full-time salary. As your startup grows in revenue, it’s also going to grow in complexity, underscoring the need for reliable financial leadership. Additionally, working with fractional CFO companies can help free up time for yourself and any other employees to focus on the matters that they’re experts in. A good fractional CFO partnership does more than just properly manage your startup’s finances, but helps support the growth and direction of the company.

Elevate Your Startup with Graphite’s Fractional CFO Services

For more information on the value of a fractional CFO partnership and to learn more about Graphite’s fractional CFO services, schedule a consultation with us today. Partnering with Graphite helps ensure your startup’s finances are properly managed by experts, providing relief for strategic and operational needs.

FAQs

How does a fractional CFO differ from a full-time CFO or controller?

A fractional CFO performs the same tasks as a full-time CFO, except they serve as an external partner that only works part-time for your startup. Fractional CFOs perform day-to-day tasks and more big-picture ones for your startup and can scale their services and support as your startup grows.

What are common tasks a fractional CFO handles that a bookkeeper cannot?

While a bookkeeper handles more of the day-to-day of a startup’s financial matters, fractional CFOs handle tasks such as bookkeeping, financial reporting, strategic planning, budgeting, invoicing, investor relations, expense reports, revenue recognition and more.

At what funding stage do most startups hire a fractional CFO?

Most successful startups are advised to hire a fractional CFO when they begin to earn revenue and their finances become more complex. For a certain period, founders can usually manage the books. However, as a startup begins to grow and earn more revenue, it often requires more high-level financial management.

How do I determine the right retainer or hourly rate for my needs?

Work with your prospective fractional chief financial officer partner and discuss your current needs to come to an agreement. At Graphite, we offer fractional CFO services at a fixed monthly pricing for our clients, with the ability to scale up to more comprehensive packages as needs change. Our services start at $1,250 per month.

Can a fractional CFO help with pitching to investors or negotiating term sheets?

Yes, fractional CFOs are experienced financial experts that can help attract investors and negotiate term sheets.

What are some red flags to watch for when choosing a fractional CFO?

Some of the red flags you want to be wary of include a lack of industry-specific experience, lack of flexibility in when they can work and meet with you, limited financial experience and poor word-of-mouth references.