Temporary CFO Services vs. Fractional CFO

Which Model Drives Better Outcomes for Startups?

What’s better for your startup — a temporary CFO or a fractional CFO?

While temporary or interim chief financial officer services certainly have their place in an organization, they are more necessary for one-time financial projects or initiatives, or to fill sudden vacancies left by previous CFO professionals until a permanent CFO can be appointed. Fractional CFOs, conversely, are designed to provide ongoing, part-time financial services to startups and small businesses. However, it’s essential to draw a clear distinction between temporary CFOs and fractional CFOs, as these terms are often used interchangeably and assumed to be the same.

This post is designed to help you draw those clear distinctions between CFO leadership models to help you make more informed decisions about which route is the best for your startup. There are times when temporary and interim solutions are effective, and times when fractional CFO partnerships are ideal for establishing strategic financial leadership to deliver a higher return on investment for your startup. Read on to learn more or contact Graphite Financial today.

What Are Temporary or Interim CFO Services?

Don’t confuse temporary CFOs and interim CFOs as being the same. Temporary CFOs function similarly to temporary workers in that they’re hired for a specific period of time, typically to work on a specific project (i.e., supporting a merger or acquisition, or helping manage a restructuring). Interim CFOs, conversely, often fill the full-time CFO position during a period of transition between a permanent CFO hire (commonly anywhere from 3 months to a year) to ensure continuity in financial leadership.

Temporary and interim CFOs tend to be best suited for mid-sized and larger businesses that are facing leadership transitions or navigating other important financial initiatives. They are not typically best suited for growth-stage startups.

Why Venture-Backed Startups Face Different Financial Leadership Needs

Venture-backed startups need different financial services and support than a typical temporary or interim CFO can address. For instance, startups require ongoing financial expertise and planning throughout multiple funding rounds, which an interim CFO isn’t ideally suited to provide. Furthermore, startups must continuously evolve to be successful and do more than just fundraising preparation. Successful startups must perform investor reporting, financial forecasting, scenario modeling, manage burn rate and other key metrics while navigating complex financial concepts, among other tasks.

Fractional CFOs are designed to provide that ongoing, consistent support that startups often need to grow and flourish, while temporary and interim CFOs can create knowledge gaps and resets that can undermine investor confidence in startup environments.

The Hidden Costs of Financial Leadership Turnover

Startups usually can’t afford to take on any more overhead than what they’re already absorbing, underscoring the value of a fractional CFO that stays with your startup for an extended period of time. In addition to per-hour or salary, there are hidden costs that must be accounted for, including:

• Onboarding: The average onboarding period for interim financial leaders is 60-90 days, and productivity may be hindered until they reach full operational capacity.
• Frequent resets with startup leadership and board members can create friction during critical periods, which can impact how well your startup operates when you need to stabilize financial operations.
• Don’t discount the value of institutional knowledge. Frequent transitions can weaken this and also impact the consistency of fundraising storytelling and financial modeling.

What Growth-Stage Startups Actually Need From Financial Leadership

So what drives startup success from a financial leadership standpoint? Here’s a look:

• Continuous needs, such as monthly investor reporting, quarterly board packages, ongoing cash flow forecasting, scenario analysis for growth paths and more.
• Tracking industry-specific metrics based on the field you’re operating in, supported by high level financial expertise.
• Accumulating and building knowledge so that financial storytelling stays powerful and consistent throughout various fundraising rounds.

Fractional CFO Services — The Strategic Alternative to Temporary Arrangements

Fractional CFO services represent an ideal alternative to temporary or interim financial leadership positions because they’re ongoing relationships that are highly flexible depending on your startup’s needs.

For instance, in the early stages of your startup, you may only require executive financial leadership for 8-10 hours per month. However, as your startup grows and evolves, your fractional CFO can grow with you, taking on additional responsibilities as needed. It’s not uncommon for growing startups to require 30-40 hours per month from their fractional CFO, while remaining a cost-effective option compared to hiring a full-time, in-house CFO or working with a temporary or interim financial professional.

What’s more, fractional CFOs can build that crucial institutional knowledge over your startup and your industry over time, creating even more value by understanding its financial story, metrics and investor relationships. This differs from a temporary or interim professional, who typically exits after a predetermined period of time, limiting your ability to access strategic financial leadership precisely when it is most needed.

How Fractional CFO Engagements Adapt to Startup Growth Stages

Here’s a look at how fractional CFOs adapt to the various stages of the startups they serve and why they’re the ideal financial leadership arrangement:

• Early stage: Fractional CFOs establish the financial foundation, build early models and help prepare for the first fundraising rounds.
• Growth stage: Fractional CFOs can increase their hours and spend more time working on fundraising and maintaining strategic advisory between rounds.
• Series B and beyond: Fractional CFOs can maintain their engagement with the startup on an external business or even transition to a full-time CFO hire or strategic advisor as your startup continues to grow.

Cost Efficiency Without Sacrificing Strategic Value

Fractional CFOs offer cost savings compared to other financial leadership arrangements, and without sacrificing the quality of service.

The key differences for instance, the average salary for a full-time CFO ranges from $200,000 to $300,000 per year, and temporary and interim CFOs typically earn between $15,000 and $25,000 per month of service. A fractional CFO is flexible based on the hours of work you require, typically anywhere from $5,000 to $15,000 per month. At Graphite, our base fractional CFO package starts at just $1,250 per month.

What’s nice about working with a fractional CFO is that startups only pay for the service that they need. When they require more service, they’re still working with the same professional, thereby avoiding any knowledge gaps or transitional periods. Fractional arrangements also eliminate recruiting costs and knowledge transfer inefficiencies that are common with temporary or interim professionals, while preserving strategic financial guidance and embedded financial operations ownership from the same leader.

Why Interim CFO Services Often Fall Short for Venture-Backed Startups

While interim and temporary CFOs have their place, they’re not ideal for startups when fundraising is necessary. Here’s why:

• The 3- to 12-month average interim arrangement typically doesn’t align with 12-to 24-month fundraising cycles.
• Temporary CFOs often lack the incentive to think strategically and build long-term financial models.
• Investors like seeing consistent, flexible finance leadership solutions.

The Knowledge Transfer Problem That Impacts Fundraising

If you’re working with an interim or temporary CFO who leaves during a fundraising round, a new financial leader is tasked with coming in, rebuilding understanding, resetting relationships with investors and finding consistency with your startup’s financial storytelling. This initial unfamiliarity impacts response times and can hamper overall productivity.

When Temporary and Interim CFO Arrangements Can Make Sense

Again, temporary and interim CFOs do make sense in some situations, though not usually for startups. Some examples include:

• When an established business has a sudden CFO departure.
• If your business is in distress and needs an expert to manage things.
• If your business has grown large and needs an expert to manage sophisticated finance teams.

These scenarios are not often applicable to startups, but rather to more established businesses. Startups benefit most from consistent financial leadership.

What Makes a Fractional CFO Partnership Effective for Series A+ Startups?

If you’ve determined that a fractional CFO is best for your startup, the next step is to select the right professional. Some of the factors you’ll want to weigh when making your selection include choosing an individual with startup experience who understands venture economics, someone who has experience in your industry and someone who can help you work with investors.

Industry-Specific Expertise That Drives Startup Success

The ability to work with a fractional CFO who has industry-specific expertise is another advantage over working with an interim or temporary professional. For example, SaaS-focused professionals understand the unique business model, revenue recognition complexities and other advanced metrics, while eComm specialists can help your startup better navigate inventory accounting and marketplace economics. A fractional CFO experienced in HealthTech can help your startup address regulatory compliance, meet unique business structures and create complex revenue models.

Building Investor Confidence Through Consistent Financial Leadership

Consistent financial leadership also helps build investor confidence. Investors prefer seeing the same CFO across the table in board meetings, as it builds trust, represents stability and can enable deeper discussions.

Continuous relationships can also help your startup better prepare for the investor due diligence process during fundraising and improve the consistency of financial storytelling.

Key Financial Capabilities Your Startup Needs From Day One

From monthly financial closings to board reporting to cash flow forecasting, scenario modeling and fundraising preparation, fractional CFOs provide continuous services for startups. These duties all require institutional and accumulated knowledge, blending both tactical execution and strategic advisory.

Financial Modeling and Scenario Planning for Multiple Growth Paths

Sophisticated financial modeling requires ongoing partnership, not an interim or temporary engagement. Effective financial models should evolve with your startup to incorporate new revenue streams, adjust for pivot scenarios and model different fundraising options.

Temporary and interim CFOs don’t tend to invest in building robust, maintainable models, as their shorter tenure doesn’t justify this type of investment. Conversely, fractional CFOs continually maintain and refine models over time, enabling faster scenario analysis when opportunities arise.

Cash Flow Management and Runway Optimization

Startups also need continuous cash management, such as weekly updates during tighter runway periods, continuous monitoring of burn rate and proactive identification of cash needs before crisis periods. Gaps in financial leadership from CFO turnover can create blind spots that can become problematic, potentially even existential threats. Fractional CFOs enable more proactive cash management, rather than reactive intervention that you’ll often receive from interim or temporary CFOs.

Making the Right Choice: Evaluating Your Startup’s Financial Leadership Needs

So what’s the right choice for your startup’s needs? Interim, temporary or fractional CFO?

The best fit for your startup depends on its specific stage, its cash runway, fundraising timeline and overall financial complexity. Again, most venture-backed startups benefit most from a fractional CFO and ongoing financial support rather than temporary service. It’s essential to view financial leadership as a strategic partnership, rather than a box to be checked to fill any gaps.

Questions to Ask Before Engaging Any CFO Service

Here’s a look at some questions to ask a fractional CFO before making your selection:

• How well do you know our industry?
• Do you have experience working with startups?
• Can you scale as our startup scales and evolves?
• Do you have any investor relationships within our industry?
• What are your preferred communication mediums and cadence?

It’s also important to find the right cultural fit for your startup and select a professional with whom you know you’ll get along and work well.

Partner With Financial Leadership That Understands Venture-Backed Growth

As specialists in providing financial leadership for startups, Graphite is ready to build a long-term partnership with your startup to help it grow and scale. With a proven track record of supporting startups through funding rounds and maintaining institutional knowledge that exceeds the capabilities of temporary CFO services, we’re standing by to provide the strategic financial leadership that startups need to flourish. Contact us today to learn more and schedule a consultation.

FAQs

What’s the difference between temporary CFO, interim CFO, and fractional CFO services?

Temporary CFOs function similarly to temp workers in that they’re hired for a specific period of time, typically to work on a specific project. Interim CFOs often fill the full-time CFO position during a period of transition to ensure continuity in financial leadership. Fractional CFOs are typically outsourced professionals who provide strategic financial leadership on a part-time, ongoing basis.

How much do temporary and interim CFO services typically cost compared to fractional CFO arrangements?

Temporary and interim CFOs tend to be more expensive than fractional CFOs. The typical hourly rate for a temporary or interim CFO ranges from $150 to $395 per hour of work, while fractional CFOs may charge hourly or offer various service packages with different price points. At Graphite, our monthly packages start at $1,250 per month and scale from there based on your startup’s specific needs.

Can a fractional CFO help with fundraising and investor relations?

Yes, a fractional CFO helps prepare financial documents, creates forecasts and can help manage investor communications, all of which can help with fundraising and investor relations. Furthermore, the strategic financial leadership that fractional CFOs provide helps ensure proper financial management, making your startup more attractive to investors.

When should a startup consider temporary or interim CFO services instead of fractional CFO partnership?

Your startup should consider a temporary or interim CFO when there’s a short-term, immediate need. Some common examples include a CFO vacancy, a crisis situation, a merger or acquisition, or a significant one-time project. Fractional CFOs are best suited when there’s a need for ongoing financial guidance, but not yet a requirement for a full-time professional.

How many hours per month does a fractional CFO typically work with early-stage startups?

This depends on your startup’s specific needs. For instance, early-stage startups may only require a few hours of service per week from a fractional CFO, while more mature startups may need more support.

What happens if we eventually need to hire a full-time CFO?

In certain situations, your fractional CFO can transition into a full-time CFO. In other situations, your fractional CFO can stay involved in a consultant role.

How does fractional CFO continuity benefit our relationship with investors compared to interim CFO turnover?

Fractional CFO continuity benefits a startup’s relationship with investors largely due to long-term stability and alignment. Fractional CFOs provide consistent and reliable partnerships that can help build investor confidence. Conversely, interim CFOs are only temporary and designed to provide stability during a specific event or leadership transition.

What industry-specific experience should we look for in a fractional CFO?

Look for a fractional CFO who has experience in your specific industry and has worked with startups. In doing so, your fractional CFO partner is better equipped to understand your startup’s unique financial challenges, as well as the regulatory landscape, to provide more effective service.