Fractional CFO for Startups – When To Hire One
Introduction
Is your startup on track to success and expanding rapidly? Then, you might need assistance managing your overall finances for the business. While you might not be in an excellent position to hire a full-time CFOs (Chief financial officer), you may need to hire a fractional CFO.
They’re also known as part-time CFO who offer services to startups on a contractual or retainer basis. One thing to remember is that a CFO is not the same as a finance director or a controller. Fractional CFO for startups are responsible for managing the company’s financial reporting.
Moreover, they’ll also handle the venture capital rounds for the company and assist the startups in handling legal matters and negotiations. So, what more does a fractional CFO do? And when should a startup hire one? Let’s discuss this and a lot more about fractional CFOs in this article.
What is a Fractional CFO?
Before we move on to the roles and responsibilities of a fractional CFO, we need to know what they do. A fractional CFO works part-time for various companies. Unlike full-time CFO, they handle financial operations and management duties for different startups. Hiring fractional CFOs for startups will allow startups to get the expertise without paying a huge salary to a full-time CFO yearly.
The payment structure for fractional CFOs is usually on a contractual or monthly retainer basis. Most fractional CFO for startups are hired in the early stage to help them follow the business plan. Moreover, they also assist entrepreneurs in:
- Raising capital
- Overcoming financial challenges
- Optimizing strategy
- Navigating an audit and/or transaction
- Implementing systems
- Financial planning and analysis
- Achieving growth
Furthermore, the CFO should also translate the company’s metrics and KPIs (key performance indicators) into insights. This way, it’ll become easy for the management to make decisions regarding recruitment, sales, marketing, etc.
What Does a Fractional CFO Offer To Startups?
Fractional CFOs for startups mostly have years of experience and are considered financial experts and strategists. Some fractional CFOs might work on part-time bases for a living. On the other hand, others would work as full-time CFO for a company.
Many fractional CFOs want to help startups grow and build into a brand from their initial stage. As a fractional CFO, the individual must have at least 12 to 15 years of experience in the field of finance. Furthermore, they should also have experience working as a VP or CFO for a few years.
However, you might also find a fractional CFO with less than 15 years of experience. These professionals might have the skills and capabilities to help your business grow. There is also a chance they have a better idea about the new technological trends that can help your business grow.
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When Should a Startup Consider Hiring a Fractional CFO?
Fractional CFOs can be an excellent option for startups that are in series A, B, and C start-ups. An entrepreneur should hire a fractional CFO before one-quarter of a new fundraising round. That way, it won’t overburden the CEO when they enter the fundraising stage.
A CFO can also create KPIs, answer queries relating to the reporting questions, and, most importantly, work on projections. In a best-case scenario, they can bring existing venture capital relationships. It can be significantly beneficial for the CEO, who can use it as leverage to drive growth.
Similarly, if we talk about companies in the seed stage, they won’t need to hire a full-time CFO. Having a part-time CFO is more than enough for early-stage startups since they won’t take up a lot of resources. At the same time, they can offer the same services that you get from a full-time CFO.
A growing startup might have some extra cash, but that doesn’t mean they hire a full-time CFO. Instead, they should take the services of a part-time CFO who will manage their financial department.
Why should you take fractional CFO Services in the Initial Stages of the Startup?
An important thing to note is that the earlier you hire a fractional CFO for your business, the better it is. Having a fractional CFO by your side early on can have a significant impact on your startup’s sustainability and growth.
Most founders aren’t aware of how a fractional CFO can help them. Here are just a few benefits that you can get from hiring a fractional CFO in the early stages:
- Take responsibility for the business finances so the entrepreneur or the CEO can focus on other core aspects of the business
- Introduce you to various connections that can make a significant difference during the fundraising round
- Integrate a comprehensive accounting system that will help you save money in the short and long run by keeping a proper record
- Help you develop a short-term and long-term strategy regarding resource utilization and cost saving
Startups continue to require funds from time to time throughout the different stages. They would have to convince investors and/or VC firms to put more money into the business for optimal returns. That is where a fractional CFO can also play a critical role.
They can explain to the investors the company’s finances and how they plan to use the funds for future growth. Apart from fundraising, there can also be other reasons that make it necessary for a business to hire a part-time fractional CFO.
For instance, the CEO might have other things to deal with instead of focusing on financial reporting or projections. Therefore, they can hire a part-time CFO to handle all these aspects.
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What Things Should You Look for When Hiring a Fractional CFO?
Now that you know what a fractional CFO is and when you should hire one, you might consider hiring one. But before doing so, you need to know about a few things to ensure that you find the best one. Here are some key points to keep in mind when hiring a fractional CFO.
Experience with Startups
Experience is the first thing you should consider when hiring a fractional CFO. You need to ask what experience they have when working with venture-backed startups. These types of startups have different needs for finance and operations.
Therefore, you need a fractional CFO for startups who has already been through different stages. You might find CFOs that have helped various SMEs (small and medium enterprises). However, they might not have a clear idea about helping startups go through a successful Series A or acquisition.
So, they might not be an optimal choice for your startup. Moreover, the CFO should also have experience in financial modeling and managing cash flow when your business is in the scaling stage.
Experience with the Industry/Sector
Apart from experience with startups, the fractional CEO should also have experience in the industry/sector you’re operating. Check if they are experts in your startup’s particular field.
For instance, if you’re startup is operating in the field of SaaS, then its needs would be quite different from Fintech startups. So, make sure to check whether the CFO has worked with start-ups in your industry/sector.
Skills and Expertise
While a fractional CFO can handle things in various areas of finance, there might be a few areas where you need their most support. For instance, some startups might find it hard to manage financial reporting for their business.
Others might need help with cash flow management to ensure there are no liquidity issues. Either way, it is important to find out that the fractional CFO (for startups) has a proven track record in the areas of your startup that needs the most assistance.
Evaluate the company’s strategic finances and how the candidate’s skills and expertise can help you.
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Network and Relationships
Besides bringing certain skills and expertise to the table, the fractional CFO should also have connections with investors and partners. They should help to expand your pool of investors and partners through their networks. It is something highly important if you want to scale a startup successfully.
Ask all the candidates about their connections with other VC firms, investors, and different companies in the industry. Also, discuss how they plan on using their network to expand your footprint and accelerate growth.
Compatibility
Last but not least, the fractional CFO you bring on board should be compatible with your startup’s environment. They should fit in well with your team and must be comfortable with your leadership and management style.
If you don’t dive into the specifics when hiring a CFO, you’ll end up finance leader that isn’t compatible with your style. Therefore, always look for someone who shares the same values that complement your style and is beneficial for the company.
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Takeaway
Hiring a CFO in the initial stages can be a great way for your startup to grow rapidly. While startups won’t have the funds to afford full-time CFO for startups, they can always hire a part-time one to give them peace of mind.
They can also assist them with short-term and long-term financial planning. A fractional CFO can also help you in conducting the financial checkup for your startup. Also, they can play a critical role in helping you through fund-raising.
