When I typed “fractional CFO” into a Google search, there were a staggering 2,740,000 search results. This is not surprising given the increasing media coverage and the growing number of fractional CFOs. Forbes Contributor Melissa Houston authored an insightful article about the benefits that fractional CFOs bring to early-stage companies. As a current fractional CFO, I would like to expand upon Melissa’s article and emphasize that if an early-stage company has not already engaged a fractional CFO, the company is late in doing so.
A fractional CFO delivers CFO level services to companies that are not large enough to warrant a full-time CFO. These experienced professionals bring years of experience to early-stage companies and can address a myriad of issues that these companies face. Below are five key benefits that a fractional CFO can bring to an early-stage company, although this list is not complete.
Business Model Validation and Product Line Profitability – A fractional CFO assesses and validates the unit economics within a company’s business model. They answer important questions, such as: How much cash and profit are generated per unit sold? What sales volume is needed to reach cash flow breakeven? Are all product lines profitable when accounting for all direct costs?
Prior to bringing on a CFO, one company was losing money on half of its software products because the company did not consider the cost of required professional services when prices were established.
Financial Forecasting – A fractional CFO builds a robust forecast model and provides answers to questions, such as: How long is the company’s cash runway? When will the company attain cash flow breakeven? How much cash is required to fund its projected growth? When will the projected financial results be optimized for a strategic sale?
Prior to bringing on a CFO, another growing company did not realize that it was four months away from running out of cash because the company had overlooked that new customer startup costs would be incurred prior to the receipt of related customer revenue.
Business Partnership – A fractional CFO serves as a trusted advisor to the CEO, offering guidance that ranges from strategic planning to tactical decision support, such as product pricing, the development of compensation plans, the engagement of service providers, and the analysis of customer attrition.
Prior to bringing on a CFO, another company’s sales compensation plan enabled its sales representatives to game the system, resulting in unintended high payouts.
Raising Capital – A fractional CFO helps a CEO raise capital by going beyond the building of a financial model. They assist in developing pitch decks as well as identifying and meeting with potential investors. Potential investors are often comforted knowing that an experienced financial professional has built the forecast model and is at the helm tracking performance. In addition, a CFO ensures that business decisions are viewed from both operational and financial perspectives.
Prior to bringing on a CFO, another company’s financial projections omitted certain costs related to preparing its product for the European market, even though the European revenue was included in the revenue projections.
Identifying ERP and Related Infrastructure Needs – A fractional CFO evaluates a company’s ERP system requirements. They assess whether an early-stage ERP system, such as QuickBooks, can support the projected growth. In addition, the CFO assures that any additional systems, such as a customer relationship management system, are integrated with the ERP system to minimize manual work.
Prior to bringing on a CFO, another company lacked an automated system to track worked hours and bill customers for professional services.
The CFO role is pivotal in all companies. The growing number of fractional CFOs offers early-stage companies the opportunity to acquire this crucial role, something that was not easily attainable just a few years ago.
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