Why Fractional CFOs Are Changing The Game For Start-Ups

Hiring a CFO is a huge milestone for ambitious start-ups.

These experts can completely transform the financial health and revenue potential of small businesses. CFOs often tackle vital responsibilities such as revenue forecasting, cash flow management, and strategic planning - all of which are key to sustained growth.

But the cost of hiring a full-time CFO may seem daunting (or even unfeasible) for growing businesses. CFOs can be incredibly valuable when it comes to improving profitability, but if their salary is placing financial strain on a start-up, there can be a serious imbalance.

So how can start-ups access financial expertise without overspending on a new hire?

The answer is Fractional CFOs.

Fractional (or Portfolio) CFOs operate like freelancers, providing part-time financial support for start-ups when they need it. They’ll often work across multiple clients (i.e. a portfolio) and can cover all of the usual CFO responsibilities more flexibly and affordably.

Crucially, they allow start-up founders to focus less on finance management and more on business growth.

Let’s take a closer look at the role of a Fractional CFO, and explore how these hires can be a game-changer for small businesses.

What is a Fractional CFO?

A Fractional CFO is effectively a third-party CFO who provides agile and flexible financial services to various clients.

Fractional CFOs are usually highly qualified and highly experienced in their industry. They’ll work with clients to identify areas where financial support is needed and essentially provide their services in a freelance capacity.

More and more start-up businesses are now choosing to outsource their financial management needs to Fractional CFOs.

That’s because Fractional CFOs are infinitely more affordable than full-time CFOs, as they only provide financial expertise when they’re required. An experienced Fractional CFO will be able to offer the same services as a full-time CFO, just at a fraction of the cost.

What does a Fractional CFO do?

“Fractional CFO’s professionalise seed and venture stage Start-Ups and take them to the next level” - Rachel Watson, Fractional CFO at Hoxby (B-Corp Certified)

While Fractional CFOs offer part-time financial support for start-ups, they’re still able to fulfil all of the roles that a full-time CFO would take on.

One of the most fundamental responsibilities of a Fractional CFO is general financial management, alongside short and long-term strategic planning.

A Fractional CFO will be able to set up controls and guidelines to regulate business spending. They’ll sit down with start-up CEOs to establish a vision for the company, and build out a plan to help the business meet its financial goals.

Fractional CFOs will also play a critical role in fundraising.

They can help CEOs to raise and manage capital during funding rounds, and even tap into a network of previous investors to generate funds. In a turbulent financial climate where investors may be hesitant to commit, a well-connected Fractional CFO can be an invaluable asset.

Additionally, these CFOs will work diligently on forecasting and budgeting to ensure that start-ups can remain profitable. They’ll establish the amount that’s being spent by the company and balance this against earnings to make sure that finances are balanced.

Another hugely important role for Fractional CFOs is performance tracking.

A capable Fractional CFO will help start-ups to identify their most important KPIs and set relevant benchmarks. They can then help businesses to understand how they’re performing versus targets, and if any areas of the company can be optimised or improved.

Finally, Fractional CFOs will also take the lead on cash flow management. These finance leaders will monitor all of the income and expenditure of small businesses, allowing them to invest and manage their cash wisely.

How can Fractional CFOs add value?

Beyond day-to-day financial management, Fractional CFOs can also offer significant value to start-ups in terms of resources, experience, and guidance.

For one thing, Fractional CFOs can be helpful advisors for CEOs who are generating high levels of investment but lack financial expertise. A seasoned CFO will be able to direct cash to the right areas of a start-up, and control funding when financial stability is needed.

“A Fractional CFO becomes a trusted advisor to a Start-Up founder, not only with regards to financials but also strategy, operations, Human Resources, and even the product itself. Advice from a Fractional CFO is also completely objective; they have no bias or have any reason to position themselves, they are just there to give honest constructive feedback.” – Dylan Davies, Fractional CFO at SeenIt and The Search Group (Global) Limited.

Many start-up founders can also find themselves tackling financial tasks that are a drain on time and resources. Fractional CFOs can relieve CEOs of this pressure, enabling them to shift their focus to improving products and services.

This is particularly important after a successful round of funding when investors are keen to see clear product development and growth.

On a basic level, hiring a Fractional CFO is often less stressful for start-ups.

Small businesses don’t need to take the financial risk of hiring a full-time CFO, but can still unlock financial expertise and support. The flexibility of Fractional CFOs is a major bonus for start-ups that are still growing.

“Permanent CFO’s tend to stick to a single industry which limits their practical experience. Fractional CFO’s can often be versatile across industries and sectors, which gives them broader market experience.” – Dylan Davies.

When is the right time to hire a Fractional CFO?

“The ideal time to hire a Fractional CFO is as the company transitions from an entrepreneurial Start-Up to an SME. This will ensure the finance function is scalable and future-proof.”- Rachel Watson.

One of the best times to hire a Fractional CFO is at the seed stage, at least 3 months before a new fundraising round begins.

Fractional CFOs can handle a lot of the intense preparation that’s required for the investment process, and since CEOs will need to concentrate on recruiting investors, this can be extremely beneficial.

A Fractional CFO will be able to prepare financial reports for the funding round, build out accurate financial models, track high-priority KPIs, and leverage VC connections.

“Start-Ups will require a Fractional CFO much sooner than they think. If you have a viable product in a growing market, you’ll want to have a KPI dashboard, FP&A function, and financial controls in place before growing. Otherwise, growth will become stunted as the finance function attempts to catch up with the rest of the company”- Dylan Davies.

These finance leaders can be a fantastic option for Series A-C funding rounds, as start-ups will need to accelerate their growth through additional fundraising, increased revenue, and expanded finance departments. Once a company has completed Series D funding, it’ll usually be in a good position to employ a full-time CFO to manage a larger financial team.

Fractional CFOs can bring enormous value to start-ups for many different reasons.

Not only can Fractional CFOs tackle pressing financial tasks (such as forecasting and fundraising) but they can also free up precious time and resources that can be directed towards product development and business growth.

Harmonic offers specialist hiring experience and high-growth expertise in finance and operations recruitment. If you need support building out your finance team or would like to discuss the option of a Fractional CFO, get in touch with Ewan ([email protected]) to discuss your needs.