Engaging a Fractional CFO: A Business Leader's Guide

As a business founder/owner/leader are you overwhelmed by the financial complexities of running your company? Are you spending time on CFO tasks instead of spending that time on areas of the business where you provide the greatest value to your company? A “yes” answer to either of these questions could mean you need a FCFO. A good FCFO can offer invaluable strategic guidance and financial expertise. However, choosing the wrong FCFO can lead to costly mistakes and missed opportunities. In this week's issue of The Fractional Frontier, we'll delve into the key factors to consider when hiring a FCFO. From assessing their experience and expertise to understanding the engagement model, we'll equip you with the knowledge you need to help you make an informed decision and avoid common pitfalls.

I asked business owner friends that had experience working with a FCFO to supply me with items that they believe need to be focused on when deciding to engage a FCFO and what to look for in FCFO candidates. Their replies are rolled into the following sections:

Experience and Expertise:

• Industry-Specific Knowledge: Look for a FCFO with experience in your industry or a similar one. This ensures they understand the unique challenges and opportunities of your business.
• Financial Modeling and Analysis: A proficient FCFO can create financial models, forecast future trends, and perform in-depth financial analysis.

Cultural Fit:

• Alignment with Company Values: The FCFO's values and work style should align with your company culture to ensure a harmonious working relationship.
• Communication Style: Effective communication is crucial. Consider the FCFO's communication style and how well it fits with your team.

Engagement Model:

• Availability and Responsiveness: Ensure the FCFO is readily available and responsive to your needs.
• Scope of Services: Clearly define the scope of services you expect. This includes tasks like financial reporting, strategic planning, tax advice, and mentoring.
• Fee Structure and Available Hours: Understand the FCFO's fee structure and available and how it aligns with your budget.

Existing Financial Infrastructure:

• Quality of Financial Data: The FCFO will need accurate and up-to-date financial data. Ensure your accounting systems and processes are in place.
• Financial Reporting: Evaluate your current financial reporting practices and identify areas for improvement.

Company Goals and Objectives:

• Strategic Alignment: Discuss your long-term goals with the FCFO. Ensure their expertise aligns with your strategic vision.
• Growth Expectations: Clearly articulate your growth expectations and how the FCFO can contribute.

Communication and Collaboration:

• Regular Check-ins: Establish regular communication channels to discuss progress, address issues, and provide feedback.
• Team Integration: Ensure the FCFO can effectively collaborate with your existing team members.

Additional Considerations

• References and Testimonials: Ask for references from previous clients to get insights into the FCFO's work ethic and effectiveness.
• Trial Period: Consider a trial period to assess if the FCFO is a good fit for your company.
• Long-Term Commitment: Discuss your long-term goals and expectations with the FCFO to ensure a mutually beneficial partnership.

Fractional Engagements: Post Mortem

To explore the differences between a successful FCFO engagement and an engagement that left a lot to be desired, I solicited business owners to share their experiences. What follows is one example of a win/win engagement and one example of a lose/lose engagement:?

Example 1: A Successful FCFO Engagement

When the CEO of a mid-sized SaaS company, decided to hire a FCFO, her business was experiencing rapid growth but lacked a cohesive financial strategy. Her primary goals were to improve cash flow management, prepare the company for a potential round of funding, and establish a reliable financial reporting system.

The CEO chose an experienced FCFO with a strong background in technology and SaaS businesses. The FCFO’s engagement model was straightforward: she charged an hourly rate, capped at 60 hours per month. This structure suited the company’s budget and allowed her to access high-level expertise without committing to the expense of a full-time CFO.?

From the start, the FCFO took the time to understand the company’s culture, regularly meeting with key team members to grasp the unique challenges they faced. She quickly identified areas of potential improvement in the company’s subscription billing system and worked closely with the finance team to implement automated invoicing and collections processes. This change reduced the company’s outstanding receivables significantly in the first quarter, which significantly improved cash flow.

Additionally, the FCFO’s expertise in financial modeling proved invaluable. She developed a dynamic financial model that allowed the CEO to assess different growth scenarios and provided valid strategic guidance.

The FCFO’s consistent communication was another key factor in the success of the engagement. She scheduled bi-weekly check-ins with the CEO and the management team, ensuring everyone stayed informed and aligned on financial priorities. She also made herself available for ad-hoc meetings when urgent issues arose, balancing her workload effectively across her other clients.

In this engagement, the combination of the FCFO’s industry expertise, clear engagement model, availability, and ability to integrate with the existing team made this a textbook example of a successful FCFO engagement.

Example 2: An Unsuccessful FCFO Engagement

The Founder of a family-owned manufacturing business, decided to bring on a FCFO, hoping to streamline his company’s financial operations and improve profitability. His business had seen steady growth but lacked financial discipline, which was beginning to impact cash flow and profitability. The Founder hired an experienced FCFO, who had an impressive resume but no experience in the manufacturing sector.

The FCFO had an hourly rate, with a monthly retainer of 40 hours. However, after the first month, it became evident that 40 hours were insufficient to address the complex financial challenges of the company. However, the FCFO only had 40 hours each month to allocate to this client as he had preexisting obligations to other clients. As a result, the Founder often struggled to get timely responses from him when urgent financial issues arose, leading to frustration.

Moreover, the FCFO faced resistance from the company’s finance team, who viewed him as an outsider. He didn’t make an effort to understand the team’s dynamics or the company’s culture, which created friction and led to communication breakdowns.

One of the biggest challenges was the lack of regular, structured communication. The FCFO only scheduled monthly check-ins, and the financial reports he provided were often late and did not address the company’s immediate concerns. This lack of responsiveness left James feeling unsupported and frustrated. All of the issues were not caused by the FCFO. The existing team did not enter entries in a timely manner and often entries were entered in the wrong timeframe. Inconsistencies like this complicated the FCFO’s ability to build a model with trustworthy assumptions.

After six months, the Founder decided to end the engagement, as there was little measurable improvement in his company’s financial performance. He felt the investment had not yielded the expected returns and that the FCFO had never truly integrated into the company’s operations.?

What Could Have Made the Engagement Successful?

Several factors could have transformed this engagement into a success. First, a clearer understanding of the time commitment required would have helped. The business needed more than 40 hours a month, and both parties should have discussed and adjusted the hours or expectations early on.

Second, the FCFO could have invested more effort into understanding the company’s culture and in building rapport with the finance team and learning about the unique challenges of the business which could have facilitated smoother implementation of her strategies.

Lastly, more frequent, structured and collaborative communication could have ensured that both of their expectations were aligned.

Summary

In any consultative business, not all engagements will be successful. Failure could be the FCO’s fault, the company’s fault or, most likely, both had a hand in the failure. It is critical that when a company is vetting potential CFOs, they need to ask the tough questions – as does the FCFO. The goal of the engagement is for the outcome to be a Win/Win and is achievable with honesty, level set expectations and frequent communication.`

Stay Ahead of the Curve: Follow These Financial Minds

https://www.cfo.com/news/future-of-finance-event-ai-leadership-Tim-Naddy-Amy-Butte-John-Cappadona-Glenn-Hopper-Eric-mason/726727/

https://events.industrydive.com/events/cfolive?utm_source=CFOcom&utm_medium=Library&utm_campaign=Q32024CFOLive

https://www.cfo.com/news/43-of-finance-and-sales-leaders-say-sales-forecasts-are-at-least-10-off/726200/

https://www.cfo.com/news/how-cfos-can-help-guide-ai-strategies-and-investments/725958/

Articles Worth Reading / Tools to Consider:

A little dated but still good advice: https://www.forbes.com/sites/investor-hub/2023/07/26/top-retirement-savings-options-for-freelancers/?sh=4a249e9c3f24

A client uses this tool. A simulated office space with customizable spaces and avatars. I am not getting paid to include this. I think it is a cool option to Teams/Zoom: https://spotvirtual.com

Carry is an all-in-one platform for tax-advantaged accounts, 401k and IRA, investments and strategy for business owners and high earning professionals: https://carry.com/?via=fractional

An offering to help SMBs maximize their LinkedIn profile and marketing: https://www.yourneogig.com/linkedin-optimization/