5 Signs You’re Ready for a Fractional CFO

By Jeff Heybruck

Thinking about hiring a fractional CFO, but not sure if the business is ready? While there’s no magic business milestone or threshold where a business will get the best value out of a fractional CFO service, a good rule of thumb is this:

The business needs expert help with short and long-term strategic financial direction, but can’t afford or justify the cost of a full-time CFO’s salary, benefits and bonuses.

In addition to this general rule, here are 5 signs that a business might benefit from fractional CFO services now:

1. Revenue Band + Level of Complexity

Businesses need to combine both to make this indicator work. It is possible to have high revenue and low complexity, so revenue alone isn’t always a reliable indicator.

While there’s no magic number for when a business might be ready for a fractional CFO, a good benchmark to start considering services is $2 million in annual revenue. Why? It’s likely at the $2M mark that the business has grown to the point of complexity and transactional volume where a senior financial resource can make a big difference. At this level, improvements to cash flow management, establishing KPIs and reporting and expertly approaching critical decisions like making a large capital purchase or opening a new line of service or location – all can make big impacts to the business’s overall health. It’s also about the time that gut feel isn’t as accurate as it used to be and the owner’s is becoming less and less able to keep a tab on all areas of the business.

If the business model is simple enough, more revenue doesn’t always mean more complexity. Take a general contracting business for example, that could reach $2M in revenue with only a handful of annual contracts. On the other hand, we have several subcontractor clients that would need to process a significantly higher number of transactions to reach the same amount in annual revenue. This is why we recommend coupling revenue with financial complexity (transactional volume is a good place to start) as an indicator of fractional CFO-readiness.

2. The Business’s Bank or CPA Is Asking For Reporting It Can’t Provide

Perhaps the bank is asking for a debt schedule. Or the CPA is asking for information in order to support with a financial audit or preparing business taxes. Whatever the reporting requested, the inability to provide timely and accurate financial information to third parties and consultants can impact the business’ ability to secure financing and create other risks. A fractional CFO service is a great resource to help proactively define and build necessary reporting, using software to automate updates (in some cases achieving real-time visibility into the financial health of an organization) and increase confidence in the numbers.

Take the bank debt schedule example above. Whether as part of standard financial review or as part of the approval process for financing, a bank requesting a debt schedule is a common request. But it is time consuming to update the debt schedule every 6-12 months (how often the bank is going to ask for it) with complete information (creditor, balance, interest rate, monthly payment, start date, maturity date, collateral, term…). Fractional CFO services can alleviate in-house accounting resources and the business owner from the stress of pulling together reporting at the last second and get ahead of these requests using reporting tools.

3. The Business Is Operating On Bad Information

Without data, decisions are made on assumptions. This is a recipe for failure. Are margins per product or service truly accurate? What happens if the forecast is considerably off? When considering the cost of a fractional CFO, it’s also worth considering potential losses from costly decisions made based on bad data. Too often, we find small businesses that have outpaced their ability to manage and understand their financial information, operating on a “gut feel” approach. One of Lucrum’s CFO’s Jason Alexander, once put it like this:

“Once the status quo ceases to work and the financial intelligence needed to make informed decisions is no longer sufficient, your company has started to move in a new direction – one that requires input and guidance from a CFO-level team member.”

It’s worth emphasizing that for information to be “good” it also needs to be understood. While most in-house resources (admin assistants or bookkeepers) can pull and format numbers in a table or spreadsheet, real wisdom comes from a deeper understanding of the data relative to other indicators. Or how to analyze the data. A single data point might have value, but a ratio of that data to other moving parts is often were powerful insight is born. As a resource with business leadership experience, a fractional CFO will be best able to understand the reporting views that leadership needs to be effective.

4. Accounting Is Taking Up Too Much Time

If a business owner is spending more than 4 hours a week in the day-to-day financial management of the company, accounting is taking up too much time – time that could otherwise be spent on higher-value activities to grow the business. Think about it- this is the equivalent of two FULL days a month. What else could the business owner do to generate a higher return on his/her time in two days each month?

The 4-hour threshold is also an indicator of complexity – if there is that much to look at, it’s best left to being looked at by a resource specializing in finance to ensure nothing is missed and reduce risk. Business owners letting themselves get bogged down in the day-to-day of Quickbooks would fall into this category.

In addition to strategic direction, many fractional CFO services also offer services to help with day-to-day accounting and bookkeeping. An added benefit, using the same service provider for bookkeeping and strategic C-level support can help increase alignment between planning and execution.

5. Management Responsibilities Are Preventing Focus on Financials

Growth means taking on additional management responsibilities – and less time for sitting down to review the financials. Business owners with growing management responsibilities who also try to take on financials without professional support will most likely find themselves managing financial issues reactively vs. proactively.

The risk here is being caught off guard by looming problems – in some cases after it’s too late to make a change. After all, owners can’t act to fix cash flow issues or other negative trends in their finances that they don’t know exist.

Even with the time in their schedule, many small business owners may struggle to understand their financial statements and reports in a meaningful way. Enlisting the help of a CFO-level resource can help the business owner both get back valuable time in their day to focus on running the business and begin to better understand the reporting that they are looking at.

It can be intimidating to give someone like a fractional CFO a look behind the curtain at the numbers, but the confidence gained in making business decisions will leave some wondering why they waited so long to start. Interested in learning more about fractional CFO services? Book a consultation with one of our CFOs here.