Guest Post: Navigating the Gauntlet; Leveraging an Outsourced CFO

Today we have Tina Gregory, a CFO from Early Growth who highlights the benefits of an Outsourced CFO with operational expertise, shares the job description of the CFO you want and gives tips on how to go about selecting a CFO to suit your business.

The compounding economic, financial and operational challenges along with the sustained impact on social function wrought by the pandemic elevate the value of strong financial and operational leadership.

For small and growing businesses, the ability to find, retain and afford the required skills to navigate a paradigm shift can be out of reach. Leveraging a fractional or part-time CFO is a viable and sustainable solution.  In many cases it can be the optimal solution for managing and growing a business in a challenging or dynamic environment. 

The intrinsic value of a CFO with strong operations experience was recognized even before the recent “rolling crises.” Once viewed primarily as the keeper of financial reporting, internal audit, budgeting and planning, the CFO role has evolved. It now encompasses business strategy, stakeholder management, communication and business operations analysis. A recent McKinsey survey confirmed that the role of the modern CFO is broader and more complex than ever before, and requires the ability to envision, plan and manage corporate transformation (“The New CFO Mandate: Prioritize, Transform, Repeat,” December 2018)

An experienced fractional CFO innately brings these evolved skills to your organization.  

Back in March, during a planning and contingency scenario analysis session a client asked me, in a panic how we could proceed if we “had never seen anything like this before.” True, we’ve never been through this exact situation or set of circumstances before. We’ll undoubtedly be buffeted with uncertainty as social and economic systems change and as the ubiquitous financial disclaimer says, while past results are no guarantee, I shared how we’ve managed through market fallouts, recessions, systemic business process changes, sales and business pivots, inflation, resource and supply chain disruptions, recovery and combinations of all of the above.  

Sometimes we can only address the symptoms, stem losses and manage the fallout, but we can always adapt and use what we’ve learned to move forward. In the best cases, we can bring about the changes we need to sustain the business, perhaps pivot it, make critical decisions and potentially identify new opportunities on a changed playing field. This is the real advantage of leveraging a fractional CFO.

A fractional CFO brings to your business diverse experience across a wide range of industries and organizational life cycles. They possess operations expertise and provide competitive and strategic guidance with real-time, current knowledge.  If you have a very specific need or project, you can also select a part-time CFO with specialty in that area or field.  

Best of all, you can leverage your CFO when needed. You can contract for a project or even emulate a subscription-based fractional CFO engagement for cost control and efficiency. 

When Should We Bring in a Fractional CFO?

The optimal time to leverage a fractional CFO varies, depending on factors specific to your firm.  For example, when the founding team has a member with an extensive background in financial analysis, you may not need a CFO at the planning stage or at inception. But it may make sense to engage a part-time CFO when your business begins to scale, to insure the right systems are in place, as well as the best processes to manage cash, budgets, operational efficiency and performance to strategic plan.  

If your team’s strengths are in technology, marketing, business development and sales, ideally the company would bring in the fractional CFO at the planning stage to collaborate on strategic objectives, analytics, risk management and corporate structure.  

Companies planning to raise capital would also benefit from the foresight, organization and investor development the CFO brings to the process and the confidence they project in investor communications. 

How Do I Best Leverage the Fractional CFO for My Business?

How firms leverage their fractional CFO also differs.  Precipitated by the 2008 economic downturn and exacerbated by a rapidly changing regulatory environment, evolving technologies and more recently a shift to subscription-based business models, where the customer and not the product is the lynchpin for success, the concept of an “Operating CFO” gained traction.  

This hybrid CFO is integrally involved in critical business decisions that span multiple functions, not only accounting and finance. The Operating CFO keeps the business on track in process innovation, and understands technology, production, operations and human resources from having worked with nimble, dynamic companies.  They now collaborate and guide strategic market analysis, pricing, customer service and product delivery.  

Leverage the expertise of your CFO to provide advanced predictive and scenario analyses and to weigh in on operating processes along with required compliance and financial reporting. The fractional CFO can provide your firm with powerful comparative analyses, give you a wider perspective on competitive advantage and bring broader customer experience perspectives to your firm (Forbes Finance Counsel: “What Changes Are Coming to the CFO Role?” November 8, 2019).   

What Should I Look for in a Fractional CFO?

While most organizations benefit from a true Operating CFO, small and medium-sized businesses likely capture the greatest advantage. 

These more flexible and lean companies offer their CFO a role in key functional areas; human resources, operations, customer experience, business development and of course, financial planning and accounting.  A first step is to scope your needs and a good way to do this is to outline a functional or job description for your CFO.

Here is an example of a CFO job description for a new startup in eCommerce:

  1. Evaluate market and competitive metrics. Collaborate with design and marketing team to solidify product pricing, customer service and tiered offerings
  2. Negotiate with key vendors; review contracts, supply chain and logistics, including contingency plan
  3. Set up accounting and operating systems
  4. Build financial and scenario management models; develop key metrics  
  5. Construct pitch deck and investor presentations
  6. Develop, communicate and implement three-year budget
  7. Develop hiring, work team management and compensation plans, including equity compensation strategy
  8. Develop and implement risk management plan
  9. Manage compliance, tax and regulatory reporting, including monthly close and Board reporting
  10. Manage and optimize cash flow forecasting, treasury and investment strategy

For a company early in its life cycle, you’ll want a CFO who can define the work, actually do the work, and use the data from execution to provide actionable plans. 

You will gain the most benefit from a CFO who has worked with cross-functional teams or has worked outside of strictly defined accounting and finance roles. While specific industry experience may be required, diverse functional expertise is also beneficial. For example, an Operating CFO who worked for a SaaS company marketing a bundled service may offer invaluable strategic counsel to the eCommerce company considering options for market expansion and customer retention.

Fractional CFOs have usually worked with a number of startups so they can also assist in investor targeting and management. They will have worked with different banks and lenders, too, which can be invaluable as your business grows and capital structures change.

When Do I Need to Move to In-House or Full-Time CFO?

The answer here depends on multiple factors, including entity operations, size, growth rate, exit strategy and it may also be event-driven. Many companies leverage their fractional CFO for years even in rapid-growth scenarios. They take advantage of the fact that the CFO is regularly evaluating and working with new tools, technology and is exposed to best practices across a range of companies. One way to determine when transition makes sense is to use the scoping method described above, building it out for scaled operations and then assigning the estimated number of hours each function is likely to require during the next 12 months. 

While your fractional CFO can bring in accounting and tax resources to extend capacity, and can help you build and manage an internal accounting team as operations scale, the cost inflection point for a full-time CFO will generally trigger at the 12-16 hour per week level. 

There are also certain factors or events that will mandate a full-time CFO hire. These include exit strategies involving an IPO or SPAC. In these cases you will want to consider bringing in a full time CFO in advance of the planned offering. With a merger or acquisition, the combined companies may have adequate resources with the resulting team. Your Operating CFO can facilitate the transition, assist with hiring or structuring combined operations and can serve as a flex resource in audit and pre-IPO preparation. 

While none of us have operated in an environment exactly like this one before, leveraging the financial and operating expertise of a fractional CFO enables your business to confidently navigate challenges, plan and potentially capitalize on a changed playing field.

Reach out to Tina on LinkedIn to learn more about what Early Growth can do for your company, or just call them at 415-577-6465!