Wednesday, January 12, 2011

What is a fractional CFO?

Author:  Wray Rives, CPA

What exactly is a fractional CFO and how can it benefit my business?
Start by understanding what a CFO is.

  CFO or Chief Financial Officer iprimarily responsible for managing the financial functions of the business. This officer is also responsible for financial planning and record-keeping.  The title is equivalent to finance director, in the United Kingdom. The CFO typically reports to the chief executive officer and to the board of directors, and may sit on the board.

The CFO of a company is the person who is ultimately responsible for managing a wide range of activities that happen within the business.  In most cases the CFO is responsible for accounting, tax and treasury functions.  This would include areas such as preparing financial statements, obtaining financing, managing the cash flow and investments.  A CFO also is very involved in working with investors and planning for the future growth of the company.  In some companies a CFO may also manage human resources and information technology and even possibly a significant amount of the daily operations of a business.

Almost all companies have a need for a CFO, but often small businesses cannot afford to have a full time person performing these duties.  Many startup businesses will prefer to devote limited resources to other areas.

Because many of these functions are essential to operating a business, the CFO duties often fall to the CEO sometimes with help from board members or other individuals within the operation.  There are a couple of critical downsides to this approach.

First while a CEO is typically well versed in the activities of his own business, he or she is rarely an expert in matters of accounting, taxes and financial reporting.  A competent CEO can most certainly find a way to accomplish the tasks at hand, but often at the cost of valuable time.  Time that might be better spent on areas where the CEO offers a greater value to the business.

Secondly many of the CFO responsibilities can fall to less experienced staff who may be more knowledgeable of the subject matter than the CEO, but lack the experience and training of a truly skilled CFO.  In fact cost is typically the biggest hurdle CEO's struggle with even if they have identified the need for a CFO's skill set.

Enter the fractional CFO as a solution to the problem.   Essentially a business will contract for a fraction of the CFO's time and attention.  This solution allows the company to avoid the expense of a full time CFO, but still bring in needed experience and expertise.

Fractional CFO is typically a service offered by either a multi-person firm or an individual with the necessary experience and qualifications.  Both types have pros and cons, and a CEO should consider what fits his particular business and personal style best.

A multi-person firm will usually offer the ability to pick and choose the person or persons who will service the business.  If an individual CFO assigned to a client is not available, there are typically other people within the firm that respond to the need.  The additional resources can come at additional cost and rates for a contract CFO from a multi-person firm are often higher than an independent CFO contractor.  Often multi-person firms will desire that you establish a relationship with a manager who will assign available resources to your needs.

An independent contractor does not typically come with the overhead of a firm and the ultimate cost is often lower.  The independent CFO also means you are establishing a relationship with one individual.  Many times people outside of the business will not even realize that your CFO is not a full time employee.  However, like any employee you can be limited by the skills and availability of the individual.  Most independent contractors that do fractional CFO work will have multiple clients they are servicing at the same time and that can limit when the CFO is available to work on your business.

Whichever you feel is a better fit for your business, I recommend that you schedule a time to interview the firm or individual you are looking to contract with.  Ask about experience within your industry and with any particular areas that you know are issues with your business.  Technology today has almost eliminated the need to be local now for a fractional CFO servicer, so don't fell that you have to limit yourself geographically.

An experienced fractional CFO can be a tremendous boost to the success of a small or startup business.

Wray Rives is a certified public accountant who provides fractional and interim CFO services to businesses.  You can find out more about him at