fractional CFO

The Importance of a Fractional CFO for Startups and SMBs

Latest posts by Seth Morgan (see all)

Businesses of all sizes continue to live through one of the most turbulent times in recent memory. Those who can quickly make good decisions based on accurate information and sound projections are more likely to come out on top. This underscores the importance of a fractional CFO in startups and SMBs.

The economic impact of the global pandemic will be analyzed for years to come.  But for those living through it, some trends are already emerging. A lot of small business owners are paralyzed by uncertainty and fear. Most owners rely on a gut feel for the condition of their business. That feeling gives them confidence to make decisions. But when the circumstances change in unexpected ways, anxiety sets in. Then they become paralyzed by uncertainty.

The answer is to have more clarity about all aspects of your business, beginning with finances. Knowing how much money you have in the bank does not tell you how that money got there, or where it is going. A lot of companies miss out on opportunities because they are stuck without the knowledge to solve their growing uncertainty.

You need to know how money moves through your business, and how your decisions now will affect your cash flow in the future. But most SMB and startup owners lack the financial expertise to make reliable financial projections. A 2014 study by Intuit, the maker of QuickBooks software, found that 40% of small business owners consider themselves financially illiterate. And business finance and tax law have only become more complicated since then.

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In addition, many financial professionals are not comfortable making predictions about what’s to come. Accounting is by nature historical record keeping. Necessary and important, of course, but historical. It takes an entirely different set of skills to look into the future based on these past activities. That’s what a good CFO can do.

What is a fractional CFO?

A CFO, or chief financial officer, is responsible for interpreting financial data in a way that helps business owners make decisions for the future. And a fractional CFO is a finance professional that works in a business only as much as they are needed.

There are many advantages to hiring a fractional CFO. Primarily, he or she can bring a high level of financial expertise to your business, but at a cost you can afford.

A fractional CFO brings a unique and broader perspective formed from working with multiple companies, rather than only one.

A good CFO can take the financial information created by a finance team, verify its accuracy and then make projections about what it means for the business in the future. It’s that ability to look ahead that sets a CFO apart from other finance roles. They are the ones responsible for creating an effective financial strategy.

A fractional model means that instead of working for one large company, an experienced CFO can work for multiple small companies. At MLA, fractional CFOs work with three to six companies on average. Even more, a fractional CFO brings a unique and broader perspective formed from working with multiple companies, rather than only one.

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The advantages of a fractional CFO

Most small to mid-sized businesses can’t afford, nor do they need, to hire a full-time, experienced CFO. As a company grows, the finance team grows, and someone needs to coordinate that team. But leading a finance team is not the same as being a CFO.  The ability to create an effective financial strategy requires experience, and experience comes at a price. That’s one of the advantages of a fractional CFO.

A second advantage is that a fractional, or outsource CFO allows a business owner to pay for that ability without the burden of hiring that person full-time. They might only need to meet with a CFO on a weekly, monthly, or quarterly basis, and a fractional model makes that possible.

A word of caution about hiring a CFO with only big company experience as a fractional CFO: It requires a different mindset to work as a fractional CFO. Being a fractional member of the team means you need to be able to get up to speed quickly and find places to make your influence felt. It means learning to advise and execute, often simultaneously. Not everyone coming from a full-time CFO background can do that.

A business strategy is crucial in uncertain times

Businesses have innovated and grown during the pandemic. But every one of them had to make the decision to change how they approach their business. Sometimes those changes are forced on a business owner, and the choice is to adapt or die. But more often they see an opportunity and are in position to evaluate whether it’s a fit or not. Having a business strategy is crucial for this evaluation.

An effective business strategy is both a road map for normal times, and a gauge against which to assess new opportunities. A business owner shouldn’t have to guess at how certain decisions will play out. Your financial strategy should give you a set of variables to play with that help you envision the future state of your company. And your financial strategy has to line up with, support and enhance that overall business strategy.

SMBs are generally more agile and responsive to changes in supply and demand. And startups can recognize a new market and quickly act on it. During COVID-19, the PPP and EIDL loan programs made a lot of money available to these businesses as well. Many SMBs and startups have done well in this environment, but others have not.

No decision can be made with perfect confidence about the future. That’s truer now than it’s ever been. But a business owner should have all the information possible to make these decisions, especially about their own company.

Money is the fuel of every business. And it takes a good CFO to know exactly where that fuel comes from, and how future decisions will affect it. A good CFO is an indispensable resource to any business owner, and fractional CFOs can provide financial expertise at an affordable price.

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