What are CFO services?
A Chief Financial Officer (CFO) is one of the crucial resources that every competitive firm needs in order to reach the next level in its development. The multi-faceted, well-experienced and highly competent finance and accounting head is responsible for among other things:
More specific to the finance and accounting function, a CFO will oversee treasury and cash management, financial modeling, options and compensation plans, business performance and cash flow, partner/vendor management, Board of Directors management, investor communications, payroll, accounts payable and accounts receivable functions, and any activities tied to turnaround, restructurings and divestitures.
Accessing CFO Services
There are several models used to access CFOs as alternatives to hiring a full-time CFO. These include:
- CFO Advisory Services – Where a company enters into a consulting agreement for high-level strategy work.
- Interim CFO – Where a company hires an acting CFO while they look for a replacement
- Part-Time or Fractional CFO – A CFO contracts with the company and assists for a set number of hours per month or days per week.
CFO Fit: The Right CFO
What should you look for in a CFO?
Fit – While developing a rapport with the CEO and management team is a must, a good cultural fit with the rest of the team is important too. The CFO should have a “been there, done that” attitude, but also be creative and flexible enough to adapt to the team and its culture.
Experience – A CFO with years of experience working with similar companies can enhance the management team, provide credibility with your board and investors and generally raise the level of professionalism at the company. Experience with your specific industry is a plus.
Leadership – The CFO should be a natural leader and have the gravitas to slip into a leadership role, even on a part-time basis.
Can-Do – Small companies often don’t have the resources to provide a lot of support. So the CFO must have a can-do attitude and be willing to do what’s necessary to support the company.
CFO Services: Strategic Advisory
For those companies — typically startups and early-stage growth companies — that do not use a CFO and have used various bootstrapping tactics to fund operations, they may choose to seek strategic advice and executive counsel from a CFO until they get traction for their products and solutions.
Make or Break Moments
Many entrepreneurs have learned to treat each investment as if it will be their last. They scrap and save and hold off on hiring in order to extend the runway and give themselves the best chance possible to develop and sell their product.
But there comes a time in a successful company’s lifecycle where the opportunity opens up and the team must flick the switch from conservative to aggressive.
This is the “make-or-break moment” and not many companies get it right. The decision has to be made and communicated to the entire company. A good CFO strategic advisor will help to identify when resources need to be allocated to take advantage of the opportunity whether it’s by investing in people, marketing, sales or the next generation product. Being able to identify when that window of opportunity opens and taking advantage is the difference between a great company and a merely good one.
Delay hiring a CFO
Startup companies are well suited to follow a familiar mantra: “Don’t invest in G&A costs until you prove you can:
- Build your product and
- Sell it.
In other words, use your scarce resources to prove the product concept and establish that you have a market.
As a result, more companies are delaying hiring staff and support functions, such as a CFO, and taking advantage of advisory, part-time or project-based professionals with deep experience and expertise.
In the case of TechCXO partners, our finance professionals have often worked for dozens of companies over their careers and have seen and done just about everything that a startup will require.
Five (5) Blind Spots
Many venture-backed companies or newly formed companies seeking to obtain venture financing are hyper focused on their products but often have a blind spot regarding financial matters.
Others simply don’t want to grapple with things like 409a valuations, revenue recognition, collections or sales taxes. Still other companies consider finance to be of secondary importance and believe they can fix things after they have built and launched their products.
In many cases, the end result is disarray in the finance function which can delay or prevent a company from raising money or doing a deal – or from being as successful as they had hoped.
The reality is that a little planning goes a long way and does not create a distraction for the management team or cost a lot of money to intelligently build the financial foundation for growth. The following are the five most common mistakes that companies make when it comes to building their finance function.
Lack of focus on Cash Management
Sources and Use of CashHow much money do we have and how far will it take us? What’s plan B (and C and D) for raising cash? Debt, equity, equipment financing? These are questions that CEOs should be able to answer with precision, but to do so requires a good cash forecast that includes a realistic view of inflows, outflows and the likelihood of achieving milestones in a specified timeframe.
Aligning Teams. Making Tough Calls.
Dysfunctional Budgeting ProcessesBudgeting not only provides a roadmap, but the process of putting together a budget serves to align the management team and engenders important and sometimes difficult discussions. It’s a key part of team building. Too often, a team will overestimate their sales and underestimate the time it will take (and therefore the $s) to achieve their targets. Budgets should reflect reality and not aspirations, though it’s okay to have a couple scenarios (e.g. upside, base case, downside).
Applying actual results to budgeting and forecasting
Comparing against assumptionsIt’s not enough to have a budget. Management must use the actual financial results as a critical feedback loop to refine its budgeting and forecasting efforts. Using actual results and comparing those against the assumptions your team worked so hard to develop is the best way to figure out what’s working and what’s not – and then taking decisive action to reinforce the good and correct the bad.
No Metrics; Wrong Metrics
Developing a set of metrics (or key performance indicators “KPIs”) is another effective team building exercise. We all have a hundred things on our to-do lists, but only 5 to 10 will truly turn the needle and make an impact on the business. It’s crucial for the team to discuss what those 5 to 10 metrics should be and then agree on a plan for reporting on their metrics in a timely and accurate fashion. This is often done in the form of a dashboard on a daily, weekly or monthly basis to help the team steer the ship. It’s also a great tool for managing the company’s board of directors and holding the team accountable to an agreed set of priorities.
Where you might call on a CFO for strategic advisory services or projects, a part-time or fractional CFO represents a larger commitment from both parties.
Some people may not distinguish between a part-time or a fractional CFO and often use the terms interchangeably.
A distinction can be drawn, though.
The main difference between a fractional CFO and a part-time CFO is that a fractional CFO only looks at a certain number of responsibilities, whereas a part-time resource looks after all the responsibilities, but only part of the time. Business owners that are not sure how to effectively utilize a fractional CFO can opt to hire a part-time one and have him/her identify the needs of your business.
A fractional CFO, as the name suggests looks after a fraction of responsibilities and focuses on specific areas of requirements. Their responsibility is usually shared with other in-house resources. Small to medium sized businesses that are seeking to add finance and accounting policies, processes and systems can use a fractional CFO to ensure timely deployment and effective troubleshooting of issues.
Fractional CFO Responsibilities
A Fractional CFO first and foremost, needs to understand the workings of your company. They have to be in harmony with the company’s vision, mission, objectives, and long-term goals for there to be a productive business relationship.
With capital needs, strategic objectives and financial and performance metrics constantly changing, a fractional CFO needs a steady hand, sound experience while balancing an eye on the future.
An open and realistic mind is invaluable as well. It is important to find a balance between a business’ necessities and luxuries they can do without. Minimizing cost while maximizing profits is every business’ mantra.
With a business’ objectives as a guiding map, and personal experience, insight and relevant technology as a shining light, navigating through challenges becomes much easier and manageable.
- Prompt accounting and finance staff management
- Taking part in developing executive decisions on leadership and management
- Researching and evaluating relevant technology of importance to the business.
- Spearheading and implementing business objectives, missions and visions.
- Development and management of key functions, software, and their methodologies.
- Defining a business’ Key Performance Metrics (KPMs)
- Understanding the level of scalability and resilience of various technologies
- Technology maintenance assessment and planning
- Board management
- Financial reporting
- M&A transaction support
- Reviewing and negotiating business contracts.
When do you need a part-time CFO?
When does it make sense to consider a part-time or fractional CFO?
High-Growth or High Stress
Companies that reach an inflection point in their growth usually consider a part-time or fractional CFO for one of the following reasons:
- Increasing number of transactions, such as more customers, more employees, more vendors and increasing complexity in the business that requires more experienced leadership
- Need to develop policies and procedures
- An inexperienced controller or other finance staff member who may simply need a mentor
- The company has raised or intends to raise significant ($1 million or more) funds from outside investors
- A merger or acquisition of a line of business that requires acquisition accounting and reconciliation between multiple systems.
Other circumstances require specialized skills to address a specific problem. Some accounting and audit firms are increasingly unwilling to risk compromising their audit function by providing in-house consulting services and will instead refer the company to a project-based CFO for issues such as:
- Transaction Readiness – Many companies that seek to raise capital or be purchased have a vested interest to prepare and tune their operations long before due diligence begins including solving GAAP, Working Capital or Quality of Earnings Issues preemptively
- Revenue Recognition – Mandatory and extensive new accounting standards in revenue recognition from contracts with customers now exist for technology companies.
- Equity Compensation – Equity compensation and reporting standards are essential for preparing GAAP-compliant financial reports
- Lease Contracts – The guidelines for accounting treatment on modifications, terminations, and remeasurements of lease contracts can be complex.
While you are in the process of replacing your CFO or choosing a new one, you may hire an interim CFO to look after the responsibilities. In addition to running key functions, they can conduct interviews of potential candidates to ensure that the new hiring is a strategic fit for the organization.
In cases of transition or an absence of leadership, a company may have no CFO in place and wishes to find an immediate resource to fill the gap until they can hire a permanent CFO. This is usually a role for an interim CFO who will commit substantially all of his/ her time to a company for a limited period.
Unlike part-time or project CFOs who generally make a living by working on an outsourced basis with a number of different companies, interim CFO are often finance professionals who are dedicated to one client.
Benefits of an Interim CFO
With an interim CFO, the company, CEO and executive team get:
- Increased credibility with Board, prospects, partners and suppliers.
- Attention/attraction of equity investors.
- Better cash management.
- An upgrade from general bookkeeping to a real finance and accounting department.
- Improved negotiation of contracts and agreements, as well as improved audits.
- Increased executive team collaboration from a C-suite finance professional .
- Optimized profits and improved working capital.
Managing Part-Time or Interim CFOs
A part-time CFO will do all the things a full-time CFO would do, but the key is to focus on the critical tasks and try to keep your total consulting costs in check.
If you find that you are using a CFO for two or more days a week, then it probably makes sense to bring in an interim or full-time resource.
- Cash management – a laser focus on the company’s cash position. How much do we have and where will it take us? What are the options to raise more? Debt, equity, grants
- Budgeting and forecasting – the CFO should lead this process and make it a team-building exercise. The team must speak with one voice when it comes to the business plan and the financial model that underlies it. As critical, when actual data are available, the CFO must create a “variance analysis” that explains where things differed, both good and bad, from the budget. The explanations for those variances are what enable the team to alter course.
- Key Performance Indicators (KPIs) – also known as business metrics, KPIs provide actionable intelligence on the most critical parts of your business.
The CFO can help identify the 5 or 6 most important metrics and ensure that these data are assembled in a timely and accurate fashion. This enables the team to focus, not just on the 100 tasks they perform every day, but on the things that are truly going to “move the needle” in the business.
Beyond these key tasks, the CFO takes the lead on major accounting issues such as revenue recognition, project accounting, commission tracking, grant reporting or leases. The CFO will also manage business systems, audit, tax, insurance and often take the lead in facilities, legal, HR and IT in the company’s early stages.
Perhaps the best reason to find a part-time CFO is the flexibility that affords you. You can have the person in a few hours per month or a day or two per week. The CFO can partner with you and make recommendations on what skills are required in the finance team and when to bring on those full-time employees.