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Finance Processes
6 minute read

The Advantages of Hiring a Fractional CFO

Natasha transitioned to venture capital after a career in banking built in prestigious firms such as JPMorgan and ESM.

One notable trend we have identified in finance projects at Toptal is the increasing popularity of fractional CFOs. A fractional CFO is an experienced finance professional (usually with at least three previous CFO roles) who brings extensive financial and business management expertise to companies on a part-time or project basis.

The right time to hire a fractional CFO depends on a company’s stage of growth or financial tasks at hand. The benefits derived from hiring at the right time are many and long-lasting to a business.

How Is the CFO Role Fractionable?

Fractional CFOs help manage a wide range of situations related to the financial operations of a business. A CFO’s role can be misconstrued as just a pure numbers person performing accounting tasks. The modern CFO is much more than that. A CFO, whether full-time or fractional, is a multi-disciplined asset that:

  1. Builds financial processes and teams
  2. Works with frontline team strategy to correctly understand and price revenue opportunities
  3. Oversees change situations such as turnarounds or management reorganizations

Just like a full-time CFO, a fractional one provides such expertise and at the same time offers excellent flexibility and favorable cost advantages to serve the needs of smaller companies.

A modern CFO’s responsibilities are varied and complex; thus, each company’s role requirements will vary depending on their situation. For some businesses, hiring a full-time CFO is beyond their needs and financial capabilities, despite the many apparent benefits gained from the leadership and strategic knowledge of a hire.

Enter the fractional CFO. For companies not mature enough to warrant a full-time CFO position, they can bring in specific expertise to help on varied projects covering the financial and strategy spectrum. When different CFO role elements are required on an intermittent basis, it’s time to bring in fractional talent.

What Types of Projects Can a Fractional CFO Help Resolve?

The projects a fractional CFO can assist with are multi-disciplined and split between financial and non-financial duties. The role of the CFO is complex and can be unbundled into specific pain points and influence areas.

Companies Looking for Funding

Running out of cash is one of the top reasons why startups fail. Besides having a tight grip on company finances and cash flow management, a growing company will need capital injections to grow or to sustain operations in a downturn. Fractional CFOs can assist with fundraising (typically starting at Series B) or with debt (e.g., negotiating bank loan terms). Because of their blend of financial acumen and strategic insight, they can expertly parse the numbers being negotiated and help plan where the investment can take the business.

Complex Budget Allocation Decision-making

High-growth companies often find themselves in the position of having to decide where cash is best spent. When evaluating whether to pursue an acquisition or change distribution channels from retail to digital, a company that does not yet have a full-time CFO can utilize a fractional one to evaluate the project and support decisions during intensive, time-sensitive sprints.

Optimization of Internal Processes

Internal processes are the cohesive link between strategy, operations, and performance. A CFO is uniquely placed to understand each step’s cost and contribution and guide their optimization. CFO responsibilities include evaluating all processes and clearly understanding their financial contribution to profitability and cash flow. Doing this exercise keeps management abreast of the company’s actual performance and shareholder returns. Fractional CFOs can also build best practice processes to document these reviews to ensure ongoing continuity and time efficiency.

Periods of Restructuring

Restructuring a company requires in-depth knowledge of processes (see above), an ability to assess how to optimize capital structure, and an understanding of cost optimization and cash flows. During a restructuring, CFOs must detach from the established norms of the business and help reorganize activities and finances toward the new vision.

Filling a Leadership Vacuum

It is common during leveraged buyout (LBO) processes to change the companies’ management structure. A CFO may resign during these times, or investors may look to start a clean slate and appoint their chosen figurehead. Such events may result in a period of flux between appointments. It may be necessary to have an interim figure to keep the business on an even keel and start implementing new strategies. The hiring process for a critical position like a CFO can take up to a year. Plugging an experienced fractional CFO into the role can be done relatively swiftly and provides invaluable flexibility and optionality for business owners.

Regulatory Changes Are Afoot

Additional regulation, such as reporting, compliance, and disclosure obligations, requires specific and professional skills. The ramifications of under-reporting or misinterpreting rules can be financially and reputationally disastrous, so it’s always best to over-prepare. A fractional CFO can unburden the CEO and senior management of these requirements while assuring external stakeholders that the task is being handled appropriately. Because fractional CFOs are likely to have worked across various industries, their breadth of expertise and insight into diverse regulatory requirements will also provide knowledge transfer opportunities within incumbent teams.

The Board of Directors Needs Support

Board members, particularly in a venture or PE funded company, hold a lot of sway on decisions and future paths. It can be beneficial to have a fractional CFO come in to participate in board meetings and bring fresh experience. Such interaction can be a two-way process by providing more insight to the directors and then communicating the salient points taken down through the company hierarchy.

For larger companies with more complex board structures, independent board members must be free of conflicts of interest. At times, a corporate action could put a member at risk of being personally conflicted. In these cases, a fractional CFO can be parachuted in as an interim board member to oversee the event, free of any conflicts.

When Does a Company Need a Fractional CFO?

The financial needs of a company will change depending on its size and stage of growth. There are four core financial roles required during the lifecycle of a company. These stages correspond with the skills needed from talent and range from an initial bookkeeper up to the traditional CFO role.

Fractional CFOs are most prominent at the third stage of growth, which is generally at the point where companies are well entrenched into their path of scaling. While this stage is typically the most optimal point of entry, as can be seen from the benefits of fractional CFOs, their adaptability may also prove advantageous for companies at other growth stages. It’s vital to consider the knowledge transfer opportunities provided by an experienced professional for building skills and culture within a financial function.

Stages 1 and 2: Bookkeepers and Controllers

When a finance function is focused purely on accounting (performed by a bookkeeper) and financial planning (performed by a controller), a CFO will, in most cases, not be necessary. However, companies at this level may want to consider bringing on a fractional CFO on an interim basis in the event of a takeover or restructuring.

Stage 3: Fractional CFO

Companies should consider engaging a CFO, whether fractional or full-time, when the size and complexity of revenue begin to overburden the existing finance team. This generally occurs at the Series B funding round.

A significant external funding event can signal the point where a business requires a finance professional to oversee the team and provide more forward-looking guidance to the increasing range of stakeholders at hand. A fractional CFO will be effective at this stage by identifying key pain points immediately, knowing how to address them using incumbent staff, and having the initiative to foresee future events down the line. Often, at this stage, companies may not be complex enough to require a full-time CFO or have the budget to justify one. A fractional CFO is a more cost-effective solution for meeting needs as they arise.

Stage 4: Full-time CFO

Generally, between $10 million and $50 million of revenue is when financial functions gain more complexity. When revenue is scaling up at this fast-moving stage, there is likely a need to establish long-term stability on the finance team. With growing investor relations and capital markets needs, hiring a full-time CFO becomes necessary to handle the responsibility. In later-stage funding events, investor terms may state that a CFO must be hired upon completion of the round.

What to Look for in the Profile of a Fractional CFO

A fractional CFO’s job description can be as varied as that of their full-time equivalents. For interim project roles, there will be a strong emphasis on expertise within the task of focus. Usually, fractional CFOs will have:

  1. Served as a CFO previously—perhaps at three or four different companies.
  2. Worked in different areas within the same industry—for example, a startup fractional CFO may usually be a former VC investor who began cooperating with the company as a fundraising consultant before advising on growth and strategic financial issues.
  3. Experience across companies of different sizes—from entrepreneurial endeavors to blue-chip firms.
  4. Soft skills for mentoring and leveling up teams to meet the expectations of a larger business.
  5. A track record of managing accountability—serving on boards is a good signal of a profile that understands big-picture decision-making and acting as a fiduciary.

Altogether, these characteristics ensure that the candidate can hit the ground running as a fractional CFO and start delivering valuable input from day one.

Understanding the basics

What is a fractional CFO?

A fractional CFO is an experienced finance professional (usually with at least three previous roles as a CFO) who brings extensive expertise to a company on a part-time or project basis, often when the company needs more experienced or additional resources to manage its financial function.

Why is a CFO important?

The role of a CFO is complex. Whether full-time or fractional, a CFO is not just an accountant but an asset to set up any company for growth. CFOs are adept at managing the increasing operational complexity, market expansion, and change events experienced by maturing companies.

When should you hire a fractional CFO?

As revenues grow, companies begin to find that more proactivity is required within strategic financial decision-making. With intermittent needs arising across a range of finance-related areas, it can be cost-effective and flexible to bring in a fractional CFO to help build processes for long-lasting stability.