What is a Fractional CFO?

Oct 18, 2022

EARLY-STAGE-STARTUP-TAXES

A lot of pieces make up a successful startup: a great idea, an innovative team, willing investors — the list goes on. But at the end of the day, there’s one key component that can make or break everything else: your finances. 

The way your organization manages its money will either enable your startup to scale or tank you. That means you want to make sure your finances are in good hands. That’s why many startups prioritize budget to hire a CFO right away.

While a lot of startups do benefit from putting an in-house CFO on salary, that’s not necessarily your only option to get this level of expertise. You can also explore hiring a fractional CFO, which is essentially a CFO that works part-time for your company. This gives you the level of expertise you want in the person managing your startup’s finances while limiting the associated overhead. 

What a fractional CFO can do for you

Some startups have someone in the founding team who has some level of financial expertise. That doesn’t necessarily mean that person should take up the CFO mantle, though. For starters, your founding team probably has their hands full. CFOs have to handle a wide range of responsibilities. You need someone who can be dedicated to that role without other distractions.

Additionally, even if your internal team has some financial know-how, hiring a fractional CFO can deepen that expertise. Fractional CFOs are fully-qualified, often with a decade of experience or more. 

When you bring in a fractional CFO, you get someone to handle the budgeting and forecasting that are so critical for startups. At the same time, you gain someone who can act as a trusted advisor for your founding team. They become a sounding board to help guide this critical stage of scaling your startup. 

Beyond that, a fractional CFO can deliver: 

  • Financial modeling. With a strong CFO, you gain a team member who can identify areas where your startup can optimize its operations to benefit its financial future. They can identify opportunities to improve margins or negotiate better agreements with vendors, for example. 
  • Fundraising strategy. Your fractional CFO can work with you to strategize the right timeline and channels for future rounds of fundraising. 
  • Risk mitigation. As a founder, you probably have a “shoot for the moon” mentality. That entrepreneurial spirit plays a critical role in building your startup, but it can also encourage you to push too far, too fast. A good CFO will temper your enthusiasm. That doesn’t mean they’ll rain on your parade, but the risk aversion that a fractional CFO brings to the table can be an asset that protects your startup. 
  • Board reporting. Most startups give board seats in exchange for funding. That means you’re going to have outside people with a serious interest in understanding your startup’s finances. You should be prepared for numerous requests coming in on a regular basis. With a fractional CFO, you get someone to field all of those requests, keeping them off your desk. At the same time, your CFO can prepare the information your Board wants in a way that represents your startup well, helping to bolster Board confidence. 
  • Scaling your finance department. Your fractional CFO should help you build out the right people and processes surrounding your finance department to ensure your company scales sustainably. 
  • Plugging into HR. Beyond the finance department, a fractional CFO can be an asset that works with your HR department to manage the financial ramifications of your headcount. They can help your startup dial in your compensation strategy to attract the best talent without skyrocketing your overhead. It’s not uncommon for a startup to dedicate a significant portion (think: 80% or more) of their expenses to labor, so it pays (literally) to have a finance expert involved there. 
  • Networking. An experienced fractional CFO may have a network of VCs and strategic investors to whom they can connect you. 

 

Hiring a fractional CFO after Series A fundraising

It’s not uncommon for startups to raise $10 million or more during their Series A fundraise. Although it might seem like a baseline in the world of tech startups, that’s a lot of money. It’s important that you think through the financial stewardship of that sum. 

Not only does careful planning and management mean a slower burn rate and extended runway, but it can also speak volumes to future investors. When they can see that you managed your Series A well, they’ll be much more incentivized to invest in your startup in future fundraising rounds. (On the flip side, bad Series A management can make investors run for the hills.) 

It might seem too soon to hire a CFO, especially when you consider the salary a full-time CFO would require. But don’t forget that you have another option. With a fractional CFO, your startup can get the expertise it needs in a more cost-effective way. 

Fractional vs. full-time CFOs

All this said, some startups benefit from scaling all the way up to a full-time CFO right away. In fact, our CEO, Akshay Shrimanker, CPA, just argued for this route

The upside of a fractional CFO primarily stems from the cost-effectiveness of this model. You get all of the expertise of a CFO without the full-fledge line item of a CFO salary.

Even so, some startups would be better served by bringing someone in-house right away. A full-time CFO is on your team, with all of their attention on your startup. Give them equity and you guarantee they’re as bought into your company’s success as you are. 

At the end of the day, the main takeaway here is that whether startups hire a fractional or full-time CFO, they need someone dedicated to overseeing their finances as they fundraise and scale. Don’t assume someone on your founding team can handle the to-dos. They’ll pile up quickly, and rushing through them could lead to costly mistakes for your startup. 

Every startup is different, so we can’t necessarily recommend a fractional CFO or full-time CFO across the board. If you want to discuss which option might be best for your unique organization, we can help. Get in touch with our team of startup-focused CPAs today.