What is a Fractional CFO?
While the titles range from Chief Financial Officer to Vice President of Finance to Director of Finance to Controller, depending on the size, culture and nature of the operation, generally a Senior Financial Officer is a critical part of the company’s leadership team. Most commonly referred to as a Fractional CFO, Virtual CFO or part-time CFO, there is an alternative to the traditional “50 hours per week in the office” senior executive CFO. Fractional CFO are experienced financial professionals that can be expected to be responsible up to as much as their full time counterparts:
- Strategic financial direction and execution oversight
- Accessing capital and negotiating with bank
- Business financial planning and analysis
- Forecasting and performance measurement
Why Engage with a Fractional Chief Financial Officer?
In answering the question: “What are the benefits of a Fractional CFO?” one has to first consider the company’s resources, goals and situation. Many start-ups or companies that are winding down operations for example may not have the need for a full time senior executive.
Compared to a traditional consultant whose relationship may be more transactional, connecting once or twice per year, a Fractional CFO maintains a consistent relationship with the company leadership and operations throughout the year, and may range anywhere from between 1-3 times per week to 1-3 times per month. Regardless, having a regular connection to operations and issues, allows for continuous oversight and current knowledge.
There are of course many other situations which engaging with a Fractional CFO makes sense. The Company may be going through a transition period and needs interim financial or operational expertise. Fractional CFOs may act as a transitional builder to design and implement financial operations, allowing the company to eventually go into a cruise-control mode.
Regardless of title, a Fractional CFO’s functions don’t necessarily overlap with the existing CFO’s. In some cases, a company may already have an existing CFO but needs extra rocket fuel for a particular period or project. Hiring a full time resource is unnecessary for temporary hurdle projects. After all, the goal of building infrastructure and systems is to do more with less.
The Value of Talent and Time
A dedicated full time senior executive leader can be paid between $150,000 to $250,000 per year in base salary alone. That does not even factor ancillary costs which, although indirect, are still very much required including:
- Non-direct employment expenses can be an additional 25% to 50% of base salary to account for incentive bonuses, employee benefits, payroll taxes, vacation and paid sick time.
- Maintenance and overhead costs per employee often range between $5,000 to $10,000 per year to account for office space, technology, licenses…
- Ramp up expenses can range between $1,000 – $5,000 including on-boarding, training and development costs (one of many factors in the cost of retention).
Furthermore, employers are bound to Employment Standard’s Act and Common Law practices, meaning that severance or working notice may be required in situations of involuntary termination based on the length of tenure and seniority. The old saying of “hire slow and fire fast” is popular for a reason.
Because of this, it is no wonder that choosing and hiring the right senior employee, or any employee for that matter, requires so much time and energy. When a decision is made to hire an employee, the company is committing to investing in an asset. The below graph represents the effective economic value of an employee over the lifespan of their employment.
This scenario even assumes that the employee is managed appropriately to maximize productivity. Even if the company has the right culture, team, leadership and infrastructure to train and engage their employees consistently, the most likely best case scenario is return on investment at or around the one year mark. In other words, not only do you have to choose the right pieces to fit together, you have to make sure they belong to the same puzzle!
While the above graph represents a return on value over a period of years, one can imagine the productivity of a standard work day under a microscope. An average work day ebbs and flows even for the most efficient employee and can be filled with downtime, slack and inefficiencies caused by others. See the below satirical but very relatable graph of an employee’s productivity throughout the day.
In other words, it is a mistake to assume that because even if you hire a talented contributor, they will be left alone to perform at peak levels from day one. The company bears to responsibility to lead and manage its employees’ time to maximize productivity.
Not to suggest they need to micro-manage of course (see Situational Leadership) but there is no guarantee that once you enter the “Return zone” that it will stay there indefinitely. Companies need to be ready to actually lead their team to consistently engage them to realize their value.
Disruption and the Cost of Turnover
Employee engagement is one of the number one reasons for employees resign which is costly over the long run ranging between 75% – 200% of the employee’s salary per year. While nobody gets married expecting to get divorced, it is a reality of today’s working economy and modern workforce. The current average life span of an employee’s time at one organization is between 3 to 5 years.
This cost of turnover results in resetting the graph back to T0 each and every time. Outsourced consultants are often an attractive option because for short term transactions, employers are not responsible for considering managing performance, accounting for personal days, vacation, downtime or slack.
But although it eliminates one factor in the cost of talent, it cannot eliminate the true cost of turnover. The time to acclimate oneself to understanding the company’s specific operational issues, company nuances, culture and relationship dynamics (ie. politics), are always considered. And make no mistake, it is factored into the consultant’s hourly rate.
The Value of the Modern CFO
Since the revolution of crowdfunding, access to capital is no longer the greatest barrier to entry for new businesses. Similarly, the access to knowledge and senior leadership is not restricted to choosing between full time senior executive, external consultants or inexperienced talent.
In the world moving from bricks and mortars to the cloud, where technology allows access to remote talent wherever you want, talent and experience can also be accessed however you want. A Fractional CFO arrangement allows the company to tap into talent and scale it accordingly as the company grows and evolves. As an example, at inception, they may be more “full time” and then scale down as operations stabilize and infrastructure is built, ramping up only as needed for specific projects or issues. The full flexibility is within your hands.
The ultimate point is not to suggest that a Fractional CFO is better than a traditional CFO. In fact, some companies even view the CFO’s role almost as importantly as the CEO’s. Instead, the point is that Fractional CFOs offer is an alternative in the rise of the gig economy, offering a competitive edge whenever, wherever and however you need it.