How Fractional CFO Services Help Startups Build Financial Discipline
Financial prudence is more than bookkeeping for startups. They must understand the amount of money that they have in the bank and the speed at which they are burning it through, the cost of their hiring and whether they need any more funding.
It is here that fractional CFOs for startups can prove extremely useful. Rather than hire a CFO until the startup reaches a certain stage of development, the startup can hire financial professionals on a part-time basis with an emphasis on forecasting, budgeting, reporting, financial controls, and decision-making.
What Are Fractional CFO Services Startups?
The fractional CFO offers high-level financial expertise without being an employee of the firm. The duties of the fractional CFO may vary according to the requirements of the particular business at the time, such as improving financial statements, forecasting, fundraising, or just giving the founders a better insight into the company’s performance.
The fractional CFO is not an alternative for bookkeeping and accounting. In fact, the CFO makes use of accurate data to interpret the numbers for management.
For many startups, this creates a useful division:
Bookkeeping: Records financial transactions.
Accounting: Produces accurate financial records and reports.
Fractional CFO: Uses those numbers for planning, forecasting, analysis, and decision-making.
Why Financial Discipline Matters for Startups
Startups have limited funds when they try to grow fast. A company might be experiencing growth in revenues but is in financial difficulties since expenditures are growing at a faster rate than anticipated.
Financial discipline gives founders a clearer view of:
- Current cash position
- Monthly burn rate
- Cash runway
- Expected revenue
- Upcoming expenses
- Hiring capacity
- Profit margins
- Funding requirements
- Actual performance compared with the plan
It is not about slowing down the growth, but making the growth decisions based on a more solid knowledge of the economic impact.
How a Fractional CFO Builds Better Financial Control
One of the greatest advantages of fractional CFO services is that they help create a consistent process rather than analyzing the numbers when an issue crops up.
1. Builds a Practical Financial Forecast
For a startup, it requires something more than just historical financial records. It requires a future perspective.
A fractional CFO can build and maintain a forecast based on factors such as:
- Revenue growth
- Customer acquisition
- Pricing
- Payroll and planned hires
- Operating expenses
- Recurring costs
- Funding plans
- Expected cash collections
- Actual performance compared with the plan
The forecast can then be updated as actual results come in.
It will help address such issues as:
Can we afford to employ three more people?
What will be the effect on cash if our revenue comes in at a lower rate than projected?
How long will we be able to continue operations before raising more capital?
The founder will be able to consider the potential effect on finances before taking these decisions.
2. Uses Runway Analysis to Protect Cash
The runway metric is one of the most crucial financial metrics for a young business.
A fractional CFO will be able to track money flow, expenditures, and burn projection to determine how much time the company will survive.
However, runway analysis can involve several scenarios.
For Example:
| Scenario | Possible Impact |
|---|---|
| Base case | Current hiring and growth plan |
| Higher growth | Additional spending may be required |
| Slower growth | Runway may need to be protected |
| New funding | Cash position changes |
| Delayed funding | Spending may need to be adjusted |
That allows founders to do something before there is an emergency of cash.
Not sure how long your startup’s cash will last? A fractional CFO can help you model your runway and plan ahead.
3. Creates Financial Controls That Grow With the Company
The importance of financial controls increases significantly with each employee, supplier, customer, investor, and additional financial system that a new business employs.
A fractional CFO can help establish processes for areas such as:
- Expense approvals
- Budget ownership
- Cash management
- Account reconciliation
- Financial reporting
- Payment authorization
- Monthly close procedures
- Budget-versus-actual reviews
- Access to financial systems
Such controls help to minimize mistakes and enable the management to have more confidence in the information for decision-making purposes.
4. Makes Board and Investor Reporting Easier
The more a startup relies on external investment, the more significant the aspect of financial reporting is.
Investors and board members usually expect much more than a simple profit and loss report. They might be interested in getting an idea about revenue performance, the company’s cash position, expenses, KPIs, forecasting updates, and achievement of corporate objectives.
Fractional CFO can be of assistance in arranging the data and preparing the reporting package.
Effective board reporting could include:
- Financial statements
- Cash and runway position
- Key business metrics
- Budget versus actual results
- Forecast updates
- Major financial risks
- Important changes since the previous period
- Management commentary
This will also make it easier for founders to have an understanding of the business prior to the board meeting rather than scrambling at the eleventh hour.
Preparing for investors or a board meeting? Get the financial reporting and forecasting support your startup needs.
5. Helps Founders Make Better Hiring and Growth Decisions
Hiring is probably one of the most expensive actions for any startup to perform.
However, the issue at hand is not only whether the organization has sufficient funds for paying a new member of the team at that very moment. The startup’s founder needs to take into account salary, perks, expenses associated with them, revenue forecast, cash runway, and future funding as well.
A fractional CFO could analyze all these factors before the decisions are taken.
The same approach can be used for:
- Opening a new location
- Launching a product
- Changing pricing
- Increasing marketing spend
- Entering a new market
- Purchasing equipment
- Taking on debt
- Preparing for a funding round
This makes financial planning a part of the decision-making process rather than an afterthought.
When Should a Startup Consider a Fractional CFO?
There is no one revenue figure that will indicate whether CFO assistance is required at a startup. Rather, the more relevant question is whether financial issues are so complex or critical that they require senior-level financial expertise.
A startup may benefit from fractional CFO support when:
- Cash runway is becoming difficult to predict.
- The founder is spending too much time on financial questions.
- Financial reports do not provide enough information for decisions.
- The company is preparing for fundraising.
- Investors or board members expect regular financial reporting.
- Hiring decisions require more detailed financial planning.
- The company needs financial controls as it grows.
- Revenue is increasing but cash flow remains difficult to understand.
- Management needs budgets, forecasts, and scenario analysis.
- The business is not ready for a full-time CFO.
Your startup does not need to wait until finances become complicated. Get senior-level financial guidance before you need a full-time CFO.
Fractional CFO for Small Business vs. Startup CFO Support
The terms may be similar, but the financial emphasis might be different.
A fractional CFO for a small business might concentrate more on profitability, cash flow, budgeting, pricing, margins, and growth planning.
A startup might have some special requirements in relation to fundraising, runway, investor reporting, equity structuring, hiring, and growth scenarios.
In either case, the benefit is that you can get senior financial expertise without being locked into a full-time CFO.
How Outsourced CFO Services Fit Into the Finance Team
It is possible to have outsourced CFO service work with an existing bookkeeper, accountant, CPA, or controller.
This can take the form of something like the following:
Bookkeeper → Transaction data
Accountant/Controller → Financial reporting & accounting
Fractional CFO → Forecasting & finance decisions
It is vital to have this kind of structure in place since a CFO will not be able to create meaningful forecasts based on bad data.
Thus, a good outsourced CFO service needs to know how the accounting works in the firm.
What Should You Expect From a Fractional CFO Service?
An engagement that is robust must be one that has defined roles and a consistent work schedule. This would involve:
- Monthly financial review
- Rolling cash-flow forecast
- Runway analysis
- Budget and forecast updates
- Scenario planning
- KPI reporting
- Board and investor reporting
- Financial controls
- Hiring and spending analysis
- Fundraising preparation
- Management decision support
The extent must be settled upon before the consulting engagement starts.
Looking for ongoing financial strategy without hiring a full-time CFO? Explore CBA Financials’ fractional CFO services.
Questions to Ask Before Hiring a Fractional CFO
Prior to selecting a vendor, consider asking the following:
- What specific financial tasks will you do each month?
- Will you create and manage our forecast?
- How will you track cash runway?
- Can you prepare reports for our board and investors?
- Can you assist in putting together financial controls?
- How will you interface with our current accountant or bookkeeper?
- How often will we discuss financial performance?
- Can you model hiring, pricing, and growth strategies?
- What happens when our financial needs grow more complicated?
- Is this engagement tailored to our specific business needs or is it a packaged deal?
The above will help you choose the right provider by focusing on what they will actually be doing instead of the CFO title.
Build Financial Discipline Before You Need It
The time to start practicing financial discipline is not when you have low on cash or you’re in the middle of your financing rounds.
Instead, for startups, it would be much more productive to set up a procedure of financial analysis, forecasting of cash flow, controlling the runway, setting up the controls, and making decisions.
Fractional CFO service for startups allows startups to get such financial assistance without hiring a full-time CFO right away.
In case your startup requires improved forecasting and planning, advanced reporting, and effective financial controls, fractional CFO services will help your management team build a solid financial base.
Stop digging through spreadsheets for answers you need right now.
