I’ll be honest, I’ve been a bit insecure about calling myself a fractional CFO, not necessarily because of the weightiness of the CFO title but because the term can mean so much to different people. This post aims to clarify what a fractional CFO is and the value having one on your team adds.
Ok, maybe not exactly my perspective but from someone seemingly a lot more qualified, the Secret CFO. The visualization of the roles of the CFO below, I think, excellently summarizes the importance of the CFO’s role in assisting the development of an organization’s strategy to execute its vision.
A CFO has 4 primary roles:
— The Secret CFO (@SecretCFO) August 13, 2024
- controllership
- stakeholder management
- capital allocation
- decision support.
The hard bit is getting the balance right, like the conductor of an orchestra. Get the balance wrong and all you have is a messy noise.
Any single part missing and… pic.twitter.com/DS3N9ujEKT
While the Secret CFO’s Twitter/X bio says “Sharing real world insights as the CFO of a multi-billion dollar company,” the core concepts addressed are highly applicable to small businesses also. Below I break down the Secret CFO’s 4 roles of the CFO depicted in the Venn Diagram.
Without controlling, there will be “decisions made on the wrong fact base,” garbage in, garbage out. Controlling ensures the data used to generate financial statements is accurate and compliant. When I think of the areas that can be traps for a fractional CFO, this is the area that comes to mind first. While controlling is vital for making business decisions, it is not in the best interest of the business or the CFO to have the CFO focused primarily on day-to-day controlling and bookkeeping tasks.
The critique that some who market themselves as fractional CFOs and are strictly performing monthly financial statement preparation are not serving in the full CFO capacity. At the end of the day, the CFO must own the integrity of the financial data but there’s even more value that can be delivered on top of that.
It can be easy to let the day to day demands of business distract from reviewing and analyzing the financial data the controllers and/or bookkeepers diligently oversee. Neglecting this discipline can lead to missing out on valuable insights and trends the financials may show. In combination with goal setting and creating a budget to compare actual results with expected results, important assumptions can be tested.
For example, if you set out at the beginning of the year to increase overall sales by 20% through a new product line and the actual performance of the product line is not in line with the budget it would prompt a conversation. This also reinforces the importance of controllership due to the importance of having this budget to actual information as soon as possible to make any necessary adjustments.
In younger businesses it can be tempting to simplify the financial statements as tools required by the tax pros. While that is certainly one use of the financials, consistent review of the financial statements can lead to more informed management decisions while avoiding “finance in a silo.”
If there are any owners of the business that do not work in the business, capital allocation is an important consideration for management in avoiding a “failure to optimize for shareholders.” This concept is still important for business owners who work in the business but the balance of investing in growth, strengthening the balance sheet, and distributing cash to the owners can be more contentious when the owners are not involved in the day to day.
Depending on the goals of the shareholders, a longer term investment in growth of the business that does not generate additional cash in the short term may be less desirable than slower growth with higher short term cash flow. There are many other examples similar to this where the tradeoffs are context specific. However, there are some decisions that, without proper analysis and thought, could put the organization’s future at risk.
In small to medium sized businesses, there are many hats worn by its employees. The same day to day noise that gets in the way of reviewing and analyzing financial data for better decision making can cause a business to get too comfortable or lose focus on the vision execution. While the CEO may be in charge of setting the vision and the President, COO, or CEO may be in charge of delivering the vision, the CFO manages the financial impact of these areas. The goal is to maximize the financial value of the CEO’s vision, the President, etc.’s delivery, and correct course when necessary.
Just like the possibility of differing agendas described in the section on capital allocation, incentives and responsibilities may cause conflict needing to be resolved. While the hope is that these scenarios are identified and addressed when the incentives and responsibilities are being defined, even if this conflict resolution is not the CFOs direct responsibility, there are typically financial indicators indicating an internal issue.
For example, there may be a sales initiative at month end that while in a rush to deliver for customers, product quality suffers, and customers refuse to pay causing accounts receivable balances to rise. This scenario must be addressed across the organization to avoid falling into the category of “great work, badly communicated.”