The business value of fractional CFOs

Allan Tan by Allan Tan

 December 6, 2022

While it is common to find a chief finance officer (CFO) helming a large or multinational organisation, the costs associated with having one in-house can be a hurdle for smaller organisations. According to payscale, the average base salary of a CFO in Hong Kong is HK$1,351,820 per year.

A CFO in Hong Kong can gross as much as HK$2 million when you include bonuses and profit sharing. It is not inconceivable to think this figure could be higher depending on the industry, the opportunities, and other perks. The pay package scales with the years of experience.

Justifying the pay package
The modern-day CFO is no longer just the custodian of a company’s financial operations providing leadership and focus to accounting and finance departments. In addition to ensuring the finance team operates efficiently, the CFO is also expected to ensure the company complies with applicable regulations and adheres to company policies.

CFOs also oversee other departments where it involves purchasing, pricing, investments, tax, debt management, accounts payables and receivables. It can be summed up that where it involves finance, the CFO is there in the thick of things. Next to the CEO, the CFO is the most visible head of an organisation, involved in research and audits to ensure that all departments follow regulatory guidelines.

While the CFO is not expected to have the same technical skill level as the CIO or CTO, he or she should nonetheless have some computing skills, with advanced knowledge of accounting, budgeting and finances. Because he or she is public-facing, a CFO is expected to have strong presentation and public speaking skills.

Hiring a CFO when money is the problem
So given the capabilities and responsibilities, it is easy to conclude that a CFO is a necessary member of the leadership team. But what happens when a business cannot afford a CFO?

Fractional is defined as “relating to or expressed as a fraction, especially a fraction less than one.”

Earlier, FutureCFO spoke to Chris Ortega, CEO of Fresh FP&A, on the value proposition of fractional FP&A. This time around, we reached out to Jeremy P.M. Gray, owner of Singapore-based 3 Continents Consulting, on the business value of bringing in a fractional CFO.

What follows is a dialogue on the rationale for hiring a fractional CFO, as well as tips on how to recruit one.

Why hire a fractional CFO? With Jeremy P.M. Gray

You have been in business for a few years and are established, but something does not seem quite right. Maybe your company is not growing as rapidly as it has in the past, possibly the profitability is different from what it was, or the business growth is not translating into money in the bank. You ask your accountant, “Can you tell me what is happening in my business?” But she cannot provide an explanation. Your team is also at a loss to offer ideas.

You have landed a large contract, but do you have the cash to see it through?

Should you invest in automation? What is the payback? How do you manage employees who will be impacted if you go ahead?

If you face these or similar situations, it is time to consider hiring a fractional CFO.

What is a fractional CFO?
Most fractional CFOs have cut their teeth working for large or multinational corporations, then honed their small business skills working with entrepreneurs and SMEs.

A fractional CFO may be working with several clients simultaneously, enabling them to charge each client only a fraction of the cost of a full-time CFO. Typically, their monthly rates are like the cost of hiring a junior employee, but they can deliver so much more.

How can a fractional CFO help?
Understanding your accounts. Most accountants can produce basic financial statements such as a profit and loss and a balance sheet. They may not, however, be able to interpret what these statements are saying about your business.

You may need an accurate cash flow forecast. Cash is the lifeblood of your company; without cash, your business closes. A fractional CFO can analyse trends, dive deeper into your accounts to explain what is going well and identify areas that need your attention.

Planning your future: A fractional CFO will be skilled in developing business plans, budgets, and forecasts so you can plan your future. What will a 4% price rise mean for your business? What are the proper staffing levels? What growth rate should you target? And how will you get there?

Provide a solid foundation: How much growth can your business sustain without getting into difficulties? If extra cash is needed, a fractional CFO can develop funding proposals for a bank or external investors.

Identify opportunities for growth or control costs: Given their years of experience, a fractional CFO can quickly help you see areas ripe for growth. Or to identify ways to reduce your costs. Focusing on improving your bottom line is what they do best.

Speed up decision-making: By quickly assessing the available options and their relative pros and cons, a fractional CFO can help you understand the situation. Enabling you to make the right decision faster and with greater confidence.

Handling the unusual: Sometimes, something out of the ordinary occurs. You receive an offer to buy your business, there is an opportunity to grow overseas, or your supply chain has been disrupted. There will be a CFO out there who has seen that, done that. They can guide you on how to proceed and see the project to a successful conclusion.

Upskill your employees: An excellent fractional CFO will pass on their knowledge to your employees. It could help your finance leader to become your full-time CFO at a later date.

What a Fractional CFO is not: A fractional CFO is not a CPA, Controller, or bookkeeper. These roles are essential, but they record the past. A fractional CFO looks to the future. They should be able to understand all aspects of such functions, but it is not cost-effective to use their time to be hands-on.

How to find the right fractional CFO?
In a supporting role: Most important is that their personality fits with you and your team. If there are no rapport things will not work out well. Ensure you are clear on your expectations for the role and ask the candidate about their experience. How will this help you achieve your expectations?

Prior industry experience can be helpful, but it is not essential. Most fractional CFOs can translate their expertise in one industry to a new environment.

Project-based hiring: If you are hiring a fractional CFO for a particular project, such as expanding into a new geographic market or a significant capital project, look for relevant experience. Have they done this before? What was the outcome?

As such projects extend over a longer period, make sure they can be available for the anticipated project duration.

How much does a fractional CFO cost?
Charges will vary based on the fractional CFO’s experience the nature of the assignment and its duration. An experienced fractional CFOs will not charge by the hour.

There is a natural conflict of interest with the client, who wants the assignment completed expeditiously and the money the CFO can earn by taking that little bit longer. It is more usual to pay the CFO a retainer, allowing you assess to him or her as needed to ensure the project is done correctly.

A typical retainer would be $5,000 to $7,500 per month. As there are no payroll taxes, sick pay or holiday pay a fractional CFO will not cost you any more than a junior employee.

Decades of experience at novice pricing: A fractional CFO brings to their client a wealth of expertise across many aspects of business without imposing high costs on a company making the transition from start-up to a successful business.

The client gets access to outstanding support, advice, and business acumen. The fractional CFO gets the satisfaction of seeing another client achieve the success the client desires.