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WHEN TO HIRE A FRACTIONAL (PART-TIME) CFO


Florida CFO Group partners Betsy Bennett, Mark Brown, and Jim Dietz discuss the role of a part-time CFO and when and if you should hire one.

When to hire a fractional (part-time) CFO

Why should an entrepreneur consider hiring a fractional (part-time) CFO?

Mark: An entrepreneur with a small company is the head of sales, operations, marketing, research and development, HR, and the CEO, COO, and CFO. And that's fine in the beginning. Then as the company grows it becomes more complex and you start adding people. Some positions, such as VPs of sales and operations are harder to do on a part-time basis and tend to be full-time. As growth continues, it reaches a point where a full-time CFO is needed to handle some of the financial aspects.

But there's this transition period, when the role of the CFO goes from being 10 percent of one person’s time to a large time commitment, but it just doesn’t make economic sense to hire an expensive CFO. If you do hire a full-time CFO too early, he or she is stuck doing controller and bookkeeping work to fill their time. So, you're overpaying somebody to get their skill set. If you bring in a part-time CFO to focus on actual work that needs to be done, you can save a tremendous amount of money.

Betsy: As fractional or part-time CFOs we're really good at leveraging internal or outsourced staff. Whether a bookkeeper, an accountant, or an accounting manager, part of our role is to make sure that we're leveraging the full-time staff to the extent possible. That way we're optimizing the amount of effort invested by our role, so that the entrepreneur is getting full value for what they’re paying.

Jim: Most entrepreneurs are not financially oriented. They're focused on market segments, on products, on customer and vendor relationships. And sometimes the entrepreneur will think that having basic bookkeeping reports from an in-house or outsourced bookkeeper is sufficient. In reality, there needs to be a strategic, forward looking financial planning view just like he or she has with regard to the products, markets and relationships.

This comes from what I call a strategic CFO, who focuses on what is needed to accomplish the vision of the CEO. Unlike junior staff, when the part-time CFO partners with the entrepreneur in visioning the future, determining what resources are required establishing financially orienting milestones, it substantially drives the growth of the company.

When should an entrepreneur consider hiring a fractional (part-time) CFO?

Betsy: There’s usually pain points that are causing the entrepreneur to seek assistance. Typically, they've grown very quickly, and they've lost sight of the difference between the historical financial perspective verses the forward-looking vision. And they're frustrated because they realize that history is history, but usually the internal staff doesn’t have the skill set to get them from there. So, they need help painting the picture of what the future will look like.

Mark: The pain point or trigger can be very specific. I was recently working with an entrepreneur who had grown her company from a home office to almost $10 million of sales and over 100 employees. And although she understood accounting, she didn’t understand how to go about getting financing. She had a relatively small line of credit and she was considering selling the business because she was paranoid that if she lost a customer, she couldn’t make payroll and would go bankrupt overnight.

I agreed to come in for just a day a week and worked with her to assess the situation, then identify the bankers that I thought would be a good fit. We increased her line of credit by a factor of ten. Her outlook went from believing that she needed to sell her business to focusing back on growing it. It transformed her mentality from desperation to back on the gas pedal full speed.

Betsy: That's a good example. I've also been brought in when things are going downhill rapidly and they need someone with experience for a turnaround type situation.

Jim: A lot of times companies start out with limited budgets and their first goal is to grow to where they're meeting payroll and they're making a bit of money that they can take out of business, i.e. a paycheck for the owner. So, they're trying very hard not to spend those additional dollars. But as opportunities and new areas of business arise they may take on some private equity or early-stage money that comes with requirements they may not fully understand or be able to meet. And there can be changes in competitors or market economics that put pressure on leveraged situations - and I say leveraged from both a financial perspective and from the perspective where people are stretched thin. Often these events combine to cause a stumble and the need for outside financial guidance.

Suddenly the entrepreneur has run into some real difficulty and needs to move from an informal seat-of-the-pants approach to a more formalized financial approach. This is where we excel, planning for scenarios that are not desired, but could occur. We do a lot of contingency planning and a lot of resolution of issues to get margins back to where they should be, with profitability restored.

Betsy: I find that as companies achieve high growth on the top line, that the control over their expenses gets looser. So that when that growth trajectory starts flattening out, the expense side still has an upward trajectory to it. As they are experiencing 20 - 25 percent plus growth, the expenses really start getting out of line. And then when it flattens out, there's not that control feature there because they haven’t needed the full-time CFO. So, they've got a controller or accounting manager whose real expertise is recording what has happened correctly and accurately, and doing all the compliance aspects of history. Rather than an experienced CFO who will take the current financials and business conditions and prepare scenarios that present the potential outlook for the company going forward. Usually we're brought in later than what would have been optimal -- often by six months or more based on my experience.

What is the Role of a Part Time CFO?

Mark: A good part-time CFO has been a successful controller, accounting manager, and accountant. But what I find is the most important part of my role as a part-time CFO - and I've been doing this for 20 years - is being a partner with the entrepreneur. About a third of my role involves being the strategic partner to the entrepreneur or CEO. Another third of my role is to be the mentor for the next most senior full-time accounting person. And the final third of my time is spent directly on the immediate problem or problems facing the company.

When you come in as a fully experienced CFO, you can tackle whatever happens to be the problem. It could be job costing or financial projections. Or dealing with off-the-wall problems with HR. Or coming up with auditors and CPAs with tax returns. It's solving the problems immediately confronting the business -- filling in the gaps -- I have found to be a big piece of the part-time CFO role.

Betsy: I call it plugging the holes. And in the 15 years I’ve been doing this it’s become much more common. But the crux of why a company needs it is still the same. A lot of entrepreneurs think that a CFO is an all or nothing proposition and they immediately conclude that they can't afford a true CFO because of the cost. So, one of the things we as a CFO group want to make sure that the business community understands is it's not an all or nothing proposition. There is a service offering that we provide as a part-time or fractional CFO to get you the right level of that expertise and to size it according to your needs.

Jim: I'd underscore that we act as a counselor to the entrepreneur because oftentimes, that's a very lonely position. They don’t have other professionals or senior level people to speak with; often they've assembled a team of doers and they're the rain maker. They have no other rain makers to bounce ideas off. Being the partner of a CEO is not just helping them deal with financials -- it's also helping them think through the business decisions they're making: sales channels, product pricing, distribution, supply chain, etc.

It's like Mark said, in mentoring the controller function or the accounting function and filling the gaps we get to that point we become a ready resource. I've got clients that need me every week, as well as some that only need me when they need me. I'll call up and we'll discuss their concerns and decide if they need me to come in this week or should we establish a date in the future? So, it becomes very affordable because once the owner understands more fully what a part time CFO brings to the table, they only pay for what they need and that's really important.

Mark: The flexibility you're talking about is key to the value that I think we provide as part time CFOs. Frequently a typical engagement starts that I come in a day a week. As a clear picture emerges and the entrepreneur decides to make some substantial changes my time may go up to three days a week for a period of time. Then that project is done, so we go back to a day a week. As you start to build up the team, through mentoring or recruiting I can go from a day a week to a day every other week. And eventually the client graduates to having a full-time solution and they don’t need me anymore.

I was brought in to a company that had fired their CFO and was having trouble hiring a replacement because the job was half controller, half CFO. So, I came in on a part-time basis to cover the CFO role and hire the replacement. It required me in their offices up to three days a week to start and reduced to a day every other week over a sixth month period. I hired a controller who had CFO potential, got him in place, trained him, and helped mentor him so he could fulfill the role of CFO.

Betsy: That's the fun of what we do there - the mentoring and the training. When we bring someone in that has the potential to ascend into a true CFO role.

Mark: One of the things you have to be careful of when you hire a part-time CFO is they have the mentality. If you have a full-time mentality, it's hard to come in a day a week and be productive. I've had times when I've been a CFO for three different companies. I have to be fully engaged and productive for each, while being able to switch back and forth with different problem sets, solutions, and procedures, and keep things going while I’m not there. It's a different skill set that I've had to learn over the years.

Betsy: We're very good at delegating when we're in the part-time world.

Mark: That's right. That's where the mentoring comes in. As you said, leveraging the existing staff and filling in the gaps as needed. In order for it to work, you need somebody five days a week who is going to see things through -- especially if you're only doing a day a week.

Jim: Sometimes we find that the person we're delegating to or attempting to mentor is just not the right person. In those cases, I’ve helped the company understand what their needs are and conduct a search and find the best person. So, getting the right person in place becomes the precursor to the mentoring and the delegation.

Mark: I have found that to be true about half the time -- that I've had to replace the top full-time person, whether they're accounting manager or controller. That's the challenge: if the entrepreneur or CEO is trying to hire a controller without really any understanding of what's required and the personality that's needed. Ideally, you're mentoring that person to become the CFO. That's plan A: to have the client graduate to the next level, to grow into a full-time CFO. I've worked through a lot of turnarounds. The most fun is when you get them back into growth and then accelerate the growth so that they really require a full-time CFO.

What's the difference between a full-time and a part-time CFO?

Betsy: As part-time or fractional CFOs, we work ourselves out of a job, don’t we Mark?

Mark: My objective is to stop being needed; to work with my clients so they grow to the point where they really need the full-time solution. I try to stay ahead of the client so I'm decreasing my time before the client asks.

Betsy: I had a client that I started on a very routine basis and then as we grew and we filled out the internal team, I kept going less and less. Finally, they kept me involved in quarterly executive management meetings so that I could stay up to speed on where they were going strategically. I had a gap of three years with this client before they needed me to help them with a transaction. But then I was able to get up to speed very quickly to assist with that transaction.

Jim: That's really the best... When I think about a client, it's a client that wants somebody to truly understand what their needs are and who can help them now and then over a period of years – from start-up to exit. If exit planning becomes relevant -- a lot of times an entrepreneur isn't thinking about an exit process and it needs to be suggested to them -- especially if they're of a certain age and they don’t have a clear exit strategy. We can then lead the preparations.

Mark: We essentially become a free insurance policy. Even when I'm working with a client a day a week, I’ll take their phone calls and emails during off hours, so they really have all the resources as a full-time person from that perspective.

Betsy: And that's the way I like it. I just had lunch last Friday with a client, where we sold their business in 2009 and now he's looking at another business.

What is that the principal difference between a controller and a CFO?

Betsy: I view a controller as being the recorder of what has happened. They have all the internal controls around finance and accounting. The CFO takes that historical information and moves it forward strategically to show the potential future of the business.

Mark: The controller tends to focus on “what happened” questions and the CFO focuses on the "why it will happen" questions and what to do about it.

Jim: That's exactly right. And we often step into roles where an accounting manager or controller has been asked to assume the role of chief financial officer because they are the most senior financial person in the company at the time. And that can take a very, very good accounting manager or controller out of their depth and cause them to falter.

The best solution is to return that person to their expertise and bring in a part-time CFO who can interpret those financial reports that had been so well prepared by the controller or accounting manager. To sit with the owner, thoroughly understand what the goals of the business are, understand where the business is, and help him or her decide how to achieve their vision.

Why hire a part-time CFO instead of full-time?

Mark: We can be more direct and less concerned with the politics of the business because we're part-time and we expect the engagement to eventually end without having any real financial impact on ourselves. We're able to tell the client what they don’t want to necessarily hear. Or if the right decision is to sell the company or to do something similar, we're not worried about our job security. We're able to make those decisions without there being a conflict between what's in the best interest of the company and the entrepreneur and what's in our best interest.

Jim: The cost of CFO compensation is really important because I've had a couple of clients that thought they needed a CFO and asked me to walk them through the process. I made sure they understood what an experienced CFO does to see if that's what they’re really looking for. Once we determined that they needed the skill set, we discussed their budget and the compensation level of those deeply experienced CFOs that were going to be able to give them the leadership they needed. Very often the full-time solution does not line up with the budget. But by engaging the part-time CFO role with that highly experienced person that's strategically oriented, they're able to have that expertise in terms of the quantity they need and also in terms of the dollar budget that they can afford.

Mark: The approach we take as a part time or fractional CFO is completely different than hiring a full-time person. Typically, if you hire a senior executive, they'll spend the first two months getting to know the business. And then they're slowly starting to make changes. Well, two months is about 40 work days and if you're doing a day a week, that's almost a year before you make any changes. When we come in we're having to be productive and adding value right away. In the first month, I typically have solutions underway to address specific problems and/or made substantial changes to processes and procedures. It's a different approach: go in and figure out what the problems are and then fix them. Not sitting back and just studying them.

Betsy: That's a really good point. In our group we're all truly seasoned CFOs. We also have entrepreneurial sides to us that drew us into doing the part-time CFO work for entrepreneurs. We find many folks in the market who call themselves CFOs that we view more as controllers. They don’t bring the vision or a global perspective that we require of our partners. If a company's in the market for a part-time CFO, they need to make sure that they truly have a CFO and not more of a historically focused individual who doesn’t have the experience to lead. I've been engaged by clients who've had a CFO who wasn’t up to the task. Particularly in growing entrepreneurial companies, sometimes they'll elevate title because they can't elevate compensation as quickly.

Is an "interim CFO" and "part-time CFO" the same thing?

Betsy: To me, interim means you're filling a gap and the gap is usually that the incumbent has left and the company is starting a search, which usually takes three or four months.

True interim assignments tend to be in larger companies. We've got a partner right now that's in a true interim assignment with a public company engaged in a search for a successor CFO. So, you know how to fill the seat, it's a full-time seat typically. And you'll be there probably three or four months, maybe six months.

Mark: I did a two-year interim assignment. It was a situation where a board member brought me in. The CFO had resigned and I had to do a turnaround that the CEO didn’t know was needed, as well as hiring my replacement. So, they can go longer depending upon the situation.

The difference between interim, long-term and fractional/part-time are the mindsets. They’re not necessarily one or the other. I have had interim part-time assignments, interim full-time assignments. I've had long-term part-time and long-term full-time.

Being interim just means you're coming in with the expectation that you're going to be getting a replacement. It's not intended to be long-term. The part-time or fractional just means you're not on the payroll full-time. It's less than full-time. So, you're usually leveraging multiple clients at the same time.

Jim: I think part-time or fractional is more of a long-term engagement. Although, it can be a shorter term if the company's growing very quickly. And then it's certainly possible for the part-time CFO to be asked to become the interim CFO and that interim role can last longer. It really depends on the situation and the fit for us. With some clients it would not be the best use of my time to be their full-time CFO. The complexity and sophistication of the business does not require me full-time. But it makes a lot of sense for me to be their part-time CFO.

Interim assignments tend to be of relatively short duration in stable companies. I've been called in to be an interim CFO with the expectation that it was to be very short-term until I could hire someone. However, once in, I found so many issues that I went from part-time to full-time interim. It ended up that from the day I came in until the day we sold to a public company was about 15 months.

What are the indicators for a business owner that a part-time CFO is needed?

Mark: It can be sudden – such as when an entrepreneur is not able to get the financing they wanted, or the financer is threatening to pull their credit. Or, it can be more gradual. For example, when the business is small, the entrepreneur has his or her finger on the pulse of everything that's going on. They don’t need financial reporting to run the business. But with growth, that connection becomes weaker and weaker to where they start to feel like they're flying blind. So, it's about to get scarier and scarier for some of the decisions they're making and allocating resources.

Jim: Entrepreneurs start out by managing simply by walking around and seeing what each person is doing, having a direct and personal relationship with each employee. With the growing complexity of a business there may be too much for the entrepreneur to manage. That can lead to the CEO being distracted by the worries about everything they have to do and how they have no one to help them. In my experience, that's when clients come to me, because they need somebody to help them as things become overwhelming. It goes beyond the relatively informal and direct personal means of management they've relied on to get to that point.

Betsy: Those are good points. It can be financing, customer profitability, needing an exit strategy – any of a number of crisis or pain points. I worked with a service company and they had eight primary customers in their service division, but they didn’t know what, if any, profitability these major customers contributed to their bottom line.

This a situation where the top internal financial person was called the CFO and was in reality an accounting supervisor. So, they didn’t have the skill set to do that type of analysis. We came in and quickly recast the way their books were being compiled so they supported a profitability reporting structure. So, the pain point could be any of the specialties of a CFO that intersects with when the entrepreneur recognizes that they're flying blind and knows there's a better way.

Mark: What I've found is there's usually a half a dozen pain points, but there's one that becomes the tipping point when the entrepreneur says to themselves, “I have to do something about this.” So, when I sit down with a prospect, very seldom do I walk away until I understand what needs to get done. Then I can show them that their situation is not unique. Almost every other entrepreneur has gone through a similar situation. It's just a matter of knowing what to do and going and doing it. It's not magic, per se. It's not reinventing the wheel. It's just, this is what the problem is, this is how we go solve it.

Jim: That's exactly right. I've been in situations where before I can even thank them for having me in, the prospect presents so many issues that it's almost like drinking from a firehouse. We obviously need to prioritize, but sometimes they’ve held back so long and the pain points are so severe that when they find someone that can help them, they just unburden.

What are the most important considerations for an entrepreneur or emerging company in hiring a part-time CFO?

Betsy: The skill set. You have to make sure the person you’re hiring is truly a part-time CFO. Not someone who's between jobs and trying to fill in. Or not truly a CFO at all.

Then the cultural fit; that they think they can work with the part-time CFO. And you discover that just like you do in a regular hiring interview. By getting to know the person and making sure that it looks like you have the right values and the same vision. I've walked into prospects where I knew we would not be a good fit long-term because our views on how to build a company weren't well aligned.

Jim: The question from our perspective is how do we select a client that’s a good fit. Our client -- the owner, the entrepreneur, the CEO -- has to be open and willing to share details. Interviews where the prospective client really didn’t want to share a whole lot of information are a sign of a poor fit.

There must be a frankness, an openness, a transparency with the entrepreneur for us to really add value. That's the key. We are by nature transparent, open, and frank. Mark said it very well, we're not that worried about job security. In fact, we work to set things up so that there's not an ongoing need. But both parties have to be very frank in this process. And so, the owner, before engaging in the process, should really think about if they’re open to bringing in someone to truly be their partner in running the business. That's important to making the whole relationship work and to me is the most important determinant to whether the fit is right.

Mark: I typically do a two- to four-hour initial engagement at no charge, where I come into the company and meet with the people. What I'm looking for is a very tangible value-add that I can bring to the organization that far outweighs my fee. And before I take an engagement I want to see the prospective client make that same judgment. Then we can agree upon what needs to be done and how we might solve that problem.

Is it the Entrepreneur’s Goal to Improve Process and Procedures or to Change Culture?

Betsy: One of the key elements of a good fit is that the client needs to be motivated to change. And I think all of us in the CFO group -- we're not maintenance CFOs. We're all highly focused on change and continuous improvement methodology to improve processes and productivity.

Mark: Very seldom can we change the culture because that's usually set by the entrepreneur and changing culture is tough. I can change the approach with an accounting department and the line business that the CEO or entrepreneur wants. But I don’t remember ever actually changing the culture. The owner needs a new mindset in order to do that.

Betsy: I've had a case where the entrepreneur wasn't seeing was how he was impacting the culture; both positively and negatively. And I think my role as a part-time CFO without the filter of a full-time person enabled me to give him visibility into what he was doing that was permeating the organization and impacting him financially.

Mark: One of the roles that I've been asked to fill is when the senior people to use me as the mouth piece for things that they want the owner or the CEO to know. They’re worried about job security, but I'm not. I can tell the CEO what they need to know without exposing the source and that they wouldn’t have otherwise known.

Jim: That's an excellent point. We're not so worried and shrinking from the ramifications of what we might say. We have to be a voice of clarity; we can be very straightforward and carry those messages that others are afraid to.

Betsy: I find that entrepreneurs tend to value that very much. Almost as much, and maybe even more so, in some situations than our finance expertise. We're the sounding board for the CEO, as well as for the other people in the organization, when they want to filter out things that they're afraid to say directly. I guess you'd say we act as a catalyst, providing that safe place, that haven.

Mark: When a business first starts out, it can be extremely aggressive because it really has nothing to lose. As a company grows, it has more and more to lose if things go south. One of the things you'll see as a company grows, CEOs and entrepreneurs get more conservative in what they're doing because they have to play the role of the CFO -- the cautious person looking at all the ramifications of their actions.

So, that's a balancing act. As a part-time CFO, one of the roles I perform is to keep the CEO from having to play both roles, which allows them to be more aggressive and grow the business. That's a key part of this part-time role, to have somebody there that enables them to go run their business very aggressively.

Betsy: You can see the relief when the entrepreneur is freed up to be themselves.

Final thoughts on hiring a part-time CFO:

Mark: As entrepreneurs, if you're not sleeping well at night, you don’t necessarily have to lose sleep. You can do something about it.

Betsy: I would tell an entrepreneur once they understand the option of a part-time CFO, to make sure that they truly have someone fulfilling the CFO role on a part-time basis and not someone that's between jobs and just looking for career filler. Because as Mark said, we come into the job and we react much more quickly than the typical full-time CFO. Just make sure that you understand what the part-time CFO offering does and make sure you get the right person to fulfill it.

Jim: Part-time or fractional CFOs must be strategically minded. They can’t be controllers that have been promoted to chief financial officers just because of their long tenure. We are not that at all. We are strategically minded. We're strategically focused. We can be of great help and we can bring the insights from working with start-ups and very large companies.

Because we’re part-time, we’re affordable and we're available for the specific, prioritized needs of the company. Entrepreneurs are not excluded from the expertise they need by the expense of hiring a full-time financial executive. We bring the expertise of companies that have overcome similar challenges to their company.

About the Florida CFO Group

Founded in 2010 the Florida CFO Group provides CFO services and support in raising growth capital, mergers and acquisitions, recapitalization, or structuring to meet ongoing opportunities to Florida's growth companies. The Florida CFO Group's partners have been providing CFO services on a fractional share (part-time) or interim basis over the past decade and specialize in cost-effective financial reporting, budgeting, forecasting, controls and financial management. Each embodies a wealth of financial skills as well as experience in servicing clients in a consultative CFO manner across markets including agriculture, construction and development, government contracting, healthcare, manufacturing, not-for-profit, private equity, real estate, technology, and wholesale and distribution. For more information on the Florida CFO Group and its partners, please visit the company's website at www.floridacfogroup.com.

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Call: 877-352-2367

Testimonial

"Jim was diligent, insightful and supportive throughout a process that after several months led to a decision to seek a buyer for the Company. Jim played a 'quarterback' role in the sale process, including building the virtual data room, working closely with the bidders and the ultimate buyer, while providing information to transaction counsel and the Company Board in order to complete the transaction."
Jerry Starkey
CEO, RE Partners International, LLC

Testimonial

"Simply put, Mark helped me save my company. It has been over 12 years since I first met Mark. At the time I was a budding entrepreneur that had grown my software company to about $10M in revenue and then hit a brick wall. Fortunately, one of my board members knew Mark and in a very short time Mark was able to unravel our financial mess and recommend a course of action to keep us alive."
George R. Linscott, President/CEO, Visicon Technologies, Inc.

Testimonial

"Betsy came to IC Intracom highly recommended by several people, and stepped into a difficult position during a financial turnaround. She exceeded all expectations as CFO (later made COO), as she steadfastly worked through capitalization of the company and enactment of cost controls during the turnaround. She meshed well with all team members and was able to help guide the company using her winning interpersonal effectiveness. I highly recommend Betsy for the top Finance job in any company. Given the opportunity, I would be proud to work alongside Besty again, including in my current or future assignments."
Don Barry, The ACCEL Performance Group

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