Part One of Three Parts: When to Hire a Fractional (Part-Time) CFO
In the first of a three-part series on hiring 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.
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.
In the second of a three-part series on hiring a fractional (part-time) CFO, Florida CFO Group partners Betsy Bennett, Mark Brown, and Jim Dietz will discuss why to hire a part-time CFO and the differences between interim, full-time, controllers, and part-time CFOs.
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