If you have never worked in finance, it can be very difficult to understand the differences in roles and responsibilities of individual members of the finance team. As a result it is very easy to assume that you can find one person that can do both the operational and strategic work. But the reality is that these are two very different skillsets, and, in growing businesses, the most appropriate person to lead the strategic finance function is a CFO, and for many businesses that haven’t yet reached a certain level of scale, a fractional CFO.
So what is it that a fractional CFO actually does?
At EmergeOne, we tend to break down the fractional CFO’s role as follows:
Capital Management
CFOs help to manage capital (aka cash!) in the business, indeed we would argue that unless you are at a certain level of revenue, or have raised a significant amount of capital either from investors or lenders, then you might not yet require a CFO, whether they are a fractional CFO or full-time. Managing cash means monitoring the runway of the business (how long the cash in the business will last) based on its average burn (how much cash the business either generates or spends in a given period of time – typically one month). For example, if a business has £1m in the bank and ‘burns’ £100k per month, they would have a runway of 10 months (£1m divided by £100k). Obviously most businesses are not so simplistic, they may have revenue coming in or growing costs and these need to be understood and modeled for the fractional CFO to be able to predict – within reason – the burn and runway.
Capital Allocation
Interlinked with capital management is capital allocation, or where a business should spend their cash. Fractional CFOs will be critical to setting budgets for the business and helping decide when and where to spend money. This might mean making a decision whether to trade off between hiring a new Sales Manager or hiring a new Back-End Engineer. Equally it might be looking at service providers and deciding who will provide the most benefit balanced against the cost of engaging with them. But capital allocation may also include an element of treasury management, knowing when and where to invest ‘spare’ cash in interest bearing deposits or other treasury instruments that can help with the company’s working capital requirements.
Capital Structuring
Fractional CFOs will be intimately involved in looking at the capital stack of the business, that is to say the balance between the amount of debt the business has (how leveraged it is) and how much equity it has. Both of these are incredibly important for a fast growth business, equity does not need to be repaid, however can be more expensive in the longer run than debt because it dilutes ownership. But debt needs to be repaid, and if the business is not generating sufficient free cash flow to repay the debt, this can put the business in a precarious position. This is why it is imperative to have an experience finance professional in the business to understand these complexities, and a fractional CFO is often best placed to do this.
Capital Raising
Clearly, one of the most important roles of a fractional CFO is to assist in the fundraising activities of the business in order to finance the business. This may be as simple as finding working capital solutions like overdrafts or invoice financing to more complex debt products like venture debt or asset financing and, more frequently with high growth businesses, raising investment from venture capital firms, family offices and high net worth individuals, strategic investors or others that might provide capital to help a business scale. They will be involved in building out the financial models to help tell the growth story of the business to show how the lender or investor will make money, in scrutinising and negotiating the loan documents or term sheets to ensure that they are as favourable as possible to the business, responding to due diligence requests and ultimately finalising the funding.
Reporting
One of the key functions of a fractional CFO is to ensure that the business is generating the right information that needs to be reported internally and externally. This includes management accounts on a monthly basis, setting and reporting on key performance indicators (KPIs) and metrics that are critical to understanding the business’ ongoing performance against objectives and reporting on variances in actual financial performance against budgets they will have set. Externally, they will report numbers regularly to investors or the board of directors to ensure that they are appropriately informed and appraised of the progress of the business so that they can make decisions around strategic matters.
What else does a fractional CFO get involved in?
Beyond this, fractional CFOs will get involved in any number of ongoing or recurring projects such as setting up and managing employee share schemes, working on research and development, managing the finance function overall, working on projects that influence pricing or margins or giving input into new products or revenue streams. As a business grows, fractional CFOs may get involved in M&A (mergers and acquisitions) activity, and ultimately may even help the business itself get acquired.
This list of activities that a fractional CFO gets involved in is by no means exhaustive, however fundamentally they are involved in defining, setting and monitoring the financial strategy of the business, working with the finance operations team to ensure that the core numbers are correct and translating this into information that can be used by the company’s senior leadership to make appropriate decisions that will help them to scale the business.