What is a Fractional CFO? That term has become a household name for financial experts who help small business owners in various industries. However, do we have a concise and complete definition for this type of professional services provider? In this special episode, we break down what the fractional CFO is based on their three unique and primary roles to small business owners. We also give the best definition of a CFO you have probably never heard before.
Episode Transcript
This episode is based on the writing of G3CFO, LLC, and was used with permission for this show.
I’ve never liked the term Fractional CFO. It’s cheesy and gimmicky. When I was introduced to the leadership team at Missouri Life more than a decade ago, I was described as a Fractional CFO. “Sorry, Jim, there is nothing whatsoever fractional about me.”
Unwittingly, my friend created a teachable moment for my soon-to-be client on the three types of CFOs who help other businesses in the financial aspects of their businesses. Within five minutes of that first conversation with the husband-wife team, I knew which of the three roles I would play. I explained the other two roles to them and why those different types of work were not applicable.
As I explain and explore the three types of these CFOs, I will continue to use the term ‘Fractional CFO’ as I perceive that term is becoming sticky (rightly or wrongly) in the minds of small business CEOs.
The Short Version of the Three Types of Fractional CFOs
There are only three types of Fractional CFOs, and I’ll order my list based on how they are most frequently used based on 20+ years in this profession:
- Contractor (typically serves clients 1 to 2 days per week)
- Consultant (scope of work is based on solving one or more problems)
- Coach (ongoing relationship with the CEO and his/her CFO)
About 80% of my work is in the consultant and coach roles. For whatever reason, my work seems to carry me more toward the coaching and mentorship role. I still try to maintain at least one contractor role at any given time as this type of work a) keeps me young and b) has its ways of continually sharpening my saw. Accordingly, I believe I can add value in addressing each of these three roles.
For each type of role, I will include the following sections:
- examples of work
- time and duration
- work location
- cost
For astute CEOs who have worked with interim and temp CFOs, I’m not including that type of CFO in this discussion. That’s an entirely different business model. That’s serving one CEO or business at a time, and the work period can range from three to eighteen months. Long gaps may occur between interim or temp gigs. If you would like to learn more about that particular business model, review the great work done by Interim Execs based in Chicago.
Revisiting the Definition of a CFO
I achieved my so-called fifteen minutes of fame when I was quoted in the book Times Up! by one of my favorite authors and speakers, Ron Baker. Ron loves my definition of a CFO, which goes something like this:
A CFO is financal expert who can easily step into the CEO role for one entire year with no degradation in sales, free cash flow, team dedication and commitment, and value of the business. After that one year, they are glad to step back into their CFO role.Mark Gandy – G3CFO
I love this definition because there is no better way to describe what we do clearly, concisely, and thoroughly.
The gold nugget in this description is that we know the primary customer: the CEO. We know the answers to her questions before they are asked. More importantly, we know the questions before they are asked. That’s why the best CFOs are generally two to three steps ahead of the CEO in their thinking, but we never displace their thinking because CEOs are generally the masters of strategy and big ideas in the business (this is predominantly true in businesses with revenues less than $50 million).
I cannot begin my discussion of the three roles of Fractional CFOs without including this definition because I’ve been witnessing the meltdown of this role since circa 2015. While impossible to pinpoint when this occurred, small-time consultants and mom-and-pop CPA firms started noticing the rise of the Fractional CFO.
Seemingly overnight, everywhere I looked, many professionals started calling themselves fractional CFOs or selling CFO services (what the heck is a CFO service?) Young men and women in their 20s and CPA firms selling tax and QuickBooks services learned a simple marketing concept. The ‘CFO’ name sells. And they anointed themselves part-time and fractional CFOs for hire.
At the risk of sounding harsh and critical, most of these professionals have no holistic understanding of financial leadership and how it intersects with business leadership. Many of these professionals have never held a W2 position in multiple businesses under complex situations as a corporate controller or director of finance.
Including the CFO definition above hopefully separates the wheat from the chaff as I delineate the three distinctive roles of fractional CFOs.
The Contractor
When I started consulting, I devoted 100% of my time to contractor work. Not so coincidentally, this type of Fractional CFO is a 1099 contractor. We have other clients and determine the scope and outcome of work using many of our tools outside the client ERP system. In my opinion, contractors are the linchpins of Fractional CFOs because they provide the financial leadership that is missing in small firms that are growing faster than the capacity of their financial resources.
Contractor Examples of Work
The Fractional CFO generally serves his or her clients two to twelve hours a week. While my client base spans the entire country, I prefer doing contractor work on-site because I want to know everyone in the organization and experience the culture.
Fractional CFOs in the contractor capacity are generally the back office architects regarding software, methodologies, and smart practices (think the 1-minute step to process AP in Intacct and paid through Bill.com as an example).
Fractional CFOs generally own the PRA™ function (PRA™ is G3CFO intellectual property that stands for planning, reporting, and analysis and is far more holistic than its step-cousin FP&A). PRA™ ultimately becomes one of the most powerful strategic tools at the fingertips of the CEO.
The above consumes mostly 80 percent or more of the Fractional CFO time each week as this work is ongoing–the exact type of work a full-time CFO would be doing.
Fractional CFOs generally own the banking and risk management relationships. To provide perspective, I’ve closed on nearly $400 million in debt financing with a close rate of 100%. I also never pay bank fees on these loans. These banking relationships take time, finesse, and proactivity. As critical as the back office work is, Fractional CFOs earn their pay in finding and getting debt capital and managing it wisely.
Risk management work is not easy and requires both art and skill. Fractional CFOs have a couple of secrets for getting up to speed in this oft-forgotten necessary part of the business. Several weeks of the year are gobbled up as a contractor in risk management activities.
I’m probably not the prototypical contractor in this particular role. That’s probably because I never did journal entries in my controllership/CFO W2 positions. I constantly did special projects in marketing, sales, operations, HR, IT, legal, and elsewhere.
Accordingly, the role of contractor Fractional CFO could occasionally be stepping in to support these other business areas. It depends on their experiences and interests.
Contractor Time and Duration
I’ve already mentioned that the contractor Fractional CFO could work as few as two hours a week to as many as twelve. I’ve never done less than four hours weekly, and the most has been one full day per week, and that’s not unusual for CEOs hiring their first Fractional CFO.
Regarding duration, I’m probably the anomaly in the industry. Contractor work needs to end by month three, six, or nine. My goal is to work myself out of a job. My ultimate mission is to install my brand of financial leadership and a financial management system that the CEO can use for staff upgrades and additions.
I don’t want my clients to be dependent on me. I want them to depend on a new way of thinking from a financial leadership perspective. After one month, I know the position or two I want to hire to start managing my frameworks. That mission should be accomplished by month six or nine.
If you are a CEO, I want you to be thinking of the timeline of your new contractor, Fractional CFO. Spell out the deliverables and outcomes you need and want and the point at which they can turn over their work to someone internally. That always needs to be the end game for a contractor Fractional CFO.
Work Location
I’ve done two types of contractor work while I’ve run my CFO practice. I will start with the fun part first.
Starting in 2009, I started implementing the driver-based modeling system Alight Planning, which has been rebranded and sold exclusively to two industry verticals. I had already been subscribing to GoToMeeting since 2004, so I worked remotely during each implementation’s consulting phases, which required much face-to-face time using that tool. Afterward, I could access their servers usually through Remote Desktop (I can’t go deeper as this part is above my head; I just followed the checklist of the IT person giving me access to their systems).
I prefer to be on-site for work requiring traditional financial leadership and ongoing financial management support because I want to know every employee in my client’s company. I want to be a sounding board for the marketing, sales, and ops people.
Accordingly, the contractor’s location of work is contextual. Implementation work of any kind can easily be remote (and should be). For routine work, CFOs who claim they are CFOs for hire should be in the client’s office, manufacturing site, or distribution center. If not, their work is more than likely high-level accounting work that has been branded as Fractional CFO work.
Contractor Cost
I have no earthly idea what contractor Fractional CFOs charge these days. While I have only billed by the hour for two clients in my career (only as a requirement), my math reveals my average contractor rate per day hovers around $3000/day.
I think that’s cheap because I’ve never lost work for what I charge. If you pay someone less, I worry about the quality of the contractor you are hiring.
A good rule of thumb regarding contractor pay is, “Can I 10x this investment?” The concept of 10x is not math. It’s an idea. Put another way, can your business scale or grow faster with a Fractional CFO than being a rugged individualist and doing this work on your own or with your staff? The answer is generally no.
The Consultant
Earlier, I stated that my goal is to work myself out of a job. While that objective comes true in all contractor engagements, the relationship with the CEO rarely ends.
By necessity, my CEOs continue to use me in a consulting capacity to address unique problems and challenges once the contractor work ends.
I needed about three years after the startup of my CFO practice to understand the natural lifecycle of the Fractional CFO (from contractor to consultant to coach). Once I figured this out, I realized I could become a consultant while bypassing the contractor work.
While not a perfect analogy, I view contractor work as minimum wage or entry-level services. This type of work can become mundane and tiring as this Fractional CFO repeatedly solves the same problems.
In the consulting role, that’s not entirely true. While there is generally a financial underpinning to all of my consulting work, the types of work are unique, challenging, and typically one-off.
However, in the following sections, I will do my best to stay in the typical lane of a consultant Fractional CFO.
Consultant Examples of Work
The best way to kickstart this section on work examples is to throw out three words:
- implement
- teach/train
- monitor
Examples of the three verbs above include quarterbacking the implementation of a new ERP solution, being the point person for a new acquisition, hiring a new CFO, opening a new business branch, overhauling the treasury management function, or adopting new or better FP&A methodologies.
I love bank packaging, but it’s a hard service to sell. Yet, bank packaging is something I’m called upon to do frequently when I’ve had a contractor relationship previously with the CFO. If bank packaging is a new term for you, it’s one I don’t hear that often anymore. Bank packaging is the art and skill of acquiring debt financing effectively and without loan fees (ever).
Consultant Time and Duration
Consultant time and duration will depend on the job to be done. ERP selection, implementation, and follow-up training could easily take nine months. Bank packaging could range from four to twelve weeks.
The short and easy answer to the time and duration question is that there is always a beginning, middle, and end. Even if your Fractional CFO does not use contracts or engagement letters, there needs to be a timeline showing the approximate time that will be needed to reach the desired outcome.
Work Location
You have probably noticed my bias toward working on-site with clients. And that comes from a professional who learned the art of working remotely in 2004. I won clients because certain CEOs loved the idea that I could work from anywhere at any time.
While I prefer to be on-site, much consulting work revolving around financial leadership and financial management can be done remotely.
Consultant Cost
Similar to the above, cost is contextual. I bill what the market will bear and then add to it because I can.
If you are seeking an ERP consultant and you’ve been recommended to seek out a certain Fractional CFO with this skillset, you can easily get comparisons to other ERP consultants.
I bill by the project, and the ending cost will always be in the five figures, depending on the nature of the work. Accordingly, it’s hard to say that the consultant’s cost is such-and-such.
However, the cost of the consultant will always be higher than the contractor. That’s why I occasionally say, “I’m the BCG or Bain of CFOs.” That helps to disqualify CEOs who are only tire-kicking to find a low-cost CFO for their project.
The Coach
Bob Myers is the former CEO of RKV Technologies. He once said, “Mark, I get more out of listening to you in 20 minutes than I get out of a full day at Vistage over in St. Louis.” While I appreciated the sentiment, my head didn’t swell too much because his Vistage experience was poor. Still, that comment and numerous others gave me the mirror that reflected that I’m better than average at the coaching relationship.
What is coaching? I’m not sure. But the analyst in me says it’s part priest, part psychologist, part friend, and part sounding board. I’m still not sure. But whatever it is, I like it, and so do the people who send me a monthly ACH.
My oldest client relationship started in 2001. We have a 10/30/60 relationship. About 10 percent of the relationship is contractor work. About 30 percent is consulting, and the remaining 60 percent is coaching.
Once I began to realize what coaching was and where it fell in the life cycle of a Fractional CFO relationship with a client, I decided to parse it out by trying to do something uncommonly well that’s unique or hard to replicate in an industry where others like to steal from one another.
While I don’t see many Fractional CFOs doing coaching in the way I’m describing it, I’ll still provide my perspective on this role in the following sections.
Coaching Examples of Work
Coaching can be broad, or it can be narrow. One area of coaching is focused on specific tactics based on certain skill levels of the coaching Fractional CFO. Other coaching Fractional CFOs I consider greybeards (old, wise, and friendly) take a more holistic approach and don’t guide coaching sessions. Instead, the CEO sets the agenda.
Here are a few examples of coaching in our business:
- Weekly or bi-monthly meetings with CFOs or controllers who are new in their positions (I sell a product called cfoBoard™ for those purposes).
- Weekly or monthly meetings with the CEO to address any topic they want to address (for instance, I sell a product called ceoBoard™ for this very purpose.
- Short-duration engagements where the Fractional CFO is a sounding board for ERP implementations, complex LOC renewals, adding new staff or upgrading the financial back office, acquisitions, divestitures, exit and/or succession planning, and family alignment around finances and mission.
Coaching Time and Duration
I apologize for some of the repetition because I find discussing examples of work without pairing the timing and overall time commitment nearly impossible.
As a short review, coaching can be done weekly, every other week, or monthly. I do not call quarterly meetings with a few of my clients coaching. However, these hourly check-ins do not fit snuggly in the contractor or coaching work above.
The time span of this work is always based on the needs of the CEO. I’ve always believed there are diminishing returns on the value provided to CEOs once these relationships start to surpass one year. That’s because these CEOs probably have management team members starting to catch up with their leadership potential, which gives those CEOs other sounding boards.
However, one coaching relationship that started as contractor work in 2009 comes to mind. Beginning around 2011, I became the coach, and I still am. This lonely example proves that the coaching CFO does not determine value; the CEO does. Additionally, the coach doesn’t specify the length of the engagement; the CEO does.
For short engagements with some of the examples above, the coaching CFO has enough experience and discernment to suggest a timeframe such as four, eight, or twelve weeks. Once that period expires, coaching could continue on a monthly meeting cadence.
Work Location
I will be brief. Remote, in most cases.
100% of my coaching work is remote, with a few exceptions. I mentioned a client above where my work is allocated over a 10/30/60 split among the three Fractional CFO roles. In that case, the coaching is in person because we live in the same city.
However, remote is the norm for relationships where 100% of the work is coaching unless the clients are in the same city. My clients span the entire country, so the Zoom meetings are expected and are effective. I prefer a face-to-face regular cadence if 100% of my coaching clients are in Columbia, Missouri.
I respond with a question for younger Fractional CFOs who ask about the ‘where’ question when clients are in the same city where they live. “Will the CEO/CFO relationship be better over Zoom or in person?” The CEO will have a preference, too, and her decision trumps your opinion.
Coaching Cost
Remember, we’re talking about CFO coaches, not partners at McKinsey or BCG. A good rule of thumb is roughly $1,000/week.
I’ve been harsh when I use the term mom-and-pop CPA firms. These are the firms claiming they provide CFO services. Do not be surprised when their coaching costs only hundreds of dollars weekly. Most have never served in multiple CFO positions with unique experiences.
However, please never buy a coach based on cost. Focus on the outcomes first, then determine if your favorite prospective CFO coach is a financial fit.
Here’s a tip. If you cannot afford the $1,500/week coach, ask him/her for alternate suggestions. The best will have two or three candidates you can consider.
Who Does the Work?
I’ve omitted an essential attribute in the three Fractional CFO roles above. Who performs the work? This answer is self-evident, but I’m not taking any chances. Here’s the simple breakdown:
| Fractional CFO | Who Does the Work |
|---|---|
| Contractor | Fractional CFO |
| Consultant | Fractional CFO and Client |
| Coach | Client |
In many cases, the Fractional CFO will use internal staff to support contractor work, but they will still be very hands-on during the engagement.
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