5 Signs your business needs a Fractional CFO

Too many businesses still go without the fundamental infrastructure needed to effectively and efficiently scale a growing business.  There is a sharp distinction between growing and scaling a business.  For a finance professional this work is the equivalent of blocking-and-tackling (or writing HTML & CSS for the programmers) because the work isn’t fun or challenging but without a solid foundation, your odds of success are significantly reduced.

Starting a business requires only something to sell and someone to sell it to. Finance is not a revenue-generating department and therefore not a core elements needed to build a business. However, finance is a value-add role (similar to the terms “scale” and “grow”, “value” and “revenue” are very different things). At the end of the day, I want the value of my business to far exceed the top-line revenue we generate.

Why do most businesses go without this work if it is so important?

The short answer, most businesses fail.

In my experience, businesses go without finance-related work for two reasons, both of which I cannot blame them for:

  1. If you don’t know if something exists how would you know you need it? – cliché, yes, but just as I know nothing about computer engineering why would you expect a computer engineer to know how to implement a prudent compensation plan?
  2. Assuming you did know this work is needed to position the business for long-term success, where would you find qualified and competent talent without hiring someone full-time?

This post begins to identify the factors that go unacknowledged for a majority of businesses even after they become successful. Keep in mind that finance is forward-looking and accounting is focused on what happened in the past.

 1) You do not have a long-term strategic plan for how to scale and ultimately exit the business.

*The end goal for every for-profit business is to have a “liquidity event” at some point (examples of a liquidity event would be getting acquired, selling the business, or an IPO). Without a roadmap guiding you along the way the likelihood of reaching your goal is almost zero.

The great Yogi Berra tells it best “You’ve got to be very careful if you don’t know where you are going because you might not get there.”

2) You have no formal compensation plan in place or legitimate cap table.

*Compensation is a delicate polarizing issue for most employees and unhappy employees ruin businesses. What needs to be considered is that regardless of how you compensate an employee there is no upside to be earned as an employer, only downside risk. Assume you pay someone 50% more than they are worth in the market, give it 2 pay periods and that employee will be accustomed right back to thinking the pay is fair and she is getting paid what she is worth pay someone $5 less than they believe they’re worth and you’ll have a disgruntled employee on your hands spreading his bad attitude around the office. Compensation must be handled prudently for various reasons because scenarios with no true upside potential or only downside risk are combustible.

3) You are not tracking key performance metrics properly (or at all).
KPIs provide both financial and operational insights into the business. While some metrics can be pulled directly from the P& L, many of the operational metrics provide more context to understanding why the numbers turned out the way they did. These metrics include capacity, utilization rates, billings & bookings, headcount, etc.

See: Key Performance Metrics – A CFO’s Perspective

4) Your product or service is priced primarily (or entirely) off of your competitor’s price.

*We’ve all heard it (or thought it ourselves) “I’ll just be cheaper than the competition”. The problem with building a business on this notion is that you don’t know how “cheap” the competition can sell their product and still stay in business. The default answer should always be that they can operate on negative margins much longer than your business can stay solvent trying to compete on price alone. Even if your final price is dictated by the competition, you must understand what encompasses the pro

5) The business intends to raise outside capital in the next 6 – 12 months but only has a bookkeeper or Controller in place.

If your business needs capital today, start looking for it immediately because it will likely take 4-6 months to get a signed term sheet. Regardless of how successful your business may be, there are dozens of events that can happen today that will hinder your ability to ever find funding, primarily revolving around the accounting and cap table making it easy to see why businesses don’t rely solely on a bookkeeper.

The article was written by Adam Jernigan on 08.23.16