5 Benefits of Working with a Fractional CFO

Bookkeeping is a fantastic start to improving your business. Better financial tracking in your company often leads to better practices and longevity.

Of the main reasons businesses flounder, monetary issues and poor management (including managing finances) are typically at the top of the list. To hedge against these pitfalls, many startups and small businesses get help with accounting, through bookkeeping and other basic services.

But these services are only the beginning, when it comes to really understanding, preparing and positioning your organization for the future. If you really want to optimize, that takes the help of an experienced Chief Financial Officer (CFO). And one of the easiest and most affordable options is to leverage a “fractional CFO.”

A fractional CFO is an individual, or service, who helps more than one company fill this executive role. So, startups and SMBs get the benefit of having a CFO without the weight of a full-time salary.

But is it worthwhile? It is, if you know what you’re looking to achieve.

A CFOs value comes in several layers. This resource is to highlight 5 specific compounding benefits of hiring a fractional CFO service.

1. Cash Flow Optimization

Knowing if you have a net positive or negative cash flow is as easy as reading a report. A qualified CFO reads the cash flow statement, assesses needs and provides advice to optimize every penny, month-to-month and quarter-to-quarter.

Here are 5 ways a fractional CFO may better your cash flow situation.

  • Accounts payable and receivable: Getting paid on time and paying your bills are the biggest factors affecting your cash flow. Better handle them and your situation is likely to improve.
  • Tax planning:How you pay taxes and leverage the tax code are things best left to a professional. Knowing these things helps avoid unnecessary fees while saving more money.
  • Overhead assessment:Utilities, expenses and other outgoing bills can “nickle and dime” your business to poor cash flow. A regular assessment often leads to savings and a tidy expense report.
  • Marketing and sales data:This is covered in more detail further down, but how you spend money to make money is often a big draw on your cash flow health.
  • Forecasting and budgeting:CFOs use past data and your business’ current trajectory to accurately forecast while better budgeting. You’ll both save money while not being caught off guard when your business needs new staff or equipment.

2. Key Performance Indicators

You can’t manage what you don’t measure. Most successful companies have goals. You may even have a plan on how you’re going to reach those objectives. But to really gauge the effectiveness of your efforts, you need to track the right metrics.

These key performance indicators (KPIs) allow you to see how well the engine is running on the way to your objectives. A fractional CFO (sometimes called a “virtual CFO”) helps come up with KPIs best aligned with goals. Then they track that performance while compiling the data into reports for the management team.

4 KPI categories to consider with your CFO service.

  • Financial metrics(actual vs. budget/forecast, this month/year vs. last year, runway, cash on hand)
  • Marketing metrics(web traffic, inbound leads, Ad spend metrics)
  • Sales metrics(close won/lost rate, customer acquisition cost, lifetime value)
  • Staff metrics(revenue/profit per employee, headcount, cost of training/onboarding)

3. Growth Strategy

Once the cash flow situation is optimized and the best metrics are compiled into your financial dashboard, it’s time to really leverage your CFO service. Growth takes resources, planning and (as discussed) tracking. Knowing where you stand on each of these categories often highlights the best path for growth in your company.

It’s time for a specific example for an ecommerce business.

Company goal:To grow revenue 10% per quarter, beginning next quarter

Current sales:$200,000/quarter

That’s the goal. It’s specific. One of the primary ways an ecommerce would achieve the goal would be to spend more on ad channels. And while that strategy may get the job done, is it the most effective use of funds?

Assume a CFO service tracks certain metrics, likereturn on ad spend (ROAS), across the advertising channels. After comparing the available cash-on-hand and projected cash flow over the next 3 months, they determine:

  • Using Google adwords would likely put a strain on cash flow. While likely achieving the sales target, the return on investment would equal little value for profitability.
  • Facebook ads offer a higher ROAS and given the available size of our target audience and cost of ads, it’s likely a better choice to reach our goal.

Growth strategy: Increase ad spend on Facebook while possibly reducing investment in Adwords (or testing/tweaking the ad campaigns there).

Key takeaway:Know the current financial situation, pair that with the right metrics. These allow you (and your CFO service) to avoid pitfalls, improve performance and meet objectives.

4. Profitability Analysis

Digging deeper into another layer of benefits provided by a CFO service, you’ll find the possibility for improved profitability. The example above, of better spending advertising funds would likely improve the margins in the ecommerce example. Which leads to the point, it’s actually difficult to separate the benefits of a CFO.

One leads to another like a domino effect.

  • Keep good tabs on your cash flow, you’ll likely see where to improve it and better utilize monies.
  • Track the best KPIs and you’ll quickly improve issues as they arise and right growth strategies become easier to find.
  • As you implement the growth strategy, opportunities to improve profitability begin to show themselves.

A profitability analysis is a comprehensive look at how you take in revenue and how much it costs to fulfill the orders/services for your customers. There are a number of data points that a typical analysis provides.

Two broad parts of a profitability analysis include:

Profitability of customers (from most profitable to least)

You can break this down by individual client (e.g. if you’re a B2B with few customers). It’s common to take a look at how your clients find you. For example, if you rely on content marketing (SEO), referrals,advertising or sales outreach. Each of these channels breaks down to highlight profitability from greatest to least.

This exercise allows you to see exactly where your business comes from and (typically) highlights areas for improvement. You can also use a profitability analysis to help set your growth strategy.

Most profitable to least profitable products and services

Learning how much it took to acquire customers and how much it costs to fulfill that product/service to them, shows your most (and least) profitable offerings. If a customer profitability analysis highlights where your money comes from, the product analysis shows how much of that you keep.

Pair these two things together and real decisions can be made about:

  • Can we eliminate products/services?
  • Should we shift marketing and sales to more lucrative customer acquisition channels?
  • Are there ways to improve the profit margins of our current offers?

5. Pricing and Cost Analysis

Inevitably, a profitability analysis should lead to a pricing and cost analysis. Are you charging enough? Is there a way to reduce the cost of production or deliverables?

Pricing and cost analysis are actually two different processes.

Figuring out the pricing also brings in comparison data, from your closest competitors. Most industries have a range from bargain prices to higher-end. Each pricing structure has its advantages and disadvantages.

Your CFO service can bring in this data, compile it and offer advice based on findings.

Ready for a Quality Fractional CFO Service?

As a CFO service runs your business through these 5 benefit stages, your overall financial health improves. Again, there is a compounding benefit to leveraging financial data through these layers.

It’s also cyclical.

Track your cash flow, monitor KPIs, set a path to sustainable growth, improve profitability, maximize pricing and cost. Once these are complete, cash flow will likely be improved allowing the opportunity to better utilize funds — beginning the cycle all over again.