The Case for a Part Time CFO
Posted on July 2, 2020 by Alec Howard
There’s no question that new enterprises need financial expertise – but do they need it full time?
A good case can be made for pre-revenue companies with either a long development cycle or a difficult “proof-of-concept” to use a part time or fractional CFO. These companies have an acute need for certain CFO skills, e.g., planning, forecasting, fundraising and reporting, and little to no need of others, e.g., operating CFO skills such as managing credit and collections, inventory or service management. If the company also has low capital expenditure requirements, and most “new economy” companies do, then using a part time or fractional CFO makes the most sense. Using a fractional CFO enables a company to get the critical skills it must have, while enabling more efficient resource use to progress towards the next development or proof of concept milestone.
Exploring the particular financial and strategic requirements of an early stage company in greater detail makes the case for a fractional CFO clearer. The early stage CFO has one overarching responsibility, which is to make certain that his/her company has the financial resources and flexibility needed to execute on its plan.
Specifically, the key tasks for an early stage company that would fall to the CFO, either in whole or in part, are:
· Assistance with financing activities
· Modeling and forecasting – most importantly cash burn
· Investor/director communication
· Financial reporting
· Internal controls
· Audit/tax professional support
The most critical initial task facing an early stage enterprise is determining financing requirements and obtaining that financing – both initial and subsequent rounds. To do so efficiently, so that the process does not monopolize management time to an extent that all other activities (including essential work on the actual business) are either abandoned or shortchanged, is essential. The CEO must lead this effort, but the supporting skills needed are CFO skills. In short, the CEO must provide the “why” to making an investment, but the CFO must provide support in the form of the “when,” “how much” and “how”. This argues for an individual with prior experience, who can help put together the proper materials, and who understands the goals and expectations of prospective investors. Experience with deal structuring is also essential.
Once financing has been obtained, the ability to track progress, and, linking financial resources to progress, is the primary financial task. The ability to accurately record activities must be a given. The ability to interpret and communicate accurately and timely is the essential value-added contribution. In a pre-revenue company, where cash is always diminishing, the ability to identify adverse events and trends quickly is crucial.
The final argument for a part time CFO is financial. The CFO generally plays a supporting role in helping a company reach its milestones. Therefore, spending any extra resources here is unwarranted. Companies with a finite time to produce value-enhancing results need to maximize resources devoted to achieving those results. Using a part-time CFO can enable a company to get the essential skills it must have, while enabling better focus on its key business deliverables.
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