The Rise of the Fractional CFO Firm

Why SMBs are turning to Fractional CFOs for help

Why successful businesses fail

Successful businesses fail because they run out of cash, period. But why? Simply, they don’t understand their financial business model well enough to navigate the growth in working capital required to grow a business. This is a tragedy. If organizations were to understand this facet of their company, many more organizations would survive, and the U.S. economy would be much stronger as a result.

The accounting and financial administrative functions at most small and medium-sized businesses (SMBs) are too weak. Historically, the cost of hiring a financial professional that can navigate the gauntlet of economic challenges of SMBs was a barrier to filling this critical role.

Ready for some good news? With the advent of cloud-based financial systems and some much-needed CPA industry disruption, a solution to this problem is emerging. Enter the Fractional CFO Firm.

Over the past five years, a new type of CPA Firm has emerged, filling the gap between bookkeeping and legacy tax and auditing CPA firms. In the following sections, we discuss what makes these firms different, how to leverage their services for your business, and what to look for when selecting a firm.

Leveraging Fractional Services

The idea of leveraging outside professionals for your business is not new. Companies bring in experts in several areas to support their core efforts, think Legal, H.R., Marketing. There is also a multitude of management consultants of every flavor that will tell you what you should do with your business. Some of their advice is invaluable, and some of it is well-packaged common sense. Unfortunately, both types can leave you with a long list of tasks to accomplish. If you are already working too many hours, this type of consulting proves to be unhelpful.

What is truly needed to scale your business is a team of professionals that not only has great ideas, but can work with you to implement them. This applies to Fractional CFO services as much as anything else. Historically, Fractional CFO work was completed by staffing firms that offered many services, or solo CFOs that had retired and still wanted to give back and use their skills. Most of the time these engagements were to fill in for a leave of absence or to transition the organization to a new full-time CFO.

What is emerging now is something much different. Growing startups and established SMBs are seeking out Fractional CFO teams to help them over the long run. These are deep strategic partnerships with a Fractional CFO Firm that last the span of the business. To sustain this, they are looking for teams that do this work and not one-off individuals. They are also looking for this team to execute the bookkeeping and accounting tasks, payroll, financial analysis, and the information technology requirements of the company. Because these firms are embedded day-to-day in your business, it truly frees up the time and resources to grow the company allowing the founders to innovate and disrupt their industry. Most importantly, they help navigate the complex working capital challenges for the business as it scales.

Disruptions — not your parents CPA Firm

Disruptions are not just for the legacy taxi businesses with Uber or hotels with Airbnb. The CPA profession is being disrupted as well. As with most disruptions, this one also started on the outside. Legacy CPA firms focus almost exclusively on compliance-related tasks like auditing and tax preparation. Many in doing so have lost sight of their most important responsibility, client success. In this void, a host of professional service companies, mainly staffed by MBAs, entered the Fractional CFO market. They have had success helping clients and providing services that traditionally have been served by bookkeepers and work completed internally by staff just trying to figure things out.

Often disruption is what causes people to be put on notice. In response, a new type of CPA firm is starting to emerge. These new firms are laser-focused on client success; they only provide advisory services, fully embracing a technology-driven future. Instead of being competitive with legacy CPA firms, they are often their best clients. The leader of these firms is the Future Fractional CFO. The days of big offices, up-or-out staff positions, billable hours, and life-stunting busy sessions are gone. In their place are flat organizations that operate like agile technology firms with diverse skill sets and teams that build lifelong relationships with clients. What remains is the commitment to quality, integrity, and legal protections for clients that don’t exist outside the CPA profession.

Does everyone understand the difference between a CFO, CPA, or MBA? CFOs have worked their way up in the accounting and financial operations of companies. They have worked as and managed accountants, treasury professionals, and financial analysts. Many times, they are a CPA or MBA, or both. CPAs have completed an extra 150 hours of college-level education, passed the Uniform Certified Public Accountant Exam, and completed two years of related work experience under a licensed CPA. Only half of professional accountants are CPAs. MBAs have completed a wider range of post-graduate education and have taken the graduate record exam as part of the process to get accepted into graduate school. They have studied topics like marketing, finance, and other general business topics.

Expectations of Fractional CFOs

Future Fractional CFOs take a longer-term view. They talk about internal controls, security, organic growth, and roadmaps. What they don’t do is try to be the CEO. A Fractional CFO understands the scope of their role and focuses on the administrative function of the organization. Some contract CFOs want to be management consultants and forget the real reason they are there. It is exciting to talk about strategy and participate in the entrepreneurial spirit of the company. However, a good CFO will remember that this is secondary to their administrative role as the Chief Financial Officer.

The aspects of what a Fractional CFO should bring to the table, accounting knowledge, business law acumen, fiduciary responsibility, risk management, and a general compliance mindset, lend themselves to the education and training of a CPA. Yes, others can acquire this knowledge by doing the work, but when hiring a Fractional CFO, one should ensure these skills, requirements, and experiences are truly present. Anyone can call themselves a CFO, but it takes education, examination, and verified expertise to be a CPA. All the reasons above show why the CPA profession will grow into this new Fractional CFO space in the future, and future CPA firms will be dedicated to this space. Unfortunately, time is too valuable, and the stakes are too high to allow your Fractional CFO to learn on the job.

It takes a different DNA

To embrace this work, firms need a totally new set of values and structures. Client service needs to be at the forefront of these efforts. Many will say that they are already doing this. The 2021 Accounting Industry NPS (Net Promoter Score) Benchmark for CPA firms operating in the U.S. was 38% (clearlyrated.com). This means less than half of clients would recommend their current accounting firm to a peer. Something is broken.

The competitive nature of compliance services at legacy CPA firms has driven much of their current structure. This won’t be easy to overcome. The billable hour, partner structures, and deadline-driven culture are all sacred cows that will need to be dealt with to succeed in this new industry.

As a result, early success will come from firms that embrace this new model from the start. A business owner or someone looking for a Fractional CFO team should ask about the firm’s blend of work. If the CPA firm gets 80% of its revenue from tax preparation, you can be sure it will be unresponsive during tax season. It is important to point out that with the complexity of the tax code and business filing extensions, it is tax time a lot of the year now. The other reality is that people gravitate toward tax and audit work for a reason. They like the structure and certainty that compliance work provides. Compliance work is a far cry from the ambiguity, struggles, and exposure common when scaling SMBs. The DNA of the Fractional CFO Firm is just different. Forward-looking legacy CPA firms have come to this same conclusion. In the 2021 CPA.com & AICPA PCPS Client Advisory Services Benchmark Survey, 52% of firms with advisory services practices said their staff in these practices only perform advisory services to clients versus bouncing between compliance work and advisory services.

The advent of the Fractional CFO Firm is really a return to the advisory nature of the CPA profession. They represent a needed specialization in an ever more complex world. Highly-trained staff using the newest technology can cut costs and provide SMBs the advantage they need to thrive. It is time for SMBs to gain the economies of scale in their administrative functions historically reserved by large corporations.

One word: Trust

Trust was important before everyone started working remotely. It has been the bedrock of the CPA profession from day one. When looking for someone to fill a Fractional CFO role at your company, slow down and do some due diligence to understand what they are all about. Are they visible in the community, online, and as a thought leader? They should be able to provide references from business owners like you. Call their references! This sounds obvious, but we are often in a rush and need to identify someone quickly. Some due diligence upfront will make sure you are getting an excellent fit for your needs. These are long-term relationships, so it is worth it to slow down and make sure the firm is right for you and your company. I would guess over 50% of the Fractional CFO sites that I go to have no pictures of the team or their leadership. That does not build trust. They either don’t have the basic technical skills to create a proper website, or they don’t have a team to support them.

Besides cultural fit and the firm’s experience, there are a few other items to ask about when selecting a firm. First, talk to the potential firm about your unique challenges and their experience solving them. Technology is a force multiplier. Leaders, especially CFOs, should not only be extremely knowledgeable about the technology impacting SMBs, but they should have a well-thought-out opinion about how that technology will impact your business and what steps should be taken to give you an advantage. Secondly, ask them about their security practices. You will have to share a lot of personal information and information that is proprietary to your business with them. They have a responsibility to protect it. Get a sense of how they are doing that and if they understand best practices. This can be hard if you don’t know them yourself. That is fine; ask them to educate you. That is their role if you select them. Let’s see how they do.

The fact that the CPA profession is discovering advisory services again is an excellent opportunity for SMBs. CPAs have a lot to offer the business owner. In the past, higher-paying compliance-related work limited CPAs’ willingness and availability to do advisory work. Competition for compliance work has driven pricing down, and new technology on the advisory side has enabled firms to leverage economies of scale. This all adds up to an excellent opportunity for SMB owners to lower costs and get better insights into growing their businesses while dealing with fewer administrative headaches.

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CFO. Small Business Advocate. Technology Guru. Owner of CPA Firm in Portland, OR. primetrics.cpa

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Adam Turco, CPA

Adam Turco, CPA

CFO. Small Business Advocate. Technology Guru. Owner of CPA Firm in Portland, OR. primetrics.cpa

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