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How to Move From Fractional Accounting to an In-house Team

Chris Schwalbach  ·  July 20, 2021  ·  7 min

AVL’s goal is to help young companies navigate the growth process, but we are not a forever solution. Our services are often temporary as we get clients to “the next level”. 

From the onset of a new relationship, we align with the client’s goals, such as reaching an exit event or scaling to a point where it’s prudent to bring a finance and accounting team in-house. 

At AVL, we call this “Graduation.”

When Is the Right Time to Transition to an In-house Accounting and Finance Team?

The fractional finance and accounting model enables businesses to progress through the initial stages of growth. However, there comes a time when a business’s needs — and capital resources — grow beyond outsourced services. It’s inevitable to progress to the next phase of the finance and accounting maturity model. 

When we work with our high-trajectory clients, we co-navigate with them by reviewing and discussing five criteria. In turn, they can determine how and when to begin building an internal finance and accounting team. 

Here are those key criteria:

  1. Cost of Finance & Accounting
  2. Build or Operate Skill Set
  3. Roles Expanding Into ‘Full-Time’ Jobs
  4. Complexity + Leadership + Accountability
  5. Ability to Attract the Right Talent 

#1: Cost of Finance & Accounting

One of the benefits of fractional services is cost. By staffing an internal team, your payroll expands — you gain the cost burden of additional salaries and benefits, increasing your business’s overhead. Those roles include:

  1. Accountants and bookkeepers: these roles provide transactional skills. For example, bookkeepers would be responsible for recording day-to-day transactions. 
  2. Controller: this role oversees reporting, analysis, systems, and controls. For example, a controller may prepare financial statements and monitor internal controls.
  3. CFO: this role supervises the entire process while also providing expertise around forecasting, planning, risk, and accountability. For example, a CFO would help the company mitigate potential liquidity risks. 

Beyond compensation, we advise emerging growth ventures also to consider the costs of “owning” versus “renting.” In other words, fractional services are sort of like renting a house instead of buying it. As a renter, you aren’t responsible for maintenance, improvements, and repairs. You don’t have to find a contractor to repaint the exterior or a plumber to fix a leak. 

Once you become an “owner” and commit to an in-house team, you accept the responsibility of hiring those employees, training and developing them, as well as backfilling open seats in the event of turnover. All of these activities take time and resources, so they should factor into your decision.  

#2: Build or Operate Skill Set

In the early growth stages of a company’s life, there are a lot of unknowns, a lot of ambiguity.  For example, there’s no “playbook” yet to operate from; it needs to be built. So, in looking to hire internally, it’s important to consider whether you want to be hiring a team that knows how to continue to build, develop, and forge the path forward, or whether it might be better to wait until the infrastructure is a little more defined. 

In other words, are you hiring someone with the skills to design, build and navigate or are you hiring someone that is really strong at following (and improving) the playbook?  As you can imagine, there can be a meaningful cost difference between those levels of skills.  And this decision connects back to the first criteria of the overall cost. 

#3: Roles Expanding Into Full Time Jobs

The fractional model works well for a reason — the roles it provides are critical to profitable and sustainable growth. However, finance and accounting functions typically don’t become “full-time” needs until the company’s operations expand. It’s usually not a simultaneous transition either. 

Instead, we migrate our clients slowly: it’s normal for transactional roles to go full-time first (e.g., accountants and bookkeepers), then the controller, and finally the CFO. In other words, we may help a client hire an accountant in year two, then a controller in year three, and then the CFO in year four; the process mirrors the client’s growth and the need for each position. 

If there isn’t a need for a full-time internal resource yet, there’s no reason to shoulder that cost until the time comes. ˛

#4: Complexity + Leadership + Accountability

As a company expands, its operations tend to become more complex. More complexity demands more leadership and accountability. Why? Because opportunities are far less straightforward and the financial repercussions are more significant. In short, the stakes are higher, so management needs more access to financial leadership, guidance, and accountability. 

This area aligns with the theme of growing into “full-time” needs. Once a company reaches a certain level of complexity, a CFO’s involvement is paramount to continued success. The CFO can go toe-to-toe with the department heads, the leadership team, investors, and the board, ensuring commitments are known, aligned, and communicated.  

#5: Ability to Attract the Right Talent

Are you poised to attract the right talent right now? Or are you better off waiting?

Let’s say your strategy is to take your company to a $30M run rate and then look to exit via an M&A event. You know that you’ll need the right CFO to get you there.  And today, you’re at a $3M run rate. So, in an honest conversation, will you be able to attract the right CFO today to get you from $3M to $30M, or are will you more likely looking at a CFO that could take you from $3M to $10M and then you’ll need to hire another, more experienced CFO later.

The thing is, the two-step hiring process can be both expensive, painful, and difficult.  Often, a fractional CFO will be the right formula to get your company to a place where you attract the CFO that will truly help take you all the way to the finish line. 

Additionally, consider that your investment partners often have “proven assets” that they’ve worked with in prior ventures that have a track record if you’re seeking venture investments. So, again, you may be faced with a two-step CFO change. And again, a fractional CFO model may provide just the right amount of flexibility for you to get to that next ‘level’ to attract the right talent.

Finally, while the CFO role is discussed here, there are parallels for accountants and controllers.  

So, make sure you’re patient and building the right team for your business, not just a team for your business.

Best Practices on How to Transition Successfully

Are you considering moving to a full-time, in-house finance and accounting team? To help you make a successful transition, we’ve outlined three best practices:

Run a Cost-Benefit Analysis

Obviously, this decision has financial repercussions. It’s easier to justify the transition when you can compare the costs to the benefits and definitively say, “Okay, the benefits outweigh the costs.” 

The primary benefit is efficiency: your internal team's sole responsibility is to handle the growing demands of your business. They’re in close proximity and can take a hands-on approach to problem-solving. Plus, they grow with your business. 

The standard costs are compensating full-time employees, which means salaries, health insurance, and retirement benefits. But don’t forget about other factors, such as the productivity costs of time-off (i.e., the hours lost to paid vacation) or incentivizing various talent levels (cash bonuses and equity compensation plans). 

Build a Roles & Responsibilities Matrix

On paper, you may see that you need an in-house team — the benefits outweigh the costs. In reality, how are you going to make that happen? For clarity, build a roles and responsibilities matrix to ensure your team is on the same page, and you’re making the right hiring decisions.  Here are a few questions to help guide you on this process: 

  • What roles do you need right now? Next year? Three years from now? 
  • What will each person’s role and responsibilities be? 
  • Do any jobs require more than one person?

Work With Your Fractional Team

As we mentioned, fractional services aren’t intended to be permanent solutions — at least, not for every growth-oriented company. Part of your fractional team’s duty is to help you make this transition seamlessly. They can help you promote your in-house openings, identify potential candidates, and even assist with interviewing. 

Who better to opine on the fit and capabilities of a candidate than the people who’ve overseen your finance and accounting activity for the last... however many years? 

We Want to Help You Graduate

Although it seems counterintuitive, AVL celebrates when it can transition a company to an established in-house accounting team — even though that means losing a client. We view this as a win-win: we’ve succeeded, and our clients have accomplished their goals. Connect with us today to start the process.