I “graduated” one of my clients late last year, meaning I transitioned from being their part-time CFO to handing off my responsibilities (and more) to my successor, a full-time CFO. As part of the transition process, I interviewed the final three CFO candidates and advised the CEO and the Board on each of them. Once the company made its final decision, my team and I sat down multiple times with the incoming CFO and we walked him through all of the tools we were using and provided information that he would need to ensure a successful transition into his full-time role.
After that, my services were no longer needed. I’d put myself out of a job … and it was the right thing to do.
It may seem counterintuitive, but it’s good news for us when our companies outgrow our CFO services. Our goal is to get clients from those early stages of development to where they will need a full-time, internal team, including a CFO. It’s an impressive credential for AVL to have those companies in the news as they raise millions of dollars or reach a $1 billion valuation. I consider those headlines a credit to the service that we provided in their formative years.
The obvious question is, how do you know when it’s time to hire your own full-time, in-house financial executive? If you find your company in that in-between stage — outgrowing your part-time or outsourced services, but unsure if you can take on the cost of an in-house CFO — here are some signs you might be ready for the next level.
Before you hire a full-time CFO, you want to have a certain degree of scale. Liquidity and visibility into your near-term future are also essential considerations. Most firms want a solid grasp of how much operating cash they have to run with before they feel comfortable making such an important commitment.
An important caveat: Too many companies tend to use revenue as a proxy for size, and that’s not always the best way to look at it. There are companies with $50+ million in revenue and three full-time employees, and there are companies that have $7 million in revenue that might have 50+ employees. The inner workings of each of those companies is entirely different. So are their CFO needs.
Whether or not you are ready for a full-time CFO depends on the needs of the business. This is often determined by the complexity of the company, your business model, your customer base and your vendor base. Your capital structure/cap table composition is also an important consideration. All of these are more impactful than just a straight revenue number, particularly when it comes to hiring a full-time CFO.
Here are nine aspects we consider when determining if you need to start the recruiting process.
We begin with the obvious: analyzing the cost vs. benefit of having a full-time, in-house financial executive. A CFO typically works 50-60 hours a week. What is the cost of a fractional CFO at that rate versus hiring a dedicated employee? Which makes the most financial sense for your company? What incremental value might you be able to get from a dedicated employee who is entirely focused on your business as compared to a fractional service?
What is your company’s stage of growth in the near-term and long-term, and what is your profitability profile? If you have a company that is in a very high-growth near-term environment and is burning cash, you may need to go out often to raise money. If that pattern is expected to continue for the foreseeable future, having a full-time CFO might make more sense. The argument is very different if you’re a more stable company that isn’t going for that high-powered growth or doesn’t need external financing. If you’re looking to bootstrap, that is a situation that can lend itself to the fractional model for far longer.
A CFO can take on multiple roles outside of their core responsibility around finance and accounting. Legal and compliance is one, investor relations is another, and HR and IT often fall under a CFO’s accountability chart. The more demanding those responsibilities become, the more time that requires of a CFO, and the more the job lends itself towards a full-time person.
If you have a strong COO, the need for a full-time, in-house CFO might not be quite as acute. Those two roles can overlap quite a bit depending upon what responsibilities each is assigned.
Does your company have high regulatory or industrial compliance components? These are often the responsibility of the CFO, and this may lean you toward hiring a full-time CFO sooner.
Do you have professional investors with more stringent, frequent or complicated reporting requirements? Do you have lenders with covenants you must meet?
Are you required to do annual audits? The intricacy of your auditing requirements is an important consideration in determining how substantial you want your in-house finance team to be.
Your CFO is typically your last full-time hire in the finance department. As one of my colleagues recently pointed out, if you’re looking to replace a fractional with a full-time resource, you will typically want to go bottom-up.
You’ll start with an in-house accountant who can handle your flow transactions such as invoicing revenue, posting payments, processing invoices and making payments to vendors, running payroll, etc..
Your next step might be to hire a full-time Controller to help you close the books on a timely basis and provide insights on how the business is currently doing (i.e. looking at margins by customer, products or other KPIs). By the time you are ready to hire a full-time CFO, you may already have four or five people in the accounting department.
If you’re a public company, there’s a Sarbanes-Oxley requirement that your CEO and your CFO sign off on the financial statements. Fractional companies or fractional individuals will struggle with that liability and may prefer not to take it on.
Once you make the decision to hire a full-time CFO, at a minimum you want to replace the service that you’re already getting but realistically you should be looking to upgrade it.
The advantage that fractional firms like AVL offer is the breadth of experience and expertise you can access from a staff of 50 professionals. You can’t replicate that in-house, but you can ensure your CFO has a strong background in your industry. They should also understand your specific compliance, reporting and other needs. Perhaps most importantly, you want someone who is a good fit for your company culture. Your CFO will be a leader in your organization and is often considered the “second in command” — you want them to be on board with your vision and values.
We are happy to help companies grow successfully, and we are also happy to be involved in the process of transitioning our companies to full-time, in-house resources. It’s our job to get our clients from Point A to Point B — even defining what Point B is in the first place. Then, we pass the baton.
When that time comes, AVL has excellent relationships with recruiting firms, locally and nationally. We constantly deal with CFO talent recruiting for our own staff and can use our network to potentially identify additional candidates. Once you get to a short list, we can help with interviewing and finally with knowledge transfer.
Knowing when to hire a full-time CFO can be challenging but you should approach it analytically, just as you would with any other personnel decision. There is no one-size-fits-all template, but there is a spectrum of decision influencers that may help you lean one way or the other. This checklist can help. So can an AVL CFO.