Need for Fractional CFO in SMEs

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Key business Pain points in business for which Fractional CFO can advise

• Lacking the right vision or purpose for which the business exists.

• Creating Social impact in your business.

• Make or buy decision – Whether the product needs to be produced in-house or can be outsourced to a third party for production, similarly in the case of CAPEX, whether to construct it or take it on lease.

• Whether expansion into new territory of existing business should be done

• Whether the group should diversify into totally new businesses.

• Whether backward or forward integration should be done in business to have cost advantage and to grow business.

• Digital transformation or adaptation and implementation of any new best practice.

• Dependency of business on a few good customers or multiple customers, out of which some are risky customers.

• Entering and executing multiple projects or businesses at the same time.

• Getting business at the cost of giving extended credit periods or low pricing.

• Doing business to get a better valuation and bringing investors on board but otherwise, business is bleeding.

• Lacking in-depth in business. Moving to multiple options without going in-depth in one segment.

• Falling in love with the product rather than falling in love with the customer and making the product or service as per the requirement of the customer.

• Showing Promising Projections to investors/banks but otherwise bleeding in business.

• Compromising on quality to improve margins or lower prices and then catering to a segment which is quality-conscious

• Focus on satisfying customers and, in the process, compromising on the margins.

• Diverting working capital cash flow to CAPEX Purchase.

• Books of accounts are not updated on time, and MIS reports are not prepared and submitted to analyze financial performance on a monthly basis.

• Lack of Systems and Processes in various areas of business, and importance is not given to same by the owners.

• The owner does not know how to present and communicate the financial performance of the company to investors since there is no senior finance person.

• The finance team is not aware of the latest updates in the corporate laws, and hence compliance is not done with all the applicable corporate laws. The owner does not believe in appointing a consultant for this purpose.

• The owner is not ready to delegate and wants to grow the business at the same time.

• Branding of the Product and company is not done correctly, especially in the B2toB2 business.

• The founder and its team are not in a position to identify its USP and differentiate to compete in a better manner.

• The founder does not believe in investing in the right senior talent when the business is growing.

• The employee turnover ratio is very high as the company is not in a position to retain talent due to various cultural issues. The performance appraisal system is not in place.

• The owner does not believe in following best practices and doing business in a structured manner.

Need For Fractional CFO In SMES Planning To Have Investor

• Need for Fractional CFO: Most SMEs have controllers who take care of the day-to-day accounting, managing cash flow, following-up for the timely realization of collection from customers, making timely payments to vendors, employees, etc., taking care of compliance and reporting the annual financials and MIS reporting on a monthly basis. The owners think that there is no need for a CFO as the existing finance team is taking care of the above aspects. However, they fail to understand that fractional CFO will prepare them for their future needs. Just like in big organizations, we have a full-time CFO who drives the strategy of the company and participates in many non-financial areas such as Commercial negotiation with vendors and customers, preparing the company for investors or to get listed, process improvements, risk mitigation, digital transformation, improving the efficiency and thereby optimizing cost, creating Sustainable strategies, working closely with other stakeholders, benchmarking to follow best practices, analyze the social impact of business, prepare succession and family charter for family-owned business for founders and so on. A fractional CFO is a Part-time CFO for SMEs who will take care of all the above areas in growing SMEs. Fractional CFO needs to identify the pain points to SME business and then persuade and make the founders of SMEs realize the need for Fractional CFO service which can address their pain points. A fractional CFO can contribute to the following areas:

• To create a vision of the Company: Most Founders have their vision in their mind, but they do not share the same with their team members. The team does not know where the company wants to go from here and how they are going to grow with the company. It is essential to involve the team members in framing the vision and mission of the group, thereby giving clarity to them and involving them in achieving the vision.

• Creating Strategic Business Plan for Investors: Any SME needs to create a Strategic business plan for the next five years wherein the vision of the group and plan to achieve it prepared, including financial projections, so that the founder and the core team have a clear roadmap as to how they are going to achieve the vision and same can be explained to the investor.

• Budgetary Control System: It is essential to have annual budgets in place, which must be linked with the Vision and Strategy of the group, and each department's KRA should be linked with the budgets. Most SME founders lack understanding of this subject and do not feel the need to follow this best practice. However Fractional CFO needs to educate the owners on this subject and ensure that these practices are followed.

• Need for systems and Processes in all areas of business: Most SMEs are used to running business in an unstructured manner as they do not give importance to running business in a systematic manner. However, as the business grows, it is essential to have systems and processes in place and run them in a structured manner, or otherwise, the growth of the company shall collapse.

• MIS reporting & Compliance: SMES must invest money in technology and ensure that all the data generated in business is captured in a structured manner and analyzed to understand the performance of the company in a better manner. Most SME founders work hard to make profits and grow their businesses, but they do not have an accurate understanding of performance, which is essential so that they can improve upon it and explain it to investors. Similarly, SMEs need to ensure that compliance is done with all applicable corporate laws, which is one of the concerns of investors.

• Creating of Cost sheet and Costing structure in place for effective pricing and ascertaining break-event points. Any business needs to understand its fixed and variable costs and ascertain its break-even point. Many times, the owners of SMEs are not aware of this subject. Hence, a fractional CFO can add value here.

• Identification of Risk in Opportunities: Many times, SMEs, in the urgency and hunger for growth, rush to grab a business opportunity without analyzing the risk associated with that opportunity. CFO can play a vital role in identifying and analyzing those risks and giving solutions to mitigate them.

• Cash flow Management & Cash Profit: An SME business mustn't grow at the cost of reducing margins and giving credit. Many times, in order to develop a business company compromises on margins, gives extended credit or uses the working capital fund for CAPEX purposes. This will affect the cash flow of the company directly. The CFO needs to ensure this. Refinancing of Debt to reduce the overall cost of borrowing.

• Identifying Growth opportunities and helping in conducting due diligence for acquisitions and mergers.

• Family Charter & Succession Plan: any family-run SME business needs to define the succession plan and also create a family charter defining roles and responsibilities for all family members as per their capability so that there are no disputes in future; the successor gets trained and investor's concerns are addressed

• Creation of Company Structure: if the SMEs open offices at multiple locations across the globe, a proper structure of the group of companies must be created which is in alignment with investor objectives.

• Performance Appraisal System: It is essential to have a proper performance appraisal system their retain good talent. The CFO can help in setting it up.

• Delegation of Authority: As the business grows, it is essential to have an organizational structure and delegate authority so that the founder can focus on more important strategic matters. Many owners are not ready to give up small tasks executed by them at the start of business, as this leads to not spending enough time on key strategic matters, which is essential to growing the business.

• Creating Social Impact: SMES must take into consideration the social impact created by their business while framing their vision and strategies so that their business objectives are in alignment with creating a positive social impact, which the investors also love.

Preparing the SME company for investors and for IPO to get listed in future.

• Interim CFO: A fractional CFO offering part-time CFO service can also provide interim CFO service, which is for a short specific period. This kind of requirement comes up when the existing CFO are suddenly company, and the top management of the company wants someone to plan that role immediately. At the same time, they recruit a full-time CFO, which may take some time, or this requirement may come when an investor takes a stake in a company and wants to deploy immediately. Basically, the interim CFO who will act as there representative while they source a full-time CFO.

• Virtual CFO: Post covid, this a new service that has comes up in the market. There are specific underdeveloped or developing locations like Africa, wherein the talent pool is not available easily. Still, there are significant business houses there as there is a lot of business potential. These business houses may require a skilful CFO to advise and drive their business. Hence, in such situations the service of a virtual CFO can be provided. Apart from this, many Tech start-ups who do not have physical office locations as their team works from home and who need factional CFO services can avail themselves of the service of a virtual CFO.

How to grow and challenges in the Fractional CFO business

• Mentoring and Coaching: Many times, a Fractional CFO is hired for specific projects like raising funds from banks for which he is handling specific tasks like preparing a Strategic business plan, including financial model, financial projections, project feasibility report, etc., to be submitted to the bank to raise funds. Once the Project is Completed the management may like his approach and skills and may decide to avail his services further in the form of acting as a mentor and coach for the finance team of the client.

• Growth of Fractional CFO business & Client retention: The development of this business can happen mainly by way of mouth. When your existing clients recommend your services to their friends and relatives who are also in business, then your business is bound to grow. Fractional CFO service is ideal for SMEs who are in the growth phase but are not big corporates who need to have full-time CFOs. Apart from word of mouth, the Fractional CFO needs to invest a lot of time in conducting seminars and webinars free of cost wherein they need to educate the business community on various areas of Financial management, tax, strategy, the need to adapt best practices, use of technology in business, etc. Apart from this, there is a need to be part of various networking platforms and meet SME owners in person; getting referrals from CA firms who are in practice in audits and accounts writing areas but who do not offer this service can also help to grow this business. Building creditability with the owner as a trusted and skilful finance advisor is the most important thing to retain the client. Most of the assignments may start with cleaning up the mess created in accounts. Hence, the fractional CFO may have to initially deliver service which is below grade, such as completing the backlog in accounts, setting up systems and processes in place, handling compliance, etc., which are more a role of accountant and controller, but this may be your entry point to establish long-term opportunity with the client. People, processes or technology problems could be there which need to be resolved.

• Diversity in the client base: Each client will have a different personality, a different nature of business and different pain points and needs for services. Hence Fractional CFO must have adaptability and flexibility in his approach to handle and deliver effective service to these various clients.

• Need to have good relationships with controller and accountant in client's team: The Fractional CFO needs to have the perfect relationship with the Controller and accounts team of the client so that the fractional CFO gets reports, data and cooperation regularly, which is essential to analyze and give valuable inputs to the clients. For this you need to assure them that you are dependent on them to deliver your KRA and you need their support. You are not here to take away their work, and hence, you should not be considered a threat by them.

• Pricing for Services: Pricing depends on a lot of factors, whether it is onsite service or offsite service, whether it is monthly retainers or on a project basis, and whether you are solo and bring clients on your own, in which case you will get the entire fee or Similarly, the client through someone else in which case you will not get a whole fee. The size of the company to whom service is given also matters. It is better to calculate your monthly cost and charge on a monthly basis rather than on a weekly or per-hour basis, except in the case of Project work.

• As compared to the full-time CFO of a company Fractional CFO is a part-time CFO of multiple companies that are in different businesses, have different cultures and different requirements. Hence, one of the challenges for fractional CFO is that they need to handle multiple clients with having massive diversity of services provided to each of these clients. Hence, it is essential that the CFO compartmentalizes himself, meaning when he is delivering service to one client, he should not think about other clients so that he can focus on the complexities of one client at a time. Initially, they could be a difficult task for a Professional who had just moved from the industry a period of this practice. However, over the period, fractional CFO needs to cope with this reality. You need to give suggestions and ideas, get involved in its implementation and then pass on that work to the controller of the client so that you can focus on other things.

• Understanding the business of the client: A fractional CFO needs to have a reasonable understanding of the business of the client to provide service in a better manner. Hence CFO should develop business acumen Similarly, to understand different businesses of different clients in a short span.

• Communication with clients and time management: The client must be communicated when you are not. Similarly, to meet the deadline of a client because of some other priority. Similarly, it is essential to keep communicating with the client regarding the work done by you in a week and in a month.