The Rise of Fractional Finance Teams: Why Now?

The fractional executive model isn’t new, but its popularity has surged in recent years, driven by several factors:

• Cost-Effectiveness: Hiring a full-time CFO can be a significant expense, especially for startups and small businesses. Fractional finance professionals offer access to high-level expertise at a fraction of the cost.
• Flexibility: Fractional teams can be scaled up or down based on your evolving needs, providing greater flexibility than traditional hiring.
• Specialized Expertise: Fractional experts often possess deep experience in specific industries or areas, such as fundraising, M&A, or international expansion.
• Access to Best Practices: Fractional professionals work with multiple clients, exposing them to a wide range of best practices and innovative solutions.

Beyond just the finance team, fractional resources can be applied to other back-office functions like HR, marketing and operations. Just as with the finance function, the key is knowing how to effectively measure success.

Why Measuring Performance is Crucial

Implementing a fractional finance team is an investment, and like any investment, it’s essential to measure the return. Without clear KPIs, you’re essentially flying blind, making it difficult to assess whether the team is meeting your expectations and contributing to your bottom line. Tracking performance helps you:

• Ensure Alignment: KPIs help align the fractional team’s activities with your overall business strategy.
• Identify Areas for Improvement: By monitoring performance, you can identify areas where the team is excelling and areas where they need support or adjustments.
• Demonstrate ROI: Quantifiable metrics provide tangible evidence of the value the fractional team is delivering.
• Make Informed Decisions: Data-driven insights enable you to make informed decisions about resource allocation and strategic initiatives.

Key Performance Indicators (KPIs) for Fractional Finance Teams

The specific KPIs you track will depend on your unique business goals and the scope of the fractional team’s responsibilities. However, some common and valuable metrics include:

Time to Close (Monthly/Quarterly)

Definition: The number of days it takes to close the books at the end of each month or quarter.

Why it matters: A shorter close cycle indicates efficient accounting processes, accurate financial reporting, and better decision-making capabilities. Faster financial reporting allows for quicker insights into performance, enabling timely adjustments to strategy. A benchmark of 5-10 days for monthly close is generally considered good, but this can vary depending on the complexity of the business. According to a study by APQC, best-in-class organizations close their books significantly faster than average performers (APQC Open Standards Benchmarking).

How to measure: Track the date the books are officially closed each period and calculate the difference between that date and the end of the period.

Example: If it took 15 days to close the books in January but only 8 days in February after implementing process improvements suggested by the fractional CFO, that’s a significant positive trend.

Budget Variance

Definition: The difference between budgeted amounts and actual spending.

Why it matters: Budget variance analysis helps identify areas where spending is exceeding or falling short of expectations, allowing for corrective action. A well-managed budget is critical for financial stability and achieving strategic goals. Understanding the “why” behind the variance is just as important as identifying it. Was it a planned increase in marketing spend that drove revenue growth, or an unexpected repair bill that impacted profitability?

How to measure: Calculate the difference between budgeted and actual spending for each line item in your budget. Express the variance as a percentage of the budgeted amount.

Example: If the marketing budget was $50,000 and actual spending was $60,000, the budget variance is $10,000, or 20%. This warrants further investigation to understand the cause of the overspending.

Cash Flow Management

Definition: Metrics related to the inflow and outflow of cash, such as cash flow from operations, days sales outstanding (DSO), and days payable outstanding (DPO).

Why it matters: Strong cash flow management is essential for business survival. Monitoring these metrics helps ensure you have enough cash on hand to meet your obligations and invest in growth. DSO measures how quickly you collect payments from customers, while DPO measures how long you take to pay your suppliers. Optimizing these metrics can significantly improve your cash flow. Many growing companies struggle because they focus on sales and forget to manage the cash lifecycle.

How to measure:

• Cash Flow from Operations: Calculated from the cash flow statement.
• DSO: (Accounts Receivable / Revenue) x Number of Days in Period
• DPO: (Accounts Payable / Cost of Goods Sold) x Number of Days in Period

Example: If your DSO is 45 days and your goal is 30 days, the fractional finance team can implement strategies to accelerate collections, such as offering early payment discounts or tightening credit terms.

Cost Savings

Definition: Reductions in expenses achieved through initiatives implemented by the fractional finance team.

Why it matters: Cost savings directly impact profitability and improve the company’s financial health. These savings can be achieved through various means, such as negotiating better vendor contracts, streamlining processes, or identifying and eliminating unnecessary expenses. This also enables more resources to be allocated to sales and marketing initiatives or other strategic priorities.

How to measure: Track expenses before and after the implementation of cost-saving initiatives. Calculate the difference between the two amounts to determine the cost savings.

Example: If the fractional CFO renegotiated a contract with a key supplier, resulting in a 10% reduction in costs, that’s a quantifiable cost savings that can be attributed to the team’s efforts. You can also track the return on investment (ROI) on the fractional team’s fees by measuring the total cost savings they achieve.

Profitability Metrics

Definition: Ratios and metrics reflecting a company’s profitability, such as gross profit margin, net profit margin, and return on equity (ROE).

Why it matters: Profitability metrics provide insights into how efficiently a company is generating profits from its revenues and investments. Improving these metrics is a key objective for many businesses. The finance team’s role is to analyze how these metrics trend over time, identify areas for improvement, and suggest ways to improve them through pricing strategies, cost management, and operational efficiencies.

How to measure: These metrics are calculated using data from the income statement and balance sheet.

Example: If the net profit margin increased from 5% to 8% after the fractional finance team implemented a new pricing strategy, that’s a significant improvement in profitability.

Forecast Accuracy

Definition: The degree to which financial forecasts align with actual results.

Why it matters: Accurate forecasting is crucial for effective planning and decision-making. By comparing forecasted figures with actual results, businesses can assess the reliability of their forecasting process and identify areas for improvement. Accurate forecasts can help avoid cash flow problems, manage inventory levels effectively, and make informed investment decisions. A more accurate forecast also allows the team to proactively identify any upcoming capital needs and adjust strategy accordingly.

How to measure: Calculate the variance between forecasted and actual revenues, expenses, and cash flows. Express the variance as a percentage of the forecasted amount.

Example: If the revenue forecast for Q2 was $500,000 and actual revenue was $450,000, the forecast accuracy rate would be 90%. The team can improve on the forecast by identifying and addressing the reasons for the shortfall.

Compliance and Risk Management

Definition: Metrics related to regulatory compliance, internal controls, and risk mitigation.

Why it matters: Maintaining compliance and effectively managing risk are essential for protecting the company’s reputation and avoiding costly penalties. The finance team plays a critical role in ensuring that the company adheres to all applicable regulations and implements appropriate internal controls. This can include implementing controls over financial reporting, ensuring compliance with tax laws, and managing cybersecurity risks.

How to measure: Track the number of compliance violations, audit findings, and security breaches. Monitor the implementation and effectiveness of internal controls. Many compliance tasks can also be automated with appropriate software and tools, thereby also reducing risk of human error.

Example: Successfully completing an annual audit without any material weaknesses identified demonstrates strong internal controls and compliance.

Key Ratio Analysis

Definition: Monitoring key financial ratios such as current ratio, debt-to-equity ratio, and inventory turnover ratio.

Why it matters: Ratio analysis provides valuable insights into a company’s financial health and performance. These ratios can be used to assess liquidity, solvency, efficiency, and profitability. Monitoring these ratios over time can help identify trends and potential problems, such as declining liquidity or increasing debt. The finance team analyzes trends in key ratios, compare these ratios to industry benchmarks, and make recommendations for improvement.

How to measure: Calculate these ratios using data from the balance sheet and income statement. Benchmark the company’s ratios against industry averages.

Example: A declining current ratio (current assets divided by current liabilities) could indicate potential liquidity problems, requiring the finance team to take action to improve cash flow.

Establishing Your Measurement Framework

Implementing a robust KPI tracking system is essential for maximizing the value of your fractional finance team. Here’s a step-by-step guide:

1. Define Your Objectives

Clearly define your business goals and what you hope to achieve by engaging a fractional finance team. Are you looking to improve financial reporting, streamline accounting processes, raise capital, or manage risk more effectively? Your objectives will drive the selection of appropriate KPIs.

2. Select Relevant KPIs

Choose KPIs that are directly aligned with your objectives and that can be readily measured and tracked. Avoid selecting too many KPIs, as this can dilute your focus. Instead, prioritize the metrics that are most critical to your success. Remember the concept of leading vs. lagging indicators. Leading indicators are predictive (e.g. sales pipeline value) and can be actively managed to drive future results. Lagging indicators are results-oriented (e.g. revenue) and reflect past performance.

3. Set Targets

Establish realistic and achievable targets for each KPI. These targets should be challenging but attainable, and they should be based on historical data, industry benchmarks, and your business goals. Consider using the SMART framework (Specific, Measurable, Achievable, Relevant, Time-bound) to set effective goals.

4. Implement Tracking Mechanisms

Implement systems and processes to collect and track data for each KPI. This may involve using accounting software, spreadsheets, or specialized performance management tools. Automation can significantly improve the efficiency and accuracy of data collection.

5. Regularly Monitor and Review

Monitor KPIs regularly and review performance against targets. This should be done on a monthly or quarterly basis, depending on the KPI and the frequency of reporting. Identify any variances between actual results and targets and investigate the underlying causes.

6. Take Corrective Action

If performance is not meeting expectations, take corrective action to address the underlying issues. This may involve adjusting processes, providing additional training, or re-evaluating targets. The fractional finance team should be actively involved in identifying and implementing corrective actions. Regular meetings with your fractional team to review performance and discuss challenges are invaluable.

7. Communicate Results

Communicate KPI results to key stakeholders, including management, investors, and other team members. Transparency and open communication are essential for building trust and ensuring alignment.

Tools and Technologies for KPI Tracking

Several tools and technologies can help you track and manage your KPIs effectively. These include:

• Accounting Software: Platforms like QuickBooks, Xero, and NetSuite provide built-in reporting capabilities for tracking many key financial metrics.
• Business Intelligence (BI) Tools: BI tools like Tableau, Power BI, and Looker allow you to visualize data and create custom dashboards for monitoring KPIs.
• Performance Management Software: Software solutions like Vena Solutions, Adaptive Insights, and Planful provide comprehensive tools for budgeting, forecasting, and performance management.
• Spreadsheets: While not as sophisticated as dedicated software, spreadsheets can be a useful tool for tracking KPIs, especially for smaller businesses with simpler data requirements.

Choosing the right tool depends on your specific needs, budget, and technical expertise. Start with a tool that meets your immediate needs and can be scaled as your business grows.

Building a Strong Partnership with Your Fractional Finance Team

Measuring performance is only one aspect of a successful partnership with your fractional finance team. Here are some other key factors:

• Clear Communication: Establish clear communication channels and expectations from the outset. Regular meetings, both formal and informal, are essential for staying aligned and addressing any issues that arise.
• Defined Roles and Responsibilities: Clearly define the roles and responsibilities of the fractional team members and ensure that they are aligned with your internal team.
• Trust and Collaboration: Foster a culture of trust and collaboration between the fractional team and your internal team. Encourage open communication and feedback.
• Long-Term Vision: Consider the long-term implications of your decisions and work with the fractional team to develop a sustainable financial strategy.

By establishing a strong partnership based on clear communication, defined roles, trust, and a long-term vision, you can maximize the value of your fractional finance team and achieve your business goals. It’s also worth noting that beyond the technical abilities, the best fractional teams also fit well into the company culture and are able to quickly develop strong working relationships with the existing teams.