What Is a Fractional CFO, and Why Do They Matter for Professional Services?

5 min read
11/16/22 9:00 AM

Professional services businesses offer expertise in their specific fields, but many niche business owners, such as those in healthcare practices, often struggle with the behind-the-scenes financial and business operations. 

In CEO's Guide to Restoring the American Dream, author Dave Chase states that healthcare-related businesses have the second-highest failure rate among small business niches, coming in at a 43% failure rate within the first five years of operation. This isn't because the services are unsuccessful or the customer care is subpar. It's often because the business and financial infrastructure behind the scenes of the business isn't up to the task. The purview of a CFO often includes:

  • Data-driven models that can assess your strongest services and make predictions for future revenue
  • Financial management tasks ranging from regulatory compliance to ensuring overhead doesn't outstrip the budget
  • Other strategic to-dos

Unfortunately, small, developing medical practices often don't have them. That's where a fractional CFO comes in—you can hire a financial professional who doubles as a consultant and a CFO to create a financial plan that can help you achieve your business goals beyond the five-year mark. In this article, we'll examine what a fractional CFO does and what benefits they can bring to your business.

What Is a Fractional CFO?

Fractional CFOs specialize in helping businesses that have developed significant financial challenges. Whether those challenges are the growth of a business that's never had solid financial plans, a business that's recently lost its financial leadership, or a small business that needs to reorganize its personnel or business strategy to stay profitable, a fractional CFO can help. Their role is to step into the shoes of a conventional CFO or partner with an existing CFO in a consulting capacity to make cost cuts, optimize cash flow, and create standard operating practices for smoother, more automated financial management.

Rather than being part of the full-time leadership, a fractional CFO is a part-time consultant that provides financial leadership at a fraction of the typical costs of a CFO. Besides that key difference, these professionals share the same responsibilities as other CFOs, including overseeing financial teams, creating financial plans, generating repeatable financial models for assessing and forecasting revenue, and working with COOs and other leaders within the organization. 

Fractional CFOs can be confused with CPAs, but they have very different roles. A CPA manages regulatory compliance with taxes and documentation, providing retroactive services for financial management. CFOs are forward-looking and create plans or strategies that guide future action.

Why Do They Matter for Professional Services?

Professional services businesses, such as healthcare clinics, differ from traditional small businesses that offer products or non-professional services. These types of businesses are primarily run by individuals that specialize in the professional services themselves, ranging from dentistry and optometry to dermatology; however, this specialization often means the business leaders aren't well-versed in the financial aspects of running a business. 

CFOs are particularly important in these organizations because of that knowledge gap. They can bring these benefits to your organization:

1. Save Time Creating a Financial Business Plan

Every business needs a financial evaluation and plan that can guide its growth and cash flow across several years. Which services bring in the highest revenue, and which are the most profitable? What operations are the biggest financial liabilities for your business, either due to high overhead costs and low scalability or because of actual legal liability? A CFO can look at the historical results your business has generated to create long-term objectives, annual goals, and milestones that keep your growth on track without opening your business up to too much risk.

2. Overcome Your Biggest Financial Hurdles

Simultaneously, a CFO can help you fundamentally address and resolve financial hurdles that haunt most businesses. These challenges include:

  1. Cash Flow Issues: Various business factors can impede stable cash flow. For example, you may have a seasonal business; dermatology offices may see far more business in the summer than in the winter, while orthodontists see regular ebb and flow cycles dictated by school calendars. Without proper cash flow management, slow seasons can put your business at serious risk of having to shut its door.
  2. Low Gross Margins: Lots of business doesn't mean your business is succeeding. High marketing costs, customers not paying their bills, and high salaries and equipment costs will cut into your profit margins. Fractional CFOs can help you adjust your pricing strategies to strengthen your margins.
  3. High Expenses: High expenses will sink your profit margins and your cash flow. If your business requires expensive equipment, it's important to have the right plans for financing, leasing, or saving up for that equipment. Too much debt and too many big-ticket purchases can be incredibly stressful and even make you a liability to your usual lender.
  4. Outgrown Existing Systems: Business growth is good. But outgrowing your network, equipment, rental space, or tools means you have to replace them or grow them. An experienced CFO can help you prioritize the right systems for faster growth, assess different methods of scaling your business, and otherwise smooth the transition to bigger systems.
  5. Need to Make Cost Cuts: Especially in a recession, any professional services business will need to reduce services, cut hours, or even let employees go. A CFO can examine the changes from a short-term and long-term financial angle so you can make the minimum possible cuts for the greatest possible effect.
  6. Navigating an Audit: Family-owned businesses in healthcare can undergo regular audits, especially if your patients use insurance to cover the cost of services. Having the right tools, software, and processes in place to systemize data entry and records is essential for any audit. 

How Do Fractional CFO Services Benefit Your Business?

Fractional CFOs play a role in all of the tasks we've discussed, but what are the real benefits of managing those tasks when it comes to your business and your own peace of mind?

1. Help Manage Growth and Optimize Opportunities

By systematizing your internal business practices and creating a clear line of cash flow, a CFO can help you identify — and act on — opportunities for stable growth in your industry.

2. Save Costs

Your business will see a reduction in costs due to:

  • Reduction of manual data entry and errors
  • Automated processes that minimize staff work hours
  • More efficient, bigger-picture purchase for growth or overhead
  • Fewer fines and penalties due to falling out of compliance

3. Limit Risks

A CFO helps your organization gain insight into growth opportunities worth taking and risks you should avoid. By creating data-driven models based on past performance and predicted future performance, your business can invest in your most profitable services and let riskier or less profitable options fall by the wayside.

Grow Your Professional Services Firm With a Fractional CFO

At Dillon Business Advisors, we specialize in providing professional services businesses with fractional CFOs, Controllers, and Client Success Managers to help their businesses succeed. Our team excels at creating sound financial strategies for businesses that need help with the complex financial commitments of business ownership. Reach out to us today to get started.

New call-to-action