Fractional CFO

What is a fractional CFO?

Fractional CFO (a part-time head of finance) is an experienced finance executive who serves a company with only part of their working time, typically a few days a month. In parallel, they work for other companies. The terms external CFO, part-time CFO and CFO as a service mean the same thing. CFO stands for chief financial officer, that is, the person responsible for a company's finances; in German companies this corresponds to the head of commercial affairs or the managing director for finance. The word fractional means proportionate. A specialist teacher who teaches at several schools works in a similar way: each school gets their full expertise, but only for as many hours as it needs.

The model is common among growth companies whose financial requirements have outgrown bookkeeping by the tax adviser. However, they do not yet want or are not yet able to fill a full-time CFO position. A frequent trigger is an upcoming funding round, a bank loan or a planned company sale. The basis is a service contract with the company. The fractional CFO works with the management, the tax adviser, investors and banks. To be distinguished from this is the interim CFO, who takes over the finance leadership full time for a limited period for a single company.

Tasks and services of a fractional CFO

• Financial model and planning: building and maintaining the financial model and an integrated financial plan in which the profit and loss account, balance sheet and liquidity are linked by calculation, plus the annual budget.
• Reporting: monthly management reporting with key figures, a comparison of plan and actual and an explanation of the deviations for management, shareholders and advisory board.
• Liquidity: rolling liquidity planning that is updated monthly, plus the management of payment terms and credit lines.
• Banks and investors: preparing bank meetings, monitoring contractual loan conditions (covenants) and regular reports to the shareholders (investor updates).
• Transactions: preparing the funding round and due diligence, that is, the review by investors or buyers, with the finance part of the data room, the document collection for the review, and answering the review questions.
• Building the finance function: a reliable monthly closing with the tax adviser, clear approval processes, suitable software and the onboarding of a later full-time CFO.

Way of working and remuneration of a fractional CFO

A fractional CFO works with an agreed time allocation, usually on fixed days and in addition as needed, on site or remotely. They receive no salary but a fee, generally as a fixed monthly amount for the allocation or at day rates. Compared with an employed CFO, there is no fixed salary, no employer social security contributions and no recruitment costs, and as a rule no variable pay and no equity stake in the company.

Legal position of the fractional CFO

Contract and power of representation

A service contract under Section 611 of the German Civil Code (BGB) is usual, either with the individual or with a consulting firm that provides them. What is owed is the activity, not a particular result. A fractional CFO is generally not appointed managing director and therefore cannot represent the GmbH (German limited liability company) in their own right. Power of representation arises only through a power of attorney from the company, for example for particular bank meetings or negotiations. Its scope should be set out in writing and narrowly.

Responsibility for the finances remains with the management. Under Section 41 of the German Limited Liability Companies Act (GmbHG), it has to ensure proper bookkeeping and bears the duties in a crisis, such as the duty to file for insolvency under Section 15a of the German Insolvency Code (InsO). A fractional CFO supports the management in this but does not relieve it of these duties.

Bank access, confidentiality and status

Access to bank accounts is often granted as read-only access. The fractional CFO prepares payments, and they are released by the management under the four-eyes principle, under which two people must approve. If a payment authority is granted, it comes with amount limits. Because the fractional CFO serves several companies, the contract regulates confidentiality and the handling of conflicts of interest, for example by excluding simultaneous work for direct competitors.

If an individual works subject to instructions and is firmly integrated into the work organisation, dependent employment may exist for social security purposes. This can be clarified bindingly in a status determination procedure with the German Pension Insurance (Deutsche Rentenversicherung) under Section 7a of Book IV of the German Social Code (SGB IV).

Boundary with tax advice

Under the German Tax Advisory Act (Steuerberatungsgesetz), assistance in tax matters is reserved for the professions authorised to provide it, above all tax advisers. This includes tax returns and tax advice and, in principle, also bookkeeping and the preparation of financial statements, insofar as they are of significance for taxation. Within narrow limits, simple activities are exempt, such as booking current business transactions by persons with commercial training and several years of experience in bookkeeping. A fractional CFO without this authorisation therefore does not give tax advice. They work in support of the tax adviser, clarify deadlines and data quality with them and use their results for planning and reporting.

When a fractional CFO makes sense

Use is typical in three situations. First, in the growth phase before the first full-time CFO, when investors or banks demand reliable monthly figures. Second, often six to twelve months before a funding round, because the financial model, key figures and data room need lead time and investors read the quality of reporting as an indication of the quality of management. Third, before a company sale or a succession, when the figures have to be prepared so that they withstand a buyer's review.

The model reaches its limit when daily presence is required: with a finance team of several people, with several companies in different countries or in an acute crisis. A full-time CFO is then the more suitable solution, and for a limited period an interim CFO.

Practical example: a fractional CFO before a funding round

A software company with EUR 6 million in annual recurring revenue and 45 employees wants to start a funding round in three months. The bookkeeping is with the tax adviser, and the managing director manages the finances alongside sales. The company engages a fractional CFO for a few days a month.

• Starting position according to the managing director: EUR 4.2 million in liquid funds and a monthly liquidity consumption (net burn) of EUR 250,000. Length of time the liquid funds last (runway): 4,200,000 divided by 250,000 = 16.8 months.
• The integrated plan captures eight planned hires, the loss of annual advance payments from two large customers and bonus payments falling due. The average net burn of the next twelve months rises to EUR 350,000.
• New runway: 4,200,000 divided by 350,000 = 12.0 months, so at the start of the process in three months only 9.0 months.
• In practice, a funding round often takes six to eight months. If the process starts in three months, the round is completed after nine to eleven months; a reserve of only one to three months remains.
• If the process starts immediately, the round is completed after six to eight months; the reserve is four to six months.

The result means that without the integrated plan, the company would have gone into the round with a supposed runway of almost 17 months. It would only have noticed during the negotiations that the funds were running short. In this case, the benefit of the fractional CFO lies not in additional reports. It lies in the management starting the process immediately instead of in three months and reprioritising hires. The reserve after completion of the round thereby rises from one to three months to four to six months.

Distinction: fractional CFO, interim CFO, permanent employment and controller

• Interim CFO: works full time, for a limited term and for a single company, usually in special situations such as a vacancy, a restructuring or a transaction. They are often appointed managing director or receive Prokura, a commercial power of attorney comprehensively regulated by law.
• Permanently employed CFO: leads the finances full time, leads the finance team and is often a member of the management. A fractional CFO is frequently the preliminary stage to this position.
• Tax adviser: handles bookkeeping, annual financial statements and tax returns and thus looks mainly at periods already ended. The fractional CFO looks ahead to planning, financing and management.
• Controller: evaluates the figures operationally, for example in cost accounting and variance analysis (controlling), and is usually employed. A fractional CFO sets the framework and can lead a controller professionally.

Common mistakes

• Starting too late. If a fractional CFO is engaged only a few weeks before a funding round, the monthly figures by which investors gauge the reliability of the plan are missing.
• Unclear authority. Without written rules on powers of attorney, bank access and approvals, uncertainty towards banks and risks in payments arise.
• Role of the tax adviser not coordinated. Without a division of tasks, duplicate work or gaps arise, for example with accruals in the monthly closing.
• Responsibility supposedly handed over. The management remains responsible for bookkeeping and liquidity, even if a fractional CFO prepares the work.
• No handover plan. If the engagement ends without documentation of the model, processes and definitions of key figures, a later full-time CFO starts from scratch.

Frequently asked questions

How much time does a fractional CFO spend in the company?

Usually a few days a month. In phases such as a due diligence or budget planning, the scope temporarily increases.

What does a fractional CFO cost?

This depends mainly on the agreed time commitment. As a rule of thumb, the day rate is in the low four-figure euro range, similar to an interim CFO; a fixed monthly amount for an agreed number of working days is usually billed. Because only part of the time is paid for, the costs are generally far below those of a full-time position. The day rate itself is higher than the notional daily salary of an employed CFO.

Can a fractional CFO be appointed managing director?

Possible, but unusual. With the appointment, the person takes on the duties and liability of a managing director under Section 43 GmbHG. For a part-time role serving several companies, this is rarely wanted.

Does a fractional CFO replace the tax adviser?

No. Tax returns, tax advice and, as a rule, bookkeeping and annual financial statements remain with the tax adviser. The fractional CFO supplements them with planning, management and financing.

When is the move to a full-time CFO appropriate?

There is no fixed revenue threshold. Signs are a finance team that has to be led, several companies, daily financial decisions and investors' expectation after a larger funding round.

The Roemer Capital view

Alongside supporting funding rounds and company sales, the finance function on a part-time basis is a core service of Roemer Capital. As a fractional CFO, we take over the financial model, planning, reporting and investor communication; for this we agree a fixed monthly fee in the four-figure range. Clients see the results in the client portal Roemer Capital OS (RCOS). There, the profit and loss account, balance sheet and liquidity sit in an integrated plan, together with the monthly budget-vs-actual comparison, benchmarks with a financial check and reports that explain the figures in plain language. Bookkeeping, annual financial statements and tax questions remain with the client's tax adviser.

The value shows at the latest in the transaction process. Because the same figures that were reported monthly later appear in the financial model and the data room, a funding round or a sale begins without months of preparation. Our aim is a data room that is ready within 24 hours. In liquidity planning, we make sure that 12 to 18 months of runway remain at the start of a funding round.