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HOW TO MEASURE THE ROI OF A FRACTIONAL CFO If you’re thinking about hiring a fractional CFO—presumably to improve finances—it only makes sense to analyze the investment and make sure you’re getting your money’s worth. But how do you go about doing that?

TIMING First, let’s talk about timing. You can’t actually measure ROI until after hiring the individual and waiting a reasonable amount of time for changes to be made. That doesn’t feel forward-thinking, though, and it doesn’t help you make an informed decision about hiring a fractional CFO. So you need two phases of measuring ROI: one predictive and one actual.

PREDICTIVE ROI During the negotiation process and the early days of the hire, work with your prospective executive to determine likely ROI. One way to do this is having the individual complete a financial diagnostic for you, either as a separate engagement or in the early days on the job. Ask him or her to estimate likely savings or revenue gains based on the assessment. You can use this assessment to establish financial priorities and compare the predictions with the cost of hiring the individual. We recommend running the numbers for different lengths of time—3 months, 6 months, 12 months, etc.—because the results of financial improvement are not often immediate (some take years). Of course, keep in mind that these numbers are only estimates, not guarantees.

But what about actually measuring ROI from the CFO’s work?

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MEASURING ROI First, keep track of the work. Having your fractional executive keep a record isn’t intended to be some type of micro-managed account of all of their activities. It’s simply so that you can accurately measure the effects of their work on the organization. In addition to keeping track of the actual activities, you need to record known or estimated savings or gains from each activity. Some of those numbers will be known immediately, while others may take weeks or months to reveal. With your CFO, regularly revisit the list and update the numbers. Another note about timing: while the CFO may need to update the list regularly, we recommend reviewing the list together only periodically. Financial gains are often incremental over months, and constantly checking those numbers will only lead to stifling the CFO and transferring his or her focus from long-term success to immediate gains. Keep in mind that some financial results may be difficult to calculate. Paths not taken or education gained are hard to quantify. Work with the CFO to reach some reasonable estimates on these vital contributions.

METRICS TO TRACK Every fractional CFO will require slightly different metrics, but here are the major categories of improvements that we’ve observed.

CUTTING COSTS This may be broadly observed across all organizational costs, or noticeable in very specific areas. Likely actions might be finding better pricing for materials, negotiating a lower price on new machinery, or making fixed costs variable. Better tax strategy may save you money as well. Your fractional CFO may also recommend production improvements that save money by increasing production.

IN ACTION In our work with an $11M organization, we were able to track $1M in savings in a single year. That’s a significant return on the cost of their fractional executive.

IN ACTION We took a phone call from one of our clients who was buying new machinery. In a short phone call with his fractional CFO, he was able to save $30,000.

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INCREASING REVENUE Your CFO can enhance revenue by optimizing your pricing structure. Better pricing can increase sales to current customers, improve your margins, and drive new sales.

EDUCATION In our experience, many business owners aren’t sure how to read financial statements or understand financial data. If your CFO can teach you to make more informed decisions, what is that worth? The answer to that question is probably a very imprecise estimate. Knowledge is difficult to quantify but highly valuable to both individuals and organizations. Such knowledge could save you from being fleeced by unethical partners or employees in the future. It may lead to your making more financially strategic business decisions. The potential impact is endless.

MENTORING Your fractional CFO is likely to mentor and improve members of your financial staff, especially your controller. In fact, this alone might be a significant reason to hire a fractional CFO. Let’s say you really like the work your controller is doing, but he or she doesn’t have the experience to be forward-looking and assist with strategic planning. You can hire a fractional CFO for a short engagement to get your finances in a good place, set the foundation for the future, and lead the controller in expanding his or her abilities. How do you measure the ROI for mentoring? Like education, it is complicated to quantify, but you can consider the cost of other options. How much would it cost to send your controller for additional training, either via higher education or industry courses? How much to hire a full-time CFO instead of promoting your controller?

BETTER DECISIONS What is it worth to have good information and make strategic decisions? Ideally, this is the role of your CFO. He or she doesn’t just check for costs to be eliminated or tweak pricing models, as useful as those actions can be. Your CFO should provide you with strong data and the strategic advice necessary to make great long-term decisions. .

If your CFO can teach you to make more informed decisions, what is that worth?

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Be certain not to neglect this facet in your record of the CFO’s contributions. Notice when he or she provides a detailed report, or offers insight in the direction of your company or the market. If major company decisions or priority shifts are made with your fractional CFO’s input, note that. If revenue clearly improves, you’ll be able to put some numbers on these decisions.

CONCLUSION You can and should measure the return on investing in a fractional CFO. Choosing a fractional CFO can be a great financial decision for your organization—high experience and value without full-time costs—and you owe it to yourself to both predict and measure the financial impact of this important hiring decision.

ABOUT BROAD INSIGHTS With more than 100 clients served in the past five years, Broad Insights is one of the leading business coaching and strategy companies in the nation. With a team of more than a dozen coaches, Broad Insights works with mid-sized companies that are looking to create more effective leadership, enhance employee engagement, clarify strategy, and increase customer satisfaction. Broad Insights coaches are available for a variety of fractional roles. If you have any questions about fractional roles or how Broad Insights could help your business, contact us at info@broadinsights.com.

Your CFO should provide you with strong data and the strategic advice necessary to make great long-term decisions.