What is an Interim CFO?

WHAT IS AN INTERIM CFO?

An interim Chief Financial Officer is a highy experienced finance professional who becomes a temporary member of your management team and takes over the responsibilities of a CFO who suddenly quits or needs to take an extended leave of absence. In such such situations, companies need to move quickly to ensure that key processes and initiatives continue without disruption.

An Interim CFO can also be brought in to deal with a crisis situation (e.g. a turnaround) or augment the finance function temporarily to improve cash flow, plan entry into new growth markets or maximize value before a potential IPO, debt financing, restrucuring or M&A transaction. We have prepared a case study on a successful mission in which we deployed an interim CFO for a software services company, which you can view by clicking on the following link: CFO case study.

An interim CFO role is usually a full time role. There are part-time CFO’s, and these are often referred to as fractional CFOs. They may continue working for your company for an indefinitely long period, whereas an interim CFO works full time but on a short term contract.

Every organization undergoes periods of change from time to time. As a business expands, it can experience growing pains, including financial reporting problems and accounting errors. Lack of systems and proper procedures can lead to suboptimal performance. An interim or fractional Chief Financial Officer can proactively assess the financial health of a company, develop a financial strategy, and implement a plan to put procedures and policies in place to ensure a strong financial future.

In addition to tasks such as preparing the annual financial statements, cost accounting and reporting, liquidity planning and procurement, working capital management and organization of the administrative areas, the interim manager CFO serves you as an equal sparring partner in all business areas and drives with “out-of-the-box” thinking and an active “hands-on” mentality, consistently advancing the transformation of processes or restructuring. The Interim Manager CFO is also available as a competent contact person on an equal footing for external partners such as auditors, tax consultants or capital providers and banks. Thus, the interim manager CFO makes a decisive contribution both at the operational and at the strategic level.

While most major corporations have a full-time Chief Financial Officer (CFO), your business might not be ready to hire a CFO or you may need time to find the right person for the role.

Other reasons for not hiring someone a permanent CFO include:

A permanent CFO is too expensive at this stage in your organization’s development
Your company is in transition, such as a merger, and you need someone with that specific experience during the transition
You have a one-off project that requires financial expertise until the project is completed
You need immediate, short-term help to implement new systems, and hiring a permanent CFO would take too long.
You’re not sure what to expect from a CFO, and you need to learn more about what they do before hiring one.

If you prefer to add a short-term or temporary person to meet the need for financial expertise, you need to understand how to find and manage such a person, because the process is very different from that of hiring a permanent CFO.

How do you evaluate the performance of an Interim CFO?

To measure the success of an interim CFO you need to compare job performance with the job description. Consider why you initially hired the interim CFO and the job you expected them to accomplish. Then compare the results against your expectations.

CFO evaluations usually include an assessment of “soft” skills, such as interpersonal communication, not just hard financial skills.

What knowledge does the Interim CFO need to have before joining your team?

An interim CFO must have strong knowledge of finance, financial regulation and accounting, as well as a deep understanding of your industry. He or she should have experience in managing the finance function in a company the size and complexity of yours.

An interim CFO must understand the mission and long-range goals of your company from a financial viewpoint.

What attitudes are important for the interim CFO to have?

First, the interim CFO must understand and accept that the role is temporary. In our experience, interim CFO’s prefer short time assignments over long term assignments and when they are induced to enter into a permanent role, it usually does not work out.

Once the interim CFO is onboard and settled in, you may learn that they don’t agree with the goals you’ve set for the company. Are they able to explain why they disagree? Can they provide solid evidence to support their position? Do they respect your feelings and express a willingness to work with you in resolving differences?

The interim CFO may discover that managerial reporting or internal controls in one or more departments need to be overhauled. Your department managers are resisting changes, especially those proposed by an interim outsider. Does the CFO have a “my way or the highway” attitude? A competent interim CFO will keep the lines of communication open. The ability to inspire trust and build cohesive teams is essential.

Nearly every company experience’s rivalries and interoffice politics. The right interim CFO avoids entanglement while remaining sensitive to undercurrents. That can be more difficult if you have promoted someone from within the company to the interim CFO position. You must ensure that the individual is not using the position to grind a personal ax or playing favorites. However, professionals from outside the company are not immune to losing their objectivity. An interim CFO that cannot remain objective is a liability for your company.

Along with objectivity in performing their job, a CFO, interim or permanent, must be objective in their reports to you. A CFO is responsible for:

Increasing the growth of a company
Improving profitability
Improving cash flow
Obtaining increased leverage
Providing financial direction and leadership

Fulfilling their responsibility means that CFOs have to be confident enough in their abilities to give you information about your company that you may not want to hear. Their objectivity enables them to be honest with you regardless of your possible reaction. If the interim CFO seems fearful or timid when presenting negative information, then they are not fulfilling the responsibilities of the position. That holds true also if their interactions with you are condescending.

Is Your Interim CFO Right for You?

Does the interim CFO increase or decrease your stress? Do you have more or less time to grow your business? Do you feel confidence in your company’s financial future? The answers to these questions will tell you if your interim CFO is the right person.

If you managing a startup or a mid-size firm, you may not be able to justify the hiring of a permanent chief financial officer. However, you could still bring in an experienced CFO to spend a month or two looking at your financial indicators (margins, working capital ratios, etc.) to provide you with insights that you might not be able to come up with on your own, especially since you are busy focusing on new products, new clients and new geographic growth opportunities.

If you are the CEO of a midsize business, you probably have a CFO already, but there are times when you might face some kind of discontinuity that your current CFO has never faced before. Or maybe that CFO has suddenly announced he’s planning to leave in a few weeks, just when you need him most.

In such situations, you need an interim CFO do deal with the discontinuity or crisis. An interim CFO, i.e. a temporary but full time CFO, is different from a fractional (part-time) one. Interim CFOs are experienced finance leaders who join a company on a full-time but temporary basis to help that company manage special projects, crises or discontinuities. In our experience, these interim assignments usually last between six and twelve months. We have deployed interim CFOs to help clients implement an ERP system, evaluate acquisition targets and manage the gap between the tenure of two “permanent” CFO’s.

Fractional CFOs, on the other hand, are people who work part-time (e.g. one or two days per week) on a long term basis, and they work for multiple clients, usually dedicating a full day at each client’s location.

There are a variety of reasons your business might need an interim (temp) CFO.

When a business moves from the startup phase and is entering into a growth phase (scaling up sales and personnel), it’s time to strengthen the finance function, especially if you are looking to raise capital.

As your business grows, a good interim CFO can come in for a few months to work with you to improve your balance of balance of receivables and payables, provide advice on venture capital, and help you think about whether to invest in specific growth opportunities.

If you need to raise capital, an experienced interim CFO can help you identify and connect with potential investors, develop your pitch deck, and update your cap table. If you have not raised money from investors or banks before, having someone on your team — if even only for a short time — can be a game changer.

Interim CFO: A full-time job with a short-term contract

If the previous CFO left without warning or was fired, or if the current CFO has insufficient experience with a particular situation (e.g. a merger or IPO), then you may require an interim CFO. An interim CFO will provide the extra horsepower you need to manage certain transitions, such as the due-diligence phase if the company is being sold.

Interim CFOs can also fill in gaps between fhe tenures of two full-time CFOs, especially when a company loses a CFO suddenly due to death, disability, or sudden termination. If your company has had a discontinuity in the CFO role and you need a few months to fill the vacant position, a contract CFO can keep the wheels moving in the meantime.

Also, you may want to hire an interim CFO is to take advantage of his or her specific expertise, such as carveouts, systems implementation, mergers or acquisitions, or restructuring in the event the company needs to reorganize through bankruptcy. Some interim CFOs have expertise in specific industries; for example, CFOs with experience in housing have been called on to help real estate firms navigate economic downturns.

Here are just some of the many advantages to using this potentially powerful strategy:

Having someone on your team with experience and skills to plan and implement your financial plan.
Interim CFOs like to focus on a specific short term task. They arrive, execute the action plan, and then, when you’re ready, they are off to the next position.
Hiring an interim CFO is substantially less expensive than hiring the wrong “in-house” candidate. You won’t have to make a long term commitment, or negotiate stock options and the other perks and benefits that typically go along with keeping an in-house CFO happy and motivated.

There can be a disadvantages too, but the pros far outweigh the cons.

The interim CFO’s effectiveness can be limited because he or she may be perceived as an “outsider” or “short-timer” from your staff’s perspective. This can happen when the interim CFO is not inducted properly into the organization.
Another disadvantage is that there is no time for the engagement to go off track, so careful monitoring is required to ensure that the interim CFO is meeting the required milestones. If not, the root cause needs to be analysed (e.g. perhaps more resources are required).

If you have not yet tried working with an interim CFO, it’s worth checking out. One of the biggest advantages of deploying an interim CFO is that it buys you time, time to hire a permanent CFO or to deal with an issue that your current CFO is too busy to handle.