Empowering Healthy Business: The Podcast for Small Business Owners
The Empowering Healthy Business Podcast is THE podcast for small business owners seeking to balance having a nicely profitable business, a sustainable, scalable, and salable business, lower stress levels, better work-life balance, and improved physical and emotional fitness. Yes, this is possible! Though it’s not easy. We’re here to help you navigate toward this objective.
Empowering Healthy Business: The Podcast for Small Business Owners
#20 - How to Achieve a Successful Fractional CFO Engagement
Small businesses may have a solution in place for bookkeeping and producing basic financial statements. Owners often yearn for analysis and forward-looking planning. The fractional (part-time) CFO model has existed for 20+ years to fill that void. Today there are more options than ever. Achieving successful results from fractional CFO engagements, however, can be a challenge. In this episode, Dave Hartley shares his insights about how business owners can create successful fractional CFO engagements that deliver the most value to their businesses.
More specifically, this episode includes:
- Differences between a fractional and full-time CFO
- Recommendations for selecting a fractional CFO
- Setting realistic expectations for your fractional CFO engagement
- Keys to successfully delivering fractional CFO engagements
- Pricing models for fractional CFO services
- Graduating to a full-time CFO or transitioning to another type of fractional CFO
Dave Hartley can be reached at linkedin.com/in/davehartley. He is the co-host of the But Who's Counting? podcast.
Sponsored by SmartBooks. To schedule a free consultation, visit smartbooks.com.
Thanks for listening!
Host Cal Wilder can be reached at:
cal@empoweringhealthybusiness.com
https://www.linkedin.com/in/calvinwilder/
Welcome to the Empowering Healthy Business podcast, THE podcast for small business owners. Your host, Cal Wilder, has built and sold businesses of his own and he has helped hundreds of other small businesses. Whether it is improving sales, profitability and cash flow; building a sustainable, scalable and saleable business; reducing your stress level, achieving work life balance, or improving physical and emotional fitness, Cal and his guests are here to help you run a healthier business, and in turn, have a healthier life.
Cal Wilder:Welcome. So in this podcast, we're talking about empowering healthy business in general, and at its core, we're talking about financial health. And that can mean profit, it can mean cash flow, it can mean sustainability, maybe scalability to grow, getting a return on invested capital in business. Maybe it means financial planning and analysis around new business lines, or M&A transactions. And so from the context of small businesses, who is our target audience for this podcast, we're talking about businesses, typically less than $20 million in annual revenue. And unless they're a well financed, you know, venture backed company with at least a couple of rounds of financing under their belt, they probably cannot afford a full time CFO. And frankly, they probably don't need one either, because there's certainly not 40 hours a week of real CFO work to be done in most small businesses either. And so these days, they can turn to the fractional CFO model. And joining me today is Dave Hartley, who runs the client advisory practice at Anders CPA, where a large part of that practice is virtual or fractional or whatever you call part time CFO services. These days, we may have fractional VP of Sales, fractional Chief Operating Officer, fractional VP of HR. But the fractional CFO is really the granddaddy of them all, the first kind of fractional C level model that really came to market a couple decades back. And so today, Dave is going to help us explore how to create successful fractional CFO engagements. And it's important to understand how the fractional CFO model is different than the full time CFO model. So, welcome to show Dave.
Dave Hartley:Thanks, Cal. It's great to be here and look forward to sharing my my thoughts and experiences with your audience.
Cal Wilder:Great. So kind of what's what's your background that brought you to this fractional CFO space? How long you've been doing it? Yeah,
Dave Hartley:So I've actually been doing professional services for over three decades. I actually started, got a degree in accounting, passed the CPA exam, started doing external audit in the big four, and then transitioned to IT audit, and then ultimately to consulting. And so I've advised clients for 30 plus years, and most recently, my focus has been on the lower middle market. So companies 30 million, 20 million and under. So happy to be here and talking about sort of what we do in virtual CFO services, and how companies can really get value from those types of solutions.
Cal Wilder:So maybe we can start the beginning of this episode geared around if I'm a small business owner, how do I set myself up for success if I engage with a fractional CFO? And so, before I make that decision, I guess I need to come to a realization that maybe I should engage with a fractional CFO. And so what are some of the signs or symptoms that would suggest maybe I should be working with a fractional CFO?
Dave Hartley:Yeah, and Cal, I thought your intro was great, because they're generally for smaller clients, a 20 million and under there generally is not enough business to keep a CFO busy full time. And then also, generally, a business that small can't afford to have a full time CFO. So I think this is a relatively new entrant into the market. And so I think it's important for companies even to be aware that this is an option. Because in the old days, what would you do? I mean, when you had a technology opening, or an accounting opening, you just go hire somebody because there were people available and on the market. And I think what you'll find now we have a lot of clients in that space, who come to us and say, I just can't attract the talent that I need either in accounting or in technology. Can you help with that? Can you outsource that? And so I think a lot of us, a lot of professional services firms are seeing that need. So the concept of really a virtual back office is really gaining steam, where virtual CFO, virtual CIO, virtual CHRO, those types of services delivered on a fractional basis are a perfect fit for the 30 million and under crowd. And I think Cal also in your intro, you went through sort of a list of these are all of the types of things whether it's capital for you want to launch a new location or you want to get funding or whatever. I mean, there's so many different needs that businesses have, and generally it's hard to find one person that has all of that experience. And that's where finding a firm that can divert deliver the services fractionally can be perfect, because then they have access to those types of resources. So it is important to understand really what you want out of this relationship to to make it as effective as it can be.
Cal Wilder:Titles can be pretty cheap, especially in small businesses. So there are a lot of people walking around with controller titles or CFO titles, who really spend most of their time doing accounting or bookkeeping. And so could you help explain some of the differences between these roles? And what is the the nature of the work that we call really the kind of CFO work where we need to bring in somebody who really has that skill and experience?
Dave Hartley:Yeah Cal, I'll answer that question, and I'll describe kind of how my firm does it. But I think that will help people just understand what the options are. So in our world, there's actually three levels of services. So the lowest level is the more transactional accounting, making sure that the books and records are accurate, whether it's payroll, accounts payable, any of those types of things, making sure that is taken care of. A higher level of service is controller. So our controller level service is more focused on making sure that all the things I just described in the transactional level are done, right. But then you're starting to do some more things, you're interacting with the client at a higher level, and maybe you have a meeting a month, where you go through the financial statements, you talk through some of the business challenges, those types of things. And that can be, you know, incredibly valuable as well. But then I think where companies get the most value is that true virtual CFO relationship. And the key to that is really, you know, what are the key business decisions or the key business issues that your business is facing? And then how can I, how can a virtual CFO help you with those decisions. And I think that that's a key part of the relationship is understanding that this is someone that's going to be a virtual CFO, is someone that you really need to let into your business, and you need to trust this person. And you need to share with them what your challenges are, what your issues are, you know. If this is a relationship that you're not comfortable with, that you think, you know, maybe I'll try this person, but I really won't share everything with them, that's probably not the relationship you're gonna get, because you want or you want a relationship where you can share everything. And if you find the right virtual CFO relationship, you have somebody that can really bring a lot of value to the conversation about the business issues that you're dealing with whatever they are.
Cal Wilder:Could you talk a little bit about the differences between what you would expect to get with a full time CFO, who's an employee and officer of the business, versus a fractional CFO who is more of a"consultant"?
Dave Hartley:Yeah. And I think the, you know, if you are there 40 hours a week, and you're in all of the meetings, not just some of the meetings, but you're in all of the meetings, you know, that is going to be a better, deeper relationship. But as we mentioned before, generally there's not 40 hours a week worth of work that the CFO needs to do. And the cost of that person is so high that it prohibits a lot of businesses from even having that as an option. So that's where the virtual CFO solution is a perfect fit, because it solves both of those dilemmas. And so, you know, one of the key things that are, that's part of our model, is that we insist that we meet with you, with the leadership team with you, if you have a weekly meeting with your leadership team, that that's one of the meetings that we participate in, because we want to understand what are the key challenges facing the business, because there may be insights and solutions that a virtual CFO can bring to you, that you may not either be aware of, or understand even what your options are. So a good virtual CFO is going to participate in those meetings, they're going to have a lot of interaction with you. And then during during that weekly one hour meeting, that's where a lot of you know solutions are going to be discussed, issues are going to be addressed, those types of things. And that intimate weekly relationship, that conversation that happens. And over time as the virtual CFO gets to better understand your business, that's when there's a lot of value, because then your virtual CFO starts actually becoming much more proactive, and looking at what's coming. And when we think about budgeting, OK, well, you said in the second quarter you were going to do this. Let's talk about that. Because we're, you know, we're behind in Q1, so how does that impact Q2. That's where the virtual CFO will bring a lot of, you know, really challenges to the situation to better understand and, you know, sort of force a conversation that needs to be had rather than just kind of crossing your fingers and hoping everything works out.
Cal Wilder:Right. And so if you've, you've come to the conclusion that you think you'd benefit from a fractional CFO, what are the first steps in that process-- in the buying process?
Dave Hartley:So I think the first thing is just doing your research, because there are a lot of different, you know, so let's let's contrast sort of virtual CFO solutions, like our model that we deliver our virtual CFO model is done entirely remote. For some businesses, that works perfect. For other business owners, that's not so great. So you know, you need to really understand what the model is and how it's going to be done. So the virtual CFO piece, or another model, and this is common in, you know, almost every market across the country, but there's fractional CFOs that are available that are in your local market. And that may be a person that actually comes on site, one day, two days a week, that kind of thing, and is providing, you know, sort of a different relationship. And so I think one of the key things that needs to happen first is really that research, where, you know, go out, search, you know, virtual CFO, virtual CFO services, fractional CFO services, and find out what's available. And you may find, you know, in your market, there's a couple of good fractional CFOs, who are doing great work. And then you also may look, you know, to national firms who are doing you know, this, and I think one of the big differences, one of the things I would recommend, as well, is sort of understanding the, the, you know, the models that they use, how they deliver the service, you should be able to get a lot of that information off of websites, and, you know, business, social media and those types of things. Once you understand that, I think one of the differentiators also then for sort of that second step is okay, they may be good at General Accounting type things, but then how much do I want them to know and understand about my industry and my particular business. So there, there are nuances, whether you're a coffee shop, you know, there's certain KPIs and metrics that are key for that business, versus if you're a transportation business, or you know, whatever you are, there's nuances to that business, there's lingo, there's, you know, a definition of how the business operates, the metrics that are used. So all of that can be really helpful to find a person that really understands your industry. And, you know, because otherwise they can provide good general advice, you know, relationships with banks and those types of things. But in terms of Do you really want them to be, you know, either, you know, a true national expert in your business, where when you have that first conversation with them, they're like, Okay, answer these two questions for me. And then they can basically say, Oh, you're way out of line with sort of the industry benchmarks, you know, your your cost and this area is too high, we really need to look at this, because your inventory turns are not what they should be, you know, those types of things. That's where somebody who really knows the industry, and has worked with similar businesses can bring a ton of value, right out of the gate.
Cal Wilder:So speaking of bringing value right out of the gate, you know when you hire an employee, you expect it's going to take some number of weeks or months for them to get up to speed. What should you expect from a fractional CFO in terms of time to get up to speed to be able to have a real understanding of your business and start to be able to have a real impact?
Dave Hartley:Well, I think it's, and that's a great point. And we do have a significant focus on onboarding as part of what we do, because we want to make sure that we're delivering value as soon as we can in that client relationship. So I think it depends on, you know, sort of what the nature of the relationship is, if this firm or person is going to come in, take over all of your accounting, a lot of times a lot of clients that we pick up, they're struggling, they're they're behind in doing reconciliations, they haven't produced financial reports in the last couple of months. And they really need help. So if that's the case, you have to be realistic and talk about expectations with your virtual CFO, around how long it will take in there are some instances where you know, things are a mess that you come in, and it's probably going to be for 812 weeks, before things are really fixed. And then you can you know that everything starts to happen the way that the full relationship should. But that doesn't prevent from day one, somebody being able to have conversations with you about your business, discuss pressing business issues, and start to learn and understand. So it's not a relationship that should take years to produce value. But there is kind of an onboarding period. And you need to have clear discussions with your virtual CFO about what that entails, sort of What's that process going to be like? You know, and that's a great question. That's a that's a way that you can really tell the maturity of whoever you're working with, is to ask them about their onboarding process. And if they answer and say, oh, yeah, here's exactly what it's going to be. There's a seven step process, here's the documents we're going to need from you, those types of things that should give you some comfort that they've done this enough before that, you know, they probably figured out their solution offering and once you've decided if it's a match for what you really want, then you should be able to get a lot of value out of that.
Cal Wilder:Right. So when it comes to things like, you know, that gray area, are you legally representing the company or not? If if I were working as a full time CFO like I have in the past, there'd be no question I do review and authorize and sign contracts on behalf of the business, or I represent the company to banks or lenders or investors, right? Because I'm a named officer of the business, I'm a fiduciary of the business, I'm an employee of the business. But if I'm a part time, fractional person, it's different. And so what should I expect of a fractional CFO,when it comes to the legal gray areas.
Dave Hartley:And cow, that's another great question to talk through with different firms as you're, as you're talking with them. Because, you know, generally in our relationships, we set the expectation that we're your coach, we're your advisor, we will do a lot of the work, but at the end of the day, you're responsible for making the decisions, ensuring the accuracy of everything that's there. So, you know, as as an in house CFO would, you know, they put things together, but then other people in the business need to review them to make sure that they're right to make sure that they're accurate. But you need to understand sort of what those roles and responsibilities are. So, you know, for example, we may, you know, uncertain bank accounts, do we, you know, does the firm get put on those, to your point about, you know, can they execute contracts based on, you know, the nature of the relationship? Those are all great questions to understand. And I do think initially, you know, when you're having these initial conversations, these are great questions to ask. And there's really no question that's off limits, because every business is different. Every business is at a different stage of maturity. You may have tried a solution like this before, and it didn't work for certain reasons. Well, with the next firm, that you're talking to talk about those reasons. Talk about why you know that what are the reasons that happened? And are there different alternatives or better solutions, or the firm may look at you and say, sorry, that's an unrealistic expectation, we would do the exact same thing as your prior firm did. So therefore, you know, unless you change your expectations, we're probably not going to be a good fit for you. And that's why that initial conversation, doing your research, following them on social media, you know, a lot of a lot of firms publish a lot of information, they have different tools that they'll put out there, looking at those and figuring out are you going to get value from that, because that's what the firm or the person that you're interacting with, you know, thinks you'll find valuable. And for some businesses, that's 100% Spot on. For others, it's not what they're looking for. And that's why you need to be an educated consumer in this space, and make sure that you're asking those questions, and you're having that conversation, and then figuring out are the people that you're working with? Are you comfortable with them? Can you share the intimate details of your business? What's going right? And what's going wrong? Do you feel comfortable enough that you can have that open relationship, and the best relationships that we have are ones that are, you know, where that trust and that confidence exists?
Cal Wilder:Right, I think, you know, it's a little bit different than your straight accounting, or controllership kind of role, where it's policy, procedure, consistency. You don't need a lot of creativity. You might not want a lot of creativity in your staff accountant. You don't want them going off the rails, right? They gotta follow the rules. But when it comes to a CFO engagement, it's a lot more consultative and a lot more creative. And I think that personality fit between the CFO and the CEO is really important. Like you said, you get to a high level of trust, and they've got to click to be able to work together effectively.
Dave Hartley:Yeah, and Cal that that's a key point that I think let's draw that point, because you're making a good one, which is a lot of a lot of prospects that we talk to, they're frustrated, because the firm that they're working with, is only giving them you know, only giving them results from the past. They're very focused on accounting for everything and making sure that everything's right. So they will deliver financial statements to you that are accurate. However, most clients are frustrated, because that are most prospects are frustrated, because that's not what they're looking for. What they're looking for instead, as you're referencing is somebody that will really help them look ahead in their business, and make sure that they're really, you know, we're talking about the future here. We're not talking about the past. I want to understand how you, as a virtual or fractional CFO can make my business better. How can you help me improve? And in theory, the virtual CFO should bring to you more experience or expertise in areas that you don't have and where this solution is particularly valuable. Let's say you know your your business As owner, and you're great at developing new solutions, or you're, you're a salesperson, you're a natural salesperson. And that's your strength. Well, that's where having somebody that has this different skill set of a virtual CFO can help you because that's not your natural strength. That's not the thing that you bring to the table every day. So a lot of times we have these conversations. And these are conversations that many small business owners have never had before, because they don't have someone on their team that has this area of expertise. So therefore, once you really start having these dialogues, and you're like, Man, this virtual CFO is helping me make better business decisions based on data, as opposed to me just crossing my fingers and hoping that it's all going to work out, which is another thing a virtual CFO should bring to you, which is really top line revenue is great. But at the end of the day, a business exists to generate profit. And so when you look at that, and there's a lot of situations that we go into, and you know, a lot of small business owners, as long as there's cash in the account, we must be doing okay. And that's a real understanding of a virtual CFO can help you with margins, looking at your spend, trying to figure out here's where the business is underperforming. And here are three potential options that we could talk about on how you can fix it. That's the value that a truly effective virtual CFO solution is going to be able to bring to you.
Cal Wilder:Yeah, Dave, I think you're spot on about a couple points there. When I'm at SmartBooks, when I'm talking to a prospective client, part of that discussion inevitably involves, we can give you a bookkeeping accounting solution that does a great job with the day to day transactional accounting and reporting on what happened in the past. But the difference between a CFO and an accountant or controller, a lot of controllers, some are great and forward looking, but many of them are, you know, classic accountants, classically trained accountants, where they're focused on accurately reporting the past. And when you're a business owner, what you really care about is what's going to happen next year, not as much what happened last year or last month, right? And that's such a key differentiator, I completely agree with that. And, you know, fractional CFOs can seem expensive, especially if you look at their price, their effective price per hour. And so the key is understanding, I think, like you said, how are they creating value for the business that exceeds their cost? At some level, maybe they're keeping you out of trouble or fixing a mess. But really, once that project is done, like you said, it's about leveraging their experience and their skills, to do the analysis to figure out what are the right key performance indicators and operating metrics that really move the needle for the business. They might not be able to tell you exactly what you need to do to get more profitable or grow. But they can focus you on the right set of metrics, and then you as the entrepreneur, who has the special sauce and the genius in your company in your industry, you can figure out exactly how to manage the business to improve those those metrics.
Dave Hartley:Yeah, and that's where that distinction between you know, and that's important for people to look at, which is, that's great if I can get a general solution that handles these seven things for me, but the thing I'm really going to find valuable is somebody that really knows my industry knows those KPIs and can tell me, you know, if I own a coffee shop, you know, does the person that I'm working with, do they advise 20 other coffee shops? Or, you know, if it's a firm, do they have 50 of these types of clients, so therefore, they're to the point where they're starting to have benchmark data, when they look around and talk about, okay, well, you have a unique kind of skill set on your team. So you need to think about compensation, because right now we've looked at what your compensation increases are, that you're planning to do, and they're way out of line with the market, you think you're only going to give 3% raises, we see everybody else in our client base in the seven to 8% range. So that's the kind of insights that somebody can bring to you. But it is, you know, it's a difference and the price point differences, differs by these, you know, different factors. And then also another thing Cal that we're seeing is also more of a combination of these types of things. So you may have, you may have somebody on your staff, that's a great accountant, that sort of handles everything that you need to do in the basic accounting, but that person does not have the skills to do really the forecasting, and to do you know, the strategic business advice. So maybe you have somebody in-house handle the accounting, but you really need somebody with that, you know, somebody who's been there done that, that has the, deep true CFO experience that can help you see around corners that you can't do on your own. So, and that CFO, you need to make sure that CFO is perfectly fine with working with your in house staff. And you know, whether they supervise that staff or however that works, those are the types of things that you need to figure out when you're doing your research. What are even the options, and then which of those options and combinations is going to work best for me in my situation and my business, whatever maturity level that you're at.
Cal Wilder:Right. And one other point I'd make, while we're chatting about expectations that I should have, as a buyer going into this kind of engagement, relates to this concept of delegation of responsibility versus abdication of responsibility. I put out a video a few years back about this, I think in the context of filling the finance seat in a company that utilizes the Entrepreneurial Operating System, or EOS, which is an increasingly popular management framework in small business space. And so in that framework, you've got their version of the org chart, where you're supposed to have one person in each seat that owns everything related to the function of that seat. And so there could be a tendency to say, Okay, I'm gonna go hire this fractional CFO, they've got all this great experience, they've given me a great sales pitch on how they can help me, and so I'm just going to expect and trust that they're going to do everything that's needed to make my company financially successful. And I'm just gonna go focus on something else that I enjoy doing more. And then, you know, a few weeks, a few months, a year go by, and you're not financially successful, things are not going nearly as well as you expected. And then you can just blame the fractional CFO, because they didn't follow through on their responsibility. And if it were a full-time CFO, maybe there's merit to that feeling of blaming them a little bit. But if it's a fractional CFO, they're limited in what they can do. They don't directly manage your employees. They're not full time. They're usually remote these days. They're not involved in your day to day operations, because they might only be working a few hours per week, on average. So there are limits to what they can accomplish. And so it's hard to say, I'm going to abdicate all the financial responsibilities in the business so I can go focus on sales or software development or playing golf, or whatever it is I want to do instead of having to be involved in finance myself. And so, how should the CEO navigate that dynamic in a fractional model?
Dave Hartley:Yeah, so first, I agree. So operating systems like EOS, Pinnacle Business Guides-- fantastic solutions for small businesses. So in some ways, when I first got familiar with EOS, when I read Traction and some of the other publications, I was like, holy smokes, somebody's basically told me how to run a small business. I've been making it up for a couple of decades. And I think, you know, when a lot of small business owners see this, they're like, holy cow, it would have been so much easier if I would have had a business operating system, like EOS are a pinnacle business guide to guide my business or something like that. So I think there's aspects and merits to that. To the to your question. I think this is really the number one issue that we see, which is mismatched expectations. So you know, so to your point, if you think that you can basically pass this off to someone, well, that's definitely a conversation you need to be having with your service provider to say, here's what I want out of this, I don't enjoy it. So I want to spend as little time as possible, a good service provider will come back and say, Okay, I understand that this is not your natural strength. But let's talk about there are five critical things that I need you to do. So whenever I give you financial statements, you need to review them, you need to make sure that they're accurate, because ultimately, they're your financial statements. I need you to be open and honest and candid in our conversations. And you have to tell me everything, or else I can't be effective for you, those types of things, and unrealistic unrealistic expectations, where somebody, as you said, says, basically, I don't want to have anything to do with this, please take this and they expect their books, which are a complete mess, to be fixed in one week. And that's the kind of thing where a good provider is going to sit down with you and say, Okay, I understand your situation, we need to go through onboarding a little bit to figure out and understand exactly where you're at. And then once we understand that, then we're going to sit down and have a conversation about how long this is going to take to fix. So you know, if you're thinking it's all going to be fixed in a week, and your your firm is a miracle worker that can help get everything cleaned up immediately, hopefully you have a firm that will have that, the relationship and the dialogue with you about this is probably going to take us 16 weeks and here's why. Here are the steps that we're going to go through. And ultimately after 16 weeks we'll get you to where you want to be, but it is not a one week discussion. So whether it's where you're thinking about responsibilities, do you expect me to look after your full time employee that you have on staff? Do you expect me to do coaching? Do you expect me to be doing mentoring? Those are the kinds of things that you really need to customize your relationship to the things that are really going to be valuable to you that the firm or the person that you choose is really good at and that's the type of work that they want to do as well.
Cal Wilder:Right? I think I described it as a partnership more than a vendor relationsip.
Dave Hartley:Completely agree. If it's a vendor relationship, you may get financial statements. And that's great. But if you want a true, highly effective relationship that's going to impact your business, it's not going to be that.
Cal Wilder:So I do want to kind of flip it to more of the service provider side how to successfully deliver fractional CFO services. But before we go down that path, is there anything else you think is important to highlight Dave on buying fractional CFO services and setting yourself up for success as the client?
Dave Hartley:Well I think probably the one basic thing that I would say is that, if you haven't looked around at this space, if you haven't thought about this before, I would encourage you to recognize that there are a ton of options that exist today that did not exist even a few years ago. You know, with the pandemic and everything becoming remote. There are, you know, there are a lot of providers that deliver this service really anywhere in the world. And so you have a lot more options, and a lot more models that have come out than before. So when you think about it before, it was basically, if I needed somebody, I'd go hire them. Well, now we've evolved in these fractional CFOs, and virtual CFO relationships have come out, and there's a ton of different flavors, there's a ton of different things. So I encourage you got to do the legwork, you've got to do the research, you know, go out, find some of these solutions, look at them, and then have a conversation, you know, set up an initial call to go through and have a discussion with them, find out the price point find out how they create value. That's, that's such a key part because there are so many solutions that exist today, that just didn't exist before. So there are new ways to solve the problem that you may not even be aware of. So that's why the research is so essential.
Cal Wilder:Agreed. Okay, so let's flip to the other side of the table here, where we're trying to be a successful fractional CFO. What are the top few things that you believe in your experience go into, you know, successfully delivering fractional CFO engagements?
Dave Hartley:Well, I think there's, there's several aspects to that. I think the first thing that you have to figure out is which segment of the market do you want to serve? Because I think, you know, there's a lot of discussion in the CPA world today about about true niching and finding your specific thing that you want to do. And then because you can now deliver it virtually, your total addressable market can become significant. So let's say that, you know, you've got experience and you've got expertise in, in med spas, or physician practices, or coffee shops, or whatever, you know, maybe, if you're in a small town, and I think this is also one of the great sort of equalizers of this is that if you're in a small town, you may only have two coffee shops that are there. But if you have that expertise, you can find how many coffee shops are there around the country, there are 1000s, that are potential clients and customers, but you need to figure out, you know, what it is, well, maybe it's coffee shops, but it's a specific kind of coffee shop, or something specific, those are the clients that you can deliver the most value to. So some some, you know, fractional CFOs, or, you know, hey, I'll take anything, I've got experience. And so I can add value to any business business. And a lot of that is true, others are going to come at this and say, you know, I'm sorry that, you know, I'm glad you're interested in my service. But it's really not a good fit for you, because we specifically specialize in this in this in this. And that's where it's important to understand what those specializations are, and do they create value for you. So I think as a firm or a provider that wants to do this, you really have to figure out how you're going to go to market? And what are the things that you're going to serve? Generally, what you'll find is the more deep expertise that you have in a certain area, generally that creates more value. So clients will pay higher fees for those, you know, that specific specialization. So I think that's probably one of the initial things. Once you get through that, then I think you have to figure out your delivery model. Which is okay, so am I going to be am I going to do this myself? Am I going to do everything? Or do I need other people on the team? I don't want to do the back office accounting, I just want to do the FP&A, the cash flow forecasting, those types of things. So figuring out what your natural strengths are and where you're good at and where you're going to spend your time. Once you do that, then that will help you understand. This is my delivery model. So therefore, this is the team structure that I need. These are the types of skill sets that I'm going to need on my team. And obviously not from day one. But as you grow, you should have a plan to scale because if you're really good at what you do, then you should be able to attract new customers. Because you know, one of the things that we hear there are a ton of small businesses that are very frustrated with their accounting relationship today, and they're looking for a new solution. So you'll have an opportunity to, you know, to pick up new clients and market share. So you need to prepare to figure out, you know, probably at the eight client level, the 14 client level, that's what I'm going to need to hire and add an additional person. So just like small businesses, these firms that we work with, you know, other, you know, virtual CFO providers, those types of things, they hit walls, as well. And so like, they're a great three person team. But once they try to scale past those initial three people, it's really hard to do. So that's where even as a you know, if you're, if you're launching your own virtual CFO firm, you know, models like EOS are really attractive, because when you think about man, if I can have somebody help me establish 90 day rocks, so every 90 days, I'm going to establish what are the most important things for my business, that I need to get done in the next 90 days, and really focus on those and then have a 90 day check point where you're accountable on those goals. And then you look at the next 90 days, same thing as any small business, you need to have that accountability yourself as well. So those would probably be sort of figuring out what your niche is and what market you want to serve. And then figuring out your delivery model, those are probably a couple of the really key foundational steps that if you're thinking about, you know, launching this business, or going into this business that you really need to make sure you do up front,
Cal Wilder:Right, and I assume initially, you're probably less picky about individual clients. Maybe you are trying to focus on a particular industry niche or segment. But man, maybe you're willing to work with a pretty wide spectrum of businesses within that segment, at least initially, when you're hungry for new business, right. But at a certain point, I assume that individual clients selection becomes increasingly important. So what does that look like?
Dave Hartley:Yeah, and it is. It's one of those things that, you know, you have to be careful with that. Because if you take on a bunch of clients that aren't the right fit for what you want to do, it may help you get critical mass, so that you can start to evolve to that stage in your maturity, where you can actually specialize in that area. Or you may find that you're taking on a bunch of clients that aren't profitable, that are very high need, that you really don't have the expertise to add a lot of value in. So it's really you have to look at both sides of the equation as it relates to that, you know, if you have, let's say, you've got, you know, two decades of experience in a particular area, well, that's the kind of thing that you probably want to go out and figure out how you can launch specifically targeted at that niche. And then you may want to have a, and we help other businesses too, as well. But you really want your go to market to be focused on that particular niche. As long as your service, you know, it's really just about thinking through what you want to be. And your right cow, there may be in the short term, I've got to do this, and this and this, but I've got to recognize after six months, 12 months, or once I pick up a certain number of accounts, and I've gotten to a certain, you know, a certain level of of recurring revenue, that's when I want to really start, you know, focusing and specializing. So maybe for the first year, your go to market is very general. But after that first year, you really start pushing that specialization message. And every new client that you pick up, you want it to be in that particular space, because you know, those are the clients that you're going to be able to deliver maximum value to.
Cal Wilder:We haven't really talked about pricing specifically yet. Maybe now's a good time to talk about pricing models for fractional CFO services. What are you seeing in the marketplace? And, you know, typically, I think it's either hourly or fixed price. But could you talk about what determines what a good pricing model is, in general, for specific kinds of engagements? How do you manage that?
Dave Hartley:Yeah, and I think it depends on, you know, once again, there are a ton of different solutions out there. So I think you're going to find a lot of different pricing options. It may even be a combination, you may have a firm that you agree to a specific price with a recurring price. You know, but then there also may be special projects, and then how are we going to handle the special projects? Is that going to be done on an hourly basis? So all of that, you know, once again, what are the conversations you should have up front? That's one of the conversations that you should have. So what we're seeing more, you know, kind of more so on pricing, is that, you know, clients don't really want the hourly model, because they don't want to have to because what that does is it inhibits that partnership. Because if I'm a virtual CFO, I want you to call me when you have a question, I want to be talking about the difficult business issues with you. I don't want you thinking about he's going to charge me an hour and that's I'm gonna get a bill and all that kind of stuff. That model really inhibits a lot of that trust and that true partnership that happens, which is why what we're seeing more so and what we've what we choose, is basically we go through we have a we have a pricing calculator as I mentioned before, we have three different levels of service. risk. And then we have a pricing calculator. So based on the characteristics of your business, your revenue, you know, how many AP transactions Do you have? Do you want us to help with taxes, kind of, we take you through a bunch of decision points, and then we'll create some scenarios for you. It's like, well, you talked about this, you said, this may or may not be valuable for you. So here's the price with it. And here's the price without it. And then in our model, what we do, it's a weekly fee. So basically, we charge a weekly fee every Monday, we ACH the fee out of your bank account. And then basically, you can leave us at any time, what we have to do is generate enough value for you to recognize, you know, sort of the the price that we charge is well worth it in terms of the value that we deliver for the business. And then if it gets in, and after six months, it turns out that, you know, your needs are a lot higher, or we, we, you know, we you, you made a guess on the pricing calculator, and it's actually turning out to be different than that, then you need to have a relationship with a provider where you can have that discussion. Also, one of the things that we do is we have clients that adjust their service level, you know, we may be doing, you know, all their credit card reconciliations for them, and they come back, it's like, really, we only want you to do these two, we can hire a bookkeeper who can handle these other things. And that's the kind of thing as well, you'll get used to this is an ongoing relationship. As you mentioned before, it's not really a vendor relationship, it needs to be a partnership, relationship. And so that's key. So we see a lot of different things on the pricing front. And that's another great question. If you're looking at these types of services, to really dig in and understand, is there a commitment? Do I have to stay with you for a year? You know, how long is your onboarding period? What is your pricing structure? You know, all those types of things, you know? And then the other thing is, do they provide other services. So there there are both fractional CFOs. And firms that have like, for example, that my firm, not only do we have the virtual CFO services, but we have virtual CIO services as well. So we help clients with technology, we're a managed service provider. So for a lot of a lot of clients, that's great, because they're like, you know, I don't want to deal with either accounting or technology. I've stumbled there in the past, I need a firm that can just take care of that for me. And that's where also what are your needs? So really looking at and understanding is that going to be valuable for you? Or really all you need is this. That's all part of the great conversations you can have up front with the, you know, the potential firms that could help you. Right?
Cal Wilder:Yeah, I think the pricing is a key issue. I've done both fixed price and hourly, and I will say that when we did primarily fixed price contracts, managing scope creep was an incredible challenge. Because you know, when you're signing up a new client, they want to underestimate everything to get the price nice and low. And then you start working and you realize a) well, there's actually a lot more new here than initially b) the client keeps asking me to do more and more, because they think I'm pretty good and can help in other areas. And then I end up you know, you're in a position where it's hard, you either tell the client No, that's not in the contract, which is not good client service. Or you just do it and don't charge for it, which is not profitable. Or you spend, potentially you spend a bunch of time renegotiating scope and pricing instead of just doing the work. And so my experience has been fixed price sounds good, but hard to manage. Maybe in a pure fractional CFO model, it's a little bit easier, because you've got a very senior individual who's able to have a little more of that partnership, push-pull relationship with the client, to try to flex a little bit when needed. In some months, maybe it's less, and maybe it works out, because the scope is, you know, a little more manageable. Kind of where I've come out on it is, in general, agree to, we generally agree to an estimated scope of service, we know approximately what that's going to cost on a monthly basis. We have hourly rates that we apply. If something comes up that needs to get done, and the client asks us to do it, we'll point out, yeah, this is going to cost a little bit extra this month, we're happy to take care of it for you. If it can be significant, we may give them a rough estimate of what it's going to cost. And then we spend our time and energy doing the work and supporting the client rather than renegotiating contracts. But everybody's got their own model and some people make a fixed price work, some people make straight hourly work, some people make, you know, some other hybrid models work. All different kinds of models out there.
Dave Hartley:Yeah, and I think that fixed price model is harder to do because just the whatever our we work, we charge you for it, that's fairly easy to manage. I think the you know, certainly I think what clients prefer is the relationship where it's fixed and they don't have to worry about it. So I think that's another good point that we really haven't talked about, which is, what are you paying for as part of your virtual CFO relationship? Are you paying for when I need you, you will do the work? And that, you know, so that that's one type of relationship, or are you paying for access. So when I do have a need, you're there for me. And, you know, and there are times, sometimes you'll have a client that has an issue, you have to spend more time on it. And then once business gets back to usual, you'll spend less time on it. But the client finds value because there's access. And when they need that expertise, they have access to that expertise. So and I think on the, you know, the pricing point, you're right, sort of the fixed is harder. But that's where when you talk to the firm, like, for example, if you sit down with us and go through the pricing calculator, we're probably going to ask you 40, to 45 questions that you'll need to make a decision on, and we'll guide you through that process. But that's a result of having done so many of these types of relationships, we know where the problems are, because we've been there and we've stubbed our toe, we've learned, yes, next we need to add that to the pricing calculator and have that conversation upfront. So that we can eliminate those uncomfortable conversations on down the road, that that can give you a sign as well for the maturity of the provider that you're considering, are they just giving you kind of one number and then they're going to come back? And they're going to change order you? Or does it seem like they really understand what I need. So therefore, whatever estimate they're giving me, I have confident that that's really what I'm going to end up paying for this service.
Cal Wilder:Yeah, I think the the good quality experienced providers like Anders or like SmartBooks, we're never going to be at the low end of the price range. We're going to tell the client, here's realistically what it's going to cost to deliver the scope of service at a high level of consistency, quality, responsiveness. And we're kind of counting on clients to appreciate and see through the lowball offers that are not set up for success and go with the offer that is probably going to be realistic and sustainable and successful long term. But that's, you know, that is a challenge, too. There's so many different pricing models, and so many different providers out there, I think, on the provider side, you know, we've we've got to make sure we're able to convey the difference between somebody who's quoting, you know, 40% less than we are who cannot possibly fulfill a good scope of service at that price. But the client may not know that. They just see two prices for more or less the same thing and might not intuitively know the difference.
Dave Hartley:Yeah. And Cal this client accounting services space, this CAS space, you know, is basically new within the last decade or so. I mean, people have been doing it before them, but it's really come on strong. So I think, you know, in some regards, there's a lot of players that are looking at this, as today are the early days to get market share. So therefore, they will discount things to get people in the door, but then they know that they're going to have to raise prices to be able to do it profitably. And so I think just, you know, when you when, as a buyer, when you do come into that situation, I would look for those types of guys between okay, what is this provider giving me versus this provider? And then what is the stage of their business? Are they at a point where they're picking up new clients, and they're being very aggressive? Well, what happens if they have some success and get a lot of people on board? Are they going to have too many clients to deliver my service? Or are they not? Because I'm not going to be a profitable client? For them? Am I going to get really poor customer service? So those are all the questions as you go through that process that you need to make sure that you're looking at but your right cow, you know, if you've never done this before, a lot of people aren't educated enough to really understand the game, and to make good decisions based on that. So which then leads you to another point, which is if I get into this, and it's not for me, what's my out? Do I My my, you know, it's an annual agreement, and I'm, you know, I'm in for this full year, or is it like an ROI model, you can leave us at any time, if we're not generating the value, you know, then once again, different pricing structures. And there's also different exit considerations as well. You know, that also needs to be part of that. Overall, you know, thought process and considerations that you think about.
Cal Wilder:Right. So let's say we, you know, we've got a business that's growing, financially successful, they've been working with a great fractional CFO who's contributed a lot of value along the way, but at a certain point, they're thinking about going to a full time position. How long and how large does the fractional model really work? And what are some of the signs or symptoms that it's time for the client to graduate to more of a full time position?
Dave Hartley:Yeah, I think it's, you know, if you have a good virtual or fractional CFO relationship, the CFO will be able to help you with that. So when we have client churn, it largely happens for two reasons. One is the situation where you've now grown to a point where you have outgrown what we do from a virtual CFO service. And that differs by business, when that happens, that could be at the 20 million mark 30 million mark 40 million mark, it's different, you know, for every business based on, you know, where things are at. So I think, you know, and then the other thing is you, you may outgrow one solution, and then there's another solution, that's going to be a better fit for you. So that may be a firm that specializes in you know, let's say you're in the 20 to 30 million space, and you kind of outgrow that, well, then you may need to look for a firm that basically has great solutions for 50 to $100 million companies in my particular space. So those are the types of things but that that transition process, which could be another thing that you ask about, which is, you know, sort of I've outgrown you and I need to get my full time CFO, or the other thing that happens a lot of times is that we provide great advice and the business is successful. And ultimately, there's an exit, the business either gets acquired, or you know, goes into something else, and therefore we lose them as a client. But for some period of years, we've helped them become successful. And that was, that's also, you know, when you go in and have these conversations, I'd recommend that you share what are your goals? You know, are you nearing retirement and you want to be out in seven years? If so, then the virtual CFO needs to be working with you on your succession planning, and, and really establishing clear roles, getting documentation in place, there's a lot of things like that. And you need to find, it'd be great if you could find a virtual CFO that has that expertise and experience that, yeah, I've been through that process seven times before. So I know three years in advance the things we need to be talking about and the conversations we need to have. So that's also an important part of the relationship is because everybody defines success differently. Every business, you know, for some businesses, its top line for others, its profit, brother, it's more of a lifestyle business, and I want to make a good living, but I want to have a lot of free time to do the things that I enjoy. All of those things are a great conversation to have to level set and set expectations with your virtual CFO solution.
Cal Wilder:Dave, that brings to mind another point I'd like to emphasize, which is I sometimes talk to clients about the different types of CFOs. In the sense, if you're a closely held business that really needs to operationally upgrade and scale over time, you're really probably looking for more operational hands-on CFO type. But there are other businesses that are looking to go out and do fundraising, an M&A transaction, buy side or sell side, within a few years. And so you need kind of the fundraising capital raising type CFO who may not be great at hands on operations. But if what you need to do is fundraise and prepare and execute M&A transactions, you need that expertise. Or for some reason, maybe you need an accounting-heavy CFO. You know, there's probably some unicorns out there who are great at GAAP and accounting, are great at hands-on operations, and great at fundraising and M&A, but there aren't too many of those out there, right? So you gotta figure out what type of background you really need based on what your expectations are for what you want the CFO to do for you.
Dave Hartley:Completely agree Cal. And that that's why that setting expectations and having those discussions is so
Cal Wilder:This has been a great conversation, Dave. I important. Because you're right, it is a very different skill set. If you're a finance a more finance oriented CFO, who's working, you know, basically, on funding and growing the business and those types of things as to more an accountant, it's really focused on the accuracy of the financial statements and GAAP, and those types of things. It's different skill sets. And so therefore, you need to understand for what I'm trying to do, which of those options is best for me. And if you think you may want to exit in three to five years, you need to bring that up and your relationship in your early conversations to say, hey, here's, here's my business, here's what we do. Here's where we're at, here's where we think maturity wise that we are. And here's our plans. As an owner, here's what I here's my perfect world. And then basically, you should find out the virtual CFO solution, how well does that match with your particular aspirations? So Cal, I completely agree. Skill sets are very different. And if you want somebody that's been there, done that, then you need to ask that question as part of your initial process. Or you need to find out hey, we really these next couple years, we got to get things under control. We don't have good internal controls, we don't have documentation. We really need help with that. But then after the you know, that first two years, then we think we want to work on you know, really exit plan. Planning and you know succession and those types of things, can you help with both of those things. And the solution may be great, we've got a virtual CFO who's going to work very well with you for those first two years. And then when you get to that latter point, and you want somebody that can help advise you on, you know, pitches and going on roadshows and those types of things, that's probably a different virtual CFO. But what we can do is after two years, we can plan to transition that relationship. So we'll have an overlap period of three months to make sure that, you know, the more accounting focus, CFO, the cleanup, internal control, CFO transitions to that other CFO, but you can do it all, you can keep those relationships within a single firm, where you can get the value for the whole journey of the things that you're going to need. But once again, in order to understand that, you've got to have good committee communications up front, and do your research to figure out if people can actually provide those types of solutions. think we've gotten into enough detail, that we're trying to provide some pretty good information for the small business owner who's considering entering into a fractional CFO engagement or perhaps not thrilled with their current engagement, maybe help them understand a little bit better, why it might not be working so well, and what they might need to change or look for, in their next engagement if they can't make the current one successful enough. Before we wrap this up, is there anything else Dave, you'd like to mention on this topic?
Dave Hartley:Well, I agree, this is an evolving area. And you know, the solutions that exist today, there's going to be more solutions next year. So there's going to be even more options. So one of the things I do quite a bit is I post on LinkedIn. So I'm at linkedin.com/in/davehartley. I post about everything from virtual CFO type stuff, to you know, cybersecurity, to those types of things. So connect with me there. And then also my firm Anders CPAs and Advisors, we publish a lot of thought leadership. And so if you follow the firm on socials, I think that would be great. The other thing Cal, I'd ask or I'd mention is that also I do co-host a podcast called, But Who's Counting? So we're in season three now, me and my co host, Missy Kelly. Season Three is really focused on innovation. So we're talking with small business owners about their innovation journeys, what has worked well. And then, you know, what are their tips for small businesses, entrepreneurs, on how they can innovate within their businesses. So those might be a couple of resources that your listeners may find valuable.
Cal Wilder:Thank you very much for joining us today Dave. Appreciate your time.
Dave Hartley:Thanks Cal, appreciate it.
Cal Wilder:Reference show notes and find other episodes on EmpoweringHealthyBusiness.com. If you would like to have a one-on-one discussion with me, or possibly engage SmartBooks to help with your business, you can reach me at Cal@EmpoweringHealthyBusiness.com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for small business owners, signing off.
