I remember when my partner, Eric Page, shared with me the idea that, “There are no expenses in business, just investments”. A light bulb moment went off for me. “Yes,” I thought. “Of course. Every dollar is designed to have some semblance of a return. When we think about expenses, we tend to just think of that as “spending money” vs. “I’m making an investment in growth.” What expenses do you have that when viewed through the investment lens are helping you achieve your goals?
Who is helping you consider the investments that you make and whether those investments are paying off? And if they aren’t, do you know why? Do you have enough information to course correct?
Understanding the implications of your investments is where a CFO (Chief Financial Officer) provides the greatest value. Do you need to incur the full-time expense of having them by your side every day? For most businesses, the answer is definitely no. What you need is someone to create the foundation of how you are going to make and evaluate investments and then check in to guide as new information comes into the system. We call these individuals fractional CFO’s and they allocate a percentage of their time monthly to supporting your business while you get the benefit of a lot of horsepower without the expense.
Here are five key questions you might ask where a fractional CFO could provide answers and solutions:
Do I understand my unit economic model? Your unit economic model is the engine of your business. It is your revenue less your direct expenses to generate that revenue. In most cases, those expenses represent your labor cost. Is your unit economic model profitable? Is your customer profitable? Are you properly allocating labor to what is direct vs. indirect (indirect being overhead costs like management salaries, rent, insurance, etc.)? Your fractional CFO can make sure your financial statements are architected in a way to understand your unit economic model at a top level and also provide insight at a customer level.
Do I have forecasted goals for the next year? What we can’t measure, we can’t improve. Forecasts represent the future you are trying to realize based on the investments you intend to make in the business. That future is driven not only by what you have done in the past but also by the dynamics of the current environment. A fractional CFO can help you build out that financial forecast and then report on how well you are tracking to that goal (or not) and why. There are a lot of ways to build forecasts. One great tracking solution we have introduced is called Waterfall Forecasting.
Do I have confidence in making key decisions around new hires, bonuses and distributions? “When can I hire a new employee?” is a common question from many business leaders. That question is often driven by the availability of cash in the business as well as the level of cash flow the business is generating to support that additional hire. Other questions tend to revolve around things like owner distributions, employee bonuses, or one-time investment conferences.
My business is growing but my cash flow is not. What is going on? Fractional CFO’s are great at digging into something called the cash conversion cycle. For service businesses that might have payment milestones that don’t match when the work was necessarily done, there can be a big distinction between your profitability and bringing cash in the door. Fractional CFO’s will be able to help you understand the cash flow characteristics of your business, improve them, and give you more confidence that you will have the cash needed to make the investments that you desire.
Who is helping me gut check my strategy and showcase my blind spots? Now, not all business leaders like admitting they have blind spots but we all do. A fractional CFO is not inside your business day to day, so they have a particular lens (less emotional, more objective) from which to evaluate your business strategy and the investment decisions you want to make. Good fractional CFO’s can step back from the numbers and ask the kinds of questions that can help you unlock some learning or insight to break through an obstacle or conflict.
There is a lot of value to bringing in fractional CFO support in order to guide CEO’s in making smarter investment decisions. They not only provide a lot of tactical financial support and discipline, but they are also a savvy sounding board with a commitment to helping you generate a strong return from those decisions.
If you’re interested in learning more about Stride’s CFO Services and how we integrate that with core accounting work for our professional service clients, please inquire below.