I recently met up with an old friend and entrepreneur who asked me for “CFO strategic planning help.” As the president of an outsourced CFO services firm, I get this type of request a lot, though it means different things to different people. Is his business struggling? Is he hoping to sell and retire? Does he want to double his revenue? Or is he just probing to find out if a fractional CFO is worth it?
“We’ve been stuck posting losses for 12 months, so I’m reorganizing the business,” Manny told me. “My ops manager is overwhelmed, so I’m moving people into teams and having everyone report directly to me.” Unprofitable and overwhelmed – classic signs of dysfunctional operations. Diagnosing the root of the issue would take some probing.
“Are you cutting the manager’s pay? How much money are you saving after the reorg?” I asked, curious to learn more.
“Um, well, none.” Manny struggled to answer, “The re-org just takes subordinates away from my one manager who’s having trouble keeping up. It enables us to take on more volume.”
Schemes that require growth to achieve profitability are risky. They sometimes work in the venture capital world, but most clients of our outsourced CFO services didn’t have $20M cash to burn while they waited for that growth to arrive.
It’s time to ask a bold question.
“Let me get this straight: your manager is having trouble keeping up, and it’s hurting profitability. So you’re fixing the problem by reducing their responsibility but keeping their pay the same?”
Manny sat with this for a few seconds before laughing and saying, “Yeah, I guess so.”
The Power of Outsourced CFO Services for Strategy
Clients think CFO strategic planning means spreadsheets, modeling, and financial jargon; but, more often than not, I help clients by asking simple questions grounded in basic financial management:
- How much money will that save?
- How long before those sales come in?
- Have you calculated how much cash you’ll need?
- Is that the most important thing to use cash on?
- What are the alternatives?
These simples questions are difficult to ask of oneself as an entrepreneur. On the other hand, outsourced and virtual CFO services are not blinded by the whirlwind of your organization’s status-quo 40 hours per week.
We can see through the emperor’s new clothes.
Thoughtful Frameworks for Decisions
I worried Manny’s ops team might be so inefficient, he’s doomed to lose money at any volume of sales. In that scenario, his plan for growth was doomed for failure.
To get him thinking about efficiency, I asked, “How do you evaluate your team’s performance?”
Manny thought out loud for a while, talking about the gross margins he calculated 2 years ago and a KPI dashboard he never finished. His eyes narrowed as he thought hard and tried to remember. He was reciting numbers and units but couldn’t assemble them into an answer for my question.
Manny was drifting. He needed a framework for analyzing his business. A CFO’s job is calculating numbers into just such a framework, then building narratives.
Good Narratives = Clear Actions
Finance is more about telling stories than reading numbers. For example, consider receiving the following three messages from your CFO:
- “We lost money last month because of a one-time expense related to legal fees”
- “We lost money last month because our largest client cancelled their contract, leaving 30% of our operation idle.”
- “We lost money last month because expenses were too high.”
Two of these narratives empower managers to make clear decisions, one does not.
- We would probably ignore the one-time event and continue with business as usual.
- We would probably review the sales funnel and consider a reduction in force.
- We’d have no idea what to do.
That’s the difference between good financial decision support and bad. Clarity about the next step.
Choosing a good Metric
Manny had no framework, no narrative, and no clarity. “Let’s figure out a simple formula for calculating your break-even, Manny. Then you can evaluate your team’s performance.” Now I finally pulled out my calculator. We worked through his average engagement size, number of employees, and other factors to determine that each ops teammate needed to close 2.7 projects per month to break even.
I asked, “Do you have any teammates missing that target?” Manny rolled his eyes, and I sensed we landed on something interesting.
He sat leaning back in his chair, arms crossed, with the smug and embarrassed smile of a poker player called on a bluff. His body language said it all: Manny now understood the root of the problem. “Yes, I have a couple in particular, who happen to work under that manager I told you about. So I should fire them?”
“No!” I cried. People often expect me to present a black-and-white view of business strategy: fire the weak, promote strong, cut every expense to profitability. Business is rarely so straightforward. “Not yet, at least. We don’t know why they are missing targets. They may be lacking the proper tools or training to do their job. Especially if their manager is the problem, not them.”
I continued, “The metric just points you in a direction where you need to start asking questions to learn more.” That’s how CFO strategic planning works – an elegant interplay between numbers and people that requires as much artistry as quantitative rigor.
After our conversation, Manny had some critical conversations with his manager and ops team. The manager resigned, Manny spent a few hours retraining their subordinates, and profitability improved two months later.
Virtual CFO Services for Strategic Planning
Do you lack a teammate who turns numbers into narratives? Who asks tough questions to drive clarity in decisions? Join the thousands of small businesses who now use fractional CFOs, FP&A Managers, and Controllers help drive strategic planning. Contact us for your free consultation.
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