179. Fractional CFOs: DO NOT HIRE (until you do THIS)

If you're a fractional CFO firm owner, do not hire your first fractional CFO to join your team until you watch this video. That's because hiring your first fractional CFO can be one of the best or worst decisions of your life, depending on the timing. In this video, I'll help you decide if now is the right time for you to hire your first fractional cfo. I'll break down five signs that you're ready to hire, and if you check all five of these boxes, you're ready to grow your team. Let's break it down, starting with number one, you, key Service delivery processes are documented. Service delivery is how we generate revenue as fractional CFOs. But at a certain point, we reach our limit because there's only so many hours in a day. That's when it starts to make sense to hire a fractional CFO to take on some of that service delivery so that we can keep growing our firms. But there's a small handful of processes around service delivery that you need working versions of before you make your first hire so that your new CFO has all the tools they need to deliver service and and make you money. Let me share a story to drive this point home. Several years ago, my fractional CFO firm hired its first cfo. Demand was growing, clients were coming in, and we had reached the point where I needed to hire somebody to continue growing the firm. But there was one massive problem. I hadn't documented a single key process. For some reason, I had convinced myself that anybody would be able to step in and know exactly what I wanted them to do and exactly how I wanted them to do it. Looking back, that assumption feels ridiculous. And frankly, I feel silly saying that on video right now. But hey, hindsight is 20 20, I guess. So anyway, I bring this bright, talented CFO onto the team and she had everything going for her. She was sharp and professional, great with clients, a total rockstar. And then one day, about two months after she joined the team, she gets on a call with me and she just completely loses it. She was overwhelmed because she never knew what to do or how to do it, when to do it. She didn't know if she was performing well or not. She had no idea what the expectations were. And when it came to service delivery, she was completely lost. She was so frustrated that she worked herself into a panic and quit on the spot. There on that zoom call with me with no notice. And let me tell you, I felt like a complete chump. I realized that I hadn't done a damn thing to set her up for success. And she wasn't the only one that was unhappy. The clients she had been serving were frustrated with her performance because I assigned them a CFO who was destined to fail. So we didn't lose a great CFO who could have been great with us for years. We also lost a client and almost lost two more. It's all because I was foolish enough to think that we could scale without locking down the key processes first. So learn from my mistakes and make sure you have your key service delivery processes documented. Now, what are those key processes that you need to have documented? Well, I'm glad you asked. That's why we're here today. First, you'll need a process for new client onboarding. This is pretty straightforward, but a must have before you hire, you've got to have an onboarding process for new clients, including an orientation call to introduce your new clients to your new fractional CFO recently dropped a video about my firm's bulletproof onboarding system. And in that video I go over our proven three step process for onboarding new clients. If you want to steal our system, we'll have a link up here here, or over here or down in the description. It's somewhere on the screen, but you'll be able to find it. Now look, I'm not saying that you have to follow my system, but you do need to have a well documented onboarding process in place before you hire a fractional CFO to make sure that everybody's on the same page. It won't matter if your new CFO is a top dog in your industry. They'll turn into a lost puppy during those first 90 days if you don't have your onboarding processed. Next, you'll need a process for preparing your monthly CFO call. What is your process for fp? And a what's your process for getting your monthly CFO report ready to go? What's your process for preparing an agenda for the monthly CFO call? You need to have well documented answers to these questions to help your fractional CFO prepare for that monthly call because it's so important. So those are the first two key service processes, new client onboarding and the monthly CFO call preparation. The third process that you'll need is how to deliver that monthly CFO call. What does that call actually look like? What's the agenda for the call? What's the order of things that you're going to talk about and how much time do you spend on each? What kind of questions should they be asking on the CFO call? What kind of questions should you anticipate from the client? What do you do after the call? Do you send them the recording? Do you send them notes with action items? Document the process so that your new fractional CFO has everything they need to execute that monthly CFO call at the same level of excellence that you're doing now. This is how you ensure the quality of those calls is consistent even after you step out of the service delivery role. And finally, you'll need a process for handling out of scope requests. Your new hire will need to know what to do when clients inevitably start asking for services that you don't offer or things that aren't anticipated. Have this in advance before you hire to avoid confusion and countless headaches. Okay, those are the four key service delivery processes that you want to have documented before you hire. New client onboarding, CFO call prep, CFO call delivery, and out of scope requests. Make sure you have working versions of each of these before you make that leap. Next, you'll want to make sure that you have sufficient cash float. Picture this. You've finally reached the moment that you've been grinding towards for years. Your firm is humming along. Your processes are dialed in. Your onboarding is airtight. You've got a backload of clients ready and waiting for you to hire your first CFO so that you can actually take them on. You find the perfect hire, you picture the perfect handoff. It's finally time to scale. And then right when you think you've got it made, everything comes crashing down. Because there's one thing you forgot to plan for. You actually have to pay your new fractional CFO during their onboarding. And they're going to expect that paycheck before they're profitable or maybe even before they're cash flow positive from actual client work. Now listen, I know as fractional CFOs, this sounds obvious, but I've watched so many firms step into their first hire and forget that multi month onboarding. That means that there's multi month payroll with zero revenue coming in from that new cfo. So make sure you start saving that cash now so that when you're ready to hire, you've got the money ready to invest in the new hire as they're learning the key processes that we just went over. If your new hire onboarding takes two months, you need two months of cash set aside. And when it's your first fractional cfo, you might want to anticipate actually like a longer onboarding process because you're going to have to work out the kinks. The last thing you want to do is hire your new shining star only to realize that you don't have the cash put aside to cover their onboarding. You'll lose them, just like I lost my first CFO a few years back. And you'll have to start the process all over again. And that takes time and money. But once you've got that cash cushion in place, the next sign that you're truly ready to hire is is having a clear employment model and compensation structure identified. Let's start by looking at the options for employment models. There are two main ways to approach this. The 1099 model and the W2 model. With a 1099 model, they're a subcontractor. With the W2 model, they're an employee. Both models can work, but they come with very different trade offs. So let's start with the 1099 route. What are the pros? Well, you're not paying payroll taxes. You get access to a much larger talent pool, and you're opening the door for part timers or flexible workers who love the freedom of subcontracting. For a lot of firms, that flexibility is a huge win. But the cons are real too. You have far less control over how they do their work. And legally, you're not supposed to direct their work at all. Now listen, I'm not a lawyer and this isn't meant to be legal advice. You should talk to your attorney, and preferably somebody that is experienced in labor law to get the answers to this. But my understanding is, is when you're directing their work, that falls more into that W2 category as opposed to 1099 plus. States are getting more aggressive about reclassifying 1099s as W2s. If they decide you misclassified somebody, you could be looking at back payroll taxes, penalties, and interest. Again, I'm not a lawyer. Talk to a labor attorney before choosing your employment model. But this is something that you really should consider before you make that first hire. Now, let's talk about the W2 model. With W2 employees, the biggest upside is control and retention. When you hire a CFO as an employee, you can direct their work, manage them much more, more closely, enforce standards, and build a team that tends to stick around and together longer. What's the trade off? Well, frankly, the talent pool is smaller, you've got to pay payroll taxes, and most CFOs will expect benefits like healthcare and 401k matches. I've seen both approaches work, and I've seen them both work remarkably well. And I've also seen both approaches fail. My firm decided a couple years ago to go with the W2 model. Decide what works best for you before you make your first hire. So These are the two types of employment models, 1099 and W2. Now, let's talk about compensation structure. In other words, how are you going to actually calculate their pay and pay them on a month in and month out basis? My firm uses a base salary that covers our CFOs up to a book of business of a certain size. And then as they grow from that base salary up to a $1 million book of business, which is our goal for our CFOs, then they get bonus incentives along the way, giving them a higher earnings potential. Another type of compensation structure is where you pay your CFOs based on a percentage of their book of business. In other words, for every dollar of their book of, pay them a percentage of that dollar. This is a great comp structure, especially if you're just getting started or if you work on that 1099 model that I talked about earlier. Then there's also the hourly model, which I'm frankly not a fan of because the CFO is incentivized to do more work and bill more hours and not necessarily to deliver better services. We've all had that hourly person that we were paying before, and it can feel like they're trying to just milk the clock in order to collect more pay. Now, this doesn't make sense to me, but it may be, you know, maybe it works for you, and that's great. You do you boo. There's plenty of fir out there that have found success with the hourly model or frankly, any of the other models. What's important here is that you have a compensation plan ready to go before you start making that first hire. And just a pro tip that I've learned along the way, if you want to scale Your revenue to $500,000 or $1,000,000 or beyond, your gross profit margins need to be fully burdened north of 60%. You're going to need those margins to invest in the infrastructure that's necessary to cover the cost of scaling. So if paying your new hire would drop your margins below 60% and you want to scale, now might not be the right time to hire. But here's the thing. Your compensation plan won't even matter if you don't check this next box before you hire your first fractional cfo. You've Got to have confidence in your backlog of clients. What I'm talking about here is your confidence in your ability to get leads and close new leads. Because the last thing that you want to do is bring in a new fractional cfo, and they end up just sitting around twiddling their thumbs as they sit on your payroll. Ideally, you want to have a backlog of clients ready for your fractional CFO to serve as you're onboarding them. If you don't have a backlog of clients, you at least need confidence in your ability to find leads and close sales pretty predictably. When your fractional CFOs outnumber your leads, you burn through cash resources like wildfire. Suddenly, your dreams of scaling your business are going up in flames and you're doing damage control to avoid going out of business. So make sure you have a steady stream of leads and clients for your fractional CFO to serve before you hire them. Okay, we just went over an example of when it might be too soon to hire. But most fractional CFOs, they actually wait too long to hire their first fractional cfo. Which brings us to the fifth and final sign on our list. You're at least at 50% capacity. I've seen dozens of fractional CFOs get this one wrong. They wait until they're spending every hour of their day on service delivery before they think about hiring. But they find out that it's far too late. At that point. Let me explain. When you reach full capacity, you won't have the bandwidth to train a new hire. You won't have the bandwidth to bring in more clients. You won't have the bandwidth to check off any of the boxes at all on this list. You'll be stuck serving the clients that you have. And I call this trap the golden handcuffs. Because making more money ends up actually holding you back in the long run. Here's a very real recent example. I had a fractional CFO in one of my mastermind groups, and he was doing north of $600,000 a year, but he's handling the entire workload all on his own. And now he's like a lot of us. He wants to keep growing, but he's a victim of his own success. He doesn't have the capacity to work on processes and procedures. He doesn't have the capacity to create compensation plans. He doesn't have the capacity to chase leads. And he certainly doesn't have the capacity to properly interview and onboard a new fractional cfo. He doesn't have time to do anything other than to serve his existing clients. He's backed himself into a corner where he really only has like two options. He can either start working more hours and that's just not on the table for him, or he can fire some of his existing clients to give himself more time during the week to do some of those other tasks that go along with hiring, onboarding new fractional CFOs. Now, like I said, he can't really work more hours because he's already working 70 hours a week serving his clients. I know that sounds familiar to you, maybe because we've all kind of fallen in that trap before. But here's the thing. If he fires his clients to give himself more time, he's giving up a lot of revenue. Neither choice is great, but he's got to pay the piper eventually if he wants to grow. Take that as a cautionary tale to start thinking about growth sooner than later. The sweet spot tends to be somewhere around 50% capacity. When you're at half capacity and you have confidence in your leads, it's probably time to start making that first hire. And remember, that doesn't necessarily make the first hire right at 50%, but it's time to start that process, figuring out the compensation model, interviewing fractional CFOs, then getting them, you know, kind of butts and seats and, and then onboarding them. But here's the thing, if you wait any longer than that, you risk slipping into those golden handcuffs that I talked about a moment ago. So avoid the trap and hire before it's too late. And that's it. Those are the five signs that you're ready to hire your first fractional CFO to join your team. If you have your service delivery processed, you have sufficient cash flow, a comp plan identified, confidence in your leads, and you're at half capacity, then you're ready to start hiring that first fractional cfo. And if you're not ready, then you need to know exactly what you need to work on in order to scale. And if you need more help, I've curated an entire playlist focused solely on helping you grow your fractional CFO firm. Each video is tailored to help firms like yours to get to a million dollar run rate and beyond. All right, my friends, I hope you found this episode helpful. If you did, it would mean the world to me if you would leave a five star review on Apple Podcasts, Google Podcasts, Spotify, wherever you're listening to this episode. In the meantime, I can't wait to see you back right here next week. I'll see you then.