54. The Ultimate Guide to Fractional CFO Compensation

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If you're considering adding revenue, net profit and cash to your firm in 2023, but you're not thrilled about the idea of working more hours yourself, then you're probably considering hiring an additional CFO to join your team. But before you do that, you've got to figure out how you're going to pay them. In today's episode, I'm going to share with you the compensation model that I use in my firm, KFE Solutions, and I'm gonna give you four reasons why I think you should consider using this model in your firm as well. Let's dive in. Hey there. My name is Michael King. Welcome to the CFO Report, where I talk about starting, scaling and optimizing fractional CFO services. Today, we're talking about compensation models for adding additional CFOs to your team. At first glance, it might seem pretty straightforward. You pay people well, they come in, they do a great job, you're happy, your clients are happy. Revenues boom, cash flows, profits, everything booms. Everybody's happy. But picking a compensation model for fractional cfo' is actually a bit more deceptively complicated that you might expect at a first glance. And the reason for that is that there's four competing priorities. Four things that kind of work in opposite directions in a lot of ways that you have to be mindful of before you hire a fractional cfo. Now, before I dive into this, I do want to share with you. This is just what I've learned running my firm. You may find other compensation models that work great for your firm or other firms. I'm just sharing with you what's been true from my firm. My hope is that you can take some of these and apply it when you're thinking about how to highlight, hire and compensate fractional CFOs for your firm. So the first of these competing priorities is the fact that you've got to pay fractional CFOs well enough to attract and retain amazing talent. We know that you can't just go hire some random Joe off the street and bring them in and tell them you are now a fractional cfo. You've got to find people and keep people that have the technical skills, the people skills, the financial skills, the strategy, understanding the perspectives that they're going to be able to come in and deliver on the value promises that you made to your clients during the sales process. Not everybody can do that. The second priority that I think you have to consider is that you want your compensation model to reward your CFOs for showing up and doing amazing work. You want them to be compensated for having timely communications, for coming up with great strategies, for really showing up and delivering on the promises that you made during the sales process. Now, interestingly, the third priority is almost the polar opposite of that. You also need a compensation structure that, that rewards your CFOs for sticking to the scope of work, for staying within the boundaries. Because if they don't stick to the scope of work, if they don't maintain boundaries, then it really limits the number of clients that they can serve. And that's not good for you, it's not good for the cfo, and it limits the impact that they can have on more and more clients. Finally, and maybe this is the most obvious one, but it's one that we've gotta be mindful of nonetheless, is when selecting a compensation model for your fractional CFOs, you've gotta pick one that's actually going to be profitable for you. And a lot of times we think of everybody but ourselves when it comes to our business. We think about our team and our clients and all of this stuff. But sometimes we lose sight of the fact that we are in business to make a profit so that we can hit our goals. So you've got to be mindful, like, what is a compensation model that you can use for your CFOs that's actually profitable for you? So when I think of these four priorities and I look at all the different compensation packages and ideas and theories that are out there, I keep coming back to one time and time again. And this is one that I've been using in my firm for years. And the model that I've chosen is one where I pay our fractional CFOs a percentage of the revenue that they manage every single month. What does that mean? Let's say that a fractional CFO has a client that pays my firm $6,000 a month. I pay that fractional CFO 40% of that $6,000, or about $2,400 a month for that client. And I know, because I've been doing this for a long time, that one fractional cfo, using our scope of work, using our processes and procedures for the types of clients, that one fractional CFO can handle about 10 clients a month. So if you do the math, 10 clients a month times $6,000 per month on average, times 12 months times 40%, that means that a fractional CFO on my team can make about $288,000 a year. That's A great salary that is going to attract and retain that type of talent that we talked about earlier. The reason that I absolutely love this model is the fact that it makes sure that everyone's interests are aligned. Your interests as the firm owner, the client's interest, and the fractional CFO's interest. And when it comes model, there's four huge benefits that I think are worthy of consideration when selecting a compensation model for your firm. The first benefit is the fact that it makes forecasting your financials so much easier. If you know that one fractional CFO can handle 10 clients, you know that that fractional CFO and every fractional CFO that you add is going to be a 40% cost of service. You automatically know that your gross profit margins are always going to be 60%. You throw in your overhead and it makes it really easy to forecast out what your profitability and your cash flows are going to be. But it also makes it really easy to understand when you're going to need to start hiring and onboarding another fractional cfo. The second benefit to this model is the fact that it encourages you and your CFOs to be as efficient as possible. Because the reality is the more clients they handle, the more money you make and the more money they make. That means everybody is really incentivized to stick to the scope of work, but to also look for ways to improve processes, to improve technology and automations so that we can handle more clients at the same level of service than we have before. The third benefit is the fact that it keeps your team hungry to serve clients with excellence, because they know that if a client leaves, they're not getting paid for that client anymore. And that's one of the drawbacks, I think, to having that fixed salary where a fractional CFO is going to make $200,000 a year. They're not as incentivized to make sure that every single client remains happy. So I love the fact that this model, everyone involved knows we've got to keep our clients happy and we've got to serve them on a high level or else they'll leave and we all lose money. The fourth benefit is you don't have to have compensation conversations with, with your CFOs, because the reality is there's really only two ways for them to get paid more. One, they handle more clients. Or number two, we work together to find a way to raise prices for our clients. That means everybody is always looking for ways to add additional value to really level up the service. So that it's a no brainer for the clients to pay more money. Well, whether or not this is the right model for you, I do want you to make sure that whatever compensation model you select does balance your firm's interest, the client's interest, and the CFO's interest to make sure that you're able to pay your CFOs an amazing salary. But you're also making sure that you get paid as the firm owner and ultimately that you're delivering as much possible value for your clients as you can. Listen, if you're a virtual CFO or a fractional CFO and you're committed to leveling up your firm, to leveling up your impact, your revenues, your profits in 2023, then you have to check out the CFO Accelerator Live. The CFO Accelerator Live is the first ever conference held exclusively for virtual and fract CFOs, and it's being held May 16th through 18th in Dallas, Texas at the CFO Accelerator Live. I'm going to share with you the seven frameworks that you need to level up your CFO technical skills, your CFO leadership skills, and your CEO skills. Check out the CFO Accelerator Live and grab your tickets because there's only 200 and they're going fast. Go to the cfoacceleratorlive.com and grab your ticket today. I cannot wait to see you in Dallas May 16th through 18th.