How to Build a Strategy for Your CFO Firm (Part 2 of 3)

Hey there, my name is Michael King. Welcome back to the Connected Accountant where I talk about starting, scaling and optimizing fractional CFO services. Today we're going to dive into part two of a three part series where I'm talking about all things CFO strategy. Now, if you haven't checked out part one yet, I'd highly encourage you to pause this episode and jump back into part one, because a lot of the things that we're going to talk about today are going to really be contingent on you having set some of those personal goals that we talked about. You're really going to want to know what, what your income goals are, what your lifestyle goals are, what your family and community goals are, because they're going to influence some of the numbers that we calculate today. Like I said, today we're talking about step two. And step two is we're going to get into some actual calculations. This is the fun stuff that we love to do as fractional CFOs. So let's go ahead and dive in. As fractional CFOs. We are world class at putting financial goals and financial strategies in place for our clients. But the reality is when it comes to our own firms, a lot of times we leave a lot on the table. Now that I've worked with over 100 firm owners, I kind of see two big things happening. One, people will drastically overcomplicate the process of figuring out their own financial goals. And you probably know exactly what I'm talking about. You'll spend days or even weeks on end deep in the spreadsheets, putting together these complex models, trying to get everything dialed in and make it completely perfect. But if we're being honest with each other, those projects never really come to an end and it ends up being a drastic time suck. And it ends up being something that we don't actually use to implement in our business and to move our firms forward. More commonly though, I see firm owners taking the other extreme when it comes to financial goal setting and financial strategies. They'll pick a vanity based revenue number, maybe a million dollars a year, and then they go out and they just try to do everything they can to fill up enough business to hit that million dollar goal. But because there's no strategy behind it, because there's no why behind it, they end up burning out and not hitting those goals. So how exactly should you go about setting a financial strategy for your firm? Well, over the last six and a half years of building and scaling my own firm, I've actually boiled this process down to a super simple but highly effective seven step process. The thing about this process is that when I'm done, I know exactly how many clients I need. I know exactly how long I should spend on each client every month. I know exactly how much I need to charge my clients. And the best part is that I know that this strategy is in alignment with the personal goals that I set in the first part of this series. The first step in this process is to determine your services and scope of work. For me, setting a fixed set of services with a very well defined scope of work was the absolute key to unlocking scalability for my firm. When you have a proper scope of work and services lined out, you're able to put automations in place, systems in place, you're able to write processes and procedures that maximize efficiency. Now in this episode I'm not going to do a deep dive into which services and scope of works you should be offering, but if you need help, I'm going to put a link in the description below to an entire episode I did on the minimum services and scopes of work that every CFO should be offering. The second step in this process is to calculate exactly how long it takes you to deliver your services every single month. Now, there's two ways you can go about calculating how long it takes you to deliver your services. There are a million free apps out there that you can put right on your computer that will help you log and categorize all the time that you're spending so you know exactly how much time it takes to deliver your services every month. But let's be real. As fractional CFOs, we hate clocking time. We've spent so much time in our careers with billable hours and logging time, I know that most of you aren't going to do the hard work and actually calculate the time. So if you absolutely must, you can estimate. But here's my challenge to you. If you're just estimating, I really want to encourage you to multiply whatever you think the final final estimate is by 1.5 or 2 because we tend to be horrible at estimating how long things take. For the purposes of this episode, let's assume that you go through the process and you calculate that it takes you 10 hours to deliver your fractional CFO service per client per month. Once you know exactly how much time it takes to deliver your service, the next thing that you want to do is calculate your bandwidth. And when I say bandwidth, that means that we've got to figure out exactly how many Working hours we have every week and month to deliver our services. Now, if you think back to step one of this process, we work through some family goals and some lifestyle goals. Using that, I want you to think about exactly which days per week you want to work and how many hours per day you want to work. So let's assume for this exercise that you want to work Monday to Friday from eight to five. That's nine hours. And when we multiply nine by five, that's 45 hours a week. But we all know that we're not going to be doing billable work every single day, nine hours a day, Monday through Friday. So a good rule of thumb is to assume that you can do a maximum of 60% of your time towards billable work. So in this example, we're talking about 45 hours a week. We're going to multiply that by 60%, which leaves us 27 available hours per week. Now, we want to extrapolate that out per month. Now, here's a mistake a lot of people make. You might be inclined to say 27 times 4 equals your available hours per month, but that's not the case. There's actually 4.33 weeks on average in every single month. So I want you to take that 27, multiply it by 4.33. That's going to leave you with roughly 117 hours per month. I know that 0.33 sounds like nitpicking, but we're CFOs and we're into the details. Plus that 0.33 does end up making an appreciable difference over the course of a month or even a year. Now that we know that we've got 117 hours available every month for client work, the next thing that we're going to want to do is calculate the maximum number of clients that we can serve in a given month. So the math here is really simple. We're going to take 117 hours per month available, and we know that it takes us about 10 hours to serve any given client. So we're divide 117 by 10, leaving us with roughly 11 or 12 clients. Let's round up because we're optimistic people and say that we can serve a maximum of 12 clients every single month. The fifth step in this process is actually really simple for us numbers nerds. We're going to want to calculate some meaningful revenue goals. Now, if you'll think back to the income goal that you set in part one of this series, what I want you to do is assume that that's net profit. Now, I know that that could come in the form of net profit or distributions. But for the sake of making things simple, for this exercise, I want you to just assume that it's net profit. What we're going to do is we're going to take number net profit, and we're going to divide it by our net profit margin. So let's assume that you want to be able to bring home $200,000 for your firm, and let's assume that you've got a 50% net profit margin in your firm. We'll take 200,000 and divide it by 0.5 or 50%. And now we know that we need to hit a revenue goal of approximately $400,000. Now, I know that if you're a solopreneur, your net profit margins are likely a lot higher. Maybe you've got a team or an assistant, maybe you've got an office space. I have no idea where your profit margins are going to land. I just picked 50% for the purposes of this exercise. So, again, we know that we want to make $400,000 a year in revenue, or approximately $33,000 per month. Now that we know that we need to make approximately $33,000 a month in revenue, we now need to go about setting our target price in step six. And what I mean by that is we know that we can handle about 12 clients a month. We know that we need to make about $33,000 in revenue per month. So now it's just simple Division. We'll divide $33,000 a month divided by 12, and we're price point of $2,750. Now that we've completed the first six steps in this process, we're armed with some really powerful numbers. First, we know exactly how many hours per week and how many hours per month we need to do client work. We also know the maximum number of clients that we can serve, and we know ballpark how much we need to be charging them each and every month so that we can hit our revenue and net profit goals. Now, I know that there's a lot of variables that come into play when you're calculating this out for your particular situation. For example, maybe you realize that you don't think that you can charge $2,750 a month per client yet, but now we understand what we need to do to be able to fix that. If you think that for your particular ICA, the most you can charge them is $2,000 a month. Now you can go back and say, all right, what do I have to do to be able to make up for that $750 per client per month so that I can still hit my take home goal of $200,000 a month. That tells you that you either need to hire help or that you need to be more efficient so that you're working fewer hours per client. This really gives you a lot of direction on exactly where to focus in your business once you're armed with that remarkably powerful information. I want you to do the seventh step in this process, and it's so important. I want you to go back and I want you to adjust. Another way to think about it is I want you to go back and sandbox. And what I mean by that is I want you to critically think about the type of firm that you want to build, the type of team you want to have, the hours, the revenue, the price points that you're able to charge, and go back into this math and play around with it and see what's true for your firm and how you need to adjust. As an example, a lot of us, we want to have a team around us. We want to hire more people. And once we hire more people, that means the number of available hours that we calculated in step three goes up. So maybe you want to hire somebody and have them work 50 hours a week for you. That would mean that your available hours per month goes from 116 to maybe like 156. Right? You unlock a lot more hours, and so that unlocks a lot more revenue and a lot more net profit for you. Maybe you've got a team now and you don't want a team, but you still want to be able to hit that $200,000 net profit. Well, that might mean that you've got to get a lot more efficient with your services, or it might mean that you need to raise prices. Well, you might say to yourself, my ICA can't pay anymore. Well, maybe that means it's time to level up your ica. Find an ICA that's got a higher revenue or a higher net profit for their industry. All of these things start to really play in and how you determine the overall strategy for your firm. So I really want to encourage you. Take the information that you gained in some step one, where you set your personal goals, and I want you to sit down with a very basic spreadsheet and I want you to walk through these seven steps, because the numbers that you're going to get are going to be so incredibly powerful and important. When we get into the next and final step of this three part series on CFO strategies, we're going to take the information that we gathered in this step and we're going to use it to set smarter goals in our firm. I'm going to break down our firm into three distinct categories. I'm going to walk you through how to set specific, meaningful goals and tactics so that you can make sure that you're moving your business forward in the way that it needs to. All of that's happening on the next episode. I'm going to put a link to that episode below so you'll want to check it out. In the meantime, I can't wait to see you here next week, my friend. See you then.