SIMPLE Method for Fractional CFO Compensation

Hey my friends, my name is Michael King. Welcome back to the CFO Report where I talk about starting, scaling and optimizing fractional CFO services. Today I'm going to share with you my favorite model for compensating the fractional.

CFOs on my team.

And I'm going to share with you why this model works so well for my firm. Without further ado, let's dive in.

How can I help you today?

Well, you know, I'm thinking about, about going through the process of hiring a fractional CFO and starting now appreciating it maybe several months before I land anybody. But I still wanted to understand what you would pay a person like that on a percentage of revenue. What percentage of revenue would be a good starting point or what are your thoughts regarding that? Sure.

So you're thinking about hiring somebody to join as like an employee or a contractor kind of thing, right?

Exactly. And it could be either. I would be thinking employee, but I'd be open to different options.

Yeah, I choose the employee route and I'm not a lawyer. And what I'm going to share with you, it shouldn't be considered legal advice. You should consult with a labor attorney that's familiar with the labor laws, your state and you know, like Canada or whatever. So I prefer the employee approach for a couple reasons. One, in the US it's kind of a gray area on what's an employee and what's not. There's a gray area that exists, but for the most part, if you're giving them the processes, the procedures, the tools, the scripts, and you're like telling them what they're going to do and how they're going to do it, then that's pretty much by definition of an employee. And that's the way my firm is set up. Right. I want to have total control of the product and the experience. And so I'm like, that feels a lot like an employee. And so like that's the route I've decided to go. There's plenty of other firms that are much loosey goosey with with it. You know, they more act like I'm going to tee you up leads in sales and I'm going to split that fee with you. But it's up to you to deliver that service however you want. And so that feels a lot more like a subcontractor or you know, a 1099. Here in the US you can do whichever way you want.

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Now to the issue of compensation. I think I have a whole YouTube video like 20, 30 minutes long where I talk about the different models, but the one that I've landed on is a percentage of the revenue that they manage, you know, of those clients. And the reason for that is it keeps in my my mind anyway, everyone's interests aligned, you know, and I worry that if I paid you, I'll pick a number, 200k a year to be a fractional CFO for me, what is your incentive to handle more than five clients? You know, I really don't know that there is one. And then what's your incentive to do a great job and make sure that those clients stay as long as possible? Maybe there isn't one. You know, there's going to be people that are going to do that, but I'm like, I would rather pay you to handle as many clients as you can and still maintain excellent service, because if those clients leave us, then that hurts you as well. And I've just found that that percentage is best. Now, what percentage should you pay? Well, you gotta look at a couple of different factors. So one is what level of talent are you trying to bring in, and how much compensation roughly is that talent going to require to want to come work for you? And so if you've got a lady or a guy that based on their experience is going to need, I'll make up a number, 200K. And you're only charging $2,000 a month for your CFO services as an example, you're going to have to have a lot of clients for them to be able to make $200,000 a year at any percentage. You know, so you've really got to kind of balance, like, how much are you charging your clients? How much comp is it going to take to attract the type of talent you want? And so for us, I'm very open about this. It's no secret for us, our services run 5,500 to 8,000amonth between our three packages. And I pay our CFOs 40% of. Of that. So it's real straightforward. It was real predictable. The other thing I love about it is when it comes into doing forecast and projections for my firm is real easy, you know, because I know that I'm going to have roughly 60% gross margin on what we bring in because I'm paying my CFOs 40%. That'll leave me 60%. So then I just factor in G and A, and it's real easy to figure out, you know, if I want to, you know, whatever financial goals I have, I know that a CFO can handle 8 to 12 clients. I know what they're going to get paid. That means I know exactly how many CFO clients I need to have. That means I know exactly how many CFOs I need to have on my team. And now that I know how long it takes to onboard a cfo, I now know when I need to start hiring the next CFO because of growth. And so using that model, I like to tell everybody, you're from Winnipeg. I'm from lower Alabama. I like everything to be simple and easy and predictable. I don't have to think too hard. And so it just works really well for me. But like I said, there's other people that have had extraordinary success doing it other ways. And so I would just say, like, do the. Do the one that works best for you and aligns most with the kind of company and team and culture that you're trying to build.

Okay, that's helpful. Thank you.

Yeah, of course. Thanks for being here.

All right, that's it for this week's episode. I can't wait to see you back here next week, my friends. I'll see you then.