The ULTIMATE Pricing Model for Virtual CFOs (2023)

Hey, numbers nerds, welcome to the Connected Accountant, where we believe that bookkeepers, accountants, and fractional CFOs that own their own businesses should be making more money as a CEO than when you work for somebody else. We believe that you should be serving the kinds of clients that you love, and we believe that your personal life should direct your business, not the other way around. And my name is Michael King, and I am so honored and humbled that you're here today. Just as I was getting ready to record this episode, I sent out invoices. And I will tell you this. It was a completely stress free, drama free experience for me, but it was not always that way. When I was first starting my fractional CFO firm, invoicing normally meant one of two things. It normally was amazing because I was flush full of clients, but that wasn't necessarily good because normally when I was flush full of clients, it meant that I was overworked. It meant that we were having to push work out the door so fast that sometimes the quality wasn't great. Right? It was like this all at once kind of thing. Or invoicing meant that we had just wrapped up a bunch of that work, and now it's like, where's next month's revenue gonna come from? We wrapped up the billing for all these clients or these projects, and now it's like, oh my God, what am I gonna do to get money in next month? And what I learned through my journey in building KFE is, is that there was this evolution for me in my pricing models that kind of helped get us out of that feast or famine cycle, you know, where it's all at once or nothing at all, into this place of predictability and calmness and honestly, just kind of a stress free business model. And so today I want to share with you the three steps of that evolution and some of the pros and cons of each step along the way. So without further ado, let's dive in. The first step in my billing model, or my business model evolution was I was billing hourly. And I think for a lot of us, when we first get into entrepreneurship, that's how we start. For me, I was on upwork. That was pretty much where I was getting all of my clients. And so, you know, I sign up for an account on upwork and I make my profile, and there's this spot that says hourly rate, and it's like, I don't know, boy, if I made 50 bucks an hour, that would be awesome. $50 an hour. You know, you do some Quick math. And you're like, that's like $100,000 a year. That's great to start as an entrepreneur. So let's call it 50 bucks an hour. But what I learned is there are two huge drawbacks to charging based on an hourly rate. Number one, this is kind of weird because, I mean, human beings are weird. But I have found that there's this psychological anchor, if you will, that goes along with charging somebody a higher hourly rate than they make. People don't want to pay other people a higher hourly rate than what they make or what they think that they're worth. And here's what I mean. If I set my hourly rate to $50 an hour as an example, and a client that's looking to hire us, maybe they bill it $40 an hour. They don't want to pay me $50 an hour to come in and do work at a rate that's higher than what they make. It has no bearing on your technical expertise or the value you bring. They just see those two numbers and. And they check out. And what I found very quickly was that I was limited a lot of times what I could charge per hour just based on what other people made or what they thought they were worth. The second downside with hourly billing is I found that even amazing clients were, like, super, super prone to pick apart my invoice. They're, like, looking at the invoice and they're like, well, I see you charged me for 12 hours over here. But, you know, I really think that because of X, Y, and Z, you should only invoice me for 10 hours. It just. It introduces this level of, like, stress into the customer client relationship, and I hated that. The other thing that I found was because of some of those stresses that I always thought were going to come, some of the pushback from clients is I sat down to generate invoices. Twice a month, I start negotiating with myself. You know, I'm like, okay, I'm looking at Acme Inc. Over here. And In Harvest or Toggl, I show that, you know, I work 18 hours for them this billing period. But I really don't want to deal with them, you know, kind of complaining about the hours. So instead, billing them for the 18 that I worked, I'm going to bill them for 15 and a half because, you know, I don't. I don't want to get any pushback. And I'm, like, literally negotiating hours with myself. And wasn't even anything the client was doing. I was telling myself this story. So I really did not like the hourly game. And so I said, well, how do I get out of the hourly game? What's the next step so I don't have to deal with some of those stresses and frustrations. And for me, the next step was getting into project based work. And what I mean by project based work is you've got a definitive scope of work, a start date, a stop date. This is what you're going to do. And when you're done, this is how much it's going to cost or how much I'm going to bill you. Project work could be billed, you know, in a number of ways where there's a deposit up front, maybe some of it's due at 50%, some of it's due at the end. I mean, there's dozens and dozens of ways that you can invoice it, but the concept is generally the same. Start, stop, fix, price. Now, I will say that this was a huge step for me because I found that project based work was like infinitely easier to sell than hourly based work. And the reason for that is it's so much more predictable for the client. A lot of times when clients are looking at hourly work, they're like, okay, you're $30 an hour, but is it going to take you 1,000 hours to finish the project or is it going to take you 100 hours to finish the project? Because, boy, that's a huge difference in my total investment. And a lot of times when we're an hourly, like, well, you know, it could take 100, but it kind of depends. It could take 300. And it just makes it so hard to sell when you do things that way. But after I got some miles behind me and I could sit down and say, well, I've done this a few times now, so I know that a QuickBooks cleanup or a company this size, well, that takes me about eight hours. And I want to be making $50 an hour. So I could price this at 400 bucks, right? So I then could go to a client instead of saying, hey, my hourly rate is 50 bucks. I could go and say, hey, I can do this cleanup for you for 400 bucks. And it just, it made it so much easier to sell. The other benefit was it was a lot more predictable for me in terms of hours because I was having to put these scopes of work together. I was having to think through how long projects would take. And so that made me more disciplined and more conscientious of how much work I was taking on. And when I was taking it on. Here's the downside to project work, though. It doesn't solve that feast or famine problem that I talked about earlier. And I think in some ways project work can even make it worse because you're kind of gearing up and working through a project and you get towards the end or you finished it and now you're like, crap, where am I going to get the next client from? Where am I going to get the next dollar into my business? Because, you know, mama wants me to keep the lights on this month. The kids need to eat. And so while project work was a lot better in some ways, especially around predictability, didn't really solve that feast or famine issue. And that's what led me to the third step. And this is kind of where we're at today with our business model. And that's to the monthly recurring revenue. And I will tell you, for us, this was kind of the holy grail and for a number of reasons. First, super easy to sell to clients. Again, because of the predictability, clients know what to expect with. With monthly recurring revenue, there's a fixed scope, similar to a project, but you're doing it every single month. And so bookkeeping is a great example. You can say, hey, look, I'm going to do weekly transaction allocations, monthly reconciliations, you know, every month I'm going to send you your financial reports and once a quarter we'll hop on a 30 minute phone call to talk things over or whatever your particular scope of work is. Your client knows exactly what they're going to get, they know exactly how much it's going to cost you and they're happy to just have the same person on the team doing the work every single month. And so it's so much easier from a sales perspective. Additionally, because it's recurring every month, it made it so much more predictable for me. And because I knew what the scope of work was every month, I knew who the clients were, I could start to really predict and plan for workload. I knew exactly when I was going to have to hire. Okay, after this client, if I get one more recurring, you know, bookkeeping client or fractional CFO client, I'm going to need to hire somebody else. And it made it easier to hire that person. Because I had a scope of work, I knew exactly what my revenue was going to be from each client. And so I could tell them, look, I can pay you this much and I love paying my vendors on a fixed rate. I can pay you this much. This is your scope of work. Do you Want the work, yes or no? And it made it a whole lot easier for me to find people that, yeah, I'm happy to do this. This particular bookkeeping for this price made my margins super predictable. It made my cash flow super predictable. It was an absolute game changer. I will also tell you that once we got our monthly recurring revenue figured out, and again, ebbs and flows go away. The first goal for me with that, with figuring it out was I looked at my overhead each month, including my comp, and I said, all right, how many clients do I need to have on my package in order for me to meet my overhead, like my fixed costs? And that was kind of the first goal or milestone that I set on the recurring revenue models. I said, I want to have enough recurring revenue that I know every, every single month. My comp, my team's comp, you know, et cetera, et cetera, all that overhead was covered. And then the way I looked at it was, if I want to take on some additional projects, that's just kind of margin for me, right? Like, that'll be my bonus. If I have some goals in my family, I'm going to go ahead and take on some project work and that will just be used to kind of fill in the gaps. We'll also tell you that once you have that predictable income and client base and workload, if you're the type of entrepreneur that wants to start offering a coaching program or if you want to create a course, this is the time to start doing it. So often I see people that are still hourly or project based, they're like, oh, I want to do coaching. Well, it's really hard to do that when your schedule and your revenue is so unpredictable. So if you want to think about offering coaching or a course or a group coaching program or a mastermind, I would really encourage you. Wait until you get your overhead covered through monthly recurring revenue before you start getting into coaching and course creation or starting a podcast and those kind of things. It's just, it takes the drama and the stress out when you've got that monthly recurring revenue. All right, I hope this was helpful. If it was, please be sure to share this episode with your friends. Tag us on the grams. You can tag us onnectedaccountant. In the meantime, I look forward to seeing you next week right here on this YouTube channel or on this podcast platform. Thank you so much for being here, Sam.