THIS is actually BAD for your clients

All right, I know I'm going to get a bunch of hater8 email on this, but that's okay. I'm here for it because today I've got a hot take. Most fractional CFOs are teeing up too many charts, graphs, KPIs and metrics for their clients and it's actually doing them a disservice. In today's episode of the CFO Report, I'm going to talk about why teeing up too many metrics for your client is absolutely a bad thing. I'm going to share with you the metrics that I suggest that you do share with your clients. And I'm going to reveal the one time that you should tee up additional metrics for your client. And I'm going to tell you how to do it so it doesn't become a distraction. Let's dive in. Foreign.

Hey there, my name is Michael King. Welcome back to the CFO Report where I talk about starting, scaling and optimizing fractional CFO services. A few years ago I was working with a client in the retail industry. It was a decent enough business. They were doing four and a half million dollars a year top line. They had an okay but not great net profit margin and they had an okay amount of cash in the bank. The number one problem with this business is that their gross profit margins were entirely too small. And that was having a downstream impact on their net profit margins which was keeping them from being able grow their company further. For a couple months I had the leadership team singularly focused on improving gross profit margins. And then one day I get this boneheaded bright idea for absolutely no reason at all to start introducing some additional metrics and some additional KPIs. I started talking about things like the quick ratio and the current ratio and the cash conversion cycle, inventory days and about a dozen other metrics. The problem with that was none of these metrics were in a bad spot. None of these metrics had anything to do with the growth that the business was trying to achieve. None of these things had anything to do with improving their gross profit margins. And then one day on one of our CFO calls, the CEO for some reason gets just locked in, focused on inventory days. And I think the number I had come up with was like their inventory days was somewhere around 27 days. And the CEO just could not wrap his head around the fact that the number was 27 and not 24. For some reason he had this arbitrary number that 24 was the actual number. His number wasn't based on equations or data or anything else. But he just could not stop arguing about the fact that inventory days was 24, not 27. And so finally I said, okay, if inventory days are actually 24 and not 27, what are we going to do differently in the business? How are we going to make decisions tomorrow based on the fact that inventory days are 24 or 27? And I got a completely blank stare. It was through that experience that I realized that when we tee up more metrics and charts and graphs and KPIs, if they're not meaningful, then they actually just become a massive distraction for the business. What I find is that the business leaders and business owners, they start just becoming fixated on what those metrics actually mean and how they're calculated and how they can be manipulated and what they need to do to change them around, when the reality is those metrics aren't the metrics that are gonna drive the business forward. That's why a few years ago, I went through this exercise where I tried to simplify things down as much as humanly possible. I asked myself, what are the metrics? What are the critical metrics that every business owner needs to understand inside and out from a financial perspective in order for them to be successful in the long run? And for me, when I broke it down, I realized that at the end of the day, all they really, truly need to understand is how every single decision in their business impacts one of four numbers. Revenue, gross profit, net profit, and cash. And I call those the critical four financial metrics. And I do believe that to the extent that every business owner understands how every single decision they make in their business impacts one or more of those financial metrics, they will be successful. Now, a lot of times, when I put this concept in front of other fractional CFOs, they start to argue. They're like, no, my clients are more sophisticated than that. They need more data than that. They need to have more insights than that. And I'm like, do they really, though? Because if they don't understand how every decision impacts the critical four financial metrics, then what makes you think they're going to be able to understand all the drivers that go into these other metrics and how those other metrics are going to move their business forward, I have found time and time again that there's this thing that I call the fundamental truth for fractional CFOs, and that's that simplicity leads to understanding, understanding leads to action, and action leads to impact. And I just keep finding that the More simple that I can keep things, the more likely the business owners are going to understand exactly what they need to do and why they need to do it. They're going to then take that action that's necessary so that they can have the impact on their bottom line or their teams, their financials, whatever the case may be. So again, simplicity leads to understanding, understanding leads to action, action leads to impact. Now, all that said, I am not suggesting that you as the fractional CFO shouldn't be monitoring a lot of other data on the back end. There's so many metrics out there that you should be watching. But those metrics are industry specific and specific to your clients goals. So you might need to look at things like customer acquisition cost, lifetime value of clients, return on ad spend, cash conversion cycle and inventory days. I don't know what those metrics are for your client or the industry they're in. That is your job as the fractional CFO to know what those metrics are and to be watching them on the back end. But you shouldn't be muddying the water with your clients and putting those other metrics in front of them when they're not problematic and when they're not standing in the way of the clients achieving their goals. And that is the one and only time that I think that you should be teeing up additional metrics for your client when those metrics are becoming worrisome or when you start to predict that those metrics are going to impede them from being able to achieve their goals in the future. Now with that said, I do think that there's a specific way that you should present the metric to your clients so it doesn't become a distraction for them. You should be explaining to your clients what story that metric tells. You should be explaining to your client how the metric is calculated. You should also show them where the metric is today and where the metric needs to be. And you should show them specifically what actions they need to take and you need to take to get that metric back on course. And finally, and I would argue most importantly, you've got to explain to them how moving that metric is going to help them get closer to their goals. Because if you're not connecting the metric and the actions to their goals, the clients are not going to take action. And that's one of the biggest mistakes that I see fraction CFOs making time and time again. We give our clients all this great advice. We tell them what they need to be doing, we show them the roadmap, but if we're not connecting our advice to their goals, our clients, at some point, sooner or later are going to start thinking that we're disconnected from their goals. They're going to think that we're giving them a bunch of work to do that's not moving them closer to their goals. And at the end of the day, if our clients don't realize that what we're doing to help them move towards their goals, they're going to fire us. Listen, at the end of the day, you get to decide what metrics you put in front of your clients. I'm just here to tell you that after seven and a half years, I've learned this lesson so many times. The simpler we can make things, the more our clients understand what they need to do and why they need to do it. And once they understand what they need to do, they're more likely to take action. And when our clients take action, they have impact. And at the end of the day, they're paying us to help them make an impact. So if impact is important to you, check your ego at the door. Realize that more charts and graphs and KPIs and those things normally just function to serve our egos and make us feel better about ourselves. Check that at the door and. And remember, it's all about serving your clients and helping them achieve their goals. I hope this episode was helpful for you today. I cannot wait to see you back here at the same time next week, my friends. I'll see you then.