The When and Why of Hiring a CFO For Your Business

When Shondra first started TBC Capital, her team would bring in black entrepreneurs that “had no idea what they didn’t know.” After doing a 360-degree analysis, they found a missing piece to the puzzle. The founders could figure out product development, marketing and several other parts of the business. But they were struggling to figure out the quantitative part of the business – aka how to think of their business in numbers. 

Shondra then began building financial models. (Something that many founders often skip.) “When you're thinking about your business model and how you're going to make money, understanding how the money flows down to the net income line or the EBI line and then into the cash flow is super, super important.”

Pricing for a service-based business

“I am my business,” she says. Time is the commodity that she’s selling to clients. 

The first thing Shondra recommends is sitting down to give yourself an hourly rate – and then try to figure out how much time you spend per client. “Whether that is $400, $150 per hour, whatever it is, figure out what your rate would be.” As a CEO, an expert or a specialist, there are all these different ways that you can look at your time. 

Shondra has a specified skill set and the CEO of a company. “My time has to be spent on doing things that will grow the business, even though I'm a CEO and I don't have other employees working with me,” she says. “You still have to think in a growth mindset.”

There are several online resources that you can use to track your time, but it gets tricky if you have a number of clients and you’re doing things all over the place. To combat this, you can block your time. Figure out who you’re going to work with, at what time, for how long. Then you can figure out what your pricing and margin should be. 

“Typically I suggest shooting for about 20% margins,” she says. “That's low in some industries and high in others, but 20% is a good starting point.”

Whatever the cost for you to provide the service, there should be a little bit of margin on top that you are taking home and putting into your business. That is essentially how you're, you're running the business. “You should always make sure that you are paying yourself first, and then adding the margin so that you can actually run the business. Then you can get a better sense of your price point for your services.”

Maintaining a P&L balance sheet

All owners need to make sure that their financials are in GAAP standard, generally-accepted accounting principles. That allows someone to look across different types of businesses and assess their financials in a standardized way. For example, it can ensure that the founder or someone else isn’t manipulating the financials to make it look better or more profitable than it really is. 

You have to track every single transaction going in and out of your business, whether it was paying a contractor through Zelle or using a credit card that isn’t connected to your QuickBooks. 

“The point of it is that an investor or a partner or a vendor wants to make sure that they are doing business with someone that's organized, understands their business and someone that is trustworthy,” she says. “It's more than just you knowing what your business is doing and the money that's coming in and out of your business. It's also the perception for a VC fund, or whoever you're talking to, of how you are running your business to other people.”

Founders can risk losing investors if their accounting isn’t up to date. 

Financial modeling

“Your P& L is historic. You're looking at the business from a historic lens from month, quarter, years prior,” she says. “The question then becomes ‘where can my business grow? How can I scale?’”

Financial models can better help you quantify your business – a sense of how the numbers go in and out of the company. And they help you think about metrics.

One way to think about this is doing a growth rate on top-line revenue, but Shondra doesn’t recommend doing this. “You get an idea of where you'll land in the next year or two years, but that's not how I would do it because the growth rate on the top line revenue is not the input.” The input could be salespeople, hours spent or marketing, etc

The better way to do this is to look at what the input of your revenue is. For example, if you’re a consumer business that requires people to go to your website and sign up or buy things, you’d want to look at how you can grow the number of people that find you online.

You put X number of dollars into marketing and got Y number of visitors. Then you can take your conversion rate from those visitors. What percentage of visitors turned to customers? How much revenue did it make?

“You can look at it differently depending on your business, but it's really understanding your revenue and the inflows into how you actually make the revenue, not just the revenue number growing over a period of time.”

Then, Shondra recommends, take what you think you're going to make as revenue that you're getting and create cash flow projections. This will help you figure out when you will actually get the cash. Your working capital helps you flow between the time when cash is coming into the company and when cash needs to go out. 

The difference between a CFO and a controller

“There's finance people that come in and kind of do your bookkeeping and make sure your accounts are right, etc. And then there are partners and strategists.” At the CFO level, Shondra acts as a strategist to partner with CEOs to help figure out where you want to be – and how to get the cash to get there. A CFO is dealing with the ins and outs of strategy planning.

Yet having a controller is crucial for businesses starting out. Controllers are the ones who are helping with the processes, like accounts payable and taxes, etc. and are the ones closing the book at the end of the month to make sure everything is accurate. 

Whereas a CFO does the strategy with you, controllers help you to figure out how to fundraise. “They're helping you figure out how to grow the business from a financial lens and all of the money and the requirements that you would need to do that. So they are completely two different things. You're talking about a strategist and then someone that's more of a tactical person within your business.”

Your first finance hire

As a venture-backed startup, should you look at a vendor, contractor or full-time hire? “Your first full-time person should be more of a controller. Then you can do a contract or a fractional CFO to help you with some of the strategic work,” Shondra recommends. 

You should find someone with actual accounting, ie closing up the books each month, experience. Shondra also suggests bringing in someone with experience managing people since the team could expand over time. 

Advice for business owners during a recession

“The one thing that we're doing across all of my clients is that we're reducing costs. And that it's not always headcount,” she says. This can start with looking at overhead, like looking at the cost of multiple offices, or looking at the contractors that people are bringing in. 

She also recommends an analysis of your revenue and the profitability of certain products or services. “We're looking at those products and we're saying, ‘how much does it cost for us to develop, produce, and create these products.’ If they're not bringing in enough revenue or they are not profitable themselves, then we are nixing them. We're saying it costs too much to produce this and it's not helping our bottom line.”

Only after doing these analyses should you look at employees. “I think people jump so fast into cutting burn rate by cutting head count. And I don't necessarily think you have to do that,” she says. If you look at your business transaction by transaction, there are so many other ways that money could be spilling out.