Fractional CFOs provide strategic financial guidance and expertise to companies on a contract basis. Small, growing businesses that have never had a financial officer are often the ones most in need of help. What is it like jumping into an organization where you have no understanding of where your losses are coming from, what your actual operating costs are, or why you always have excess inventory?
Eric W Neumann has solved many client problems as a part-time CFO at New Life CFO Services in Dallas. Our writer Katie Kuehner-Hebert asked him to provide examples of two notable client engagements and explain how they turned out. He also asked him to explain what it's like trying to be a change agent without the mandate of a full-time CFO.
Tell me about a time when you joined a company without actionable, accountable strategic direction regarding the product mix.
In 2019, the new CEO of a craft beer company hired me to help improve the company’s profitability. My initial assignment was to determine the cost per barrel of beer by brand and packaging type, and encourage the brewer to use information systems to manage and track inventory and production to understand unit costs.
The CEO had implemented SAP a few months before I joined the company. Upon joining, I quickly discovered that the system was not being used correctly and all the numbers were wildly wrong. For example, the cost of goods sold on the income statement was shown as a negative $200,000 cost as if it was revenue. This was not possible and the tracked costs were useless since we could prove that revenue was accounted for correctly.
For a craft brewery to fully understand the strategic direction of sales and production and where to put their marketing budget, they need to understand brand profit margins by package type and production costs (including ingredients and production time in the brewing process).
Not all beer is created equal. Each beer is different in the time it takes to fill the tanks and the time from start to when the final product leaves the dock. Times can vary from 20 to 45+ days. The client had fixed brewing tank sizes that were used to their maximum capacity throughout the year. They were limited in the amount of beer they could produce. The mission was to find the best balance for their brand using the tanks, but without a cost structure in mind, it was all guesswork.
How did you solve that problem?
We started from scratch and did the hard, tedious work of calculating costs from the ground up. We had nothing to draw on. We watched tutorial videos to learn how SAP software worked. We talked to brewers to learn the brewing process and ingredients needed for each brand. We built a way to track every aspect of beer production in Excel, with inputs managed in the SAP system.
The key was to get the brewers to trust the system and make the right inputs. Weekly meetings to go over each batch of beer being made were essential to track down mistakes. Previously, inventory counts of ingredients and packaging had been ignored. Now that they were being held accountable and it was clear that everything was being carefully tracked, adjustments began to shrink.
It took months of tweaking to get all the systems and Excel calculations to work together and figure out the right amount of beer we could make and sell profitably. We cut our available beer brands from 15 to 6. Sometimes all you can do is roll up your sleeves and make the numbers.
Can you give an example of another initiative that proved interesting?
I was brought in by a restaurant group that had been running a successful business for over 12 years. The brand was expanding, sales were growing every year, profits were substantial, but it wasn't clear how much was tied to marketing.
We had a worksheet down to the dime: We knew, for example, that private parties were consistently profitable, but we couldn't prove that social networks were profitable. [postings]Sponsorships, radio ads, and TV ads were bringing in customers. Management was reluctant to cut marketing costs because sales had increased within the past advertising spending period, so spending continued despite the lack of proven ROI.
Were these marketing costs ultimately reduced or eliminated?
Sales started to decline across the board. Our flagship store sales fell the most, and upon observation, it became clear that a new store had opened close to our existing store, and the two stores were cannibalizing each other. It also became clear that we didn't need advertising as we were a neighborhood restaurant. No matter how good our food was or how well-known we were, we were not a destination restaurant brand, and we couldn't expect to become one. Customers came solely for the convenience, so word of mouth about great food and service was enough.
Over time, that proved true, and the company effectively stopped investing in marketing. In hindsight, that makes sense. But when a company's sales are still growing, marketing expenses can create the illusion that name recognition equates to future revenue, which in reality isn't the case.
What are the challenges of going into this situation as a partial CFO, given that you don't have the mandate of a full-time CFO with the long-term backing of the CEO and board?
In these situations, it's difficult to make decisions in the context of the company's strategy. Each company has to balance the uncertainty and how to deal with it. Projections with numbers and metrics, strategic plans with their pros and cons, all involve uncertainty. There is also uncertainty about execution and results, and how management will handle the instructions after I leave the room.
All of the above topics involve judgment and how they are communicated, documented and followed up on. Also, my accountability to my clients. I am generalizing broadly, but the stories I have heard from companies past and present are all different and I have not found a cookie-cutter solution for how my authority should be exercised.
The CEO's tacit approval of my actions is essential to effectively implement change. Clear objectives are a prerequisite for gaining the CEO's trust, which means I always ask questions that indirectly reaffirm my direction, which is reflected in the client's strategy.
