A fractional CFO provides companies with strategic financial guidance and expertise on a contract basis. Often, small growth companies that have never had a head of finance need the most help. What’s it like parachuting into these organizations, some of which may have no idea why they’re losing money, what their actual operating costs are or why they constantly carry too much inventory?
Eric W Neumann has resolved many client issues as a fractional CFO with New Life CFO Services in Dallas. Our writer Katie Kuehner-Hebert asked him to give two examples of notable client engagements and how they played. She also asked him to describe what it’s like trying to be a change agent while lacking the authority of a full-time CFO.
Tell us about a time when you came into a company with no actionable—and accountable—strategic direction on product mix.
In 2019, the new CEO of a craft beer company hired me to help the company achieve profitability. The initial mandates were to determine costs per barrel of beer by brand and packaging type and to encourage the brewers to use their information system to manage and track inventory and production—and, therefore, unit costs.
The CEO had installed SAP in the months before my hiring. Upon my arrival, it was easy to see that the system had not been used correctly and all the figures were wildly wrong. For example, the cost of goods sold on the profit and loss statement read as a negative cost of $200,000—as if it were revenue. Since this was impossible and I was able to prove revenue was being booked correctly, the costs tracked were of no use.
For a craft brewer to fully understand the strategic direction of sales and volume production and where to push its marketing budget, it must understand the profit margin for any brand by packaging type and production cost (including ingredients and production time in the brewing process).
Not all beer is created the same; the time it takes to fill the tanks and the time it takes from initiation to the final product leaving the dock differ for every beer. The time can range from 20 days to 45 days or more. At this client company, the brewery tanks were fixed in size and used to capacity year-round. The quantity of beer capable of being produced was limited. Using the tanks for the most optimized balance of brands was the mission, but without cost structure considered, it was guesswork.
How did you solve that problem?
We started from scratch and did the hard, tedious work of figuring out costs from the ground up. There was nothing before me that I could leverage. I learned how the SAP software worked by watching tutorial videos. From conversations with the brewers, I learned the brewing processes and the ingredients needed by each brand. I assembled a means of tracking every facet of beer production in Excel while managing the inputs in the SAP system.
The key was getting the brewers to trust the system and make the proper inputs. A weekly meeting reviewing every batch of beer in production was essential to ferreting out the errors. Ingredient and packaging inventory counts were previously ignored. Now, those had to be accountable, and adjustments began to shrink as it became clear that everything was being tracked carefully.
It took many months to get it dialed in tight where the systems and Excel calculations all tied out to find the proper amount of beer to produce that could be sold profitability. The beer brands available were scaled back to six from 15. Sometimes, rolling up your sleeves and grinding out numbers is all you can do.
Can you give us an example of another engagement that proved interesting?
A restaurant group with more than a dozen years of success brought me in. The brand had expanded, and sales were growing every year. Profits were substantial, but it wasn’t clear how much was tied to marketing.
We had a worksheet reconciled to the dime. We knew, for example, that private parties were consistently profitable. However, we couldn’t prove that social network [postings], sponsorships, radio ads or TV ads brought in customers. Ownership was reluctant to cut marketing costs, as sales had grown within the past timeline of ad spend. So, the spending kept going despite not proving an ROI.
Were these marketing costs ultimately reduced or eliminated?
Sales, in general, started to taper off. The flagship restaurant saw the greatest decline, and from observation, it became clear that two of our restaurants were cannibalizing each other as a newer one was built in proximity to an existing one. It then became clear that as a neighborhood restaurant, no advertising was needed. No matter how good the food or name recognition was, we were not, nor could we expect to be, a destination restaurant brand. Customers only came out of convenience. So, word of mouth about great food and service was all that was needed.
Time playing out proved that, and the company virtually eliminated the investment in marketing. In hindsight, it seems obvious. But when a company’s sales are still growing, marketing spend can create the illusion that name recognition equals future revenue—it doesn’t.
When you enter these situations as a fractional CFO, what are the challenges, given you lack the authority of a full-time CFO with the long-term backing of the CEO and board?
These situations make exercising judgment difficult in the context of the company’s strategy. I must balance uncertainty and how I deal with it in each company. Forecasts with numbers and metrics or strategic plans with pros and cons all have some uncertainty. There’s also uncertainty in execution and outcomes and how management will handle directives once I leave the room.
There is judgment in all the above topics and how they are communicated, documented and followed up. There is also my accountability to the client. I am making a sweeping generalization, but the stories I have from companies past and present are all different—I haven’t found a cookie-cutter solution to how my authority plays out.
The CEO’s tacit approval of my actions is essential to effectuating changes. Clear goals are the prerequisite to getting that trust from the CEO. This means I am always asking questions that indirectly reaffirm my direction as it plays out in the client’s strategy.
