January 8, 2024

Hi there, and welcome to this episode of TrendsTalk. As I’m sure you’ve noticed, we’ve made some changes to the show. And one of the things we wanted to do was introduce our audience to some of ITR Economics business partners. Now, as we navigate the world of business, it’s good to have partners to work with, share ideas with and partner with. And one of ITR Economics most exciting business partners is FocusCFO. When I first heard about FocusCFO years ago, I was really excited to understand how they are impacting businesses all over the United States. Recently, I had the opportunity to sit down with FocusCFO’s director of marketing, Michael Stier and Area President, Greg Gens, to talk about what FocusCFO is all about and how they’re changing a whole slew of corporate misconceptions.

All right, well Michael and Greg, I’ll start off with a higher level question here. First, could you share with me the value of a chief financial officer within an organization? Michael, maybe we’ll start with you there.

Michael Stier:
It’s a great first question. Especially given our target market which is private businesses in the small to middle market range, a lot of times they’ve never had a CFO. And I get this question often. They’ve started out with the necessary in-house accounting function, they have a bookkeeper. Perhaps they have a controller, whether they’re in-house or outsourced and they have a CPA performing their tax returns. But they ask the question, what does the CFO do for me? And what we try to do is what’s been most effective is using the metaphor of the front windshield versus the rear view mirror type role. Your accounting function, your bookkeeper, your controller are the folks looking out the back window and it’s a very important function, but telling you where you’ve been and hopefully doing that very accurately.

What CFO is, is basically sitting in the front seat with the owner, with the leadership team, helping navigate where the business should be going. Tying their overall business goals and business strategies to a financial roadmap and helping identify what are the resources you need, where are the best directions to go in to achieve those goals. And sometimes with the analysis it may be even, “Hey, this particular goal does not look like the best direction, based upon the numbers maybe we should be targeting this direction.” And so it’s that kind of in-house trusted advisor who is really the speaker of truth, that’s driven by the numbers about where the business can and should be going, and what’s it going to take to get there.

Taylor St. Germain:
Sure, that’s great. And there still might be some businesses out there that are in that small business world that hear that description that you just shared about why a CFO is important, might be thinking to themselves, well, why can’t I do that myself? And what would your response to that be?

Greg Gens:
Michael, can I take that?

Michael Stier:
Please.

Greg Gens:
Typically, we’re working with really smart people that have worked real hard and bootstrapped up their business. The problem is there’s only so many hours in the day and there’s a certain lack of discipline in history. If you haven’t gone through a banking relationship before, you don’t know how a bank thinks, you don’t know how outside financial partners think, you don’t know how to build a team because you’ve never built a team. We really bring in really a focus on information and process. And those things start to create visibility throughout the organization so that you can gain alignment, can ask for accountability and then can delegate. And once you can start to delegate as an owner, you can scale.

And one of the keystones of building a great team is having good information that’s accessible to the entire team so that you can set goals, and go forward and have accountability and then delegation. And that frees up the owner. One of the kind of buzz phrases that we like to use is, you should as an owner be able to go on vacation for six weeks and when you come back, your business should be better than when you left it.

Taylor St. Germain:
And I know you both at FocusCFO specialize in exactly what you’ve been describing. But for those of our listeners that aren’t aware of what a fractional CFO is of FocusCFO, could you share a little bit more about the role of a fractional CFO and some of the value add that the fractional CFO can bring?

Michael Stier:
So Greg is talking about the value of a CFO in general. In the small to middle market business, a lot of times these businesses don’t need or can’t afford a full-time CFO. And that’s perfect most of the time. And that’s the beauty of this fractional space, is that these businesses get the benefit of a highly experienced CFO, someone who’s been a CFO for decades who now will come into their business part of the week, typically a day a week, plus or minus a little bit. So they get the benefit of that experience brought to a business that they’ve never had before because these CFOs have been there, done that with many businesses in the past. And they love to be able to bring value and add this kind of experience and value to these businesses that would normally never have had that before. So it’s a win-win on both sides.

Taylor St. Germain:
Yeah, it sure sounds that way. And maybe a question for both of you here. I’d love to hear some of the success stories with your fractional CFOs. You don’t have to call out names or titles or companies. But any general success stories that you could share with us in terms of as these fractional CFOs have engaged with these small to medium-sized businesses?

Michael Stier:
I will start then and I’ll let Greg kick in here as well.

Taylor St. Germain:
Great.

Michael Stier:
I think for us probably the two big successes that we celebrate all the time with clients, and we’ve typically work with clients for many years averaging maybe five or six years but it could be longer. But success stories for us are one, if we lose a client because we’ve helped them grow large enough that they need a full-time CFO now. And we’ll actually help in that process and help them find that full-time CFO. To us that’s a really big win. The other big win of why we lose clients is we’ve gotten to a point where they’re healthy enough, they have a good structural business and there’s been some sort of transition or exit, whether as Greg mentioned, it’s internal transition or they’ve been bought by a strategic buyer, et cetera, that’s another success story for us. And we actually celebrate our CFOs and award them for helping clients get to that point.

Taylor St. Germain:
Yeah, it’s interesting to hear that losing a client is a positive thing. It’s a great thing. Absolutely, that means you’ve helped him out. Often that’s not what you hear from businesses, so it’s a really interesting perspective.

Michael Stier:
I think it’s great. To expand upon that, typically the pain points that are occurring in the business that are kind of the catalyst for them to either reach out to us, or have a trusted advisor introduce a FocusCFO into that business are probably three or four items. One is a lot of times the business has been growing pretty rapidly. They’ve gone from being a smallish, maybe Mom-and-Pop-ish business and growth has exploded, but they’re still operating like they were that small business. And quite frankly, operationally and financially they’re falling over the front of their skis and that could cause a cash flow problem. Sometimes it’s the reverse, their business has stalled. They’re concerned about the performance of the business and they need to take a hard look at all the various components, their products, their services, their customers, et cetera. And understand where they should double down, where they should back out and try to restart the acceleration of that business growth.

And we provide a lot of analytics behind that. And probably the last biggest pain point that we often hear is that the owner’s concerned about what’s the end game, because most entrepreneurs their entire or most of their net worth, their wealth is tied up in their business. Is this business going to create for me the value at the end that will fund my retirement goals or whatever else my goals are after that fact? And they have no idea what their business is worth, how to get it to that point. And so we spend a lot of time with them strategically, as I mentioned before, building up the value of the business so they actually have something that will fund those goals at the end of whatever that road happens to be.

Taylor St. Germain:
Yeah, we’re often so busy on the day-to-day that sometimes we forget to look ahead to the finish line.

Michael Stier:
Sure. Absolutely.

Taylor St. Germain:
And so I certainly see the value in that. Speaking of some of these pain points though, I am going to put you both on the spot here a little bit. But I wanted to ask, being an economics podcast that TrendsTalk is, we talk a lot about where we’ve been and some of the challenges that we’ve been through. And COVID is one of those major challenges. I’m wondering if you might be able to share some of the lessons learned over the last few years, maybe from either your perspective or some of your fractional CFOs or client’s perspective. When we look at how we’ve had to navigate through this crazy economy in the last few years, is there anything that sticks out to you?

Greg Gens:
Well, an example comes to mind. I have a client right now that first with COVID and the disruption in the supply chains that have happened, okay, there’s really radical changes in steel pricing and they got hooked. Interestingly enough, they didn’t have a cost problem. They had a contract problem because they had long-term contracts that presumed stability in steel prices and that really obviously didn’t work out because you had 400% increases. If you are sitting down and looking at something like the scrap steel indicators, you’re seeing something where you can see out a few months in advance where you’re going to have a pressure point. So now if you look at your contracts, you need to get in front of your clients and start to say, “Hey, look, we need to renegotiate this. This works out for you and if you can’t renegotiate it, then we’re going to have to go down different paths.”

It’s always great to have a warning shot as opposed to get into it six months after you’ve had horrifyingly bad margins, and you’re bleeding money and you don’t have good visibility into what that means on your cash flow. So it’s almost counterintuitive because people think of CFOs as you put your financial hat on and you’re watching costs. That is really one of the big difference between a controller and the CFO. The CFO is looking at margins and pricing and things like that. This was a pricing model problem that bad assumptions were plugged into. And we were called in and we sat down and we renegotiated with major billion-dollar companies. This is a $25 million company that was dealing with billion-dollar companies. And because they do such a great job, they were able to lever their service, not the price of steel and tell people, “Look, if you want to have us around in the future, this all has to change.” A lot of credit to them because they have a great business but you have to know what your leverage points are.

And having gone through that kind of thing before, our CFO is actually able to sit down and say, “Look, here’s what’s going to happen. If this is going to continue, we need to do something really dramatic right now and it needs to be on the pricing side. There’s no other fix in this. So I know this is going to be painful.” And nobody wants to go hat in hand to customers and say, “That contract, we’re just kidding.” Kind of a thing. But if you have the facts in line, you can make a much better presentation. And interestingly enough because they did a great job, every one of their customers accepted price increases that they were not contractually obligated to do because they saw the interruption in the supply chain as being a bigger problem than margin loss for particular products, because they knew if they went to the market they weren’t going to get a better price anyplace else.

So knowing what’s going on in the market is very powerful. Knowing where the market is going with some good non-biased forecast is very powerful, when you sit down and talk about your relationships with customers, vendors and bankers, to be frank.

Taylor St. Germain:
Yeah, when we look at our clients today, those that were able to have those conversations and increase prices and not just… I think the point that you made that was really interesting to me is it’s not just a price increase, it’s also the service that defends it. So it’s not just, “Well, we need to protect our margins.” But it’s, “Here’s our competitive advantages that provide support for improving the situation in increasing prices.” And I think that’s really important. We talk a lot with our clients. It’s not just, “Well, the market increased prices.” It’s really use your competitive advantages to support some of these conversations. And the transparency that I think you are highlighting here with the customers, all important lessons learned during the pandemic. And I think we’re still having those conversations as we sit here today. Before I talk about today though, Michael, any comments from you there?

Michael Stier:
I think Greg highlighted a very effective example. I think if you generalize it, the forecasting discipline prowess that our CFOs bring to the business provides tremendous value as far as being able to predict going forward, where some of these disruptions or risks may occur. So think about the CFO, not only is being kind of the financial forecaster but also being a major player in de-risking the business because as Greg said, you may have disruptions from increasing costs from suppliers. And during the pandemic, another big area of risk was just the whole cash cycle. When are you collecting from clients? Are clients able to pay? What are suppliers looking for? Be able to manage that so that you know what the working capital requirements are going to be for the business, because I’ve had plenty of new clients come in who almost fell over their skis and failed because of a cashflow problem in the business, running out of working capital, not being able to manage those cashflow cycles.

So to be able to tie those things together, bring in your banker relationships, so as Greg mentioned, you’re speaking with data and hard facts about what’s going on in the business, you can make adjustments to those things and start to de-risk the business.

Taylor St. Germain:
Yeah, I love your comment about the forecasting side and how important that is for de-risking, because as you know that’s part of our motto, which is reducing risk through this economic intelligence. A lot of synergies there between CFOs and economists, although I know economists are often called the soft side of finance but I’ll let that go for now. I wanted to finish off on the last question here for you both today, and it’s related to 2024. As all of our businesses clients are preparing their budgets and strategic thinking for 2024, what is something that you are watching closely? It can be a concern, it can be something that you’re excited about, something you’re talking about a lot with your CFOs. What is maybe a big ticket item that we should be watching closely for 2024 from your perspective?

Michael Stier:
I’ll start and let Greg step in from here as well. As they’re starting to plan for 2024, again, when you get back to this whole forecasting thing, the scenarios that are starting to come into play is, well, are we going to have that soft landing? What does that actually mean? Or are we expecting an acceleration in later 2024, or is there going to be a deceleration? And is it going to be across all markets or going to be in certain industries? Those kinds of things are really important because 2024 it’s very murky if you listen to everything that’s going on, including with you guys. So our clients are definitely interested in understanding that. It gets back to the regional question I asked before, certain industries in certain regions may be going gangbusters next year. Throughout the end of the year, other regions may start to be softening. So our ability to be able to provide that kind of scenario analysis and having hard data and a good data to support those things, is critical to what our clients are interested in.

Greg Gens:
Just to add on then, in the clients that I’m working with as we go through the budget process, I think Michael hit the key word with uncertainty in 2024. So what we end up doing is essentially creating a main model and then we stress test it. And we stress test it against what we think the most likely scenarios are that can come up, for instance, maybe it’s raw material or maybe we’ll lose a customer, or somebody off-shores. Or what different things can hit the model and then you run it through so that you can have a plan that sits down. And we’re doing this right now with a client where we’re walking through and they have a very large customer who might be in financial trouble because of different things. So we’re running this now with, here’s the business now and this is what we think is most likely, and now what’s it going to be if that business just leaves?

Okay, and if that business just leaves, then what do we have to do? And it’s a complete test. What’s the equipment we need? Do we sell equipment? What people are we going to move with? What things do we have to do to keep the business cash flowing? And if you have those things lined up, then you don’t have to panic and make the decisions once you’re halfway in and you’re making the decision too late. You’ve already made the decisions in the calm of the planning process, and so you have your second stress test kind of plan. So stress testing is something that we end up doing a lot, going into uncertainty to make sure that you’ve got, what does it look like if XYZ company takes its business overseas?

Taylor St. Germain:
Yeah, I recently heard a business executive say, “We can control 80% and the other 20% we plan for and scenario forecast, and then we take it as it comes.” And I think that really highlights 2024 as you both are saying, is that there are going to be markets that perform better than others. There are going to be businesses that perform better than others. Some are going to feel recessions, some are going to feel soft landing. So understanding those contingency plans and doing some of that stress testing in 2024, although important every year, will be more prominent in 2024 given the downturn that we’ve been talking about with our TrendsTalk listeners for quite some time now. I really appreciate you both being here. I know ITR Economics values our relationship with FocusCFO very much. So thank you both for taking time out of your busy schedules to come and chat trends with us, and tell us a little bit more about the Fractional CFO. I learned a lot, I’m sure our listeners will as well. So I really appreciate it.

Michael Stier:
And likewise, we obviously value our relationship with ITR. You help us be better at what we do, which is to help our clients be better. So thank you.

Greg Gens:
Yeah, thank you very much for your time today too.

Taylor St. Germain:
Absolutely. Thank you both.

I was so struck by the simplicity and the power of FocusCFO, but also the impact that they’re having on businesses all over the country. If you’d like to know more about FocusCFO, I encourage you to reach out to them directly. There’s a link in the description of this episode to their website. Don’t forget to mention that you heard them here on TrendsTalk. That’s all the time we have here today. As always, I’m Taylor St. Germain, and this is TrendsTalk.