A universally common question that growing MSPs will ask themselves at some point in their business journey is when they should seek additional financial help. First off, congratulations! Asking yourself this question means you likely have a handful of clients and a certain amount of stability in your business. You have grown from the starving-for-clients phase into the I-have-a-real-MSP-now phase!
Taking on a CFO is likely the last thought on your mind when you can barely afford to pay yourself. In this phase, there is only one goal – and a super reasonable one – to get more clients! If you are still in the early growth/starving for clients phase, you should likely forgo a CFO for now and focus on getting more clients.
After your client list has grown, you will start thinking about how to make the most out of your existing client base. You will develop questions like:
How do I properly invest in my business?
How do I transition from chasing sales to planning for the future of my MSP?
Whether you are looking for an internal hire or outsourcing, you must first have the resources - or capital - to make financial moves. Otherwise, engaging a CFO is similar to hiring a chef without ingredients or a salesman without a phone. You will not get your money's worth if your CFO does not have tools (money/capital) to work with.
For the remainder of this guide, we will assume that you have enough clients to pay your bills – which is all you need in some cases – and that you are looking to know: At what point in your continued growth is the best time to receive help from a CFO?
What is a CFO?
You must know what roles a CFO can handle for your MSP before we get into the timing of bringing one on. Why? Because they are not what people often think they are. A CFO stands for Chief Financial Officer, and the role of a CFO is to maximize the shareholder value of a legal business corporation. Although small MSPs likely do not have shareholders to answer to, they still want to maximize their company value.
This is where Fractional CFOs come in – they are part-time CFOs for small businesses who do not have the needs – or budget – for a full-time CFO but still need help maximizing their business value. As the name implies, fractional CFOs will do a fraction of the services a discrete CFO would do but focus on the services that most benefit a small business without shareholders. They specialize in services like:
Pricing
Forecasting
Budgeting
Risk Planning
Strategies to maximize profits
When do you need a CFO?
If you have read prior articles on this subject, you will likely get the answer: It Depends. That is because the question itself needs to be changed. Instead of asking “When do I need a CFO” ask “When do I need this particular ‘xyz’ CFO service.” The latter is a question with a clear answer.
Pricing
Pricing will likely be the first CFO service that your MSP will need assistance with. Due to the nature of the MSP business, it is naturally difficult to build a fair pricing plan. You must determine the nuances between hourly or fixed fee engagements and what specifically is included in your services. You must juggle services like:
Proactive vs. reactive support
3rd party licenses
Outages
Multiple equipment maintenances
Ever-changing compliance standards
However, proper and fair pricing is crucial for the following reasons:
1. Adequately fund your business to provide the best service for your clients.
With low pricing, you will have to cut corners somewhere in your services. Whether that be less proactive support, lower quality/paid support, or longer wait times. Somewhere low pricing will have to be absorbed into lower service quality. Prevent this with fair pricing.
2. Grow your business with proper tools and support staffing.
Beyond the direct service provided to your clients, your team will need a full suite of tools and admin staff to help them do their best work. Without proper profit margins, your team will be spread thin and ultimately allow incidents to fall through the cracks.
3. Communicate your value to new and existing clients.
Clear and fair pricing is a great way to attract new clients, allowing you to communicate your value to existing clients each month when they receive their invoices. The best way to get clients to ask themselves: “What are we paying you for again?” is unclear and constantly changing pricing models.
So – when does your MSP need a CFO to help with pricing? Right when you and your team grow consistently busy! Why? An MSP’s largest cost is labor, and before your service team is consistently busy/utilized, no pricing adjustments will make that waste disappear. However, as your staff becomes fully utilized, “Opportunity Costs” will appear. Opportunity costs are defined as:
“The loss of potential gain from an alternative."
This means that once you are busy, every hour spent on one task is an hour lost doing something more valuable. And for your team – that means doing more profitable work that was properly priced.
Therefore, you will not gain as much value from engaging a CFO to help with your pricing until your team is fully leveraged. This is when you can start replacing or upgrading their work from improperly priced clients to fair and profitable clients. If you are at - or past - this point in your business development you should find an industry-specific CFO to help with the nuance of MSP pricing.
Forecasting
A common analogy is that if your business is a car, the CFO is your windshield, and your accountant is your rearview mirror. That is because a fundamental role of a good CFO is to focus on a greater future and make forecasts to help you get there. In the hierarchy of needs, businesses will not plan for the future until they have their current needs met, and this is good advice for using a CFO for forecasting as well. We define 'Current Needs' as enough work to keep your team busy doing profitable work.
Oftentimes MSPs simply keep hiring more techs as they get more clients and hear grumbles from the existing team. This process will hit a wall around the $1 Million in sales mark. Why? It is reactive rather than proactive and there is no plan in place to ensure that your growth is sustainable. The processes that got you to a million will not get you much further and you will start losing service quality as you scale.
Communication will break down, service quality will drop as requests get dropped and more labor will be tied to administrative tasks rather than billable work. The best time to engage a CFO about forecasting/future planning is when your “current needs” are just met… before you make that next hire based solely on the grumbles of your team.
Budgeting
Budgeting for a new/small MSP should be treated differently than a personal budget. Of course, you should always have a personal budget, but with a new/small MSP, you should focus on your profit margin. Profit margin is the percent of revenue RETAINED in the business after all expenses are considered. Another way to think about it is: How many cents of a single dollar of sales are left as profit when everyone takes a bite?
Why focus on profit margin instead of a budget? Since your profit margin considers all expenses, you can use this single metric to determine if you can reasonably afford something. Of course, there will be variables such as cash flow making the decision more complex but if the new expense will not reduce your margin past your goal – then you can probably afford it. This line of thinking does not answer if you should afford it, but that you probably can afford it.
That being said – there is a point your business should have a budget that you operate off of. A small business budget is more of a communication tool rather than a financial tool. So the best time to create a budget for your MSP is when you have multiple mid-level staff who are responsible for hitting certain budget benchmarks in their day-to-day. Certain affected roles would be the service manager, sales, and project manager. These roles are all determined to hit their individual metrics which will unify together to reach the overall company objectives mapped out through a master budget. Once you have department-level staff members who are expected to hit specific metrics, it's likely time to create a master budget and tie the performance of your staff to how close they can hit/exceed the budget.
Risk Planning
Every endeavor has risk, but potential rewards should compensate for their risk. If the risk is greater than the reward, you should hold off on doing it. If the reward is much greater than the risk, it may be time to pull the trigger!
A fractional CFO should be trained in quantifying risk and determining if potential rewards outweigh the risks of a decision. However, because there are so many influencing factors to risk and reward, firms need to track plenty of data to accurately quantify the two.
Certain business use cases that this applies to are:
Mergers and acquisitions
Large company infrastructure changes (RMM/PSA implementation etc.)
Substantial staffing changes (such as hiring middle managers for the first time)
As with many of the preceding CFO services, determining the best time to engage a fractional CFO for this type of work depends on how many funds are impacted by your current decision. Hopefully, at this point in your growth plan, you have used a CFO already and know if they have the expertise in your industry to provide substantial value in this decision. Additionally, you should ensure that you have a proper PSA (Professional Services Automation) or LOB (Line of Business) software gathering enough relevant data for the CFO to make an educated decision. Otherwise, your return on investment will be lackluster.
In summary, before engaging a CFO for help with a risk analysis on a company decision, ensure that your company is tracking all of the relevant data in your central business apps and that the CFO you choose to engage with is an industry specialist who understands the unique position your MSP is in.
Strategies for Maximizing Profits
Last but definitely not least, a fractional CFO is a core member of your management team who should be able to help make decisions that will increase the profitability of your business. All of the above services will do this, and ultimately the biggest driver of MSP value is how profitable your operations are.
There are infinite other strategies where a fractional CFO will help drive more profits. Some examples include:
Reducing costs
Increasing help-desk efficiency
Focus your marketing efforts on the most valuable target client profiles
The list goes on
The best time to use a fractional CFO to assist in strategies for maximizing profits is right after you get your pricing right and ongoing thereafter. The one caveat - like in other CFO services - is to ensure that your company is gathering the relevant information first, otherwise, your CFO will not have the tools they need to properly guide you.
Conclusion
There is no right answer to when you should seek help from an CFO for your MSP. But there are answers to when you can best make use of particular CFO services such as Pricing, Budgeting, Forecasted, Risk Planning and Strategies to increase profitability.
The best time is different for each service, but in general engage a CFO for help with pricing right when you have enough clients to keep your team utilized, begin forecasting/future planning around the $1 Million in sales mark, start a budget when you have multiple employee roles geared towards a specific departmental metric, get help with Risk Planning once you are tracking enough business data in your central business app(s) and leverage your CFO's other strategies to maximize profits every step of your business journey.
Stratified Accounting is an MSP-specific accounting firm that understands the unique data requirements for MSPs and the systems you use to gather them. In addition, all our service plans come with at least quarterly fractional CFO services to ensure that you get access to these services within any budget/growth phase. We don’t just keep MSPs compliant, we are strategic business partners every step of the way.
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