Today, I'm going to share 3 common reasons why Fractional CFOs run into cashflow challenges.  

Yes. We are the money experts: the financial gurus and the seer of flagrant financial follies. However, even a great Fractional CFO can make mistakes when managing their cash flows.

Over the past 9 years, I've made a handful of mistakes myself. Big mistakes that lead to some narrow misses when it comes to cash. I've also seen other firm owners make similar mistakes lately, so I decided to share the list with you!

Today, I'm sharing 3 common causes of cash crunches in hopes that you can bypass some of the avoidable errors I've experienced over the years.

Let's dive in.

Cash Crunch Cause #1:
Hiring Other Fractional CFOs Too Soon

If you're trying to scale a firm, you will eventually need to hire someone else to handle client work. You might even need to hire a few people eventually!

It's a very big but necessary shift if you want to move into the CEO role at your firm.

But if you don't get the timing of these hires right, it could end up sinking the ship.

If you pay your CFOs a fixed salary and bring them on before you have enough work to cover their labor burden, it can quickly drain your free cash flow.

There's even some risk if you pay your Fractional CFOs on a 1099 basis. If they need a certain amount of work in a given period and you can't deliver it, there's a non-zero chance that they end up dumping the client you handed off to them to join another firm or get a W2 job somewhere. This means you either have to take on their clients or let them go. Both are bad.

The remedy for this is getting a predictable lead flow in place. Once you can reliably predict your lead flow, you can start to time your hiring and onboarding.

This is another reason to put a daily prospecting operating system in place.

Cash Crunch Cause #2:
Overreliance on a Few Clients

For my first several years in business, I was extremely overreliant on a small handful of clients. There were times when just one client was the difference between the business surviving or choking like the Dallas Cowboys in any playoff game over the past 20 years (for those of you that don't know, the Dallas Cowboys are an NFL team that famously can't seem to win a playoff game).

Being overreliant on a small group of clients can lead to several problems ranging from a power imbalance (they can essentially force you into scope creep, accepting payments late, etc.) to operational issues limiting your growth.

Boo!

But when you're overly reliant on one or even a few clients, even one of those clients leaving your firm can be catastrophic to cash flow.

That's why I try to limit any one client from accounting for more than 20% of total monthly revenue.

I know this can be hard, if not impossible, during the first year (or longer!) of running a firm. However, finding ways to diversify your client base should absolutely be a top priority.

Cash Crunch Cause #3:
Taxes

Yeah, Fractional CFOs have to pay taxes, too.  

We all know this, but there has been more than one year when I didn't account for big firm growth in my tax plan. The result was a big, "unexpected" tax bill due at the end of the year.  

That's a rookie mistake (that I made 3 different times).  

Today, we have tax estimates and tax savings built into our firm's annual and quarterly planning.

I know this sounds like common sense, but common sense isn't always common practice (at least for me, anyway).

Practice what you preach, and make sure you're looking at your estimated profitability and tax liabilities. 😀

The TL;DR...

Look, I know none of this is groundbreaking. These are the same things we always talk about with our clients.

But, if you're anything like me, it can be really easy to miss the implications of simple mistakes.

• Make sure you're intentional about when you hire.
• Make sure you don't have 1 or 2 clients that can sink the entire ship.
• And for the love of Uncle Sam, please keep an eye on your tax liabilities.