Educating Clients on Cash Flow and Capital Allocation Decisions ft. Kevin Steel (Clarendon Finance & Strategy)

Speaker A: Welcome to another episode of the new F Word. And um, it's great to have with me as a guest today Kevin uh, Steele, um, from Clarendon. And Kevin, uh, why don't you tell us a bit about yourself and um, how you ended up uh, in this role.

Speaker B: Sure. Colin, thanks for the introduction and glad to be here. So my background is I uh, worked in various roles in practice and industry while qualifying uh, as a chartered accountant. Then I set up um, my own firm in 2015. I grew that to a few hundred clients, then sold it in 2019 and then um, took maybe 12, 18 months, kind of just chilling. Do some consulting work on the side. And then I took on a longer term role at a um, tech startup. And then after that uh, took on and then again another longer term though working for a multi entity group who were quite heavily focused on M and A. And then after that decided to uh, set up my uh, own firm, uh, which is now Clarendon Finance and Strategy in partnership with my business partner. So the idea is that um, I do uh, primarily the fractional CFO stuff and um, my business partner, um, he's an M and A expert and he handles the M and A side of things. So it's quite a good combination. For the value chain. We've got kind of the fractional CFO in the middle, we've got the MA at the end and we're maybe thinking about acquiring an accounting practice. So we'll see how that turns out.

Speaker A: Right? Yeah. Because you're, you're fully qualified accountant as well. And um, and I guess not every um, cfo, fractional CFO will be um. Do you feel that that's an important thing for you to keep up? Do you resent paying the fees every month for that or are you happy? You know, does it feel like it's still a useful part of the toolkit?

Speaker B: Yeah, I would say it's a useful part of the toolkit in terms of kind of that recognition when approaching speaking to potential clients. And um, however I would add the caveat that um, there are many, many very, very good um, non qualified accountants that can do just as good a job as a qualified accountant. But certainly having the um, in my case the kind of ACCA bit against your name, it does help with that initial credibility for sure. And um, the ACCA do kind of provide some good uh, ongoing CPD learning materials, that kind of thing. So yeah, I don't regret it but uh, it was a long hard slump to get there. But uh, yeah, I definitely don't regret Anything Brilliant.

Speaker A: And you're based in Scotland? Um, same as us. Uh, which is, which is fantastic. Um, and does that mean you focus in Scotland? Are you all over the uk? The world?

Speaker B: Yeah, definitely. So I am based in Scotland, up in, uh, not so sunny Aberdeen. And I operate remotely. Um, so we don't have an office or anything. And I just operate 100% remotely for clients throughout the UK. Do I have any clients in Scotland? I don't think I do actually, no. Um, all my clients are um, based in England. So, um, that kind of um, ties into why fractional CFOs kind of. They're becoming a lot more prevalent in the market these days because of the kind of rise of technology and uh, remote working. Like for example, um, in May. Previously, um, companies might be a bit reticent to kind of hire somebody working remotely, especially in a kind of C suite role. But um, the. There was a lot of unfortunate things about COVID Um, but one thing is it made the kind of general market for remote working a lot more accessible. And that kind of benefits, um, the fractional executive. Definitely, for sure. And again, linking to the technology side of things, um, tools like Xero float, et cetera, make um, jobs, uh, for fractionals a lot easier these days than say 10 years ago, um, maybe 10, 15 years ago. You may have to kind of drive to your client's office, have a look at the books of records. Maybe not 10 years, a bit longer. But, uh, as technology get better, it kind of allows fractionals to operate on that remote basis. Uh, for sure.

Speaker A: Yeah, yeah. I mean that's the thing. It does feel like Covid was the kind of almost catalyst for so much of this. Um, when did you set up the firm?

Speaker B: Ah, so the firm has only set up recently, um, in January. Ah, so we're fairly new firm. Um, but I've always worked remote. So when I set up my first firm in 2015, uh, that was 100% remote as well. Um, and that was ah, servicing clients kind of, um, again all throughout the uk. So that was pre Covid, but it did seem to work quite well. Um, I actually did hardly any advertising or marketing spend for my first firm. I was just all focused on client delivery, just communicating well, getting things done super fast, response times. And it grew pretty much 98% through kind of organic deferrals. And if you're getting like an organic deferral from an existing client, okay, I operate remotely with this guy. I've never need to pop into his office place to see him in my Case didn't have an office, that kind of thing. Um, so.

Speaker A: Yep, brilliant. So what, so when, what was the kind of catalyst for you then to set up the uh, Clarendon and how did you, you know, what was the story there?

Speaker B: Yeah, sure. So I decided to set up because um, I wasn't kind of longer term engagements and that was kind of um, more involved really in the companies I was working for. Kind of in the C suite, um, kind of really in the French with those companies. But I decided okay, um, what I like doing is I um, like a variety of work with different clients as opposed to like one to two main clients kind of thing. Uh, so I decided to kind of set up Clarindon to kind of more focus on working with different businesses and adding value. Um, for example some people's hobby might be painting, drawing, reading books. My business um, my hobby is working with businesses to kind of uh, help improving them. So the more kind of exposure I bought working with multiple different clients then um, the better because that's what I like doing. Just being exposed to as many different industries as possible, helping as many people as possible, um, to do as good as I can.

Speaker A: Yeah, makes so much sense. Um, and how's it been, you know, like you say most of your, you're quite um, prevalent on LinkedIn. Uh, is that your kind of primary channel for acquiring new clients or like what percentages are coming that way versus word of mouth?

Speaker B: Yeah, definitely. So um, I would say I'm very high percentages coming from LinkedIn, uh, with the company only officially launching kind of end of January or start of February. I've always found when it comes to marketing through a fairly new firm company, it's best to focus in on one kind of area for marketing first. My um, kind of opinion is that businesses that are kind of below that 1 million mark, founder led marketing is absolutely key. Um, for example, um, I wouldn't waste money. I wouldn't waste money is maybe the wrong term but I wouldn't focus money on Google Ads, LinkedIn ads, SEO, that kind of thing. It's just a case on do that, find a line marketing people buy from people and in this case I'm um, I'm the lean fractional CFO at the moment. So basically people are buying me. So the more I can kind of focus on LinkedIn providing value, um, I prefer to kind of post about CFO stuff and kind of provide value in a way that's simple to understand because that's one of the key things, not just um, um, on writing posts on LinkedIn, but actually engaging with clients, uh, kind of sounding like a corporate robot or sounding like you're basically chatgpt kind of thing, it's not great. Uh, one of the kind of key things I've always found is the simpler you can communicate something, the better. Um, trying to speak in clever language, etc. It doesn't make you clever, it just makes you harder to understand. And uh, finance isn't a technical topic Anyway, so fractional CFOs who can kind of explain technical, technical topics in a simple way. Not a whole lot of value.

Speaker A: Yeah, no, absolutely. And I think I totally agree with you. I think you're absolutely right. Um, you know, when you see the human side of it and you see somebody posting and you sort of. There's so many people I think that now where I find that I want to work with just through their posts on LinkedIn and it is hard for some people to, and it was hard for me as well to kind of get over that initial hurdle of putting yourself out there.

Speaker B: Oh, for sure.

Speaker A: You know, how did you find, how did you finally, like what, what kind of forced you over the edge, like detect, you know, it's not easy for people.

Speaker B: No, it's definitely not easy. Um, it's just kind of, um, it's an irrational fear, to be honest. Um, it's just a case of like when, when you first think, okay, right, I'm going to start putting out some content in LinkedIn. You think, oh, my mates are going to see this, oh, I'm going to get the mickey taken out of me down the pub, that kind of thing. But once you start posting, you kind of realize people only care about their own world. Like for example, if you see somebody else posting on LinkedIn or whatever, you're like, okay, it's cool content, you don't think anything bad about them, so to speak. So it's just a case of, it really is just an irrational fear. And um, the best way to go over it is just put yourself out there and just start posting content. And then after the first or second week it just becomes natural and you start to enjoy it. Instead of being scared of it, you start to enjoy it and it just becomes second nature. Like having breakfast in the morning.

Speaker A: Yeah, absolutely. Um, we're seeing this rise, uh, of fractional rules. And I was actually part of a group chat, uh, this morning where a couple of founders were sort of asking the question, who do I need in my team? Uh, have you guys hired? Do I need full time CFO Do I need a fractional? Do I need an afd? Is it a finance ops person? What do you typically see the journey as for companies that you work with in terms of the different types of people? And are you the only, do you do everything or do you typically recommend they bring somebody in house? What would your advice be to that company that are maybe in that stage of the million, you know, Mark, starting to um, think about scaling up?

Speaker B: Yeah, definitely. So it can be very sector specific and kind of does depend on volume of transactions, etc. Etc. But basically the uh, the kind of journey for businesses, they will of course kind of start with a bookkeeper who's basically the custodian of clean data so to speak, and then kind of accountant to deal with the compliance stuff and maybe start offering some tax advice. And then once they get to maybe the million mark, they're probably going to need somebody, somebody maybe just a little bit above a bookkeeper, perhaps not a full time financial controller, but somebody kind of right about that level. A really good, really experienced bookkeeper may be able to do that because um, for the fractional CFO to do their work everything comes down to clean data. Um, unless that data is clean in the background. The fractional CFOs for their wings are completely clipped and they can't do any kind of accurate projections, any kind of accurate forecasting. So kind of at that million mark, um, definitely like either a very, very, very good bookkeeper or perhaps one or two or a kind of financial controller, um, to get in there or indeed um, if they are approaching a fractional CFO firm, um, who can offer bookkeeping as well. That dovetails very nicely because the um, fractional CFO firm will have bookkeepers, we do in this case as well, who can handle all the bookkeeping side of things. We arrange the chart of accounts in a way that will actually um, be able to provide insights to the business because that's one of the key things I see um, when I first look at a company the chart of accounts, especially around about the million mark is arranged in a way that the year end accounts and corporation tax will be able to be calculated correctly. However is the data actually arranged to make this to make business decisions? Like one of the key things is you might see salaries just posted under one line in salaries. But hold on a minute, some of those staff are part of cost of sales, so therefore the gross margin is incorrect. XYZ ABC 1, 2, 3. So like that's one of the main things um, at the start is really getting that quality of data and arranging it in a way that the business can make good decisions.

Speaker A: Yeah, it makes sense. Um, like I love that about the. Everything comes down to clean data. And like everybody has said like that the crucial role of the bookkeeper, uh, is just seems to be, you know, it's almost. It used to be, I think, I think it used to be something that um, different people kind of saw as almost like an afterthought. Before we'll do the, you know, the VAT or the month end, we'll just get the bookkeeper in to tidy things up. And actually it seems to be, that rule seems to be evolving into this kind of regular, like couple of times a week, just tidy it up, go in, do the bank reconciliation, uh, set up something like, you know, Dexter, uh, to capture data so everything's flowing in. It's very quick to do.

Speaker B: Yeah, I would totally agree with that. Um, like, um, bookkeepers. I think the perception of bookkeepers is slowly changing. And that's a good thing. Um, pretty much like you said, bookkeepers kind of just used to be viewed as, okay, fine, they're just coming in there. Go click, click, click. Okay, okay, okay. A lot of people might think it's, it's, it's kind of a low value function, but it is so, so, so not a low value function about like a really good bookkeeper is worth their weight in gold. It is such an important thing because comes down to, um, garbage in, garbage out. Like I mentioned before, um, if the bookkeeping is reconciled, um, incorrectly, etcetera, it's garbage in and that means any analysis is going to be garbage out. So I'm good bookkeeper is really, really, really worth the weight me gold and a severely undervalued function.

Speaker A: Um, yeah, no, I totally agree. And do you have a network of bookkeepers? Do you do the bookkeeping yourself in house or do you like, how do you approach that?

Speaker B: Yeah, so we've got a bookkeeper that kind of helps us in house and some clients do prefer to kind of do it themselves. And um, if the clients are, do it themselves, then we'll actually check in once a week. So we've got a kind of recurring task set up in practice management system going, okay, every Friday, go in, check the bank regs, um, check the postings. Um, we can use tools like um, you mentioned Dext before. Um, Dext Precision, for example, do a quick scan, check everything's okay. And are there any, um, duplicate supplier contacts, customer contacts, um, vat, has it been reconciled correctly? That kind of Thing I generally find that weekly check in is best of the clients kind of doing the bookkeeping themselves. And then just find a quick, a quick email to the client, um, or the client's bookkeeper just saying, hey, I've had a quick look at the bookkeeping. I've noticed xyz, abc and you're kind of de facto trading the client's bookkeeper as well. And it gets better and better and better as it goes along. Um, so yeah, two ways to be there.

Speaker A: And Kevin, have you found, is there a point at which a company will outgrow you where they'll decide now we need to bring somebody in house full time or what sort of seems to be. How does that work?

Speaker B: Yeah, definitely. Um, I generally put the limit of the fraction of CFO round about that 15 million mark. Again it is very dependent on the sector kind of thing. Um, but generally at that point, um, I would be saying to a client, look, you're expanding rapidly. You've been working with a fractional CFO for let's say 12, 24 months or whatever. You already have good system in place, that kind of thing. My own resources are being spent working with you kind of thing. And I really think um, it's best if you kind of got a full time CFO because you really need that person to come in. I ah, really kind of spend that 40, 50 if it's a startup, 60, 70 hours a week kind of looking at things. Does um, because the role of a full time kind of cfo, it does tend to kind of bleed into other areas of the business as well. Especially kind of operations, strategic oversight, kind of troubleshooting internally. Um, so yeah, I would generally recommend run by that point. But again it is highly spec, uh, uh, sector specific and company specific. Of course that's just a very kind of broad straw member.

Speaker A: Yeah, yeah, no, but that makes, makes sense. And do you. I'm just thinking for people who might be thinking of moving to becoming a fractional CFO or taking the leap and setting up their own company, how do you think about things like your capacity? Maybe some people think uh, I was working in a startup and it was burning me out and uh, I just want to take on less hours, maybe a couple of clients, four to five hours a month or whatever and uh, that'll be me. But what about a, do you ever worry about not getting enough work or getting too much? How do you, how do you manage

Speaker B: the capacity in terms of capacity, um, for fractional cfo especially kind of on, at the level I Operate between that kind of 1 to 50 million. One thing I will comment on for anybody thinking about doing that is to be aware that um, if it's the first time that a company's thinking of hiring a factual cfo, a lot of your work's going to be front loaded. Um, like I said kind of before, in terms of the quality of data etcetera, you're going to come in and you're going to need to do a lot of work, maybe rearranging the target accounts, um, kind of understanding the actual businesses strategy because effects from the cfo, it's not just about kind of doing the forecasting, doing the budgeting, that kind of thing. It's about understanding the strategy of the business and linking the finances to the strategy. Very, very important element. So a lot of the work will be front loaded, especially in that kind of, I would say five to six weeks especially. Um, so in terms of capacity planning, that's one thing to always bear in mind that the front loading is there. But um, since we have such good um, software solutions like float on the market, um, that can help motor things going forward. That means once the setup work is done, it becomes a little bit easier as the months go by because you've automated a lot. You've automated a lot of stuff in the background. You've got the chart of accounts the way you want, you've got the data flowing the way you want. You're kind of starting to understand the strategy of the company. So you're really just kind of monitoring a lot kind of thing. And then if the business is thinking about perhaps a capital allocation decision, xyz, abc, then you can kind of get involved at that point. So that would be the, the kind of key thing. I would uh, I would say that um, the first kind of five to six weeks, sometimes a bit longer are going to be front loaded.

Speaker A: Yeah. And do you factor that into the cost or do you kind of let that just sort of smooth itself out over time?

Speaker B: Yeah, I smooth it out over time basically to de risk, um, the initial engagement for the client. Um, fractional CFO is still quite a new kind of thing on the market. And um, a lot of clients think, well, okay, I've already got my accountant, I've already got a um, bookkeeper. My accountant maybe sends me a pack of um, management accounts every month. So really what kind of value can you earn kind of thing. Um, so I tend not to charge a setup fee. Um, a lot of people do. And um, perhaps maybe I should start thinking about that But I don't currently at the moment. Um, I prefer to kind of just add the value up front and smooth the cost out throughout the year. Um, because on the understanding that a lot of my work, um, will be front loaded, but maybe in month five or six I'll be uh, doing a bit less.

Speaker A: Yeah, that makes sense. Makes sense. So you tend to work on a retainer basis of just a fixed rate.

Speaker B: Yeah, yeah, exactly. Just a fixed fee, retainer basis kind of thing. And uh, if the business, let's say does take investment or it does or does seem like they need um, a lot more time, let's say in month six they're going through an acquisition or whatever, then you would maybe think about flexing that kind of fixed fee, maybe up or down a little bit or a one off invoice. So it's kind of reactive to the needs of the business, which is one of the key things. Um, why a fractional CFO is ah, good for a business. Um, they can kind of flex but up or down, um, as required.

Speaker A: Yeah, yeah, absolutely. And um, what are your views on cash flow? We have to talk about cash. I, uh, know, um, you know, you'll be doing that kind of report. Have uh, you seen, you know, companies moving, needing that more so in the last, you know, couple of months? Or is it being, you know, are your customers asking for that or is it something you have to educate them on? How does that typically work?

Speaker B: Yeah, I would say, um, that word you mentioned there, education is the key point. Um, business owners generally experts at what they do, amazing in their domain. Um, not everybody is kind of bored like me and loves finance. Um, so a business may think, okay, there's my net profit over the last whatever months. Okay, cool, that's how much tax I've got to pay, that's how much I can spend on whatever. That's not the case. There's things in balance sheet that need to be taken into account, etc. Etc. Etc. So like the main thing is educating clients um, on cash flow so they can make capital allocation decisions, which is the absolute key thing. This is, um, on the assumption that the business wants to grow. So capital allocation decisions. So um, after they've accounted for um, cash inflows, outflows, tax outflows, debt outflows, etc. Um, they'll kind of have free cash flows. So what should they use that on? Should they hire another marketing person? Should they look at that acquisition? Should they do something else kind of thing? And that's something else. All links back into the strategy of the business. Which links back to what I was saying before in terms of um, strategy being super, super important and it works in conjunction with finance. So kind of that's why I would say cash flow is really, really, really important because different businesses have different aims. Uh, some businesses are looking for kind of slow and steady growth. Other businesses are looking for hyper scale. So the cash flow capital allocation decisions will depend on the strategy of the actual business itself and the, and indeed the actual end goals of the shareholders. Are they looking to kind of cash out in three years? Are they looking to again just uh, growth slow and steady and all it all kind of factors back into the strategy?

Speaker A: Yeah, absolutely. Brilliant. Well, um, is there anything else we haven't touched on that you want to, you get into a little bit about your journey or uh, any advice you would give for people that are thinking about moving into the role or businesses that are thinking of taking somebody on?

Speaker B: Yeah, sure. Um, I can actually do a quick, a, uh, quick screen share here at the moment and I can kind of show, and I can show uh, you and the viewers. Um, it's kind of a mind map based on the business model canvas and it's actually part of my discovery session, um, when I'm going to engage um, with a new client. So I will just share screen just now. Uh, so share screen share uh, window and I want to share this one. Okay. So hopefully uh, you should be able to see that. Okay, perfect.

Speaker A: Yep.

Speaker B: Okay, so this is a mind map template that's based loosely on the business model canvas with a few of my uh, own kind of questions sorted aside. So what I do is after I've had an initial kind of 30, 40 minute call with the client, I'll arrange a 60, 60 to 90 minute session and I'll run through this in the client's business. So I do this live on the call. So I ask these questions as the um, as the client answers. I'll kind of type out in real time kind of thing and then um, at the end of the call this mind map will be like a huge tree of information. So we kind of run through this really really quickly. So they'll cover kind of what does a business do? What's the infrastructure? So key activities, key partners, key resources, the customers for who is the business creating value? Who are the Most important customers? B2B. B2C channels. Which channels are the customer segments reached by? How are they integrated relationships? How does the company establish and maintain relationship with the segments? How costly are they? And then we'll do a quick kind of high level overview. Um, this is before, um, looking at the client's finance system. So revenue, current pricing structure, how did deals, discounts work for the most profitable revenue streams, etc. Etc. Cost structure and then margins. This question is thrown in here to kind of gauge um, the client's understanding of their margins. So I kind of ask what's your average gross margin? What's your average net margin? And that kind of gives me an understanding um, of the client's financial skill. Then I'll move over to the left hand side and ask some key questions. So what are you aiming for? Is it to scale aggressively or slow and steady growth? Uh, what are the three year, what's the three year goal for the business? Do you have a revenue net profit figure in mind? If so, what are the main things that might stop this being achieved? What's your biggest frustration right now? What's the number one priority in the next few months? And what does your personal journey look like over the next few years? This question is especially important because um, a client's personal journey and a client's business journey, maybe two, two kind of separate things. So it's important to ask this question and then I kind of round off with a systems map at the end which asks them what are the core systems that the uh, the business uses. And um, then after that what I generally tend to do is um, then request guest access to the client's accounting system. So whether it be zero, QuickBooks, whatever. And then I'll um, I'll use the information from the mind map and I'll use the information kind of I gained from my analysis of the client's accounting system and then I'll send a long email, usually about 1,500 to 2,000 words and it brings together everything and it goes. Okay, cool. So based on everything you've told me about the business, your strategy, and um, based on my own analysis of your finances, this is what I think. And here's a 30, 60, 90 day plan and what I can do for you. And then generally, um, the client will hopefully accept the fee quote. After that we'll get rocking and rolling.

Speaker A: Brilliant. That's so good. Uh, did you come up with that yourself or did somebody teach you that or.

Speaker B: No, I just uh, I cannot believe it myself. I um, mean it is based on the business model canvas, which a lot of the stuff from the right hand side came from. Yes, but no, I basically, I think in mind maps, I plan in mind maps. That's just Basically the way my mind works. So I've been doing these for the last kind of 20 years kind of thing. So yeah, I just kind of use the business model, canvases a template and then um, I'm doing some of my own stuff on the left hand side and the client gets a copy of that full mind map as well. And even if they don't sign up, um, as a client one of the key things I find um, in terms of feedback is well, I should have kind of done this high level exercise on my business a, uh, long time ago. Um, so the worst thing um, a client goes away with is um, a mind map analysis, a financial analysis. They want to sign up then cool, good luck and um, hopefully my information is useful to them.

Speaker A: Yeah, brilliant. Oh that's so good. Um, I think having a system, anybody who's thinking about setting up, it's such a good way to build like repeatable practices and ultimately if you bring somebody else in to the business as well, then they can work through that system and you know, it's just, it's all part of the growth stacking, isn't it?

Speaker B: Um, exactly. Totally agree.

Speaker A: Um, well look, uh, thanks so much Kevin for coming on uh, to the new F word. Uh, really great to explore just this rising uh, trend of that's going on at the moment and um, really value your contribution and your posts and just yeah, hopefully um, you know, we'll see a lot more of you and uh, really wish you all the best. So yeah, thanks, thanks again for coming on.

Speaker B: Thank you sir. Very much appreciated and I hope your viewers and listeners have uh, found this useful and uh, somewhat enlightening.

Speaker A: Brilliant.