231. The Fractional CFO Files | Mastering Financial Models & Fractional Life with Karl Lloyd

231. The Fractional CFO Files | Mastering Financial Models & Fractional Life with Karl Lloyd

Hannah Munro 0:48

Hello everybody, and welcome to this episode of the CFO 4.0 podcast. With me today is Carl Lloyd, who is a fractional CFO at Lloyd consulting limited. So welcome Carl. Fantastic to have you on the show.

Karl Lloyd 1:02

Thanks for the invite. Hannah, yes, nice to meet

Hannah Munro 1:05

you. So, tell us a little bit about your journey to CFO. Carl

Karl Lloyd 1:10

crikey, qualified as a chartered accountant going way back, was with EY for four or five years, and then went down the more commercial finance route. So, I spent time with Matalan and then the co-op group in commercial finance roles, really enjoyed the analysis and really helping people to make decisions based on facts rather than gut feel. And then I spent some time in financial control, ticking that box, and then moved to be FDA of a travel business in Chester for eight years. Really enjoyed that. So I think look at the journey gone from Ian y and Matalan and Co Op down to 80 million turnover travel business, and then my next role, we did a couple of management buyouts there, which really enjoyed my next role after that, I've been left on the second one was into a small kind of 10 million turnover, e commerce business. That's fashion business in Manchester. And I think that looking back now, that's the role that really tempted me down the fractional route, because it was really working closely with the MD, the founder, and as people call it, the only grown up in the business. It felt, I mean, I was double the age of everyone else, so, but I really enjoyed setting the finance function up from scratch, doing the processes, building out the financial model, working closely with the VC investors you know, to build out the month end reporting, the cash flow reporting, etc, etc, as I say, working with The rest of the business to instil those strategic priorities and make sure that everyone was aligned and just getting involved and learning about the whole business rather than just looking at finance. I had another full-time role after that, in another well, it was a distribution business with an E comm side, but after two years there, I then started on my, uh, my fractional journey. I've been doing it for five years now.

Hannah Munro 3:29

And when you look back at that first fractional role, what was the biggest challenge that you actually had when you went into it? Was it what you were expecting?

Karl Lloyd 3:40

I've, um, I, no, no. I mean, I, my first one was with a SAS business, and that was they'd had a fractional before, so, so they knew what to expect, which was great. And there was a lot of cash flow reporting in there lot of a lot of forecasting, lot of business modelling for future investment. And then my second role was more that was literally starting from scratch. There was there was a bookkeeper employed no one else. Two and a half million turnover in another econ business, and that was really about working with the owner to improve the quality of data flowing through the business to again, to help make good decisions. And that was a great role, because I was involved, you know, throughout the business, in providing them with the right data, in improving their financial knowledge throughout the business, and then really involved in the strategic, long-term view as well. So, yeah, those two roles were early doors and were really kind of influential. On, on, you know how I've progressed as a fractional CFO,

Hannah Munro 5:06

and you mentioned with that first role; it wasn't quite what you're expecting. What were some of the things that that weren't as expected?

Karl Lloyd 5:16

Um, I think it's, it's when you, although you know as a fraction, we're kind of always on, it's that the clients tend not to want to bother you when you're not working with them. On that particular day, I tend to work a day, a day a week, with most with most clients, but when you're not there, you don't really hear from them unless you're checking in, and that, for me, was a little bit strange. I do like to feel part of the team.

Hannah Munro 5:49

And in terms of, I guess, the differences between you had one that knew what the world of fractional CFO was like, and then one that perhaps wasn't used to having a fractional CFO. Was there a difference in how he engaged with you, you know, or things that you had to do differently for those definitely, because the

Karl Lloyd 6:11

guys who were the one before they were, I suppose, fairly prescriptive about what they wanted. They had VC involvement. So again, they had thoughts on what they expected from CFO, whereas the other guys were just really open to any ideas that I came up with, anything I wanted to do I thought would add value anywhere I wanted to get involved, they were happy to let me. So, it's a much wider ranging role, a lot more freedom there, I think, looking back, and that's, I don't think there are those differences still apply depending on which kind of business you're going into, current clients, for example, the VC backed ones. Again, you are, although you know they have their expectations, and you've built out the pack and improved the reporting from what it was previously, and built out the forecasting capabilities of the business proving processes so but then I'm allowed, not allowed, but then I do, you know, look elsewhere within the business to improve processes and reporting and data availability and such. So, I think as you gain confidence as well, you're able to add more value throughout the business.

Hannah Munro 7:34

And what do you think been what do you think is the biggest challenge as a fractional CFO? I

Karl Lloyd 7:40

I suppose it's from a business development point of view, always ensuring that you've got enough potential prospects in the pipeline, so that when you know clients do come and go, so that when they do go, that you've got something to take its place. And I think going from full time employment where you know exactly where you're going to be for the next, you know, year, two years, or what have you, knowing that actually, because you're on a rolling contract you know you could say goodbye within a week. So, it's just knowing that you've got the network to be able to pull on and land another client within a fairly short space of time. I think historically, fractional work was probably guys who'd retired, guys and girls who'd retired weren't necessarily worried about the income coming through as much as the younger set, whereas now, I think it is. It's not like a lifestyle business. It's more of a, you know, it's more of a career choice.

Hannah Munro 8:54

Um, what do you think are the best things? What are the things you like most about fractional CFO life versus full time CFO life?

Karl Lloyd 9:04

Yeah, I enjoyed the variety to be honest. You know, you wake up in the morning and there's that split second where you're not actually sure where you're going today. It's great that you know you don't have that Sunday night dread. And I think that variety really helps. So that's why I really enjoy about it, different people, different jobs to do, different prospects. Yeah, really enjoy it.

Hannah Munro 9:32

And you mentioned, obviously that sometimes that you wouldn't hear from them from week to week, like in between your day with that organisation. How do you manage to make sure that you've got enough? I don't know, foot on the pulse of the business in between the days that you spend with them.

Karl Lloyd 9:56

So, it's. Us that's quite difficult in a way, because you are only, you know, properly checking in that one day a week. But you know, as long as you are copied into certain emails and you can, you know, check the emails daily anyway, I think that's how I mostly maintain contact with the guys, or maintain some knowledge about what's going on in the business, WhatsApp, phone calls, etc, throughout the week. That's, again, a great way to keep in touch. And then at the end of each you know, when I've when I've been somewhere for a day, I always like to give them an update on, you know what I've been looking at, what we've achieved, and things that are in progress. And so, the replies to that are quite useful during the remainder of the week as well.

Hannah Munro 10:53

And obviously you mentioned that you mentioned actually a few times, that data and modelling is a key part of what you bring to your role as CFO. So, tell us a guess about how you approach that, that financial modelling, and how do you think about how to build that out for a business? Yeah,

Karl Lloyd 11:15

as it goes back to my roots at Matalan and the Co Op, in terms of wanting to dig around in that data and find anomalies and find reasons for why, you know, sales or margin have moved in a particular direction, and just to try and pull out those anomalies and make decisions, whether it be on pricing or margin or, you know, going ahead with a project or pulling a project, and it really is about that data and using that to make decisions, rather than, rather than gut feeling. Particularly entrepreneurs, when you start in a business, you don't necessarily have access to all that data, so you are going to make decisions. And generally, if you're if you got to a stage where you're looking for a fractional CFO, you've done really well with those gut feel decisions. So, but there comes a point, particularly when investors get involved, where they're not happy with gut feel you know, they want the data and the analysis to back up any decisions. So that would be my, the main driver for me. And in terms of the data, it's all about making sure that, well, making sure the integrity of the data. The last thing he wants to be making decisions based on data. That's wrong, that's not good for anyone. So once you're happy with that data, you know, where it's come from, you know, it's robust and it reconciles, then it really is a case of just cracking on and trying to find those anomalies to back up any decisions that that need making, whether it's, you know, how many products, which products do we need to buy more of this week based on, you know, the anticipated sales over the next few week, and the stock availability currently, or, you know, what price do we need to charge for these we've got a new product, so loads of different things. And then, of course, you flow that into the financial modelling. So, bearing in mind the long-term strategic aims of the business, you know, one, 310, year plan, and then chunking that down, and then providing a three-year plan with a one-year budget and the financial model. For me, it's going to be based on assumptions that are tested and just kind of really easy to model. I've seen some models that are so detailed that have been, you know, done the financial modelling for decades. It takes me so long to understand what the hell's going on. But for me, a model needs to be understandable by the reader, you know. So, if the MD is looking at it, and he's not got a background in financial modelling, he needs to be able to play with it and change assumptions. And so, keep it nice and simple, yeah, and then, yeah, make sure that it looks nice. I mean, it's really basic, but it needs to look nice and presentable. Because ultimately, it's not just for finance people. It's these needs. This is the kind of thing that needs to be presented to potential investors, VCs, PES, etc, yeah. Etc.

Hannah Munro 14:23

And you mentioned that you need to validate and check assumptions. Tell us about the process that you go deciding which assumptions are in there, and how do you figure out the right point at which to model

Karl Lloyd 14:37

off. Yeah. So a lot of that goes down to looking at historical data, really digging into that, analysing that, to come up with, you know, what are the, what are the relationships between certain types, with between certain lines on the P and L, and then obviously discussions with the with the founders, with the MDS, etc, and within the. Wider business as to what are the key drivers, and whether that be, you know, pay per click, or social media marketing, or, you know, some kind of external driver, really understand the key drivers behind the business, and then knowing what the KPI trends have been historically, you know, we can start to map out what we think they should be in the future, put the basic model together, and then just sit down with the guys and understand, well, it doesn't look right. What do we need to tweak? And then it that's the best bit. There is the back and forth. So, you're understanding the business better, but also the guys are understanding the financial model better as well, because they need to. They don't necessarily need to own the financial model, but they're owning the outcomes and the and the projections.

Hannah Munro 15:55

And you mentioned that the way that it looks is really important, right? What some of the, I guess, the key things that you look for, like the do's and don'ts of model presentation,

Karl Lloyd 16:08

let's just keep it simple, not too far, not too many years. So, it's not spreading too far across and certainly not too detailed. If you think about, think about the audience. That's the key. Whoever's reading this won't necessarily want to know 2530, lines on the P and L, maybe three or four, just summarising the three or four lines with an historical trend four or five years. And then obviously the cash. I mean, I try and condense it onto 111, slide. So really summarise P and L, little bit of balance sheet, but the depending on the business, the key one on the balance sheet is cash. I just see how that is moving over time, highlighting any pinch points, but then the overall trends as well. But just keep it simple and keep the keep the audience in mind

Hannah Munro 17:08

as a functional CFO, you're obviously jumping into different organisations. Have you ever had to pick up somebody else's model and gone? Oh my god, I Yeah. What have they done here? Yeah.

Karl Lloyd 17:23

As a surprise. And yeah, sometimes you're looking through and you start smiling to yourself because, yeah, that's how I would have done it. This is great. Other times you see formulas as long as your arm and yeah, keep it simple. You know, you know, you don't, you don't need to worry about that. Well, the best assumptions are the really simple ones. And if you need to get too technical, then maybe your assumptions are a little bit off. But yeah, when they don't add up, or they don't balance, and some, some models don't balance, don't get that. But, yeah, sometimes it's, it is a case of having a look and thinking it's too complicated. I'm starting again and just create a really simple one. You've done it for. You know, as long as many of us have, it doesn't take too long to put a model together if all the assumptions are in the existing model already, quite often it's easiest just to start again.

Hannah Munro 18:31

So, you mentioned obviously keeping it simple. How do you find the balance between keeping it simple and delivering something that's actually going to give an indication of where the business like some kind of accuracy around forecast. What's your balance point?

Karl Lloyd 18:53

Yeah, so it really depends on the business as to how complex it needs to be. And as I say, the simpler the better. I think it's about backproofing it as well. So, with the benefit of hindsight, you're able to look at the assumptions you've got in the model. Now, had they applied to an historical period, would those assumptions have held true? And if they, if they didn't, then you need to tweak those assumptions going forward. So that's always a valuable piece of work in the key is understanding the KPIs and the key drivers, if, if those are complicated, then the muscle, then the model necessarily becomes more complicated. But quite often there are maybe five different levers that are driving sales. So as long as you're addressing each of those and the assumptions are clear, then if there is a variance to the budget. It, then, which one of those five levers was responsible for? It? Was it all of them, or was it just the one, and was the assumption wrong? And therefore, do we need to tweak that going forward? So definitely not one of those that sets the budget the start of year, and that's it. I think if you can get a rolling forecast going, so much the better. So, upload your actuals every month, check the actuals against the forecast, make any tweaks as necessary, and then you've got a realist, a more realistic view of what your year-end output is going to be.

Hannah Munro 21:04

and you mentioned levers. You know, there's, you know, maybe five or so levers around sales. How do you look at levers, and what sorts of things do you make assumptions about? And how do you make sure there's not too many in there?

Karl Lloyd 21:21

It really depends. On the kind of business. But if we look at, say, an Ecom Business, then, you know, you looking at marketing as being one of the, one of the key drivers, and you know, you've got a decent marketing team, or an ex an external marketing team, and they'll be looking at, you know, the cost of each click, for example, and how that converts so looking back historically at the trends and conversion trends and marketing spend and how that's converted into, Say, transactions, and then you've got your average booking value, average transaction value, etc, and the margin on each item. So, you can, you can decide the marketing budget. I mean, ideally, you'd be going to the marketing director at the start the year to say, this is our sales target, and this is your conversion historically. What marketing spends do you need to achieve this, so you get in there, buy in to the budget right at the start. And obviously there's going to be some back and forth, but at least then you've got agreed conversion targets, for example, and traffic targets that everyone's aiming for. They will obviously vary by the type of business. But for example, an E com Business will have very similar drivers to another econ business, even though products might be completely different. So I think finding someone with a background or knowledge of an E com business, if you're looking for a fractional CFO is really important, and that's coming from someone who's always said that sector specific knowledge isn't really necessary, particularly in finance, because, and I find that really useful, going from, say, an E com business into construction management, into SaaS, it's really helpful for me to have knowledge of these other sectors, because you can transfer knowledge and assumptions and just thought processes between each and that's a little bit of value that had someone just come from, you know, SAS background wouldn't necessarily have thought of but in terms of finding those levers, it really is A case of discussions with the with the team to understand what they look at. It's knowledge of the business sector, yourself, from your experience, and then just applying that, testing it, and making sure that what you're putting together makes sense, and discussing that with the team.

Hannah Munro 24:23

Now, you mentioned, obviously, in a lot of cases, you're working with investors, and you've got your obviously existing executive team, and when it comes to modelling, you know, have you had any challenges, I guess, managing people's expectations, if they're working towards a number. So, you know, have you had to manage an MD or a sales director who wants to put in a really big number that doesn't perhaps quite fit with the assumptions and the history, and how did you go about that process?

Karl Lloyd 24:55

It's always, I mean, it can be challenging both ways. When the sales director wants to. Put in a really low number or really high number, they want to make their life easy in one regard, or, you know, demonstrate that really ambitious in the other regard. And I think as a finance person, you can go in there, you've got the benefit of hindsight, and you can say that we've got a really nice trend, upward trend here. Why all of a sudden are we dropping off 20% year on year? Or why, when we've done 10% uplift year on year, are we suddenly doubling? And there may be completely valid reasons for the ultra-ambitious or the really pessimistic view it's just getting it's talking basically, understanding where they're coming from, why they think it's going to move one way or the other, maybe sharing with them some history, particularly if it's a new person that's come in and doesn't necessarily Know about the history. We're just talking those through. How on earth did you get to this number? Does it make sense? And sometimes it will make sense, um, but then it's particularly, it's very high. It's a case of, it's going through month on month, saying to hit that number, we need to be hitting these. I mean, if we're talking about e commerce, visitors, visitors don't just ramp up overnight on TikTok, going viral or whatever, but it's about building up slowly over time. And you can see whether you know three, six months down the line you need to be generating that build up. And if it's not happening, then your big numbers at risk, and that's when you're waving your flags, and

Hannah Munro 26:45

you mentioned earlier about working with investors. So, tell us a little bit about how you approach that, both, you know, I guess, from a how you manage it, but also how you manage it from a fractional perspective. Does it pose any additional challenges because you're not in the business full time. So, two questions wrap up into one, I think, yeah.

Karl Lloyd 27:05

So, managing investors, again, it's just about building up that relationship. They will have certain expectations of finance, and you know they do. They will vary from team to team, but typically they want to know about that one decent month and reporting with the cash flow forecast and know that they got someone safe in the Finance Chair, that it's going to wave any flags if they need to be raised, and to keep the keep the business on Track. You know, from a from a finance point of view. So, it's those conversations, early doors, you know what, laying out expectations. And quite often, they'll have worked with people in the past. So, it's just a case of understanding whether they want any changes. You know, start, stop, continue, type stuff. From a factual point of view, I've not found it too difficult, because they're not the conversation that you tend to have three or four times a week. These data may be once a week, or, you know, a couple of times a month, conversations which you know you'd be available for any so, anyway, so, so no, I haven't found that to be an issue so far.

Hannah Munro 28:29

And have you got any top tips for anyone you know? What have you found the secret to successes with keeping investors on, on board and in the conversation?

Karl Lloyd 28:41

Yeah, don't. Don't bring them surprises. They hate surprises. I think if you've got wind or something that's going on, or you've got some kind of inkling that at some point in the future, there's going to be a pinch point in cash, then make sure you are sharing that it's in your monthly report, or your, you know, the weekly cash flow update that you might share. Just bring those out really quickly. Don't assume that they're going to read your, you know, three-, four- or five-page report. Just give them a very brief, very brief highlight that says, in six weeks’ time, if this doesn't go our way, then, you know, we might have, we might have an issue. Ideally, you point out six months in advance, so they've got a little bit more time to do something about it and then go to them with ideas about what you're going to do about it. So, it's, it's looking ahead, solving the problems that necessarily haven't yet happened.

Hannah Munro 29:41

And when you look at different organisations that you've worked with and the different opportunities you've worked was there any particular ones that stood out as very challenging, like when you look back? Were there any difficult sites and what was it that made them particularly challenging? I.

Karl Lloyd 30:04

Um, the challenges are either technology that just doesn't work, like a really old accounting system that no one really understands, that just takes far too much time to keep up to date, to fix if it goes wrong in those situations, you are just sometimes better off. Just keep it simple. For the size of businesses that we're talking about, there's no real need for, generally speaking, there's no real need to go anything more than a nice, simple accounting system, and that kind of extends into the data. You know, I talked about it, the data is, is key. And if you can't rely on the data, then it's, you know, you really are up against it. And then the other one I mentioned was people, it's, this is key in this role, is maintaining good relationships with everyone in the team, particularly the owners and the MDS. And sometimes that can be challenging, because they're flying all over the place trying to grow the business. And it really is key to carve out some time to really ensure that you know you're aligned around keeping those communication channels open, sharing wins and losses. So yeah, say technology and people are ones really to concentrate on.

Hannah Munro 31:39

And you mentioned earlier, actually, that you've been through an MBO as part of one of your previous roles. So, tell us a little bit about what that looked like. It sounded like you done a few actually.

Karl Lloyd 31:51

So, this was, yeah, back in my travel days, we came into a family-owned business, and the owner was keen to do a transaction at some stage. There were no more details around this statement than we want to do a transaction at some stage. And it probably took maybe four or five years from starting there before anything actually happened. But, but, yeah, the journey was an interesting, interesting one. I learned a hell of a lot about how these deals happen and the amount of work that's actually involved in due diligence, and how you can prevent a lot of that hard work at the point of due diligence by putting in more robust processes earlier in the process. So, you know, one of the things I do now with any new client is started to build out that monthly reporting that is pretty rigorous gives a story about what's happening at that point in time. So rather than just having a table of numbers that that you have to spend an hour to trying to figure out just couple of bullet points, sales were up this month because this happened, or that happened, or, you know, margin was great because of this. So that when you back two years later, and the guys doing the DD are asking for all this information and historical trends, you can almost give them. You know, there's the management accounts over the last two years, and it tells you what was going on at the time and the reasons for the variances and any write offs and any upsides, and it's just all there, and that's saved so much work because, you know, two years down the line, who's going to remember why margin was up or why we missed sales that month?

Hannah Munro 33:47

Yeah, that historical tracking, and you kind of get through a month, don't you, and always put it behind you, but actually you need it later. So, you mentioned there are, you know, there was a lot of learnings. What were the key? What were the other learnings that you took out of that process,

Karl Lloyd 34:02

so that, yeah, it's quite a stressful um process, particularly for the finance person in a in a smaller business where not only will you be looking after the financial due diligence, but Quite often you'll be tasked with the legal DD, and, you know, trying to dig out contracts from all humane suppliers and all humane customers, which you know, some might not have contracts. So, you really are scrambling around in some circumstances to try and find all this information. And again, it's about preparation now, making sure that you know the deal might not be even in the ether at the moment, let alone on the horizon. So nevertheless, if you sign any documents, just make sure that they're all. File nicely, so that when you come to need them, they're just all there in you might even call it a data room. I do just in case, but it's just about being prepared. And I know nothing can really prepare you, I don't think until you've done your first one, and then, you know, once bitten twice shy, you're a lot more prepared the second time around. Even if there's nothing on the horizon, you're still thinking about it in the background. And that's the way I approach now, is if you are thinking about doing something in the future, then we'll start now. We'll put those put that structure in place. We'll gather our data. We'll keep it maintained. We'll start telling the story on a monthly basis, just so that if and when someone comes knocking, we've got that story all prepared. We've got the data for them. We've got a list of all our customers. Oh, and there's a contract, and there's our contracts for the suppliers. We got it all nailed down,

Hannah Munro 36:03

and was there anything like that surprised you about the process as you went into it? Anything happened that you weren't expecting?

Karl Lloyd 36:13

Brexit happened

Hannah Munro 36:18

in the middle of your day?

Karl Lloyd 36:20

Well, not necessarily in the middle. Now it's nearly the end. We were just about to sign the deal, and the vote was the following week. So, they understandably said, Listen, we know nothing stupid is going to happen, but it would be remiss of us to sign it today and not just wait and see. So, let's pencil in next Thursday to sign this with the vote being on the on the Tuesday, whenever it was, anyway, the inevitable happened. So yeah, all went quiet for a few months. And yeah, they obviously took the opportunity to chip at the price and but yeah, we did get the deal away three months later. So that was a surprise.

Hannah Munro 37:02

Yeah, I can imagine that being a real challenge midway through, not even midway through, right at the end of that biting cycle as well, after you done all that work

Karl Lloyd 37:14

to do all again, because things have changed. So that was that was a load of fun.

Hannah Munro 37:21

Bet it was. I'm not sure if Ben is the word that I would use, but absolutely. So, we talked a lot about, obviously, the day to day of a fractional CFO. And you know, when you're speaking to others that are considering the world of becoming a fractional CFO, like, what's the advice that you would give them to figure out whether it's the right choice for them as an individual?

Karl Lloyd 37:49

I think you have to be comfortable selling yourself. I mean, sometimes you, if you're in a in a role you've not necessarily had interviews for years and years, and sometimes I feel like I always been interviewed. Because whether it's a client or a potential client, or an investor or whoever you know, they can all be potential clients, ultimately. So, it's that ability to sell yourself. It's the ability to sleep at night knowing that you might not have enough clients at the moment, but that you're doing the best you can to generate more prospects. Sometimes that can be tricky in a dry patch, but I think the key is to, from that point of view, the key is to have a buffer before you go into this, have a little buffer so that you're not, you're not too worried all the time. But I think the variety, we've got to be happy with. That variety. You're not going to be in the same office every day. I prefer to go into the office. So, I do go into all my clients. Others work from home, and they might really enjoy that. So yeah, it's just about carving out a niche for yourself. You know, making it your own

Hannah Munro 39:15

absolutely well. Thank you so much, Carl for sharing both your journey and some top tips for any aspiring professional CFOs, if people want to learn more you or about Lloyd, can you know your organisation? Where's the best place to find you?

Karl Lloyd 39:31

The best places is LinkedIn. You find me, car Lloyd CFO, or Lloyd consulting. But you know car Lloyd is where all the information is. And, yeah, if you've got any questions, then, then, yeah, just reach out Carl Lloyd consulting limited.com.

Hannah Munro 39:51

Absolutely. And for anyone that's listening and would like to do that, access that profile, we will pop the link in as normal. So, thank you. So Much Carl for joining us on today's podcast and thank you to our listeners. If you have any questions as listeners that I should have asked Carl, then please do reach out to me. Always great to get some ideas and thoughts from for our fractional CFO series. Thanks again for listening, guys, and we'll see you next time on the CFO 4.0 podcast.