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Do you need a virtual CFO for your home building business?

Shopping for accounting services is absurd in today's environment. There is absolutely no guide for home builders looking for help. It's way more complicated than shopping for a car because there's the human element here. Not only do you have to find someone who's qualified, but you also have to find someone you enjoy working with enough to not want to strangle them through the screen of your next Zoom meeting. Let's face it, accountants aren't usually known for their striking personality. Worst of all, just when you think you've found the perfect fit... they quit.

Accounting professionals are facing an industry shortage just like pilots and it's only going to get worse. The number of students studying accounting at colleges and universities continues to decline, which means the number of people sitting for the CPA exam is also under threat. To make matters worse, us accounting professionals are now being told that ChatGPT is going to take over our jobs... who wants to jump in with this kind of threat?

Turns out, you might not need the level of accounting help you first thought. On the flipside, there's probably no accountant out there who has the qualifications of a CPA who can tailor their services to fit your exact needs. You just need someone who does it all, right? Numbers, scheduling, and project management... sign me up for that!

When is it better to have an in-house accountant as opposed to hiring a firm?

I see this all the time where a home builder has brought in their sister/nephew/friend to be office manager plus bookkeeper. QuickBooks Online looks super friendly, just jump in an add some transactions from the bank feed, right? It's all automatic .... Wrong!

Unfortunately, this is a crash and burn tactic. Unless your sister/nephew/friend has explicit accounting experience, there is no way for them to succeed in this role (especially if you are also asking them to maintain your calendar, grab you coffee, and interact with clients).

In some cases, I have seen this work out if the office manager has a dedicated accounting firm who sets up processes/procedures and is available for troubleshooting when things go wrong. Hint: things always go wrong, at least on a monthly basis.

Whether you hire an in-house accountant or not, you're going to want a CPA on call to answer the monthly troubleshooting questions, but it's going to be cost prohibitive to hire them in-house.

But... how much help do you need?

This is somewhat tough because it's likely to change over time, which is why you should pick a firm that you can grow with. Don't have a desire to grow? Great, no problem! Just pick a firm that's going to be able to keep up with your pace and who's size goals align with yours. If you pick an accountant who's looking to grow their firm into the next Big Five, you're eventually not going to be able to afford them.

Basic monthly reports such as Income Statement (P&L) and Balance Sheet should be pretty standard. Some home builders don't even know what other reports they could desire? Until they start growing, that is. Once they start growing, all of a sudden they realize they want to see P&L by job, what's in the pipeline for future revenue, and if/when they need to take a draw on a line of credit. Once you get past the basic P&L and Balance Sheet, I would start to call these analysis services. Your analyst isn't necessarily making decisions for you, but they are helping you gather the data so you can call the shots.

So, back to the question... do you need a virtual CFO?

In reality, most people probably do not need a virtual CFO. This is such an advanced service level and most home building businesses would never be able to (or need to) hire this person full time. The only way it's feasible is if it's on a fractional basis, which means you are hiring only a fraction of their time. They only way they can earn enough to justify their investment in education, licensing, and continuing education is if they serve numerous different home builders simultaneously.

This CFO role will do waaaayyyyy more than just P&Ls and Balance Sheets. They will even do more than analysis for you. They will actually help you and guide you to make decisions. In some cases, after building much trust, you may even become comfortable with this person making decisions for you. For example, if great profitability is ahead but you just have to get through a temporary low-cash week before you can collect the next round of draw payments, you might be comfortable allowing this person to initiate a draw down in your line of credit.

If you are just starting out, find a bookkeeper and review your P&L and Balance Sheet monthly. Throughout the month, make sure you are carefully scrutinizing all expenses, make sure they are coded to the job on BT, and make sure you are never going to lose money on a job (be sure to include overhead costs in your bid). This is perfect for someone doing $1 million or less in sales per year.

As you grow, seek out a CPA who can help you analyze your results and give you some in-depth insight. It's alright not to understand the reports, so be sure to ask the CPA what the numbers mean. Ask for their opinion instead of just allowing them to give you the report at face value. This is typically great for a home builder doing less than $3 million per year in sales.

When you start to get into the swing of things, when you have a team assembled and you're doing upwards of 7+ major jobs per year, that's when you want to start looking at a virtual CFO. Don't wait until it's too late to build this relationship, because you can never build a relationship on the fly when you actually need it. When the time comes where you have a team and a fair amount of overhead expenses, you'll want to invest in that virtual CFO. Why? Because things can turn on a dime. In a moment of crisis, you want someone who already has an intricate knowledge of your business who's able to tell you what to do. You won't be able to find that person during a crisis.

Think about everything that happened during Covid and the PPP funds that were available, but then dried up almost immediately until Congress could approve more funding. Do you want to be on hold for your financials during a time like that? Those who had their financials ready to go from their dedicated, virtual CFO were the ones who received the funds first... which potentially allowed them to survive.

The rules of 5

To answer the question on whether or not you need a virtual CFO, it can depend on a number of factors but it certainly gets a lot more clear as you grow. The larger you get, the higher the consequences become from not having a clear picture of your financials.

This is why I created my own, unscientific rules of 5. If you do $5 million+ in sales per year, if you do more than 5 large jobs per year, or you have 5 or more team members... it's time to build a relationship with your virtual CFO!

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