Ronette Kite, Startup CFO, on Finance and the Evolving Workforce
Liquid CEO Saujin Yi interviews Ronette Kite about how the workforce is evolving and what that means for CFOs.
At Liquid, we’re always thinking about the future of work. Our CEO Saujin Yi talked with Ronette Kite about the changing and evolving workforce. Ronette is a CFO for startups and has advised many different companies. Listen now or read the interview below.
Tell me a little bit about yourself – your background and what you do.
I am a startup CFO. I’ve been doing this for almost 15 years – primarily with companies from between 20 employees and 150 to 200 employees. Right now, I work as a startup CFO consultant with Countsy, who focuses on companies that have just been funded. Generally, companies that are growing very fast, very quickly, tend to use consultants frequently as they build up their product and secure funding for more permanent hires and employees. So very familiar with how startup companies utilize consultants at various stages as they grow and scale.
We power the liquid workforce.
So with the typical companies you work with, there are the consultants, and then there’s service providers and things like that. If you considered all of those non-permanent workforce or agencies and firms, how many invoices do you think on average do you cut a month?
Well, it’s interesting because that’s part of the biggest issue. Because generally, when we work with professional services, if it’s with a firm, we get monthly invoices, which is fine, sometimes more often. But most of the time, monthly when we work with contractors or individual consultants. That’s where the variability comes in. And that’s what makes my job harder and all of our accountants’ jobs harder. Some consultants bill monthly, some weekly, some in the middle of the week, or until the end of the following week. So there was no consistency in some of my clients.
We have processed up to anywhere between 50 to 70 invoices per month for some of our companies. That’s on the high end. On the lower end, it’s maybe five to 10, but never have I gotten a company where we don’t have any contracts or consultants. There’s always somebody that they’re working with either temporarily or on a recurring basis.
Tell me a little bit more about the process from when someone decides to bring on a consultant all the way to the payment, so onboarding all the way to pay me. Can you tell me about the process, people involved, tools, etc.?
You have a contractor that you want to hire, either temporarily or recurring. The first step is a contractor agreement – that’s pretty much standardized that has all of the proprietary and confidential information that you need. So an agreement is fine, and in the agreement, it should say the intention of the service agreement and the hourly rate wage and how often we’re going to be invoicing. It’s best if the company dictates that so we can get all of our contractors on a regular schedule, whether it be weekly, bi-weekly, or monthly. First is the contractor agreements, and that would be part of the onboarding where we get a W-9 in place, and then we start to get the invoices.
But for every one of our contractors, we require them to send us an invoice, and I have seen invoices of all kinds. I will say I’ve gotten things on the back of a napkin, that’s like their 10-year-old wrote down and they scan it and send it to me. And so, literally, I have a standard email that goes to my clients to say when you hire a contractor, it must have all these things. And it’s not a lot of things. It’s the standard things, but it has seven to 10 items, as simple as an invoice number, a date, a due date, and a person. Because sometimes, the contractor could be, for example, Liquid LLC, but then Saujin is our contractor. So sometimes it’s hard for accounting to connect the company to the person. So [the required list also includes] the contractor’s name and service period – hourly rate, etc. And, of course, a description of services which people always leave out and you know us accountants have to figure out what they did. So the invoicing is very important and very standard and required for all of our company.
Do you have a freelancer management system or vendor management system for all the contracts, all the way to the invoices? What are some of the tools that you’re using?
So, unfortunately, we don’t have anything that helps with that on the contractor management. I’ve seen a lot of people do use Dropbox with Panda to hold the documents. And those are the ones that we actually have contractor agreements in place. And then, and then the invoicing happens, which can be a CFO’s and accountants’ nightmare.
Let’s just say we’re dealing with 20 contractors, and that’s not even a lot. For my smaller clients with seed funding, they likely have 20 contractors and some again temporary, or maybe 10 hours a week recurring. So 20 contractors, and this one sending it monthly, this one weekly, that one bi-weekly. It’s very easy to double pay somebody. What then I have to do with each of those contractors is then go and look at their invoice and say, “Oh, they’re invoicing me from August 27 through September 3, so now I have to go back to their last invoice, which was invoiced through August 20. What happened in those seven days in between?” It turns out the contractor didn’t work those days, but I don’t know that or if there’s another invoice for those seven days out there.
So you could see that just getting a simple invoice from a contractor is potentially a five-step process if the accountant is diligent and checking everything. Number one, we’re not duplicating payment. Number two that there are no invoices out there that I haven’t received. And then obviously that the invoice is in agreement with the contractor agreement – this generally will fall on the hiring manager. So whoever hired them gets the invoice and will approve it. But at the end of the day, if the accountant isn’t checking and some stuff’s crossing over, it is our fault. If somebody sent us an invoice and this one says it’s through August 31 and this one says August 27, and there’s a crossover as accountants because we’re loading, it is our fault that we didn’t catch that. So it’s something that we have to be very careful of.
And as you were talking about before, this error management takes a lot of time, but it’s also the cash management or the visibility of things coming. How do you manage that or think about the visibility of cash management?
Yeah, very hard. Literally, it has to be done manually, so it’s an Excel spreadsheet, where we have listed recurring contractors. We estimate based on the last trailing couple months of what that is and or talk to management about contractors to see if they may have terminated some or will be ramping up. It’s a combination of historical trends, very manual, and conversations with management to see what their current trends look like.
But even then, it’s so hard. Last month I got invoices for a particular contractor back from February, and we are in August. I thought we hadn’t used that person, and I’ve already finished budgeting for the rest of the year. The problem is when it is small; obviously, it wasn’t $20,000 a month because I would have caught that, but it was just on the cusp – two or three grand a month. That’s small enough that it is under your radar but big enough that it’s a big number to not have in your budget for the last six months.
So it’s hard. It’s very manual today. It takes historical trends plus discussions with management to understand the continuing use of the contractors.
Do you think the administration burden adds to people not using this group of people that are not full-time employees? Do you think it’s a restrictive thing? Or because it’s on the finance team, do the people who are doing the hiring care, or do they understand how annoying it can be?
Completely, I think it is another challenge. I just had an email from one of my clients the other day that a contractor hasn’t been paid, and it’s important to get paid right away. The other thing is that these things have to happen fast. So if you’re dealing with a law firm that’s sending semi-monthly invoices and you’re not paying exactly on 30 days or 40 days, they’re going to be fine with it. But a contractor individually, we must get that paying right. So number one, we know that it is time-sensitive, and as soon as we get the invoice, we process it as quickly as possible because we understand that. And it’s an extension of our company, so we want to make sure that they’re taken care of.
And literally, I had to spend two hours on a Friday before I left on vacation to chase down an invoice and send a wire because the initial check that went through went to her old address since she never updated the new address. We had a void gap where we couldn’t void it because we had to wait for a while, but we needed to send a wire out. And even if we double pay and can’t void, I want to get this wire to her. It was one o’clock on a Friday and Pacific time, which means I have negative 45 minutes to make this wire right. So the hiring manager had to find out where the check went. It was two hours of my time to track down and settle everybody down.
The problem is that we had just integrated Bill.com, and as part of that integration, brought over a wrong address that wasn’t corrected, which was an issue. So, things like that happen, and it’s unfortunate, but it does affect somebody getting paid.
So the pros and cons of if you had the choice of an employee versus a consultant or contractor. How do you think about that choice because there are many rules and laws that go with the employment side and then, of course, compliance and stuff that goes with the consultant side? Do you know the sort of the pros and cons that go with it from your finance perspective, besides just the admin burden that you just talked about?
California has very strict laws around contractors versus employees. And let’s assume that we have a situation where we have a recurring contractor doing work on a project by project basis that has amounted to anywhere between 10 to 15 hours a week. And now, we have two choices – we can continue to contract them or bring them on as part-time employees on an hourly basis. And that generally then depends on preference on the contractor side. Sometimes they say, “I’m a freelancer, and I want to have the ability to say yes or no to projects on a week to week basis versus getting locked in.” Or, okay, I’m an employee part-time, and we pay you hourly, generally going to work 10 to 15 hours a week.
So, it generally depends on the contractor and what other stuff that they’re doing for the rest of the 20-30 hours that they’re working. For contractors, we generally pay them a little less when we get them as an employee – they may have benefits and holidays that you don’t normally get as a contractor. So assuming all things are equal [in terms of cost], it is easier [for finance] to get somebody as an employee part-time than to have to deal with bi-monthly or monthly invoices every month and make sure they get paid and get mailed to the right address. So from a finance perspective, it’s easier to put them on payroll, get a timesheet, and get that in.
Since it really isn’t equal in terms of the admin side, there’s a cost to having those types of people, even though they might make more sense from a non-administrative point of view to use them. You were just talking about misclassification and compliance because of the requirements of AB5 in California. Tell me a little bit more about how to think about the best practices for working with compliance in mind.
I am not an HR expert, and these things tend to change. The last requirement, I believe, happened in February or March of last year, and that changes the requirements as a contractor. At a very high level, again, not legal or HR, but from a financial standpoint, the contractor could work their own hours, work on their own computer, and work on a project basis and be classified as a contractor. And based on last year’s more recent California guidance, it has to be that the contractor doesn’t work with you full-time, that they’re marketing themselves to work with multiple companies. They’re still on a project basis. Still, they can not come to the office or come to the office. They could work on their own equipment, and they could still accept or reject a project as needed.
And so in terms of best practice, having a contractor agreement in place is great because it tells both sides, you are a contractor, you will get paid this, and here’s the expected period, but it can continue as long as nobody cancels. It’s on a project by project basis.
Number two is to get invoices every month that have all the information – service period, what we’re paying, and payment method, because obviously, that’s really important.
The third is if there’s anybody that’s a recurring contractor working close to 20 plus hours or 30-40 hours that can appear full-time. That’s something your HR and finance people should regularly address to make sure that a person shouldn’t be an employee and, therefore, on payroll getting benefits and paying employer taxes. Right now, the part that people will get in trouble is when the contractor has been working with an employer, and they’re not sending invoices. For example, if you’re getting paid a flat $5,000 every two weeks. When that happens, it’s like, wait a second. Are you getting paid $5,000 in advance, or is it behind? No one ever knows, and then when you terminate the contract, there aren’t any invoices. So we’re going to assume, you’re telling the truth and that we’re paying you in arrear. So we have to pay one more invoice, just to make sure we’re all clear.
Where we get in trouble is when we terminate contractors and give the normals two weeks or 30 days notice, whatever is required in the agreement, and say, this will be your last project, and then they go file for unemployment. And then that triggers a red flag that company ABC has somebody that filed unemployment. Then because EDD will send the company an email noting the person has filed for unemployment and asking what was the payroll. We say that the person wasn’t an employee. And then they ask why the person thinks they were an employee? So the more they see that there is a requirement issue between the two [parties]. And that’s kind of where you can open yourself up for an audit, and I’ve had clients that I just took on who have been audited by the EDD and they don’t look only at current, but they look at prior, and then they think you’re evading employer taxes. And then there are penalties on top of that. So you definitely don’t want to be in a situation where that’s happening. So you want to be diligent, you want to make sure you’re addressing it and bringing it up on both sides. You want to be perfectly clear that this is a contractor to company relationship. So here is the agreement that we have in place.
That’s one of the reasons why you said it makes sense to always separate contractor payments out from, let’s say Gusto, instead of using all the contractors on the same system as your employee ones, right?
Our standard practice is that we have employees on payroll like a Gusto or ADP, and then we pay contractors off of our vendor, which might be Bill.com or directly through QuickBooks, or whatever other payment plan that we have. And if it’s completely segregated, I’m not sending payment until I get an invoice, so it’s not just a recurring thing going through payroll.
I know most of the companies you work with are startups. What percentage of contractors are international from your experience?
Most of my startups always have an international component, whether it’s a subsidiary that they have out there or a branch that they have like their engineering team out of London or something like that. Or they have an entity that they’re paying out there that’s some of their engineering work. Or it is an international contractor that they’re paying on a regular basis. So most of my entities have a handful of international payments, they have to be paid on a regular basis and we use Bill.com. It’s an extra step for us because they’re international and even when they make it super easy and send us a UFC invoice and put everything, getting that money to them is an extra step. So because it’s an extra step and manual, things can get overlooked or double booked. So anything that’s not streamlined in a centralized process is always at risk to have errors because humans make errors.
What’s the extra step?
The extra step potentially is if you’re paying out of Bill.com, depending on what currency they’re paying, it’s an extra step to reconcile that in the accounting system at the end of the month. If you’re not using Bill.com to pay, maybe you’re paying directly from your bank account because it’s cheaper, or you’re getting better FX rates, but now you still should be uploading that invoice in Bill.com so you have it. It’s all centralized, and I’ve already paid it outside of the system, but that’s where the extra step comes in to play either way.
Thinking about the liquid workforce – consultants or people who are working more remotely or internationally – I think we’ve talked about how the trend is for companies to use more of these types of people. Do you see that the trend is moving towards this, and the comfort level is moving towards this? Do you think it’s a good trend? Does it set up companies to be more competitive, and how do they ensure they are getting the most of this group?
It was always a trend. Let’s call it five years ago, where contractors always wanted to be converted to employees. They wanted that security; they wanted benefits. Nowadays, it’s likely because the Millennials are coming in, but also the type of work – it’s more on-demand. As it relates to production and creative, those are trades that are really sought after. I would tell one of my clients – we need to convert these guys to employees. The client said they didn’t want to be converted. They want to be contractors and be independent. They’re not caring about the benefits – they’re able to get their benefits independently. And they like the freedom of hey, maybe I’ll get a better offer tomorrow.
So I do think that it’s changed. And I do think it’s going to end up with more and more contractors. I feel like it gives, from a contractor perspective, flexibility. They have to be more responsible with the taxes they put aside and the benefits and stuff that has to do things individually. But it gives them more flexibility from a company standpoint. It also gives us flexibility, especially in California. You hire somebody, and it’s not quite working out, and you’re trying to make it work out. You’re still trying to make it work two years later. That’s not what happens with contractors. You give them a project. It’s not working out; maybe we didn’t communicate well. But you have another project. And then you come to an end, and you know what it really just wasn’t a good fit. And you both go your separate ways. And you’re both professional about it. I think there are benefits on both sides to it now.
Now the downside. On the employer side is the fact that you have to keep that person engaged, and you have to keep that contractor at market rates because somebody else can swoop in, and there you go. It’s not like you’re hiring an employee, and you know every year, or every two years, you’re getting a market adjustment. So on the flip side of that, you have more real-time contractors engaged in things that you need. But on the flip side, you always have to make sure you’re paying at market rate – and giving them interesting work that they want to work on or someone’s going to scoop them up.
That’s so interesting that you say that it’s a benefit that people see from both sides. You’re getting the best work out of them. And then the other side is that work becomes more interesting for them as well. Do you think there’s a leadership style or type of culture and companies that are more conducive to working with this group? To draw the most out of them?
Definitely a startup company that’s growing since the startup doesn’t have to commit to hiring 10 employees – they commit to hiring contractors to get this work done. And then this pandemic is a perfect example of “We need to pause work, because we’re in a pandemic and we’re not producing anything right now.” So you can potentially pause, whereas, with employees, you have to get them furloughed or even terminated.
So definitely a startup, because they have to be flexible with budget and timing. And definitely a culture that’s very much innovative and always looking to try new things. That’s going to be a company that can have contractors on a regular basis.
Now, the flip side of that is that we always have to train contractors and get them up to speed with the company and make sure they understand. The contractors are going to be like, “Look, I don’t need to get an orientation of a company. I know what I’m going to do. I need to deliver that. And I’d need to be excited about that.” And yes, they want to know that this company does this, but they don’t need the whole orientation, connection with everybody, and all-hands meeting. They want to get a job done. They want to be proud and produce and move on to the next project.
So there are two sides. It’s a company culture with flexibility, variability, and innovation and is moving and growing fast. But on the flip side, the contractors also have to be the same because that’s what’s going to get new work in. And that’s probably why it is more exciting for them to be contractors and not employees because they get to work on different projects all the time. This is true for the kind of people who cannot sit in one place and do the same thing over and over. We have many accountants that love accountings because they know what every day in the month includes. This is the day that I close the books every day, and they are perfectly happy. You and I work with many people who are perfectly happy doing that for the last 15 years because there’s predictability. But that’s one personality. The contractor always wants to try new things and continue building skills and getting new things kind of under their belt.
One of the downsides that I’ve heard is that consultants don’t care as much as employees. And I’m not sure if that’s necessarily true or that trend is actually right. But how do you feel about that?
Well, the consultant is on the outside. The bottom line is they are on the outside. They’re not intimate with the company, and that doesn’t even have to be the fact that you’re going to an office every day because you’re not in the office every day today. It just really has to do with the fact that you’re spending 40-50 hours a week on this one client, and this is your only job.
Consultants are prioritizing workload and working on various things and reprioritizing as they go along. So, it is very different. I’m an employee of Countsy, but I’m a consultant to a few other companies. The caring part and that you want to see the companies’ success is still there. But the connection of being intimately involved in operations on a day to day basis is different. So the passion is still there in that I love to see this company be successful, but the connection of this is all I work on is not there, and it is different.
It’s like the client has to appreciate that this is the type of person to draw the most out of them. To have these people be ones that care, even though they’re spread among other things. They are proactive and have a certain personality for this type of work to succeed. And that seems to be the trend for most of these people.
Yeah, and I think that there’s a mutual understanding that we’re not going to be with you forever. I’m not here for five years. I’m probably here for six months to a year or two. And then you’re going to outgrow me and go somewhere else. I think that’s the difference here with an employee. It’s “I’m going to stay here until I’m moving up the ladder and forever, potentially,” but I think that is also the unwritten rule with contractors and consultants is that number one, we have to go in and start day one. There is no ramp-up and orientation – we have to be producing on hour one. Which means you get the most bang for my buck when I’m there. When I’m there, I’m adding value to you immediately, which means that it’s generally temporary in nature – could be a month or a couple of weeks or two years. It could be longer, but there is a mutual understanding that it’s temporary and that I’m not going to be the CFO of a company in five years because you’ll outgrow me naturally.
That’s the understanding, and that’s the value extraction on both sides because that’s what both sides need.
Category: Spotlights Leadership Interviews Industry Trends
Updated: December 8, 2020