THE SMARTER FINANCE BLOG

For the long and uncertain trek you have ahead, make sure you partner with a CFO who understands the terrain and can master the journey.

Photo courtesy of Christopher Michel.

A few months ago, my colleague and fellow on-demand CFO James Jones, published an insightful article titled “There’s a Time for Everything: When to hire the right finance help for your startup”. In his article, James brilliantly laid out a “Framework for Finance” that advises CEOs and founders on when to engage various types of finance and accounting talent.

As James indicated, there is a time for hiring a CFO, whether full-time or part-time. Once you have determined the timing is right you will be faced with one of the most important hiring decisions for your startup and you need to be prepared. Hiring the right CFO will boost your company’s performance; hiring the wrong one will distract you and will slow you down.

The “textbook” marching orders of a CFO are to “maximize shareholder value.” This implies many things, including a control aspect, which involves making sure the right controls and processes are in place so you can make the right decisions, and a judgment aspect, which involves maintaining an objective viewpoint to help you do what is right for the business. However, you also want to have someone who does the above and has the rare ability to foster relationships within the company to collectively work towards the same goals and objectives.

You are not just hiring someone who understands the process of closing the books and issuing financial statements. Anybody with a financial education can do that. You are hiring one of your closest partners, someone who gets it not only from the financial performance side but from the operational and infrastructure perspective as well. This CFO partner needs to be someone that can not only speak to what numbers on the financial statements went up or down, but can provide the insights as to why they moved and can drill down to understand the operational drivers of your company, turning data into information you can use to make good decisions.

A good CFO will partner with you and your management team so that all are collectively working to “maximize shareholder value,” as the textbook definition of a CFO indicates. This partnering is particularly important in startups as they are often a new experience for the CEO or for their management team.

The Psychology of Finance: how to go beyond the resume

Hiring the right CFO certainly requires, of course, carefully evaluating a candidate’s resume. Beyond this basic requirement is where you need to pay attention. Assuming the finance skills are there, you need to understand what most likely is not on their resume—their ability to build internal partnerships to help you operate the company. This is what I refer to as the Psychology of Finance. Specifically, more often than not, your first CFO will also be your acting COO because they will be the ones setting up basic systems such as HR, Legal (negotiating contracts, including sales contracts), M&A, IT, Supply Chain/Logistics and facilities. A CFO with poor people skills will not be able to champion your internal team to succeed at this.

Partnering with the right CFO that gets the importance of people dynamics will be one of your most important early decisions. When scouting for your partner CFO, make sure you ask for examples and find evidence of: a) the person’s flexibility (how do they manage the unforeseen?); b) the candidate’s preventative or enabling style when managers come up with issues outside the plan (are they about “getting to no” or about “getting to yes”?); and, c) their ability to nurture stakeholder relationships (the acid test here is the extent that business managers have consulted them for advice on key aspects of business/strategy in their past).

Key to ensuring you have the right CFO is to understand their view as to their role in your organization. Along with answers like setting up planning, forecasting, processes, controls, helping to raise money and preparing the board decks, listen for past experience that evidences they see themselves as someone responsible for turning the financial data into information that helps you and the rest of the company make informed decisions. A CFO who understands their role in your startup will ask you questions that evidence they do. These can include questions regarding your style for running the company, what are you looking for in a CFO, how your executive team work together, your relationship with your board or the biggest challenge you are facing right now.

Net, what you are looking for in a CFO for your startup is evidence that the candidate knows the importance that people dynamics have on their role as one of the key executives in charge of steering the company in the right direction. Mastering the numbers with no emotional intelligence is of no use to you when you need sound cover from a CFO. So when you decide it is time to hire your part-time or full-time CFO make sure to look beyond the resume to find the person who can make strategic finance actionable and useful.

Unlike this city in the desert, you only get a chance to set up best practices once.

Photo courtesy of Christopher Michel.

Those going to Burning Man next week will be arriving to a city that did not exist a few weeks ago and will cease to exist in just a few days. It is one of the very few examples of its kind where everything is temporary, and can be re-done better next year when the entire city will raise again from nothing.

Unfortunately, startups do not have the flexibility to start over each year. The systems that are put in place early on form a foundation that will affect the company’s performance for the foreseeable future.

Here at Burkland Associates, we help our startup clients set up scalable systems that not only minimize the friction from everyday accounting, but also ensure that the business runs smoothly over time. While supporting startups with on-demand bookkeeping and accounting services for many years, I’ve identified five important items that should be kept in mind when setting up your systems. Here are some of the details on these five set-up practices, so you can be mindful and avoid unnecessary pains as you grow.

  1. Select systems that scale

Quite often I find that many startups that are poised for fast growth choose bookkeeping systems that can’t keep up. Although Freshbooks, Bench.co, and Indinero seem like simple solutions to start, their automation and integration with outside apps and services are far inferior to other solutions such as Quickbooks Online and Xero. This ability to connect easily to outside services offers the flexibility to optimize accounting systems to each company’s specific needs. As for expense reimbursement software it’s best to choose one, such as Expensify and Abacus, that not only syncs with existing accounting software, but has the ability to structure multi-tier approval paths (although a young company may only have one approver at the moment, this almost certainly will change as the company grows).  The same for bill payment solutions- chose one that syncs and scales such as Bill.com.

  1. Open a business bank account as soon as possible with a bank that specializes in Startups

Opening a bank account early on for your startup not only is the easiest way to begin organizing your company’s finances, but it also offers the opportunity to develop a relationship with an important business ally- your bank. Co-mingling personal finances with your company is a no-no, and the opening of a business account (along with appropriate debit and credit cards) has the added benefit of less expense reporting and reimbursement activity. So, avoid using your personal credit or your savings account as soon as possible. Also, be sure to select a bank who is supportive to the startup community. Here in Silicon  Valley, several banks, such as SVB and Square 1, have developed special services for startups that result in lower costs and red tape for you, with the added benefit that they help their clients network. In addition, when you develop a relationship, there will be someone you know on the other end of the line when you need your bank to work with you.

  1. Don’t handle payroll on your own

With ever changing payroll tax laws, periodic filings, and the need to make sure your employees get paid on time, there is a lot that can go wrong during the payroll process. Make it easy on yourself and hire a low-cost payroll provider that will handle these responsibilities and more. Gusto, for instance, not only syncs automatically with QBO and Xero, it provides your employees easy onboarding, digital pay stubs and direct deposits right into their personal bank accounts.

  1. Introduce simple and appropriate policies and procedures

This is the time to set precedent. Take some time to think of best practices regarding issues that impact your bookkeeping and accounting systems such as credit card usage, expense reimbursement approvals and limits, collection of accounts receivables, client and vendor onboarding, etc. Document these policies and procedures then share and train you crew. Early adoption can help avoid bad habits and ensure that your team is singing from the same sheet of music.

  1. Gain basic accounting know-how

Your startup will begin generating tons of information regarding your finances. However, for this information to be meaningful, you need to become familiar with accounting principles that signal different aspects of the health and growth of your company. Sales, COGS, Gross Margin, Net Margin, Burn Rate, AP/AR, and Cash Flow are only as important as your understanding. Websites such as Accounting for Management, Accounting Coach,  and books such as Financial Intelligence can help, but for a deeper understanding you might want to consult with an experienced CFO or Controller.

Although the five items listed above seem obvious, with hectic days of coding and acquiring your first customers, it is easy to ignore the accounting/bookkeeping function. Yet, you don’t want to;  as an initial focus on setting up scalable and efficient accounting systems will save you time, money and energy in the future. And if you get stuck, there are several terrific and cost effective on-demand bookkeeping and accounting services (like ours!) that can help you get on track.

2017 Copyright Burkland Associates. All other trademarks are property of their respective owners.

No matter your size, you’ll need financial guidance to gain or maintain momentum.

Photo courtesy of Silicon Valley entrepreneur Christopher Michel.

Medium’s blogger John Cutler wrote an interesting article on startup complexity (Complexity is a Startup Killer. Don’t Grow Up) in which he analyzed how the two advantages of a startup – speed and focus – start to evaporate as your company grows. His advice is to resist the complexity that comes with growth and avoid the temptation to: Let features reproduce; Add endless sales tools; Multiply enhancements; Add more people to the Board; Find more and more partnerships; and Hire “experienced” people.”

To this last part about hiring experienced people, Cutler adds “Company experience doesn’t equate to Startup experience.” As an on-demand CFO at Burkland Associates, I’m a member of a team that enables access to startup experience on a fractional basis, enhancing a Company’s ability to scale up with the guidance of a strategic financial resource – when you need it!

A forward-thinking startup rents before buying whenever possible.  Posit the following two scenarios where “renting” a CFO can help you minimize growing pains and burn.

Scenario 1: All the low-hanging fruit is coming your way.

A friend with a green thumb tells me “plants usually die out of an excess – not lack of – water”. Sadly, this is the case for many startups that find money and initial traction come their way relatively easily. I’ve been at more Board meetings than I would like to count in which investors were pushing their portfolio CEOs to scale up faster. On the surface, there is of course nothing wrong with scaling quickly; after all, startups are about speed.

The problem comes when scaling up follows little planning – tracing a horizon based on the initial traction that a talented business development person may have generated.  Planning involves understanding how the interdependencies of product delivery, market expectations, and customer management could evolve.  If you follow short term thinking without considering longer term context you may find yourself in a quagmire in future growth stages.  As your strategic financial partner, people like me can help you craft the right plan.

Burkland CFOs can help develop a sound business model that plans growth looking at likely and unlikely scenarios (developing contingencies for them), and evolves your business in the right direction with models that show how to sustain and improve margins while optimally servicing existing customers.  Smart investors look beyond traction, they want to see “smart traction” that doesn’t dry up and lives up to the market challenges you will inevitably face. A sound plan helps you to attract the additional capital and key resource hires you need as you scale, and becomes critical to sustaining momentum.

Scenario 2: You’re struggling to gain momentum.

If you’re losing sleep, it’s most likely because you’re not growing as fast as you expected and the solution is not obvious. You’re draining cash and not building the business growth story you need for your next round of financing which, by the way, is around the corner.

The challenge becomes one of creating processes to drive efficiency, fine-tune key variables such as pricing and levels of service, and buying time to figure out your market and educate prospect customers. You can’t justify hiring a full time CFO given your size, but you need a strategic minded CFO more than ever to stabilize your business, or face dire consequences. A part time CFO from Burkland is a huge asset in your corner to help you find traction. In this case, renting is a no brainer because a hired gun brings the relevant experience you need to figure out how to start sales momentum in context of a plan, as most of us have seen this problem several times even in your own industry.

Lack of traction can be a blessing – just ask SaaS star Slack, which came out of a failed gaming company – if and only if you have the right guidance to know where and how to tweak your model. A strategic CFO from Burkland could give you the partner and coach you need to help solve the puzzle and develop sustained traction.

Please contact me at pkang@burklandassociates.com to speak further.  Thanks

Make sure you plan ahead; it’s going to be a bumpy ride no matter what.

“Plans are worthless, but planning is everything.”- Dwight Eisenhower

Developing a financial plan is one of the most beneficial actions you can take as an entrepreneur when starting a business. A financial plan is like a spec for your company; it forces you to translate business strategy into a concrete business plan and to establish an operating roadmap that identifies the timeline for your key business milestones. As you develop your plan, your team and your investors will align on the goals and objectives to move your business forward.

A financial plan is also an essential tool for raising capital. Your projections enable you to determine your business’ funding requirements and communicate the financial opportunity to investors. In discussing your plan with prospective investors, you can demonstrate the financial literacy that investors expect from executive teams.

There are three types of financial plans that every start-up needs: a Long-range Plan, an Annual Budget, and an Intra-year Forecast. Here are some details on each.

1. Long-range Plan

A Long-range Plan is the first financial model a start-up should build. The Long-range Plan should include a 3-5 year outlook, with the number of years determined by how long it will take to prove and scale your business model. You should build the plan with monthly detail for at least the first 2 years, and you can plan the remaining years quarterly or annually.

The Long-range Plan should set your vision for the business model and help you to test the sensitivities of your key business drivers. It is helpful to prepare different scenarios of the model so you can anticipate and plan for different outcomes. I generally recommend preparing a base-case, a best-case and a worst-case scenario.

Investors expect to see your projected funding needs and the business milestones that can be reached in advance of each funding round so that they see a path to scale. You should target enough cash raised between rounds to last at least 12 to 18 months. Think of this plan as building blocks and create it as a detailed bottoms-up plan while keeping a top-down view as a reality check (e.g. what % of the market can we reasonably expect to capture?)

One crucial detail that many new CEOs overlook (sometimes fatally) is to ensure you forecast your cash flow, not just your income. Make sure to account for the timing of working capital (accounts receivable, inventory, accounts payable) collections and payments as well as capital expenditures. Poor working capital management causes many early-stage companies to fail.

2. Annual Budget

The second type of financial projection you should prepare is an Annual Budget, which is a detailed monthly plan for the coming year, generally prepared in the quarter prior to the upcoming fiscal year. The Annual Budget is presented to and approved by your Board of Directors.

It is always a good idea to preview your thinking, assumptions and high-level numbers with your investors before you send them the budget and ask for their approval. Sit down with members of the board that are willing to brainstorm scenarios for the year with you to ensure you get good advice and the buy-in from your board members before the actual board meeting.

Once your Board approves your Annual Budget, it becomes your North Star to measure performance throughout the year. Ensure that every executive team member is involved in the process of creating the Annual Budget, as their input and buy-in to the process is crucial to their performance. I recommend you share the Budget with the entire company to ensure everyone is aligned with the organization’s goals (although some executives prefer to omit sensitive details, such as the timing of cash running out).

3. Intra-year Forecast

As its name suggests, an Intra-year Forecast is simply an update of the budget completed during the year to reflect actual performance to date and an updated view of what is expected for the balance of the year. An Intra-year Forecast is an important tool to manage your cash and make the necessary adjustments to stay as close to the Annual Budget as you can. I recommend preparing an Intra-year Forecast at least 3 times per year – at the beginning of the 2nd, 3rd and 4th quarters.

As the quote at the beginning of this article says, “plans are worthless but planning is everything.” In general, reality significantly deviates from your plans. By having a plan, you will quickly identify when business and market conditions have diverged from expectations and you will be prompted to quickly react and adapt. One of the most useful things that on-demand CFOs like us can help you with is to develop Long-range Plans, Annual Budgets and Intra-year Forecasts to help you plan, monitor and grow your business with confidence.

Here are some useful articles that dive deeper on these three essential types of financial projections.
http://avc.com/2010/04/projections-budgeting-and-forecasting/
http://avc.com/2010/05/scenarios/
http://avc.com/2010/05/budgeting-in-a-small-early-stage-company/
http://avc.com/2010/06/forecasting/

Photo courtesy of Silicon Valley entrepreneur Christopher Michel.

Pay-as-you go or subscribe?

Have you ever wondered why managed service providers usually hesitate to offer subscriptions?

What my experience as an on-demand strategic CFO for several managed services tells me is that the reason is rooted in the concern over the need to change customer behavior, as the traditional financial transaction for the industry has been on-demand, pay-as-you-go. Therefore, selling services requires consumers – both individuals and businesses – to buy into a completely new way of acquiring services.

Interestingly, both your customers and your organization need to change your behavior in order to have a subscription model that sticks. The White Paper, linked at the bottom of this article, we just published gives some hints on how to do this successfully.

Slow to subscribe 

The managed services sector has been slow to adopt subscription business models despite the success of product companies in doing so. Recent subscription model pioneers include software developer Pivotal Labs, medical services provider OneMedical, mobile application QA tester Testlio and airline operator Surf Air. However, using a subscription model to sell services is still a new concept. The main concern seems to be the need to change behavior of the consumer of these services, which includes both individuals and enterprises. Importantly, this model also requires your company and your people to change behavior, as managing a subscription model is a different game that requires different skills.

The 4 keys to a sticky subscription model

In this White Paper, I’ve drawn upon my experience to identify several key success factors common to managed services providers using the subscription model. Pioneers will lead the charge in changing consumer behavior and reap first-mover benefits. Their success will depend on their ability to activate four key success factors:

  1. Gain an understanding of the customer’s true internal costs
  2. Provide an alternative to building an internal core competency
  3. Understand the nature of the customer’s needs
  4. Establish the organization necessary to support the subscription model

Download the White Paper to get the full insight into activating a subscription model that sticks.

GET THE WHITE PAPER HERE:

4 Keys to a Sticky Services Subscription Business Model

 

Photo courtesy of Silicon Valley photographer and entrepreneur Chris Michel.

Your CFO: A co-pilot you often need to rely on for handling a healthy HR process.

Photo courtesy of Christopher Michel.

Sometimes in a startup, your CFO will need to step up to handle non-financial duties and act as an informal COO. The reasons can range from fast growth to a key VP leaving to the need to establish processes, or even to simply not having the team/bandwidth to complete the needed work. Because of his or her familiarity with the daily pulse of the company, the CFO is often in the best position to assist, especially in matters regarding HR.

Several of us at Burkland Associates have been required to take over the HR processes of our clients for some periods of time. This can look like a trial by fire for a CFO, so we created a framework that helps us evaluate the company’s HR options and choose the best path. Limited resources are usually the norm, and the priorities often start with ensuring you can secure payroll and benefits, closely followed by the need to find an HR partner who can handle the recurring process of compensation and give you strategic HR cover.

There’s no quick fix for a function as central to success as HR, which touches everybody in your company. However, you need to find a balance between the urgent and the important so that the path takes you to a well-functioning HR practice. Here are some guidelines you may find useful as you evaluate partners, whether it be your part-time CFO, a 3rd party resource, or a combination of both, who can help you run HR without a glitch in the short and long run.

  1. Compensation and benefits advisory and administration

The ability to set and run compensation & benefits must be at the top of the list when you are evaluating an HR partner/service provider. The five things we look for are: a) does the partner have an employee help desk for all HR/benefits/payroll questions & issues? b) Can they create employee communication materials? c) Will they help you set compensation levels and stock option programs with relevant benchmark data? d) Can they support you regarding compensation and benefits compliance? and d) As you grow, do they have the capacity to organize, coordinate, and run open enrollment meetings and health fairs for your people?

  1. HR policies and procedures

A solid HR partner needs to help you establish written HR policies and procedures that can accommodate your startup’s team growth and help you attract the right talent. In addition, their HR policies and procedures capabilities must include a sound and clear process for hiring, on-boarding and also one for termination. Finally, make sure their policies and procedures include compliance with regulations in your market.

  1. HR Technology

HR is one of the areas where technology has made a huge difference for companies of all sizes over the last few years. A partner needs to have a good Human Resource Management System (HRIS) with integrated HR, benefits and payroll functionality, and benefits enrollment software. It also helps if the system has an employee on boarding self-services portal, and gives you the ability to easily implement and manage payroll.

  1. Recruiting & staffing capabilities

As you grow, you need a partner who can provide expert guidance on recruiting strategy, not just short-term tactics and practices. This strategy often includes a hiring plan and a pipeline of the positions you need to fill over time. Ideally, they will manage this hiring plan and the recruiting pipeline for you. Expert guidance also includes giving you access and helping you make sense of compensation benchmark data that is relevant to your industry and to the stage of your company.

  1. Ability to help you set up a strategic HR practice

Finally, an important but not urgent task for a good HR partner includes an initial strategic HR audit and a review of the big picture with you and your executives. As time goes by, your partner should be able to provide guidance on the strategic HR road map they help you develop, while giving you sound advice and expert guidance with setting the crucial cultural tone for the business that reflects the unique essence of who you are, often, this essence is found through interviews with management and well-designed employee surveys.

These five elements are by no means exhaustive. HR is a complex task. However, evaluating HR help using these five areas as a guide provides the cover you need to have a well-run, healthy HR function that accommodates growth and supports recruitment and retention. Most importantly, solid HR practices designed early on can ensure you nurture and maintain your culture through time, no matter your size.