Make sure you understand what lies underneath the data you use to make big decisions.
You’ve heard it many times and in many different contexts: garbage in, garbage out. This universal truth can have serious consequences for CEOs of young companies when it comes to financial reporting. The devil is in the database that provides the data that affects the numbers you rely on to take all kinds of decisions – from sales forecasting to modeling to pricing.
Sound financial planning requires data science to ensure data definition, design and governance support data analysis and ultimately, reporting. A CFO must understand more than their ERP (Enterprise Resource Planning) system such as Quickbooks or NetSuite. They must understand numerous data sources, how they relate to each other and how to reconcile them, because at the end of the day, a spreadsheet as a reporting tool will only be effective with proper data definitions and a solid database design.
Good CFOs start with design
To do proper reporting for bookings, revenue and SaaS metrics, it is critical to first design the data sources. I can’t understate the fact that database design is a critical step of any serious financial planning and analysis (FP&A) that can provide executives the knowledge then need to make decisions about their startup. If the data is poorly structured, incomplete, or inaccurate, the tools for analysis (i.e. a spreadsheet, Looker, SaaSOptics, etc.) will be at best limited in their usefulness; at worst, it will provide wrong information that can lead to poor decisions.
The Devil is in the Data
For example, let’s focus on SaaS bookings – whose reporting often seems to be controversial within the organization. To design an accurate spreadsheet to reflect sales, your CFO needs to determine, first, what is the definition and data source for a booking. For many startups, the data source is the Salesforce.com opportunity (either maintained there or replicated in an ERP system such as Zuora or SaaSOptics or held in a reporting database such as Redshift). The key here needs to be a total agreement on the database object or table that defines the booking. If you select the Salesforce opportunity, and export to Excel, then you can setup the opportunity to include the data element (field on record) for type with the possible values of (new, expansion, renewal or churn) and then use that data element or column in Excel to filter or build a report or a pivot table.
Another approach for designing the bookings database for SaaS could be to use a more granular level of detail, such as a contract or a subscription. Then, if the team needs to query the contract, they need to determine what is the definition and data source for a contract. In most Salesforce configurations, there is not a contract object – this is where sound design comes handy. Your CFO can create a contract object in a subscription management solution such as Zuora, SaaSOptics, and even on an Excel spreadsheet.
If you are creating reports based on the contracts or subscription, then you will need to ensure that your data table includes the following: a) common reference such as a customer ID, b) unique contracts or subscriptions id, c) subscription data such as start date, end date, item, amount, etc. With this data table, you can apply logic to determine if new, expansion or renewal. For example, if there is a subscription with a customer ID and new prior subscription (use start and end dates) with the same customer ID, then the subscription is new. If the start date is coterminous with the end data of a subscription with the same customer ID, then it is a renewal.
If there is a period with no revenue but revenue in the same period, then the amount of the previous period is churn. It should be obvious that a proper data structure will make the logic easier and you didn’t ask about re-activations (contract ends, there is a lag period, contract begins at a later period….is this churn, new, renewal or none of the above such as re-activation).
CFOs should offer Strategic and Tactical Skills
In a technology startup, CFOs are needed for many strategic efforts such as long-term planning, raising capital, assessing buy- and sell- side acquisitions, and hiring top talent. However, at times, many startup CFO’s must also lead data design and analysis. Often times, it is data and financial insight that helps to ensure success in the strategic efforts.
Photo courtesy of Christopher Michel.
A well chosen board: collective wisdom that will will take you places.
Do You Really Need a Board?
Legally, every company is required to have a board of directors. It could be just one person (i.e. you), but building a well-functioning board is an opportunity to increase your startup’s chances for success. The board is responsible for authorizing major decisions like senior executive hiring and compensation, issuing debt and equity (including stock, options) and approving budgets/strategic plans, major expenditures and significant transactions.
Many founders I’ve met are focused on their percentage ownership in the company as the primary measure of control, with 51% often the magic number. But the reality is that very few decisions require a shareholder vote – generally, raising money or selling the company. As noted above, far more decisions (including those that require a shareholder vote) require board approval, making your board at least as, if not more, important to controlling the fate of the company.
A good board helps you refine your strategy, improves your decision-making and adds stability to your company. It should also help you recruit senior managers, secure customers and partners and raise capital. Board members can and should make introductions to relevant parties and sometimes help you close the deal. Having the right people on your board also increases your credibility with these parties, allowing you to punch above your weight. You can use positions to attract highly-experienced talent that would otherwise not be interested, available or affordable.
How Do You Build the Board?
The ideal size and composition of your board can and will change over time depending on the stage of the company. As a general rule of thumb, smaller is better and an odd number is often preferable so there is no potential for a tie vote that is the same as a “no” vote (in practice, this is quite rare, however). Given the importance, be very thoughtful about who you add to your board. Each board member should add some unique value or perspective and be able to work effectively with the other board members and the senior management team.
Initially, just you and/or your co-founder is probably sufficient to make sure you can move quickly and get your company set up the way you want. The CEO should definitely be on the board and lead the meetings. If the founder is not the CEO, it may be appropriate for him or her to have a seat as well, but beyond that I don’t recommend having anyone else from the management team on the board. They will pretty much always vote with the CEO and don’t bring much fresh perspective. The remainder will be made up of investors and independent “outside” directors.
Often, your board will expand or change each time you raise a round of financing. Investors should hold seats that are roughly proportional with their ownership of the company. For example, if an investor (or group/series of investors) owns 20% of your company, then one seat on a five-person board is appropriate. In order to maintain this relationship, early investors may need to give up their seats to later investors. Smart investors bring a lot of value to your board given that they have broad experience with similar companies and business models as well as relationships with industry players and potential follow-on investors. That said, the marginal value of adding additional investors to your board goes down quickly and investor-dominated boards are not ideal.
Your outside directors are a tremendous opportunity to add talent and guidance to the company. Given the math below, it makes sense for the early outsiders to be people you know and trust so that you can rely on them to not only help guide the company but to be aligned with your vision should there be critical early decisions to be made. That said, resist the urge to appoint them based solely on the reliability of their vote and instead pick people who bring real industry knowledge and contacts to the table. As the company grows, you will likely add outsiders who lack a personal connection, but if you choose individuals with wisdom and integrity, you can be assured they will act in the best interests of the company and its shareholders (including you). This may not always be in your best interests as a manager, but this needs to be OK as your goal should be to maximize the value of your equity not to protect your compensation or perks.
See below for the ideal board based on each stage:
Resist the urge to expand your board beyond seven people until you are much larger or publicly-traded as it makes scheduling and decision-making more difficult. One way to accomplish this goal is by appointing “Board Observers” who have the right to attend meetings and receive information but don’t have a formal board seat/vote and/or by allowing people (e.g. the larger management team) to attend meetings by invitation.
How Do You Compensate BoD Members?
In an early-stage company, it is generally not necessary to compensate management, founder or investor board members. Each of these individuals typically already earn cash compensation based on their management roles and own a meaningful equity stake in the company. Some companies provide a small stipend to their outside directors (often paid on a per-meeting basis) but the primary compensation is usually via participation in the management equity plan. For an early-stage company, each independent director might receive 0.5-2.0% of the company, which gets diluted over time. The company should reimburse the directors for their out-of-pocket expenses incurred while attending meetings or otherwise discharging their responsibilities.
The bottom line is that a good board makes you more effective and increases your company’s probability of success. A bad board not only does the opposite but can make your life miserable. Be thoughtful about how you assemble your board and seek the advice of experienced mentors and advisors to ensure you do it right.
Now that you’ve built your ideal board, stay tuned for next month’s article on how to manage it…
Photo courtesy of Christopher Michel.
Learn to recognize if you’re ready to move to smarter accounting.
Smarter accounting is simply accounting that helps you stay smart. The stage at which your company is, influences whether you are ready to move to Accrual Accounting, which is a better method for financial reporting and control. This is because accruing reflects the realities of a growing business better than cash accounting and positions your company ahead for the next stage. Public companies, for example, have no choice, they are required to use the accrual basis for accounting.
First let’s define what such an accounting-sounding term means. Accrual Accounting is an accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The big advantage of an accrual system is that it can provide better information for management decision-making. The disadvantage is additional accounting costs and a diminished ability to show less expense and more profit just because you pay vendors late (which is actually a good habit to avoid!)
Sooner or later, your startup will reach a stage in which using an accrual basis for accounting can help you grow smarter. In this article, we explore five signs that can point you to the fact that it may be time to shift to this method of accounting for revenues and expenses.
Five signs that indicate your startup is ready for accrual accounting
In the ideal world, all companies should choose accruing from day one, as it is a method that makes you more disciplined and gives you a more accurate and realistic financial view of your business. But startups never start in an ideal world, and many begin by using the cash method and eventually change. These are the five signs to be aware so you know when you’re ready.
Most small companies begin by having a vast majority of their transactions on a cash basis. There can be significant clean up work to match income and expenses to the proper period, and when the company is too small, this is a cost that may not be justifiable. It used to be that you would record all your bills/payments (made via check) and invoices/receipts (received also via check) and then at the end of the month reconcile to your bank account. With the proliferation of cloud accounting systems, which integrate with bank and credit card data, the model has flipped to one where transactions are initially posted to the accounting system based on the bank and credit card records, and then the source documents are often used in small companies without an accounting process to adjust the cash-based entries.
Almost all startups move to an accrual basis once they start getting prepayments from customers for services, including online services, they provide. This is what eventually happens in many current tech business models, and when this is so, accrual is the right solution: it lets you use the money received without paying taxes on it, and recognize income (revenue) when the obligation (i.e. service delivery) is completed.
2. Stable and predictable cash flows
A common barrier for accrual is that unstable cash flows force companies to use new cash to pay for old expenses. We’ve all been there: you finance your operations by delaying payments to suppliers until you have the cash. In a way, this is the intuitive and often times necessary way to operate for small companies. However, doing this while accounting on a cash basis can diminish the usefulness of you financial statements, because it does not reflect the true state of your business.
A common problem is you let payables build up over many months while trying to raise money, then you raise money and pay off a bunch of old expenses. But when you want to budget for the future with your new cash, you don’t have a good historical record of the timing of what was expensed, because a big portion of the expenses were lumped into the month when the money came in.
If you have lived through the example above, now that you have money in the bank and have experienced the struggle first-hand creating projections without a meaningful historical record, it may be a good time to move to an accrual basis. With cash flows now more stable and predictable, you can move to accrual accounting and get in a position to better understand your business going forward.
3. A venture round
For a potential investor to understand the nature and the realities of your business through your financial statements, it will be necessary to move from a cash to an accrual accounting system. This is because cash accounting makes for imbalanced accounting, and therefore may distort your true cash flow and the nature of your expenses. If you’re venture-backed or planning to be, it is always smarter to be on accrual basis or to move to it quickly once a round is on the horizon.
Eventually, your VCs will require this change, either right after money comes in, or, if your cash method distorts reality beyond their comfort zone, they will demand it before the round. This can mean one thing every CEO dreads: slowing an investment round while your accountants change your accounting system. Sometimes this takes even longer, as once accruing is on, modeling and forecasting will need to be re-adjusted based on the new numbers. If venture money is on your near horizon, do not miss this sign and move to Accrual Accounting before they ask you to.
4. Financial audits on the horizon
The fourth sign that indicates you may be ready to move to Accrual Accounting is if your company is or will be subject to financial audits. These are quite common when outside investors come in and want a clean slate in terms of understanding all business liabilities (for example, to ensure their money goes to growing rather than paying past debts). Additionally, when there is potential M&A activity, accrual accounting will make your life easier by reducing the friction of any transaction for your company, and often is a requirement for large acquirers.
In the United States, GAAP (Generally Accepted Accounting Principles) is the standard for preparing and reporting financials statements and thus, it is required by outsiders who need to understand your business. When an audit is performed, a company’s revenue and expense recognition has to reconcile with GAAP, which means accrual accounting method needs to be applied.
5. You need serious modeling and financial management
The final sign that indicates you’re ready for Accrual Accounting is your own need for useful financial statements that enable your company to do accurate modeling and sound management. When your team is ready to manage the business using financial statements that reflect the reality and the true financial health of the company, an Accrual Accounting method trumps a cash method as it provides an accurate view of the drivers of cost and revenue.
Unfortunately, it is quite common for small companies that use cash accounting method to run out of cash before they even realize it, adding a level stress and uncertainty that could have been easily avoided. Accrual Accounting can give you and your team a real picture of your resources and of your financial responsibilities through time, enabling you to plan with the confidence that the numbers reflect reality. It also allows businesses to manage and plan their financial activities and future in real time instead of “after the fact”.
You will be there no matter what
Eventually, all companies move from cash to accrual as they grow. A move from cash to accrual should be part of the strategic advice you get when your company is ready for a CFO. Before that, an approach where the accrual basis is used partially – it can be done, just ask us! – can be a way to avoid the full costs of the effort, get started on this method of accounting, and attain a better position for sound financial planning, faster investment and accurate modeling for the long-run.
Photo courtesy of Christopher Michel.
A trove of profitable information may be hiding under your horizon.
Photo courtesy of Christopher Michel.
Are you overlooking a revenue opportunity?
In the past you could identify a location, sink a well and black gold would flow from the ground. Today, all you need to access these riches is to identify data sources that already exist in your business and drill down into it, or information you could have access to, but have yet to collect. With a bit of analysis and help, you can create new revenue streams by monetizing your un-tapped data, by thinking of it as “liquid gold,” while creating rules of engagement with your customers so that all this is transparent and safe for everybody.
A lesson from Facebook
Facebook founder Mark Zuckerberg, who hopefully just learned the hard way that data presents huge opportunities provided you use it responsibly, recently described his business before Congress as a “community” (with 2.2 billion members), a vehicle to connect people all over the world. In reality, Facebook is a data / advertising company whose currency is your information. It collects hundreds and sometimes thousands of data points from its users, aggregating and monetizing them by offering targeted advertising to various companies while maintaining control over them and making a fortune! Mark’s net worth is currently $66 billion – all built with my information and yours.
You too may be sitting on a wealth of untapped data or the opportunity to collect it. Most of us don’t like to stray from our core businesses; however, in today’s environment it’s imperative to grow and diversify. Plus, having this additional revenue stream may allow you to give your customers lower prices, just as Facebook can afford to be free as long as it can monetize information collected from their customers. Mining existing data (customer lists, buying patterns, preferences, etc.) or creating simple mechanisms to capture it (apps, websites, discount and loyalty programs, collection of email addresses that access Wi-Fi at retail locations, etc.), enables you to collect, aggregate and monetize it.
Lose your fear of data
Many companies are reluctant to monetize the information they control for fear of breaching customer confidentiality. However, if the problems Facebook is facing can teach us a lesson, data collection and data use can be part of a ‘covenant’ with our customers where they get some benefit in exchange for the rights to use their information to generate revenue via ads. This, when done properly, allows a company to maintain control over the data without losing customer trust.
One way to monetize your data is by focusing in your core industry and utilizing it to enhance your sales or offerings to assist industry partners in enhancing their sales, at a price. Another is to think out-of-the-box and look at other verticals that may be interested in reaching the companies or consumers in your data base. The one thing to remember is that the goal is to facilitate the marketing effort while maintaining control over your data so that your customers’ trust is not weakened by having third parties misuse their information – which has contributed to Facebook’s current trust problems. Ensuring this takes considerable planning and dedicated resources but enables you to continuously monetize data with confidence. By following simple rules of engagement on third-party use of your information, each time a vendor needs to initiate a new marketing campaign, you create a new revenue opportunity without compromising it. This is the Facebook model: each bite of the apple generates additional revenue for your company and enables you to offer your customers lower prices or even a free service!
Your CFO can help
Like oil, data can be a blessing or a curse, depending on how careful you are when monetizing it. One of the ways a strategic CFO can help you is by applying some out-of-the-box thinking so that you can identify and collect it in a way that maintains your customers’ trust and monetize it with confidence.
“There’s nothing to fear but fear itself.” – Franklin D. Roosevelt
Photo courtesy of Christopher Michel.
Recently, our team read a fantastic book – Getting Naked, by Patrick Lencioni – that explores the journey from superficiality to deep empathy that amazing human relationships usually take. Amazing consulting relationships, being just one kind of human relationships, also follow this journey, starting as professional engagements and becoming meaningful relationships of loyalty and trust. The book explores why.
It turns out that consulting relationships that stay superficial in the name of looking “professional,” never move a consultant from a vendor to a trusted partner. This is a book that goes deep into the simple but powerful insight that growing a relationship – any relationship – is about becoming vulnerable. For a consultant, this openness results in a better understanding of the “whole,” enabling us to understand their business better by understanding their motivations, their strengths, their weaknesses, in short, their true needs. It is about a humble approach to consulting where you open up completely and show your human side. It is in this zone of humility and openness that loyal and sticky relationships can develop. The book is a call to open up by facing three fears that prevent us from building deep relationships.
The concept is surprisingly unsurprising: professional relationships are human relationships. There is no way around it. Like all lasting human relationships, professional ones also move from the superficial to the deep, as those involved open up to fearlessly expose their humanity with all the good and the bad that comes with it. It is this fearlessness that is the basis for the insight of this great little book.
Lencioni brings home this need for fearlessness that turns into trust and loyalty on both sides by exploring the three specific fears that prevent consultants from becoming trusted partners of their clients.
Like in dating, if you’re afraid of losing your partner, you will behave in a way that actually gets you there. Your relationship will stay superficial because you will avoid the “difficult” conversations that make a relationship more intimate. In regards to consulting relationships, Lencioni puts it brilliantly: “ironically, though, this fear of losing the business actually hurts our ability to keep and increase the business, because it causes us to avoid dealing with the difficult things that engender greater loyalty and trust with the people we’re trying to serve.” This happens, he explains, because clients can “smell” that fear of losing their business makes us put our interest in keeping it before their interest in being helped.
This year marks the 50th anniversary of one of the most acclaimed movies of all time: 2001: A Space Odyssey. In it, pride causes HAL, an AI-enabled computer, to assume it is infallible, pushing it to eliminate all but one of the crew members, derailing the mission it was trying to maintain intact. It is pride, Lencioni writes, that keeps consultants from asking questions that may make them look ignorant or stupid. This leads to the second fatal fear in his book: the fear of being embarrassed. Nobody can look smart 24/7 in a deep relationship, vulnerability, which builds empathy, needs to go through the trial and error of making mistakes, sharing stupid ideas, and facing errors. In my experience, it is how one reacts to errors that shows a client what one is made of. A client will fire a consultant who tries to save face before firing one who owns their mistakes and problem-solves to correct them. As in personal relationships, wanting to be seen as smart is a turnoff. Smart people don’t yearn to be seen as so.
This final fear that prevents consulting relationships from taking their journey to loyalty and trust is also based on pride, but on a different kind. Lencioni writes that the “fear of feeling inferior is not about our intellectual pride, but rather about preserving our sense of importance and social standing relative to a client.” Interestingly, he reminds us that the word “service” comes from the same root as “servant,” and outstanding consultants who build loyal relationships overcome their need to feel important by serving, or in the author’s words, doing “whatever a client needs them to do to help them improve, even if that calls for the service provider to be overlooked or temporary looked down on.”
At the end of his insightful book about loyal relationships, Lencioni provides a practical list of actions that outstanding consultants can take to overcome the three fears and build a deeper relationship that grows roots. These practical actions are the following:
To fight your Fear of Losing the Business:
To fight your Fear of Being Embarrassed:
To fight your Fear of Feeling Inferior
At the end of the day, Lencioni reminds us “we all have weaknesses, and if we try to cover them up, we’ll probably put ourselves in a situation of having to do more and more of what we aren’t good at.” Nurturing trust and loyalty in a consulting relationship requires us to put down our egos so that we become vulnerable by showing – not hiding – our weaknesses, by showing our humanity to ultimately generate the empathy we need for our relationship to go deep.
Become fearlessly human in your professional life! Realize that you can’t conveniently put your humanity in a drawer in the name of a “professional” relationship, because at the end of the day, all relationships are human.
Craft a sticky story of your company’s journey.
Photo courtesy of Christopher Michel.
Last week I had a Monday morning meeting with the founder of a pre-seed, self-funded company. We had been collaborating for almost a year and he told me that they had their first pitch competition in three days. He wanted to do a review of their pitch with me.
After a quick run through his pitch, I gave him my brutally honest take on it: “None of it was usable”
The deck would have been OK for an investor sit down, but it was not appropriate for a three minute pitch in front of an audience where the goal is not to attract investors but rather to win a competition – or at least to peak interest and to be memorable. After all, win or not, you want them talking about you afterwards. A totally different frame of mind is necessary in the prep and the delivery for an event like this. You do not need to be a Ted Talk master, but you do need to tell an authentic story people will remember and connect with.
Unfortunately, they had already submitted the deck and could not make changes. I pondered for a moment. The deck had one good slide so I advised them to just focus on that one slide and ignore the rest. As scary as it sounded, a good story focusing on one good visual was much better than a bad story focused on many bad visuals.
Here’s how we re-worked their pitch.
Make you and your story the focus of your pitch. If your story is powerful when you sit down one-on-one, then it is simply a matter of figuring out how to translate it into one that captivates a large audience. So for my friend (founder), this meant it was time to break him down and build him back up.
We began by asking all sorts of questions….
Now, can you tell all this in no more than three powerful sentences?
Notice that not once did I ask about Sales Growth, Exit Strategy, MRR, LTV or financial models, setting up the story is all about you and your story. If your story is compelling, the details can follow. It doesn’t work the other way around.
Here are my top 9 pitch tips that can help you weave a sticky story that is authentic.
After considering these pitch tips, it was only a matter of weaving the the story in a sequence that made it progress. Here’s the outline we used:
Happy to report that being the amazing entrepreneur he is, he turned this advice into a pitch competition victory three days later.
Proper financial modeling is critical, but not for the faint of heart.
Work with enough early stage companies, and you’ll inevitably hear reference to a financial model. Depending on the company in question, the model will be either a mysterious topic discussed only in hushed tones, or something casually mentioned on a Friday afternoon as a box to check in the start-up’s sure-to-be rapid ascent to riches. Neither is correct; in my experience, entrepreneurs at early-stage companies almost always approach financial modeling from the wrong angle (if at all), resulting in incorrect expectations and potentially costly decisions down the road.
Here’s a quick list of the five most common misconceptions and mistakes that early-stage management teams make when it comes to modeling.
Proper financial modeling is not for the faint of heart, and it’s one of the areas in which Burkland’s on-demand CFOs excel. It requires an interesting mix of accounting knowledge and good, old-fashioned operating experience to do well, which means modeling is often the very last thing an entrepreneur wants to tackle. But it’s critical to not only understanding and managing the inner workings of your company at a granular level, but also to raising outside capital, and most importantly, to understand all the moving parts that affect your own business. Take the time to do the modeling right; your company, your investors and you will be thankful you did.
Photo courtesy of Christopher Michel.
Don’t let bad practices turn into stormy nightmares.
Photo courtesy of Christopher Michel.
Running a successful startup is a feat of enduring determination. What begins as an awesome idea for a couple entrepreneurs, becomes a growing Company that demands more attention to how you administer the business than those things which captured your excitement to begin with (i.e., product design, marketing plan, technology roadmap). Careful early attention to Finance and Administration (i.e., process, procedure, and people stuff) can avoid trouble later in what I term “nightmare growth.” This is when you are growing but your time, attention, and pleasant dreams are sacrificed to frustrations even as you sleep!
Here are four examples how a lack of discipline and culture can turn the small cracks in a wall appearing with growth over time, into a watershed dam rupture that ultimately derails a business. Avoid pending nightmares as you grow by paying attention early on to how you administer your Company.
Top management sets the tone. How they conduct business, treat people, deal with big and small Company issues, and portray the Company to the world establishes the values and social mores to be emulated internally. I’ve seen leaders in good times become driven by ego and limelight and in bad times experience significant stress – but in both cases – I’ve witnessed leaders who stray and become unpredictable or undisciplined in their behavior, causing volatility in the foundation of their culture. Guard yourself to maintain culture in good times and bad, or you’ll have employees adopt your poor behaviors or just leave.
A talented Strategic CFO can help you guard culture and even repair it in times of decay. Leaders need to regularly engage in conversations about culture, defining the values intrinsic to culture, and take the pulse of the organization through surveys or other formats to make sure they stay on course.
We’ve all heard stories of crazy dynamics inside startups that often make venture investors impose “adult supervision,” many times in the form of a new CEO. I wonder if Facebook would be Facebook if a seasoned CEO had replaced Mark Zuckerberg early on. The truth is that many times the vision and drive that a founder has is key to driving the business forward. Often, the problems begin when startups ignore cultural fit as they hire people to fill key positions, focusing more on specific skills a potential candidate brings to the job. This approach to hiring for growth can lead to “people problems” later.
I’ve found that hiring people who share the same passion that drives the founders and the CEO is more important than hiring people who seem to have the perfect skills. Spending time understanding where a candidate comes from, what inspires them, and how the work habits they bring fits with your culture will pay off in good times and in bad!
Humans are wired for fairness, so when your team perceives things as unfair, you will lose their energy and passion as they emotionally check out. In my personal experience, I witnessed a young and thriving small Company with highly paid key executives and a weak Board (i.e., proxied votes) drift into a downward spiral as employee effort dwindled and ‘pseudo sabotage’ set in as employees demonstrated who is really key to success. Compensation was not the Company’s only problem as culture was also weak, but it proved that comp structure is a cultural glue, for you nonbelievers try not paying people adequately and you’ll find out.
The Company would have been better off designing a formal comp plan that rewards a larger set of employees for rowing in the same boat in the early stages, striking a balance between base pay, incentives and upside in an exit. Prioritize creating a compensation plan early, one which you can flex up with incentives to balance growth objectives across your most critical employee base.
Cash flow always seems to be in short supply. It is a slippery slope where you lose footing fast if you start funding expenses through payables to buy time for cash to come in. This works (but still with risk) for Companies that have reliable recurring revenues, stable liquidity sources, and market power with vendors. They make tradeoffs with short term liquidity in mind as they take creative measures to pay bills.
The problem occurs with smaller and less stable Companies that begin financing growth initiatives through vendor payables. If you don’t have adequate capital to fund a growth initiative, the temptation to fund growth by slow paying vendors and growing payables is hard to avoid. After all, you have employees inside who are critical to the initiative at hand, and vendors outside who are less so. Having adequate capital to support investment decisions is an issue management needs to solve at the time the decision is made, not doing so turns growth decisions into bad decisions that create bigger problems. There is always embedded risk in any strategic decision you make (e.g., one that requires incremental short or long-term resource investment), understanding that risk and how/when it trades into cash is key to understanding how you should fund the initiative at conception.
Increase your odds of winning by setting smart goals for the new year.
KPIs, MBOs, OKRs. You’ve probably heard of these and several more ways to set your company’s objectives. With so many options to get to the same goal, it is no wonder why by the middle of the year, objectives, as originally set, often go the same way as New Year’s resolutions. The problem often lies on the goal development: sometimes goals are crafted at the leadership level and not effectively shared and refined with the rest of the organization. Also, there’s a tendency to focus on numbers without regards to the operational goals that drive these numbers, for example, growing revenue by x% (a key business goal) may require sales restructuring (an operational goal).
OKR: a framework that may work for you
Although there is no magic formula for setting goals and sticking to them, I’ve found that the framework provided by OKRs (Objectives and Key Results) can set teams on the right track when it comes to goal setting. Before going into details, diving into the Wikipedia definition of OKR can be useful:
“[OKR’s] main goal is to define company and team “objectives” along with the measurable “key results” that define achievement of each objective. One OKR book defines OKR as “a critical thinking framework and ongoing discipline that seeks to ensure employees work together, focusing their efforts to make measurable contributions.”
The key term to focus on is “to ensure employees work together.” The OKR framework is good at steering top management to align their goals with those actually in charge of driving the business towards them throughout the year. This means that as you think of OKRs, you need to make sure you’re delivering on the key initiatives the company needs to get done to get to where it needs to be. I find it useful to think of a “value chain” that will support the OKRs with specific initiatives from your team.
Some guidelines about setting objectives and key results
Setting goals and key results together – which is basically what OKRs are all about – can help you create the discipline to have the right internal conversations initially and throughout the year to ensure the team stays focused.
Here are three easy ways to get you going:
The benefits of using a framework like OKRs go beyond just ensuring you develop objectives and meet them. Crafting objectives and key results together disciplines thinking at all levels, communicates the company’s vision accurately, establishes a measurement culture, focuses the effort of your team and enables employee engagement.
Are you ready for OKRs?
Goal setting using OKRs is valuable regardless of your size. As stated before, creating a culture around setting measurable objectives is always a good thing. Think in terms of developing OKRs around functional or product teams in addition to the executive team.
No matter your size, aligning goals with the specific results needed to get there will only result in an organization where everyone – from the CEO to the most recent hire – point their efforts in the same direction.