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To play the marketing game prepare a solid marketing budget with which you can win.

Photo courtesy of Christopher Michel.

Crafting a marketing budget can feel like a guessing game. The options to invest your marketing dollars could seem endless, and you could spend weeks debating what will move he needle for your startup. In this article, Steve Lim, Vice President and Head of Marketing at Vantage Data Centers, and I have put together a quick guide that our CEOs and their marketing teams have found useful for budgeting marketing spend. We divide this brief guide in two parts: the three guiding principles for guiding your plan and the process for defining your marketing scope

Guiding Principles: The 3 Cs of your Marketing Budget

We’ve found three simple guiding principles we call the “3 Cs” that can help you navigate your marketing budgeting options.

1. Comprehensive

Your budget must include spend for the key areas:
1) brand awareness
2) content and tool creation
3) demand generation

Specifically, to drive awareness for the brand, you need to budget for public relations, social media, websites and digital presence as well as other brand related programs that reach customers but do not drive direct lead creation or engagement. Then, to develop content and tools, you need to budget for thought leadership content and sales tools. The important thing to keep in mind is that you need an ongoing strategy to tell your story in a compelling way and to portray your company & products in a positive light. Finally, to deliver contacts and leads to sales, you need to budget for things such as digital programs, digital media, trade shows & events, and partner marketing – all of these create a blended program that directly engage customers and drive lead or contact creation for sales teams.

2. Calculated

We recommend that rather than using rules of thumb, you calculate estimated marketing spend based on lead conversion or customer acquisition costs (CAC) payback period.  To do this you need to incorporate specific building blocks, including:

  • Total addressable market (a large market requires a broader marketing outreach)
  • Size of your existing database (if you don’t have a strong target list, then you will need to invest to build it)
  • Size of sales teams and velocity of sales process (you need to calculate the number of leads required to support each sales rep over time and in relation to time of sale)
  • Your market position (newer entrants will need to assume the CAC will be higher, whereas known companies are able to spend less)

3. Committed

For each category of marketing spend, there is a minimum threshold. Either you commit to spending a certain amount or, in the category, forego spending anything. Do not try to find cost savings in specific line items.  The worst possible scenario is to try and execute a plan after your board agrees on that plan but asks for simple percentage cuts across the board.  You have to look at each area of marketing spend and determine what the minimum threshold for spending should be, and either decide to proceed or cut entirely. This is especially true for demand generation programs that drive direct contact acquisition and lead creation. For example, activities like media spend (digital ads, SEM, etc.) require a certain level of investment with some consistency over time to tune, adjust and manage before you see real results. If you cannot commit to spending consistently for a minimum of 6-12 months, you are best to forego this activity completely.

Some areas are more flexible in how you can tune spending up or down, but you need to ensure that you know the thresholds for each as well as the overall mix of spending required across the key areas of marketing. Properly planned and executed marketing is a well thought out mix of spending across the key areas with deliberate thought to how each investment influences the activities overall – essentially the sum is greater than that parts.

Process: Size and Shape of your Marketing Budget

You need to spend time to determine the right size and shape for marketing spend based on your unique circumstances and your market.

Size

The size of your marketing budget should be based on an overall estimate of spend. To determine the range for marketing spend, we recommend using the average cost for an inquiry and lead conversion analysis to estimate the spend per closed/won opportunity (Marketing program portion of CAC). With a range of estimates for leaders and laggards, you can then determine the overall Marketing spend level with confidence. It’s important to note in the process, however, that there are both minimum thresholds that you need to be conscious of and ceilings that are capped based on total addressable markets. Simply put, you have to spend at certain levels across marketing to achieve any results at all – if an average cost per lead is $100, you can decide to invest $100 and get one lead.  On the other end, you should not assume you can put an unlimited budget into marketing and generate infinite leads.  You’ll be limited by the total addressable market and by some basic assumptions about what a reasonable penetration percentage is for your target market.

To size the marketing budget determining the average costs per inquiry, answer the following key questions:

  • What is the quota assignment?
  • What is the average sales price (ASP)?
  • How many new deals per year?
  • How many Quota Carrying Sales reps today and planned?
  • Who is the buyer? what level? executive? manager? is this a software purchase?  What part of a typical org would make the purchase?
  • What is their target market geography? Are they going after just US business or global?
  • What is the length of the sales cycle (sale velocity)?

Shape

The shape of your marketing budget is determined based on the relative importance and spend between brand awareness, content & tool creation, and demand generation. For an early stage company to build infrastructure and capabilities, there is a minimum amount of spend needed in all areas. In later stages, companies can shift emphasis and spend depending on whether they need to build awareness, capabilities or sales leads. The shape is also determined based on the approach to planning and executing your marketing programs. This approach can be either agency or internal-resources led with the appropriate management resource for each approach and is a basic build vs. buy decision. To achieve high levels of quality, many startups should use an agency-model until they can hire enough people to assume relevant functions – after all, the trend in marketing – and in finance also BTW – is rent versus own.

Co-author Steve Lim is Head of Marketing at Vantage Data Centers. He has deep experience in marketing strategy, field marketing, sales enablement, program development & delivery, content marketing, and operations.

 Make sure you fill those crucial initial spots with a great team that will take you places.

Congratulations to the Houston Astros, 2017 World Series Champions, and to the city of Houston who can use the win after a rough summer of devastating storms.  How did the worst team in baseball in 2013 with only 51 wins turn it around so quickly and reach the pinnacle of their sport?  They committed themselves to building the best possible team using all means available.  The Astros beat the Los Angeles Dodgers, another great team that also had a great season.  Both teams won over 100 games and survived a tough run through the playoffs.  Also, both teams made major in-season moves that just may have been crucial to getting them to the World Series.

Assembling the best team

Like every other major sport, it’s now conventional wisdom that to win a championship, you do everything you can to put the best team on the field. The Astros traded for Justin Verlander, who went a combined 9-1 in the remainder of the regular season and playoffs and was key to all three of their playoff series wins.  The Dodgers picked up Yu Darvish who helped solidify their rotation and get them to the World Series.  Last year, it was Aroldis Chapman joining the Cubs and Andrew Miller joining the Indians.  In 2015, it was Johnny Cueto and Ben Zobrist for the Royals and Yoenis Cespedes for the Mets.

This lesson applies just as well to startups and to companies as a whole. The best team wins, and the question to ask is: are you doing everything you can to put the best possible team on the field?

I spent 13 years as a venture capitalist and during that time we had a saying.  If the three most important factors in real estate investing are “location, location, location”, we often said the three most important factors in VC investing are “management, management, management.”  We would take an “A” management team with a “B” idea over the reverse every time.  Why?  Because we had confidence the “A” team would be able to handle all the twists and turns required to successfully navigate the startup minefield and eventually find the “A” idea.  While the “B” team might just get stuck and fail to execute.

As a founder and entrepreneur, I had the same experience regarding the importance of having the right team. No matter how novel the idea, there were always multiple other companies chasing the same goal.  With the proliferation of startups, accelerators, incubators, seed funds, crowdfunding, etc, this is likely more true today than ever.  There is no doubt that timing matters.  Market size matters.  Business model matters.  But all else being equal, the better team has a much greater chance at winning.  I’ve seen it personally from both sides.  Bet the jockey, not the horse.

The relentless pursue of opportunity

Of course, as a startup you don’t have unlimited funds to pay seasoned leaders to join your team.  So, you need to be creative and grab talent whenever and however you can.  Probably the best definition of entrepreneurship I ever heard was from legendary Harvard Business School Professor Howard Stevenson, who defined it as “the relentless pursuit of opportunity beyond resources controlled.”

I joined Burkland Associates about a year ago and one thing that has surprised me so far is how many founders I’ve met who spend their time building Excel models, creating pitch decks and even doing journal entries and reviewing expense reports instead of leading their companies. At a stage where assembling a great team is crucial, a great founder focuses on setting the vision, charting the course, motivating the team and assembling the resources to be successful.  Recruit a team of experts – full time or part time, employees or consultants – to help you execute.

Justin Verlander and Yu Darvish may only take the ball every fifth day. They may not even be around 2-3 years from now, but this year, they made all the difference. The lesson to learn from this is: who can you add to your team to give you the cover you need to put you over the top?

Think about it.

There will be storms ahead. Make sure you learn resiliency from the ones that came beforehand.

Photo courtesy of Christopher Michel.

For millions of people in the U.S. and the Caribbean, the summer of 2017 is synonymous with tremendous suffering and loss, as one of the most active hurricane seasons in history hit their communities. As tactical response to the storms scales down and recovery begins, strategic focus will shift to making critical systems more resilient – such things as the water levies in Houston, and the power grid in Puerto Rico.

Although there is a world of difference between how governments and organizations respond to the challenges of large-scale disasters like storms and how a management team runs a business, I think there are some valuable resiliency lessons that can be drawn for startups.

When I’m not working as a consultant, I serve as a Civil Air Patrol liaison officer to FEMA’s Region II. In this capacity, I’ve worked six major hurricanes in the past several years, including Sandy in 2012 and this year’s Irma & Maria. Aside from master-of-the-obvious missives like “failure to plan is planning to fail,” here’s my top five list of lessons from disaster response every CEO can incorporate into their business strategy.

  1. Resources always govern results. There is never a shortage of demands on an organization’s resources, and the natural tendency is to pay the most attention to the fire burning brightest at the moment. However, an organization’s effectiveness is metered by the resources it can strategically bring to bear, not devote to this or that tactical fix. Avoid the trap of allocating resources (in a company, usually capital or talent) to things that are not bringing your organization closer to your broader goal. Also, avoid the cardinal mistake of not allocating enough resources to do the job at hand properly. Another landmine is the order in which you deploy your resources, which can matter as much as getting them in the first place. To use a FEMA parallel, there’s no use surging hundreds of trucks to help distribute food and water in Puerto Rico unless there are drivers on the ground to operate them. It sounds obvious, but in high-stress environments, it’s the simple and obvious things like this that will make or break the impact of scarce resources.
  2. Know what has to come first. Prioritization and precedence are critical to resource management, so knowing (or carefully planning for) what should receive support first is paramount if you are to avoid going back and doing something over again, or worse, detracting from your ability to deal with more important things down the road. Resources are almost always limited, while demands invariably outstrip supply. Management must prioritize, but it should do so more adroitly than merely forecasting an ROI on capital invested; look at your resources holistically, with your strategic goal in mind, and parse out in which order they should be expended. Bear in mind that it’s not always immediately apparent what should come first, and your decisions regarding prioritization will be based on incomplete information.
  3. Consequence management. This is one of the most common mistakes I see leadership teams make. While they may be very adept at allocating resources and prioritizing, CEOs often fail to extrapolate the broader impacts of their decisions, and how their choices may affect subsequent requirements. The more ambitious the goal and the tighter the timeline, the less likely is that you have really worked through how everything fits together, and how what you decide today may govern what has to be done tomorrow. I recommend mapping out how your decisions will move your startup towards its ultimate goal in order to see where the consequences lie.
  4. Avoid the soda straw. Every executive, commander and leader is at risk of viewing their world through the proverbial soda straw, focusing on the immediate requirements or mission they are tasked with at the moment to the virtual exclusion of everything else. This is a natural tendency: concentrate on the immediate task for survival. However, maintaining situational awareness of the entire enterprise – and its priorities – is key, no matter how exciting or promising a certain project might look today. In the disaster world, this means remembering that almost every decision comes with a long logistical and economic tail that must be managed – for instance, the person who orders thousands of first responders and military personnel to a hurricane zone must also think of the lodging, provisioning, and sanitary requirements they will place on an area that is likely to be already highly deficient in all three.
  5. Rapidly iterate based on new information. Private sector companies typically exist in rapidly-changing environments, and as the old saying goes, no plan ever survived the first hour of combat. Don’t be afraid to abandon prior conceptions about your market or customers in favor of new, real-life information you receive from the field. In this sense, treat your decisions as MVPs (Minimum Viable Products) that are just starting points from which to depart. Real-time adjustments are more valuable than anything you put up on a white board six months ago. And make decisions quickly – one of the few unassailable advantages a startup has over its larger competitors is an inherent ability to move very quickly, so use it often. Case in point: Google’s plan to use high altitude balloons to temporarily take the place of cell towers may restore mobile phone service in Puerto Rico weeks or even months ahead of any other solution available from local telecoms or the government.

In many cases, your CFO can help you not only properly define your company’s strategic goals, but also help you execute the day-to-day demands in order to reach them in a focused and efficient manner. Like with disaster response, there is no one thing that makes all the difference, but rather countless small elements that make up the overall effort. To sum up, remember another old saying: Manage the little things right, and the bigger things will take care of themselves.

If you’re in for a long race, venture debt financing could give you the air you need to get to the next peak in better shape. Photo courtesy of Christopher Michel.

Raising venture debt is always an interesting subject for startups. For some CEOs it is completely off their radar, and for others it is a taboo subject. In between these extremes, there’s a growing number of startups using venture debt effectively to buy time for a higher valuation, making it a cheap form (in terms of amount of stock it costs) of financing while the value of your company rises.

I thought we could shed some light into whether venture debt is a good thing for your company by creating a simple model you can use to project its long-term effects on your valuation and on your stock and explore if it makes sense for you. For a sense of the value of this exercise, under a relatively conservative growth scenario, Venture Debt could save the company from having to give away 3% of equity. Before getting into detail about how this model works, it’s worthwhile to spend some time reflecting on a couple of issues you will need to think through before raising money this way: covenants and purpose.

Covenants and Purpose

Many think that some banks and venture debt providers require excessive terms and may tie up the company with covenants that hurt you in the long-run. Our experience with this is that most of the terms and covenants can be negotiated, with the exception of the investor support covenant, which requires the venture investors of your company to agree they will continue to support the company or the covenant is triggered. Even the MAC (Material Adverse Change) covenant, which seems to be the most draconian of all because it gives the venture debt provider the option of not following up on their promise if there is a significant change in the company (based on their definition), can often be negotiated. What you need here is a supportive board that has a venture investor with venture debt experience, working closely with you and your CFO to ensure you get the best deal for the company.

Putting in place venture debt is best done right after a VC raise. You can usually structure it to pull the funds much later – and face only a small portion of the costs before pulling the funds. The goal is to have it available in the future in order to buy time for growth so that the next round comes a bit later, giving you more time to increase the value of your company. This means that  growth should be the purpose for making your case to raise venture debt with your board. Emergency money or, worse, an excuse just to spend more, is what this kind of financing can unfortunately be wrongly associated with. Although if it comes down to using it in the event of an emergency, that can also be a valuable use, but in that case, it’s usually just to give another shot at pivoting and potentially save the company rather than juice value. In any event, raising venture debt with growth in mind, before you need it, will help you get better terms with debt providers and negotiate favorable covenants.

The Model

The basic assumption behind our model is that you’re raising venture debt for the purposes of growing. As such, the spreadsheet helps you look at two scenarios of growing: with and without venture debt. The results, once you input your numbers, are quite simple:

  1. Whether using venture debt made you save equity
  2. Whether using venture debt gave you time to increase the value of your company

If there is a positive number answering these questions, then you should take a closer look at venture debt. We plugged in numbers to show you how it works, feel free to substitute these with yours (red fields are input fields and the two key outcomes are highlighted in yellow).

Click here to access the spreadsheet.

The model begins by assuming a venture raise just happened (Cash at the End of Period 0, $10 million in the example). In the example, you raise $5 million in venture debt, giving away 0.2% of equity (0.1% when you put the facility in place and the other 0.1% when you draw the money), and paying a setup fee of $30,000. Cash burn is the same in both cases ($3 million), except for the venture debt payments. The example assumes a valuation growth of 25% every period (in this case, every 6 months). Note that you pay the bank the initial fee ($30,000 in the example) even though you don’t draw the venture debt of $5 million until you need it in the third semester.

This model is built to show the debt enabling a six-month funding delay in your next round ($20 million in the example) and assumes the same valuation for both scenarios, as it is just comparing financing structures in isolation. The result in the example: you raised money at a valuation of $97.6 million in the last semester rather than raising it at a valuation of $78.1 million six months before. The net value saved was $3 million, leaving you with 3.07% in equity you can keep. Not too bad!

Does venture debt work for you?

If you plug your numbers into our model through this link (red marks indicate input fields), you will see the impact of using debt in addition to equity for some of your financing. The model buys you time, but you need to keep in mind that growth needs to happen.

Venture debt works when it buys you time for a better valuation because things are going well. You pay for this time with debt and not with equity, saving you equity in two ways: initially by raising debt, and then afterwards by using that debt to get to a better valuation. If your growth scenarios come to fruition, venture debt enables you to raise money a bit later than you would, when the value of your company is higher. That is a great deal if you’re good at forecasting. You can also explore the impact of the debt using different growth scenarios, thus further exploring the potential value or the downside. Have fun 😉

Sometimes in finance, long and complex ways actually take you somewhere.

Although the SEC (Securities and Exchange Commission) does not regulate the financial reporting for your privately held company, you will benefit greatly from understanding, and maybe even adopting, their regulations. When serving in a Strategic Finance role, I ensure that the P&L follows this format and then use the historical data, as well as comparable company metrics, to develop company models.

This guidance is actually a very basic concept that defines the formats for financial statements. By adopting this definition for your subscription company, you will present your financials in an easily consumable format. This format also allows for comparable company comparisons that will help you refine your business model, identify KPIs and manage your business performance. Using comparable company comparisons will help you to better forecast your business and add credibility to your forecasts.

Income Statement Format

The regulation calls for what’s known as a “Two-Step” format, in that “subtotals are used to show decision-useful line items such as gross margin and operating income separately from non-operating income and net income or loss,” as stated by CFR Title 17.

Below is the specified two-step format customized for a subscription company. I’ve defined the resulting ten steps as follows:

  1. Net sales and gross revenues. State separately product and service revenue for each business line which accounts for more than 10% of total net revenue.
  2. Costs and expenses applicable to revenues, stated separately according to the net revenue categories. These expenses are known as Cost of Revenue for subscription companies.
  3. Gross Profit and Gross Margin
  4. Operating expense defined as Selling, General and Administrative expenses, or SG&A, and other general expenses relevant to your business, such as R&D or Operations. Subscription companies typically use R&D, Sales & Marketing, and General & Administrative.
  5. Operating Income, which is Gross Profit minus Operating Expense.
  6. Non-operating expenses, such as Interest, Taxes and Depreciation & Amortization (D&A) expense, if relevant.
  7. Net Income, which equals Operating Income less Non-operating expenses. Use if #6 is relevant.
  8. Earnings Before Interest, Taxes, Depreciation & Amortization, or EBITDA.
  9. Change in Working Capital
  10. Free Cash Flow

In my experience, early-stage, venture-backed companies typically have little or no Interest, Taxes and D&A expense. Most have convertible debt, but do not used debt lines. Most are in loss positions, meaning that they do not generate profits. Also, most are capital-light, meaning that they do not buy equipment above the $2,500 amount typically set for capitalizing purchases. Without non-operating expenses, Operating Income will equal EBITDA. In this case, use Operating Income in lieu of EBITDA because the latter implies that ITDA expenses exist. Free Cash Flow is the cash-based profitability of the company and should be added along with a liquidity metric such as bank balance.

The example in the call-out presents a typical format that I use for subscription clients. Please note that all numbers are entirely fictitious and presented solely to illustrate a financial reporting format. Any resemblance to an actual entity’s results would be coincidental. Additionally, these fictitious results do not indicate any view or opinion on the performance implied by this illustration nor do they suggest the size of the business that should adopt the recommendations herein.

Advantages of this Presentation Format

There are three main advantages you will achieve by adopting this format for your subscription company.

First, anyone who worked in finance will be intimately familiar with this format and can quickly grasp the financial performance of your business. You can skip the time needed to explain your custom single-step P&L and move straight into the performance.

Second, this format will allow you to analyze your performance with respect to comparable public companies. The comparison gives insight into key financial metrics such as gross margins and operating expenses, especially when shown as a percentage of revenue. You can back into R&D headcount using salary and overhead assumptions. Using multi-period financials, you can derive estimates of SaaS metrics such as Magic Number, CAC Ratio, and LTV/CAC. This insight will help you refine your business model, identify KPIs and manage your business performance.

Third, your finance team will use comparable company comparisons to better model your business. Actual revenue growth, gross profit and operating expense margins, cash flow and operating metrics combine to set parameters for the forecast. And this gives you credibility in discussing both the short-term and long-term forecast.

Useful and insightful for CEOs

The SEC directives in the case of subscription companies are quite relevant because they are useful and provide CEOs with great insight into the numbers. I’ve seen this approach work well in fundraising and for financial reporting.  Feel free to contact me if you would like to dig deeper on the topic. emersch@burklandassociates.com

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.