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The Smarter Startup

A Self-Assessment to Determine if Your SaaS Startup is Ready for a CFO

To determine if your SaaS startup is ready to hire a CFO, ask yourself these questions related to subscription revenue and metrics reporting.

When advising startups, venture capitalists, and ecosystem partners, I often get one particular question: “When should my startup hire a SaaS CFO?” My answer is full of questions instead, and I bucket them into two main categories:

1. Subscription Revenue

a. Pricing

  • Before we even get to revenues, how are you pricing your product? How you price your product impacts revenue long before customers start signing contracts.
  • Are you certain that the strategy you are following makes long-term business sense?
  • Have you analyzed the unit economics of your pricing structure?
  • Do you know what the discounts and terms involved cost so that deals get priced appropriately?

b. Revenue Recognition

Revenue recognition is one of those crucial areas you likely “don’t know what you do not know”.

  • You are collecting revenue every month, but what is your confidence level that revenue is recurring?
  • Do you know how the variability of user-based pricing and your bundled services might change that?
  • Do you know where your obligation begins and ends?
  • Are you sure that the termination clause does not break recognition?
  • Do you know the definition of deferred revenue?
  • How familiar are you with ASC 606?

c. Contracts

Deals need to be closed nearly any way you can as an early-stage startup, but contracts should ideally have details and features that are trackable, repeatable, and scalable for revenue operations.

  • Is your sales team accumulating contracts that look slightly different on pricing, terms, and features for every new logo you acquire?
  • You leveraged the legal team to construct your contracts, but did you examine them from a business perspective too?

d. Revenue Operations

This is the most obvious indicator that your SaaS startup is ready for a CFO.

  • Are you managing revenues across multiple spreadsheets with customizations that are getting unwieldy?
  • Do you have a climbing customer count that brings trouble keeping up with invoicing and collections?
  • Can you afford the creep-up in your unbilled and accounts receivables?
  • Is your AR stack past its scaling date? Do not neglect your operational infrastructure while you are closing sales on the front end.

 

2. Metrics Reporting

a. Definitions

Open up a churn calculation across multiple SaaS companies, and you will realize they are not all the same. What has been excluded is just as important as what has been included.

  • How have the components been quantified?
  • What is the implied time period represented?
  • Are you familiar enough with investor definitions of key metrics or confident enough to defend how your metrics are defined right now?

b. KPIs

Every definition is the foundation of a KPI.

  • Do you know which key performance indicators are significant to your business?
  • Not just the topline metrics – the operational KPIs that are actionable to your startup at its current stage.
  • Do you understand the relationship between their inputs and outputs, and have you thought about which are leading vs. lagging indicators?
  • Do you know which ones have the most leverage over the next 18 months to help you hit the targets for a successful fundraising?

c. Reporting

  • Who owns this function in your organization? If it is everyone, then it is no one. When there is no one, things like definitions and infrastructure become an afterthought. Someone has to proactively develop and manage the reporting chain: business actions must be turned into bookkeeping, booked properly using GAAP, constructed to form financial reports, and leveraged for forecasting and business insights.
  • Can you pull a report and feel confident about that snapshot of your business?
  • How much time does it take to construct monthly financials or do ad hoc reporting on demand?

d. Consistency

To see trends in your business, you need metrics, metrics need accuracy, and accuracy needs consistency. Your reporting is not truly useful to you or your investors if it is not consistent.

  • Do you have confidence in the consistency of your reporting when it comes to tracking performance and measuring it against stated goals?
  • Are you comparing the same metrics month over month and quarter over quarter to have confidence that you are progressing year over year?

There are a lot of subtle technical finance questions that you need to be aware of as a CEO or founder, but having access to an experienced Saas CFO that can advise and execute is the only answer you need to know in order to make sure your company gets these things right. If you didn’t feel comfortable answering the questions above, then you’re probably ready for a SaaS CFO.