Scaling companies is a constant process of innovation. The following phrase describes these rapid periods of growth: what worked 12 months ago, doesn’t work anymore.
Once your product lands squarely in its market, revenues and customers can begin to grow exponentially. In response, the organisation must scale in size and ability to execute. Otherwise, the company’s infrastructure begins to age, processes break, and disharmony sets in among staff.
In 2017, a customer of mine saw their annual revenues increase 350%. Furthermore, the company is planning for revenues to double in 2018. With only 4 project managers implementing its enterprise software 12 months ago, it was easy to monitor tasks and efficiency. However, with 10 full time project managers on staff, they now need a more sophisticated system to track the numbers.
In addition, they’re trying to forecast how many staff still need to be hired for the remainder of 2018, taking into account the number of expected project wins, the yield of each project manager, and the estimated monthly cash flow available to use for hiring. Their model must change to adjust for scale. This challenge will be the topic of my next article and will be important whether you’re hiring your 1st staff member or 100th.
Scaling
We will now examine how the budgeting process changes as the organisation scales to 100 staff and beyond. At Barclays or Apple, the finance and accounting team will consist of many book keepers, accountants, controllers, (S)VPs of Finance, and CFOs, with ultimately one group CFO heading up the entire function. But Barclays has 130,000 employees and Apple has 115,000.
What does the finance team look like when there are only 1, 10, 50, or 100 employees? In addition, I’ll examine how the finance team adjusts and grows at each level of scale. The titles we’ll discuss include the book keeper, the accountant, the controller or VP finance, and the CFO. A well-functioning finance team allows the business owner to stay on top of her numbers and therefore her business.
The 1+ person company
Hire a book keeper as early as possible. Get her in, get the books correct, and pay her a consistent monthly fee. When you find the right one, do everything you can to keep her. It’s very hard to find a good book keeper.
Frequently, I see the business owner doing his own books to cut costs, only to end up with spreadsheets in various states of disarray. Avoid this mistake. Fixing the problem will require a higher monetary investment than hiring a professional in the first place.
To become successful entrepreneurs, one must learn to delegate. And book keeping should be one of the first tasks to be outsourced.
What does a book keeper do?
A book keeper is responsible for processing all the company’s business transactions. These will be recorded in a general ledger using small business accounting software such as QuickBooks, Xero, or Sage. Book keepers are expected to be detail oriented and fully understand debits and credits, accounts payable and receivable procedures, issuing invoices, and processing payroll, among other things.
She can perform correct adjusting journal entries to complete the monthly reconciliation of the accounts and produce the income statement and balance sheet. The business owner must work with the book keeper to set up the chart of accounts. The initial set up will be aligned with the different operating lines of the business. This will allow data to be extracted to calculate KPIs, an important task.
Ideally, you want your books and taxes done by the same person. Once the books are correct and understood, it’s relatively easy and quick to complete the tax filings. If any of the terms above are foreign to you, you must ask your bookkeeper to explain them. Being freely conversant in this area will give you confidence and authority and will attract staff, board members, and investors. Remember that you, the business owner, are always the final financial decision maker.
The 10+ person company
Dashboards, key performance indicators and analytics must change as the company has grown beyond the ability of the business owner to do it all in his head. You now have a decision to make. Will you continue to work with your bookkeeper and hire a part-time accountant to check the books and do your taxes, or do you outsource the bundle to an accounting firm for a flat monthly fee? Depending on the character of the company, you might even consider hiring a part-time VP Finance/Controller to help set a financial foundation upon which to further scale.
It’s imperative you know your numbers at this nascent stage. The more cash you can generate and conserve, the longer you’ll have to establish product/market fit and get to profitability.
The 50+ person company
Things don’t work in a straight line. It’s doubtful dramatic changes will occur at a specific headcount or that all functions will change at the same time by the right amount. At this level of scale, it’s certainly time to hire a full-time accountant. In addition, depending on the level of revenue, the number of staff, and the owner’s desire for rapid growth, he may want to hire a more senior finance person to provide strategic advice. Enter the VP Finance and the CFO.
Difference between a VP Finance and CFO
A VP Finance or Controller will most likely have a CPA degree and frequently has an audit background. He will make sure the books are 100% correct, the financial controls are in place to prevent fraud, and the monthly and quarterly reports are finished in a timely manner and well presented. In short, he makes sure the historical numbers are correct and has created a strong financial foundation upon which to grow. A good controller will let you sleep at night.
The CFO steps in when the business owner is looking to use his financial foundation or platform to scale and replicate. He needs a strong right hand, a financial partner and deep strategic thinker to help free up his time to focus on running the business. The CFO will be able to extract the correct information from the business to make cutting edge decisions. The CFO will also manage the investor relationships alongside the owner and will be in charge of any large financial transactions such as capital raising and M&A. He is the person who understands how the business will reach its goals.
The sweet spot of hiring a CFO is when your company reaches the US$2 million revenue mark. In my experience, this is when the owner has lost the ability to understand the numbers on his own as he starts to scale, replicate, and take on the world. Under $10 million in revenues, it may be possible, and in some cases wise, to hire a part-time CFO.
In summary, a book keeper, accountant, and controller/VP Finance will look at the past and present of a business’s finance. The CFO plans for the future.
Does a pre-revenue start-up looking to scale using other people’s money need a CFO?
A great start-up CFO is more than just a numbers guy. Successful start-ups need the forward-looking and transaction savvy individual early on. As the company starts working with angel investors and venture capitalists, they will expect the business to have a level of professionalism, governance, and communication. For this reason, the CFO will also play the role of controller and create a strong financial foundation upon which the business can then scale and replicate.
Budgeting – Growing/scaling business with staff from 10-100
Your VP Finance or part-time CFO will run the budgeting process with you as your partner, along with the head of revenues (sales/marketing) and the head of capital expenditure/engineering/product design.
The following 3 parts to your budget need to be well described:
- Detailed revenue plan model
- Set of KPIs
- Comprehensive cost model with headcount
Begin with your revenue plan and work your way from the bottom up. This means you’ll go contract by contract, sale by sale, for the next 12 months. Ask your head of sales to estimate sales and scale it back as he is always overoptimistic. Push him for clarity and details especially around estimated contract wins in the 4th quarter of next year. These must be put into the budget as accurately as possible, even if they only currently exist in the imagination of the salesperson. A budget should always be conservative.
Knowing all your revenue numbers, now think through your KPIs for each region, division, and team. KPIs are the glue between the revenue lines and the expenses.
As you grow, your capital expenditures (whether ‘capitalised’ over a certain number of years, such as large fixed assets, laptops, and vans, or expensed immediately, such as monthly software costs and hosting fees) will increase. Separate the fixed costs from the variable costs. The fixed costs will remain roughly the same all year, whereas the variable costs will fluctuate directly with the revenues. Ensure that your profit margin (=revenues – variable costs) will be large enough to cover your fixed costs.
Budgeting starts in September, with the board taking its first look in November and providing a final approval in December. The budget is first and foremost for the team, not the board, so ensure sure the whole team buys into it first before presenting to the board. Ultimately each team is accountable to its own budget.
The 100+ person company
At 100+ staff you will need a full-time CFO. Keep these 2 items in mind when hiring one:
Firstly, hire for scale at the right time. The early stage CFO who is perfect for a company with revenues between US$2-15million, might not be the right fit for when the company becomes a public company. For that matter, the early stage CFO may not want to work for the same company post-IPO
Secondly, look for a CFO with a synergistic mindset for your company. The CFO position you’d love to fill is not the same position at Accenture or Google.. Look for an individual who shares your vision and has the skills to drive the company there.
Budgeting – Growing/scaling business with staff over 100
The larger and more complicated the company, the earlier the budgeting process starts. Aim to begin September 1, with a board review mid-November. The CFO must negotiate several times with each senior manager around revenues, KPIs, and cost numbers and will need adequate time. Each manager puts together his or her revenue forecast, drives the unique choice of KPIs, and determines the appropriate cost structure. Then the CFO brings it all together into one global budget.
In one memorable experience as a part-time CFO, I was shocked to learn how much each manager had low-balled their revenues and padded their expenses. When I incorporated each division’s budget into the global model, it showed total revenue growth increasing at half the rate of the monthly expenses and a year-end loss of US$447,000. In fact, it would have run out of cash by May. This tactic, known as sandbagging, is used to limit expectations and produce greater than anticipated results. After I discussed this discrepancy with the relevant parties, we were able to adjust the budget. Afterwards, I initiated an annual 2-day global budgeting strategy offsite at the start of October.
Conclusion
The budget forces the senior team to think strategically about investments, resource allocation, priorities, and partnerships. It focuses on the team and the company and creates company-wide discipline around hitting goals.
