Feature It

Generally speaking, as a CFO you have 2 types of bad news to deliver.  The first type is where there’s a blip that you should report, but you and the CEO are pretty convinced that it’s not worth a long navel-gazing session with your investors.  A simple example that falls into this category is higher than expected G&A spending because your law firm forgot to invoice you for 3 months and you didn’t remember to accrue for this.  So, yes, it makes the numbers look worse than they really are, but if you can present the numbers in a way that doesn’t highlight this in bold underlines, that’s probably all for the best.
The other type of bad news is something that is impossible to hide.  Many CFOs are tempted to do this.  An example: new SaaS bookings are way behind even though the revenue curve for the current month or quarter is fine.  Quota deployed against bookings goals is way behind.  Hiring got away from you and you suddenly added 10 people when the budget called for 3.  You had projected cash lasting 18 months but now it sure looks more like 12.
If this happens, don’t hide it – feature it.
Meaning, present the financials as you normally do, but highlight the miss and make it front-page, bold-type, and unmissable.  Make the discussion about the bad news.  If you have conscientious investors who want to help you find solutions, they will.  In the closed-door executive session, they might have less-than-generous things to say about the company’s or management’s performance.  That’s fair.  Let them have that discussion instead of the one about why they had to uncover issues through forensic analysis because you tried to gloss over or hide it.
The same general rule of thumb goes for sharing numbers with your CEO.  Some bad news should be featured, early and often.

Bookings, cash and revenue

Frequently I find myself explaining accounting concepts to non-accountants.  It’s actually a part of what I do that I enjoy; I’ve taught courses as an adjunct in the past and the teaching was the fun part.  The rest of being an adjunct… well, the less said about that, the better.
One construct that seems to come up a lot, and can be confusing if you don’t spend all day thinking about this stuff like I do, is bookings vs revenue vs billings vs cash.
Bookings are closed orders.  Take the example of a subscription software business that sells a $10 per month service.  If you sell a 1 year subscription, that’s a $120 booking.  2 years, $240, and so on.  It is not revenue.
Revenue on this deal is $10 per month, recognized monthly, starting when the software was turned on for the customer.  Not when the deal is signed – when the service is turned on.  Similar concept in businesses that ship physical products.
This is different from cash.  You might get paid up front, in arrears, as you go, or 50/50 up front and at the end.  But when you collect the cash has no impact on revenue.  If you never collect the cash, this is bad debt expense (although if this happens a lot, you might need to adjust revenue).
I won’t get into the accounting debits and credits for all of these, but they can get complex quickly.  Imagine you have a subscription where the fee is $10 per month but you give away the first month for free.  The booking is $110, and the revenue is $9.17 per month over all 12 months.  From a revenue perspective, it’s the same as an 8.3333% discount.  Again, when you collect the cash for this is irrelevant.
This comes up a lot in membership based businesses where the first month can be free.  If there’s no term for the membership, then the revenue is just zero.  If there is a term, you recognize revenue ratably over the period.
The inverse of this is also true – if you sign a real estate lease with a rent-free period, your rent during the rent-free period isn’t zero.  For a 10 year lease with rent of $10 per month (just making the numbers easy), if you get the first six months free, your monthly rent expense is actually 10 * 114/120 = $9.50. The part you didn’t pay in cash for those 6 months gets carried on the balance sheet as an accrued liability. If you pay your rent late – which I don’t recommend – that doesn’t affect that rent is still an expense.  The total value of that lease is $1140 – it’s sort of the opposite of a booking from the company’s perspective.
Depending on your team, you too might find yourself explaining this frequently.  I have found certain board members in particular struggle to keep this straight.  It is the CFO’s job to make sure terms are clear and consistent, and as always, surprises are at a minimum.

Accounting and finance people

In an earlier post, I suggested that there are 2 kinds of people in business, those who have the money and those who need the money. I stand by this oversimplification. To it, let me add another one about accounting people vs. finance people.

As someone who became a CFO having never been either, this took me some time to figure out.

Accounting is about portraying the past as accurately as possible. Debits and credits. Extreme attention to detail. Process. Tying out pennies. Having the equity roll work exactly a certain way. On average, this attracts a certain personality type: precise, introverted and someone who operates well at ground level. This kind of person is absolutely essential and vital to have in any business and especially one that is growing quickly. They provide the data for the early warning systems. They strive to eliminate ambiguity.

Where I’ve had to adapt is in describing how the output should look and what it all means. I can look at a balance sheet and quickly tell if something doesn’t make sense. Deep in the weeds accountants, even really good ones, most often cannot. Frequently this has frustrated me; when I get a statement that can’t possibly reflect reality, it makes me doubt the accounting that was behind it.

Although sometimes this is right, I’ve had to unlearn this reflex. That’s because this is finance. Finance is about making sense of the results, communicating them, and trying to predict the future. It’s about a lot more than that but this is it at its heart.

Finance people, of which I am one, often lack the patience for accounting. It’s a little more right brain than left. Yes, you need the skills to build a pivot table or a model. First though, you need to know what you are looking for. Ambiguity is your friend. This is the part that CFOs are good at, or should be. That mindset is very different than being particularly OCD about the accounting for stock-based comp.

Over time I have learned to appreciate both and tried to adapt in particular to working with skilled accountants. I respect what they do, and know that I couldn’t do it. I hope that they can appreciate what I do as well.

Choose your words

Recently I’ve had to get particularly pedantic with a couple of my clients about language. Specifically, how they talk about certain metrics in the business.

A common one things that young companies conflate are bookings and revenue. It’s not just an accounting nuance that they aren’t always the same thing. It’s an important business problem to be solved. My client that sells fashion online? The credit card swipe is nice, but until we ship, it’s not revenue. It’s actually a debt: we owe someone a hat. In the SaaS world this debt is called deferred revenue and it sits on the balance sheet for a long time.

Another is on the opposite side: cancellations and churn. Or for my co-working client, cancellations and move outs. If someone cancels on November 10th, their move out is December 31st. Without getting into which one is more important to track, they are different and tell you different things about the business.

These distinctions matter a lot when you’re looking at unit economics (more on this topic later). Put simply – per widget that I sell, how am I doing? A widget can be a hat, or a square foot, or for a staffing company, an hour. My new client services cars in mobile trailers. Our unit is the trailer (like a store). It makes sense to know how each trailer is doing. But I could argue, and might continue to, that once the trailer exists, it’s the appointments that matter. Optimizing those is the whole ball game.

My point is that this stuff actually matters. Once you choose a unit, it becomes the root word, so to speak, in the language that your team and your investors are speaking.

Skinny G/Ls

Because I work in build stage companies, and often early ones at that, the general ledger (G/L) system I encounter the most is Quickbooks Online.  Often one of the first questions I get is whether we need to make a change to a more robust system.  Always my answer is no.

My philosophy on this is that until a company is much bigger, having an accounting system that knows all isn’t worth the workflow change, the financial investment, and the upfront systems hassle.  Quickbooks Online (QBO) is fine.  It’s not great — but it’s fine.  It does the basics and has the benefit of having tens of thousands of qualified people who know how to use it.

What I would rather do is invest in smart systems around it that do their functions well, and integrate with it.  This can be A/P (bill.com), ERP-lite (Fishbowl), payroll systems (any of them), expense management (Expensify), cap table management (eShares, Carta), sales tax (Avalara), and on and on.

If a build-stage company is going to invest in systems, it probably should be in optimizing Salesforce.  Or if it’s an e-commerce company, better to get your Shopify instance really singing.  Building a sole source of truth about all things customer is way more important than implementing an expensive G/L system.

I’m a believer in keeping the G/L’s functions limited.  I use it for management and Board reporting and as a transaction repository.  That’s it.  For anything else, there is a better system out there and most are not expensive either.

I’ve seen $50M software businesses backed by some of the most sophisticated venture investors in the world run their businesses and do their reporting based on QBO.  If they can do it, I figure I can too.