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From Data Rails, this is FP&A Today.
Welcome to FP&A Today.
I'm your host, Glenn Hopper.
Today on the show, we're joined by Rick Smith, a five-time CFO who's helped companies move from startup chaos to growth stage structure.
He's led finance teams in SaaS, healthcare and digital services, guided multiple acquisitions and now works as a fractional CFO, helping founders prepare for what's next.
Rick is also the author of Demystifying the Role of the CFO in Venture and Growth Stage Companies a grounded look at how finance leaders manage complexity, risk and rapid change when there's no playbook to follow.
His book is available on Amazon.
We'll talk about what he's learned across those roles, what separates strong FPA from reactive reporting, and how finance leaders can create clarity when everything around them is moving fast.
Rick, welcome to the show.
Thank you, Glenn.
Thanks for having me.
I'm really excited to talk to you today because I feel like when we were talking before the show, I feel like we've been on very similar paths in more ways than one.
So I'm looking forward to getting into all of that.
But I guess for our audience, walk us through your background and experience and maybe what early roles shaped how you lead finance today.
You bet.
My story is kind of funny.
I would say it's a little bit unusual, but I started off on the FP&A side with a massive retailer.
And I gotta tell you that was super helpful because you had tons of data to work with and I was always surrounded by really good modelers.
And you learn a lot about Excel and about modeling when you're working with a group of really good Excel users.
You really do learn a lot of stuff from each other and you make each other better.
But where my story gets kind of funny is on a bit of a lark.
I interviewed to become the controller of a 60 million company that had multiple business units and they had some international business units.
And I was not qualified for that job.
They totally should not have hired me.
I had never done an accounting entry in an accounting system in my life.
But they never really asked the right questions and I did get the job.
Unfortunately for me, they had just poorly done a systems conversion and their books were a mess.
But fortunately for me, accounting is just rules-based math.
And I do love math and I'm a competitor and I don't like failure at all.
So I poured my life into fixing that situation.
And fixing all of that accounting pretty much earned me a CPA in School of Life Accounting.
I like to say
I actually liked being a controller and I think I was pretty good at it.
But after a while, I switched back to run FP&A for a while.
And then I became the CFO there.
Despite their apparently questionable hiring and screening practice.
I was there for 10 years and we grew the business to 300 million in revenues and we sold it twice.
So net-net, it all worked out for them and it worked out for me too.
And I've been a CFO ever since.
And I bring all this up because, even though I'm an FPA person at heart, Doing hardcore accounting for a long time was super helpful.
It's really hard to be a good CFO unless you truly understand how both the accounting and the FPA sides work.
And I tell everyone who wants to be a CFO to push to get roles in both finance and accounting, because it will make you a better CFO down the line.
That being said, I can't envision a lot of people were better prepared for their first CFO job than I was, because I'd been working at the same company for a long time and I knew the accounting side and I knew the FPA side.
But once I got the job I learned that there were so many things that I didn't know yet and I had to figure those things out.
And so I'll do an early plug for my book.
That's kind of why I wrote it.
And so across maybe like a 10 year span as a CFO.
I just started to take notes about how I did things and what I learned.
And there are just so many weird things that pop up for CFOs that you have to learn on the job.
And I really couldn't find a book like this anywhere.
So I wanted to create a roadmap for new CFOs or people who aspire to be a CFO.
So that's why I wrote the book Demystifying the Role of the CFO in Venture and Growth Stage Companies.
And honestly, for a business book, it's actually a really fun read.
The writing's casual and I pepper it with crazy stories about stuff I encountered in my career.
It's not a boring read at all.
It's a fun read.
That's great.
Yeah.
And we'll definitely I definitely want to get into the book a little bit more later, too.
Thinking about your career and I had.
I came straight through FPA with, in a lot of ways, a customer of accounting because I, like you, I'd never made an accounting entry in my life and took my first CFO role before I'd done any kind of accounting and if I didn't have a decent controller at that company, I don't know what I would have done, but it was.
I think the best way to learn is to have to clean up books, to clean up chart of accounts, and I spent so much time in those early stage companies that you know if it's founder-led or startup mode and you're just kind of and you don't have a full-time accounting person there.
Those early days when you're setting up the chart of accounts and you know there's a it's always a mix of you know some gaps, sort of blended, accrual kind of thing.
And it's just a mess to kind of unwind and get to true cashflow and all that.
But it is like you said it's trial by fire when you are having to learn it while you're cleaning up and trying to build a proper structure.
I'm trying to remember.
They had probably three or four entities, might have been more.
And they've just done the systems conversion and just so many things that nothing was reconciled.
And so I just started dumping all the data from their accounting system and literally going account by account and asking myself well, what are the ins and outs on this account?
What should be in it?
What justification do we have?
Can I reconcile every single account?
Just going one by one through their chart of accounts.
And what's great is you learn then, the chart of accounts and you learn all the little micro items that make up a business and how it runs.
So look, it wasn't fun.
I never left the building.
But after about a year, we had it all super tight.
Everything was tied out.
It was great.
We got through the audit.
It was fine.
I just left.
Accounting is top of mind for me today.
I just left an advisory board meeting for University of Memphis School of Accountancy.
I'm on the I'm the only non-accountant on the advisory board.
So I always I immediately feel like the the odd duck when I go there.
But I wonder and actually there were.
We were meeting with some instructors today and I was surprised there were several accounting instructors who did not have CPAs.
Since you talk about sort of what CFOs need to know when they come into the job, what would you advise if somebody was early career?
Maybe their background is finance?
Would you advise someone to get a CPA at this point if they were interested in being a CFO?
It's a tough call.
I don't have a CPA.
And I think at some point I probably could have taken at least the audit side and done well.
I'm definitely light on tax.
I don't think you need it to be a CFO.
I just think you need to have worked.
I think it helps if you have done some sort of accounting related roles and understand just the ins and outs of how books get closed and how stuff flows through the accounting.
I know a lot of CFOs who are not CPAs.
And actually, I know a lot of CFOs who did not come up through the accounting side.
But that being said, I will say that they probably are doing that with larger companies.
And because I tend to gravitate more towards late seed and series A companies.
There's always a major accounting component.
And the accounting has usually been done very poorly, going backwards at that point when I signed up to help them.
And so I could not do my job if I didn't have a solid accounting background.
I would Four out of five situations I walk into, the accounting's a mess.
And I don't do the accounting myself.
But I can go through it quickly, figure out what's wrong, and then I will help them somewhere find accounting resources to get the books fixed.
And I would not be successful at my job unless I'm quick about pouring through accounting and saying these are the 20 things that are wrong and we're going to have to find somebody to help us get all this stuff fixed.
Yeah.
And that's, you know, I really early in my career and for the maybe the first couple of CFO roles I had, I had sort of imposter syndrome about not not having the CPA behind me.
But I did see a stat.
I think it was like last summer or there were, it was something like 51 of cfos had an mba versus and obviously you'd have mba and a cpa, but uh, you know, an mba versus the, the cpa route and um, i think that's it and you know the role is shifted and especially with where you're focused, i think there is I've heard the saying that controllers today are what CFOs were 20 years ago.
And in a startup, a lot of times you have to be both or maybe a little more.
In a growth company, you would have a controller as well.
But with your background and with going through all that cleanup kind of early in your career and sort of understanding that stage, did you know then that kind of this growth company is where you wanted to be.
What were the key turning points that pushed you in that direction?
It really is funny because I went and got an MBA a long time ago.
And when I was coming out of business school, I said to myself I want to be the CFO of smaller to mid-sized companies.
Part of it is I like working for businesses that are small enough that I can have a good feel for how everything works within the business.
But also, I appreciate doing what we do.
The system side is such a pain.
It's really hard if you have to move from system A to system B.
And so I love that at this size you can make systems changes, and those changes take months, not years.
When something is too large, I just start to feel really uncomfortable about the fact that I don't know a lot of the aspects as to how things work.
And I don't love when you go to plan a systems change, that you're planning 12 to 24 months out versus three to six months out.
So my preference is always to work with companies that are sub 50 million in revenues, I would say.
At this size.
What I love is you can provide clarity into what's going on with the business and help everyone think three steps ahead.
And that can be a real difference maker in terms of helping the business grow and scale and thoughtfully plan for the future.
I'm always asking, in everything we're doing, how would we do something if we were three times our current size?
And I try to implement systems and processes for that future state, not for the current state.
If the company can afford to invest in its finance and accounting infrastructure at that early of a stage, I really want it to build the company now that we'll need two to three years from now.
And really that's, I mean, it's that building, right?
I mean, it's different in that growth stage.
You feel like you're bringing something into existence where you know large, established company.
It's kind of, you know, just hold the course and make incremental changes and all that right.
So again, when I started off doing FPA for that large retailer, every day I would come up with a new idea as to how to do stuff.
And every day somebody would look at me and they'd be like yeah, we just kind of want you to do things how they were done before.
And that's when I literally said this is not the right fit for me.
I want to go to places where that creative side of me, I can be more of a dreamer and an artist in terms of envisioning.
What do we need to tell that story about?
What's going on within the business, versus just doing it how it was done before?
That just that didn't work for me at all.
And is that mindset?
Is that the same thing that led you?
Okay, I like growth stage companies, but I also like to be in a bunch of.
You know the idea of going to the fractional work instead of just staying inside at one company.
Yeah, a little bit.
I mean, I have an attention span where I think I can do a lot of things at once.
And I enjoy, for me, just intellectually, I enjoy working with a lot of companies at the same time.
But I decided to shift into fractional work because when I was CFO of some mid-sized growth equity firms,
When we would go to do acquisitions, I was always really surprised at how many companies we bought weren't able, in my opinion, to maximize their sale value in the process, because they showed up just looking small-timey in the process.
They often they had questionable accounting.
They had no real financial modeling.
They needed higher level CFO support and help.
But you could tell they probably, A, couldn't afford a full time high level CFO.
And B, they probably didn't have enough activity to occupy a full time CFO.
So all this started to really hit me like three, three and a half four years ago, a little bit before fractional became a thing.
And I reached out to a friend of mine, a good friend who runs a VC firm.
And I asked him hey, if I were a fractional, could you basically spread me across a couple of companies in your portfolio, like maybe three or four companies?
Do you have companies that could use my help?
And he basically said, I could use your help like yesterday.
And so I quit a full-time CFO job.
And within 30 days, I already had several clients thanks to him.
And it worked out exactly as I'd hoped.
I mean again, I spread myself normally across three or four companies and I help them get to that next stage, that capital raise, that debt raise or that sale that they're trying to get to.
And I'm doing it as I've described already making sure the accounting is done to a certain standard, but really building out the FPA, the modeling and the story as we head into the process.
And then kind of being a Sherpa and helping them get through a process that maybe they haven't gone through before.
The good part about what I do is a fractional too, because I've been doing this now for three years across a lot of companies is I can move super fast.
I have tons of pattern recognition.
I'm very unemotional about anything I see, which means I can often give a CEO completely candid, unvarnished feedback about what needs to be done for them to have a successful outcome.
Much more so than if I was the employee of that CEO and I'd be nervous about telling them Your baby's kind of ugly and we got to do some fix it work to de-uglify the baby.
But the flip side is that I've learned as a fractional is, I can't get too deep in the company strategy.
I can really help them build out the operations and the financing, the accounting and that stuff.
But the strategy I've got to leave that to their professionals, who know their business and industry better than me and are doing it every single day.
Since I'm only there, you know, at best a couple hours a day, I can't get too involved in the strategy.
And I also can't get too involved in a lot of the micro level day to day stuff.
I've learned that that just doesn't work because I'm only there kind of here and there.
And that's so hard to figure in those VC back to those growth stage where you know they may have had someone whose title was head of finance but really they were kind of just an FPA analyst probably.
Or it's somebody that had you know they were doing operations but oh, you have an MBA so you can also handle the finance.
And it's that same thing you were talking about with the company before, where you you know the chart of accounts, nobody's really thinking about that.
They don't have audit responsibilities, so they're not.
You know the way everything's getting logged.
Um is uh, you know not where we, as as finance and accounting professionals, would love it.
It's interesting because when they a company's done, you know there's so many out there now that have done big raises around ai or whatever, and they're just, they're charged with, just spend spend, spend to get to that inflection point and nobody's really thinking about the financial strategy and the modeling.
You don't have any historical data to go on.
So it's a lot of conditional stuff that you know how to get this hockey stick.
These things have to happen.
And you end up, there is art and science to building those, those startup models.
But so when you come in, I'm guessing there's probably there's not a finance accounting department, right?
I become the FBA.
I'm their first FBA department.
Absolutely.
So usually they have accounting and probably the accounting has been done really poorly.
And so, um, And it's hard, right?
If you have bad accounting and you have bad data, it's hard to get going on the finance side until you've at a minimum, fixed the accounting.
It's hard for me to move forward a lot of times until the accounting is fixed.
And that's a bummer for everybody.
And more than a few times now I've been engaged by a company who says hey, we want to go raise a Series A round or a Series B round and we're going to do it in the next three or four months.
And then I start looking through their accounting and I'm like, no, we're not.
We can't go through a round.
Nobody's going to invest in us right now until we get this information fixed.
And then they will.
So drag out your timeline a little bit.
And again, I'll give them unvarnished opinion.
And a lot of it's.
You did this to yourself because you trusted a low paid bookkeeper or somebody who's a questionable accountant.
You didn't focus on it at all.
You weren't minding the store.
And so that's what got us into this mess.
And unfortunately, now we have to go back and fix it before we can move forward.
Yeah.
I mean, if you're doing a seed round, obviously, you know, you don't have any customers.
But once you start trying to get the larger investors and larger investments and you have to.
You mentioned storytelling.
And I wonder you know if you're modeling out and getting that story ready for investors, you have to have clean financials around it.
But I would imagine in the modeling, you start to kind of see the levers they need to hit.
So don't you kind of find yourself, well, you're not saying, here's the company strategy.
I bet you're given a lot of insight around.
Look at the correlation here.
Maybe something they didn't see.
Yeah, I might have crappy accounting, but I'll start the modeling.
And for me, at that point, it's revenue modeling.
So let's really figure out our revenue story.
And I'll expand that actually.
It's gross margin modeling, because that's what a lot of venture investors are focused on.
They're focused on the revenues, but they're also focused on the unit economics and the margin modeling.
So yeah, we might not have all of our accounting nailed down and we certainly might not have the world's best viewpoint into a lot of our operating expenses.
But let's have a good revenue model and a revenue story.
And then let's have a good margin model that logically flows and gets people to a point where they can look at it and say okay, this is investable.
Usually where I'm coming in, it's either they're about to raise a series A, or they have raised a series A and at some point they're going to want to get to a series B, And at that point the hard part is is that a lot of those investors are going to really dig through the financials and they might start demanding audited financials.
And so a lot of times what I'll say is, fine, bring me in and we will figure this out.
You just got to be patient.
We'll get you to audit it.
We'll either get you to audit your financials or get you to financials that could be audited, but you might choose to not do an audit, which is actually something I often advise.
We'll get it to a high enough standard, but we don't need to get it audited.
This business is not that complicated.
There's no point to it.
And so that's usually what I'll try to sell them on.
And then we'll march in that direction.
But I hate to keep going back to the accounting.
But again, it's hard to build that story and know all of your metrics in your economics if at a base level your accounting is junk.
So to me, that is kind of table stakes.
We've got to fix that first before we can move forward.
It's funny that you mentioned you know, get them ready to be audited but unless required, don't have them go through an audit.
I found audits are expensive.
And if you want to just completely take the wind out of the sails of a founder, make them go through an audit and go through all that you know, and obviously you as even as fractional CFO, would be the point on it.
But going through all that can be if you don't have to do it at that early stages.
Yeah, it's really not the founders who want it.
It's never the founders who want it.
They don't want to spend money on that stuff.
It's always the VC investors.
And so I'll fight a couple of battles on that topic.
Battle one is, do we really need to go through the audit?
Look, you can believe me, you can not believe me.
I will tell you that the books are done to a certain standard.
And I will tell you the five things we need to do to get you through an audit.
But there's a lot of non-value added stuff that is in between having good books and having auditable books.
Suddenly you have to book a lot of stuff like non-cash stuff, like stock comp expenses, deferred taxes, things like that.
That don't do anything really for you.
They don't move the needle at all.
But you're suddenly gonna have to do that and you're gonna have to have a bunch of memos drawn up and some of that stuff might be expensive.
So we can get the books to a really good standard, not go through an audit, and everybody still should feel pretty good about where we're at.
So that's battle one.
If I lose that battle which I might then it's okay, we'll go through an audit.
But can we not use a really expensive big four firm?
I fight this battle all day long because I've never had a buyer of a company say well, we were going to value it X, but we're only going to pay 80 of X because you used a regional firm instead of somebody else.
It does help right now that all this M&A is going on in the accounting world.
Because suddenly there's a lot of big firms that are outside of the big four, that are sitting there in number five six seven eight nine 10, who are great firms, who will do just as good of work as a big four firm and they'll do it for less money.
And so I will usually fight that battle to get out of the big four.
And really what you want to do with early stage companies is you want to try to find an auto firm that isn't doing public company audits, because then there is a slightly different standard.
And so try to find those firms that are focused on rapidly growing, venture backed or growth equity companies that are private, because it will just be a little bit easier for you.
It'll cost a little bit less.
And I often, especially these days, I win that battle.
The reality is is when you go to sell a company or raise a round.
Well, when you go to sell a company, a lot of times they're not gonna be focused on a stale audit.
That was done six months ago.
They're gonna bring in a firm to do a quality of earnings study, a QOV, and they're gonna focus on that.
I love QVs.
QVs are great because they're so much better than an audit in terms of actually telling the story of the business bringing in headcount data, HR data, maybe operational data, really breaking down revenues into microcategories.
They really tell the story of a company.
So when I buy companies, I love a good QV.
And so when I take a fractional role and I'm working with them to get to a sale, a lot of times I kind of paint that picture of let's focus less on an audit and let's focus more on getting to the accounting to such a good standard that we'll go through a QV, we'll sail through the QV from an audit quality standpoint, but really the buyer will rely on the QV to get a great feel for not only the quality of the accounting, but also the quality of the business. yeah and i would uh i would always you know if if the buyer initially is saying audit and qv i would say how about compilation and qv and then maybe you like maybe you get up with just being they're they're satisfied with a review that's uh you know not quite as expensive as an audit and because if they're doing the qv anyway normally they'll they'll have the the bigger firms come in for the qv too so in my experience so and i think of founders that i worked with in my career but you know the growth stage uh vc backed i always picture you know like the ceo of we work running around barefoot and and being you know the dreamer and i always thought of you know the cfo is or head of finance or whatever the title is in those early stage companies you do have to you're kind of the adult in the room and it doesn't mean you're the you know the cf no or the naysayer of everything but you do you know if you let a founder model it out.
They're going to be a hockey stick to infinity in six months and it's always six months down the road.
But what is I mean when you come in to a company or even I don't know?
I guess there's a lot of sort of myths about what that must be like.
I mean it seems like it would be very cool to be in a high energy thing.
But are there some myths around that growth stage CFO job and how do they contrast to the reality?
Yeah, it's funny.
I love being CFO, often of venture-backed companies because it feels very different than being CFO of growth equity stage company.
The biggest myth at the growth equity stage truly is how much latitude you will have in your role.
So outsiders probably think that because you have a C in your title and that C stands for chief, that you can do whatever you want to get the job done.
But it really depends on who the growth equity private equity firm is that's backing you.
There's usually a list somewhere of what the CFO and the CEO of that portfolio company can decide on.
That might sound surprising to a lot of people, but usually that list exists and you'd be surprised at how constraining sometimes those lists are.
I will give you a great example.
I was CFO of a hundred million in revenue growth equity backed company and I had to ping the growth equity PE firm five times minimum to get approval on a tiny lease that that company needed to renew.
In my head, I seem to recall that lease might have been like a thousand bucks a month.
It might have been maybe a little bit more at most, but it was not like an expensive lease.
And I think I was trying to renew it for like a year.
So we're talking about like 12 grand on $100 million in revenues.
And I have to reach out to the PE firm five terms, five times to get approval for that lease.
And honestly, at some point they started making me feel like I'm bothering them.
And it's like, I got to get this renewed, like it's about to expire.
To me, the whole experience just felt really bureaucratic in what should not have been a bureaucratic situation.
And it really in a weird way it sent a message to me that maybe they don't trust their CFOs that much in that growth equity firm.
That's not awesome.
It's not awesome at all.
I want to feel like I'm being treated like an adult and like the skilled CFO.
And they're making me feel like, a middleman in a large company.
You have to do the best you can to build that trusting relationship with the PE sponsors.
And sometimes it's easy and sometimes it is much easier said than done.
And sometimes that's the life you will have as a portfolio company CFO of a growth equity firm.
So remove all visions of glamour.
And you may find yourself feeling like a middleman, kind of sending stuff over to them to get their approval and then pinging them a few times.
Then maybe they'll eventually get back to you.
And I was CFO of a division of a large public company.
And that's kind of how it felt.
And that's not great.
That's not what you envision when you're CFO at this level.
And that is a reality I think that nobody talks about.
It's also why I strongly prefer working with VC-backed companies.
They appreciate you're there.
They trust in you.
They aren't questioning stuff like a tiny lease renewal.
And, you know, they're valuing you and they know that you're there to help.
And so that's one of the reasons I've gravitated down market versus maybe something that sounds more glamorous being a CFO of a much larger company.
I would just prefer to be CFO of something smaller and not have to deal with bureaucracy.
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Learn more at datarails.com. it is funny having worked in both PE and VC backed space.
If the VC is just such a different because I was early, you know, in seed round, even on a couple of the places where I was just, you know, early head of finance kind of role.
But, VC is – they're taking so many moonshots, and they're kind of gambling on the management team.
So they do – they tend to trust the team more because you don't have the numbers, whereas PE is trying to squeeze out every nickel of the numbers to maximize the value there.
And I guess – I don't know.
I mean –
As much as that could drive you crazy and with the weird spending and sort of bureaucratic stuff you have to go through, I did find that actually for both of them early in my career as a CFO, made me a better, Because when you're at that small a company it's not like you have much of a team.
So it actually made me a much better modeler and...
And it made me lean way more into statistics and even machine learning in that, you know, a decade ago, when it was first out and we you know doing web businesses where you had a lot more data, but it was there are, it was almost like a finishing school for the MBA and finance degree, I guess but not always the most fun, I guess, going through that when, especially the bureaucracy, you know the modeling and the requirements they had on the analysis side, it's like okay, I get it.
That makes sense.
And it actually that helps you.
If you're getting that sort of steady pressure from the PE firm.
That helps you in MA right.
I mean, because due diligence is like, oh, we've already got that.
We've done that.
And when you have the financials cleaned up and you've practiced the storytelling and kind of know where everything's buried.
It's funny the way you just described it because a lot of times I describe it very similarly.
I'll say you know, the VCs are investing in your business because they believe in the idea and the management team.
But a lot of times when the growth equity guys show up, they believe in the idea, but they're questioning the management team a lot.
I don't mind the questioning.
In doing so, they're making sure that you know the business and you know the ins and outs and the micro areas of your business.
I don't love the bureaucracy.
Like, I don't have a lot of time either.
And I have a lot of stuff to accomplish.
And if I have to go back to you three or four times for something, then you're not helping in this process.
You're hurting in the process.
And if it's something small and immaterial, it makes me feel like you don't trust me.
And again, then I start asking, why am I here?
What am I doing here?
Yep.
Makes complete sense.
When you come into a new company, you know, you've done this a lot.
I feel like there's got to be a playbook.
Like you know what you're going to get, but what's the?
What's the most common finance problem you find, and how do you diagnose it early on?
And what is, what does that look like?
It's so unfortunate at the level I deal with.
But because I'm usually late seed or early A.
Unfortunately, probably four out of five new clients of mine have significant accounting corrections that need to be done.
I hate to keep going back to the accounting, but it's the world I live in.
And it's such a bummer to me because doing quality accounting when you're small is not hard.
I mean, there's just not that much there.
And a lot of these companies.
As you said earlier, in the seed and maybe Series A stages, they're keeping their books more on a cash basis or a selectively accrual basis.
I want to coin the word kind of cruel, because it's kind of cruel.
But they often are.
And then some of them outsource their accounting, which has some pluses, but it has a lot of minuses, especially once you get to a series A or series B.
You're probably going to have to bring that in house.
And When you go to do a series B round or take on venture debt or sell, the company is going to be required to do audit.
Quality books
And, from what I've seen, the third party, like outsourced accounting firms, probably aren't going to be able to get you there.
And so at some point you do have to bring it in-house and build that out.
An outsider might hear everything I'm saying and look at it and say well, you should automate this and automate that.
And I don't disagree with that at all.
But it's hard to automate until your current situation is fixed and everything's tied out.
It's really hard to move forward with anything until you get the books to a certain level of quality.
A first time audit for a company who is starting with super questionable books.
It's a heavy lift.
Fixing all this is non-value added.
It takes up a lot of time.
It's a distraction.
It costs a lot of money.
So, you know, kids at home, if you're listening, do accounting right from the start.
It's not that hard and it's going to pay off in the long run.
You got to figure out who are some competent people or competent third parties to help you with this.
But don't just focus on the business itself.
You've got to focus on building out a little bit of a back office and that has some level of quality to it.
So I'll go straight to dork territory to answer your question.
With all of my clients, the first thing I do is I ask them for monthly trial balances going back a few years, a current payroll register listing out all of the employees, the titles, the departments and their comp, and then any operational metrics you have.
And I will quickly build out three statement financials.
I will comb through the payroll register to better understand who is doing what.
And when you're doing all this stuff and you're going through the trial balances in an accounting system line by line, you can learn a lot about the underpinnings of a business and how it works.
And you can also tell if the data is architected in a helpful or unhelpful way for driving insights.
And if the quality of the accounting is any good, it's pretty easy to go through trial balances and start to say hey, why does that balance sheet item never change?
That's not good.
Something's wrong there.
Nobody's paying attention to that.
All of this, to me, is super valuable because if the data isn't architected well, you're going to have to fix that going forward so you can gain insights from the accounting data.
And if the quality of books is poor, you're probably going to have to ask yourself some questions about the staff and if you need to do some upgrading there.
Then if you layer into the accounting data and the payroll system data, whatever available operational data they have, you can learn a lot about a business very quickly.
And so often when I start to do this and this is like with my clients this is like week one and week two.
This will probably become the beginning of the financial model that I'll build for the business that we will use to manage everything off of on a go forward basis.
And as a fractional who works with a lot of clients, I've gotten crazy speedy at doing all this and I can usually bang it out in a couple of days.
And by the time I've completed all this work, I will have a really good feel for how the business operates and really the details of the business.
I enjoy doing it.
I know I'm straight to dork territory.
I love building out three statement financials for companies.
I don't know why, but it's something I've really enjoyed.
Yeah.
Especially when it involves that sort of pretty much forensic accounting where you have to, you're just taking that trial balance and putting everything work.
I don't care.
I don't know where you were booking this.
We're going to clean this up and book it.
And then I fully, fully relate to your.
You know that concept of you can't automate chaos, you know.
So you have to get all that in order.
And I always think of it When you come in growth stage or early stage business, where you've got to look at the people and the processes and the technology and the data and look at how everything flows and kind of where those silos are, where those bottlenecks are, what are they even tracking?
Now,
Where do you have different sources of truth and everything?
And then, once you get that full lay of the land to your point, you might have you know, maybe it's a great person in a role that is doing some stupid process for invoicing or for AR collections or whatever.
That it's like what you spend six days a month doing this and looking at all that.
But your point that you have to start with that three statement model, that is, this is our descriptive analytics of this is where the company is.
Now we have a clear picture of that.
Now we can figure out how to move forward.
And usually when I walk in the door, if I can see that they're keeping books in a small timey way, they're probably not automating anything.
And so there probably is a lot of efficiencies that can be gained there.
But also the level you know when you automate stuff.
A lot of times the level of accuracy goes up too.
And so that's that's helpful.
Yeah.
Are there.
I mean, when you come in too, there's got to be.
You pick up signals like maybe that model needs a rebuild or the data stack needs an upgrade or something in the way that they were reporting.
I mean, how do you manage all that transition, especially if you're new there and you're like well, your baby's ugly and we're about to swap it out for a cuter one?
Yeah, it's a lot.
But usually with my clients I see the same reasons over and over again as to why they might need to kind of upgrade their stack.
And so normally the upgrade is brought about because, A, they were operating under a single entity.
And now they have multiple entities and you have to do at that point probably consolidations, eliminations and allocations.
And probably their stack accommodates none of those things.
So that's usually kind of item one is to wipe what might cause them to need a stack upgrade.
The other item which you might not think about is the minute a business goes international and you're dealing with multiple currencies.
You might need a stack upgrade then too.
I know a lot of people try to.
They try to get by with like, converting every transaction into US dollars at the point at which, at some point, you got to set up a whole different entity in the home currency.
And then figure out, you know, either the system can do the consolidations for you and do currency translation adjustments, or you'll just keep the entity in that currency and you'll manually do that.
But at some point when you start doing meaningful international activity, you're probably going to have to revisit your stack again and how things are are done.
The other areas when i see companies start their their operating model starts to break down is when they get into an entirely new business line where the revenue mechanics or maybe the billing mechanics are just so different than how their business was operating before.
That might precipitate a big change in the stack.
And then the last one is always are we doing lots of m a?
Because if you're going to do lots of MA, you need to have a game plan for not only how are we going to diligence these, but that's the easy part.
The hard part is how are we going to move them?
How are we either going to bolt their systems and their data into ours, which is not what I ever advise doing, or how are we going to bite the bullet and move them to our systems and our process?
And we need to have systems in process in order to make that work.
And also this might sound funny but as somebody who's done a lot of MA, Nothing is crappier than when you buy somebody and you move them to your systems and stack and it's a downgrade.
Like, if we're going to consolidate stuff, we need to be like hey, we're going to make your stuff better.
We're going to move it to our stuff.
It's going to be so much better otherwise.
You kind of look stupid and they regret selling to you when they're like well geez, I used to have X Y, Z and now I only have X.
That sucks.
So those are really the reasons why a lot of times you need a new stack.
I will say that a lot of times with my clients.
It's very possible they're on the right stack, but they've just set it up wrong and set it up poorly.
And maybe there's modules that they don't subscribe to on their existing stack.
So a lot of times, before switching anything, I'll just look at the solution they deployed and ask myself is there a better way to use this and get by with it?
Or do we need something else?
Yeah, because I mean there's so many people make the mistake of.
They hear about some really cool software and they buy it without a requirement stock.
And then it's just like, I don't know, this software is going to fix everything.
But it's like, well, what is everything?
What are you trying to fix?
Why?
Or even worse. they turn it over to IT and they say, this is an IT project, implement this.
And it's like, no, it's not.
It's an accounting and finance project.
Make sure you're nailing this.
The other thing I often see too, is when you use the software company to implement its own software.
A lot of times they do a crappy job at it.
A lot of times your best move is to find a independent third-party implementer who specializes in that software.
They usually will do a much better job.
It's just hard to find somebody who you know is going to succeed at that.
You are preaching to the choir and I'm biting my tongue to keep from upsetting some of my friends at some of those companies that I've worked with in the past.
Yeah, where there's definitely having that, that third party implementer um, is a smoother way to go.
I'm trying, i'm debating, asking this next question because i feel like we could have done a whole episode on m a, but i i guess i will go ahead and throw it out.
When you talked about being acquisitive and trying to put everybody under the same system, i am always amazed and as someone who's been in an acquisitive company, it's was maddening, because when you build out synergies prior to the merger, you know a lot of those synergies the financial synergies obviously, but a lot of the synergies are just we're all going to be on this one platform and this is the migration plan.
But then you get.
You know you get into depending on how many companies are in the roll-up.
I mean every company for years could have their own systems.
And then it just makes a data nightmare and all that.
And I talk to you know, on the other side, on the PE side, at the firm level, that you know they're ideally yes, they're always going to find the company that has the highest operational excellence.
And the idea is, yes, that would be a perfect system.
But when you start bringing in all these other companies, that well, company X does this better, company Z, B does this better.
It's really hard to integrate all that.
And that's, I don't know.
I mean, do you in your experience, having been in an acquisitive company like that, how do you approach all the different systems and technologies from the different companies?
Are you, do you try to speed up getting them all under one system or does it make sense?
Yeah.
Yeah.
It's hard work and it's a heavy lift.
I do because there's so many challenges you have when you don't.
So, first of all, it's hard to map anything into anything and have it be apples to apples, especially when it comes to customer data too.
It gets really hard if you're trying to pull in somebody else's customer data into your kind of architecture for customer data.
And people are always going to ask you for kind of a universal database of what's going on with your customers.
And it's really hard if they're not on the same systems.
I get nervous about accounting.
I know I keep getting back to accounting and I get nervous about accounting quality.
If I'm basically trusting in somebody I just acquired to do accounting to the standard, I need it done at.
And if they were a lot smaller and I just bought them, I might be nervous that the quality of their accounting isn't where I need it.
And then it slows the process down.
Maybe you can run one or two companies on separate systems for a while and maybe it'll be speedy enough.
But again, I'm trying to think three steps ahead.
If you have 10 companies, 15 companies, how long is your close process going to take if they're all on separate systems?
So, as painful as it is And I'm going to give you an exception, but nine times out of 10 I'm going to want to try to get everybody on the same systems as quickly as I can.
The exception might be, which we talked about a little bit earlier, and that is if their revenue model is just so different than what our systems can handle and maybe they're on specialized software that helps deal with that then I can understand not trying to agglomerate them into our system.
I've had this happen a few times, where I've bought something and I've looked at just their business model and I've said they're on software, that There's a reason they're on that software.
It supports their industry.
And ours will be a downgrade for them, and we can't have that.
So fine, in this case, we're going to make it an exception.
We'll let them live on what they were on.
But nine times out of 10.
My best move and it's painful is to get them on my system as quickly as I can.
Also, by the way, you just bought somebody, they might be nervous about their jobs.
And they could be probably looking for something else the minute you bought them.
And, you know, a lot of times I'm buying stuff that's not that big.
And so if a controller disappeared or if somebody else disappeared, the next day, I have a personnel problem on my hands at a business that might be far away from mine, at a business that I don't even know that well.
So the sooner I can get them on my systems and process, the safer I am from that kind of turnover.
Yeah, really good point.
So I want to talk a little bit about board communication, about CFO working with FP&A.
But I also just because I know you've spent a lot of time here I think I want to talk a little bit about storytelling and data.
And just because you and I have so much commonality here in what we've done From your standpoint what should on the sell side, what should the FPA team have ready?
You know when they say okay, we're looking for a raise or looking to sell, you know how does that.
What do you do for advanced planning that gets you ready for the due diligence around that.
And who owns what at that point?
It's a long list.
And the M&A chapter in my book is like 25% of the book because it's such a meaty topic.
And there's so many permutations to it that could be driven by the size of the company or the size of the deal, or who the buyer is.
Is it a strategic?
Is it a financial buyer?
And so to me, item one, which cuts across both accounting, finance and the sales team, is the revenue story's got to be nailed down.
Nobody is buying anyone unless they have a great feel for the revenue story of the company.
And the hard part is when you go a layer down.
Within that there's a lot of different types of revenues.
So first of all, let's start with current revenues.
And there's a lot of different types of current revenues.
So for SaaS software companies, what you're ideally trying to build out is what they call a data cube.
And you want to build out a perfect data cube that cleanly lays out by customer by month, both the unit and revenue volumes.
And from that you need to create the CFO, needs to create a narrative of anything that has an upsell.
So the relationship is growing, either from price changes, volume changes or you sold in new services.
The CFO needs to have that narrative for the upsells, what's driving it.
Same thing on the downsells.
So any customers where the revenues are going down and that could be driven by hey, you're giving them price discounts or uh, their volumes are going down, or maybe you were selling a couple of services to them and some of those churned.
You need to be able to clearly articulate what is driving down cells and then churns.
Everybody will gravitate straight towards churns.
Why did a customer leave you?
And so you need to be able to paint the picture of these are the reasons why the customer left us.
They will poke at that all day long and especially if those churns went to a competitor, they're going to ask very specifically why did they go?
Is the competitor better than you, cheaper than you?
Why?
And then also, you're going to need to lay out new customer wins and what drove those.
When you're a CFO of these companies and you have a small number of large clients, this is not a crazy tough exercise.
The hardest situations for me are when I've been a CFO of a place that has a large number of small clients.
Then it's a huge lift to be able to kind of nail down all this data and have explanations for all of them.
For SaaS customers and other customers, buyers really want clarity on which revenues are recurring.
And then I love the second bucket, which are non-recurring revenues that generally do recur.
So you have like a base of revenues, but maybe they're not under contract.
Maybe there's some variability to it, but you generally have a level of revenues that will continue to recur, even though they aren't under contract.
So they're kind of non-recurring, recurring.
And then which are one-time non-recurring revenues.
And the reason why they're going to want the exceptional level of detail on each of these buckets is a buyer will value your business using different multiples for each of those buckets.
No doubt they're going to love recurring revenues.
They might kind of like non-recurring recurring revenues and they probably don't give a whole ton of value.
They'll give some value, but not a ton of value to one-time non-recurring revenues.
And so nailing down that revenue story in detail and being able to articulate what's going on in every one of those buckets is important.
So then, they're going to go to the next important bucket, and that is your sales pipeline, your forecasted new revenues.
And they're going to poke hard at that pipeline and they're going to look backwards at historical pipelines to see if the new client win rates that you're using to forecast your go forward revenues are consistent with what has historically occurred.
And along with this, they're going to want to ask a lot about your company's sales motion, the number of salespeople, what is the comp structure for those salespeople?
Do they have quotas?
What is their typical quota attainment?
A lot of this will fall more towards the sales organization to prepare, but the CFO has got to really pull it all together and make sure it's accurate in telling the story that we're going to tell.
You should have all this stuff ready to go.
For me honestly, it's good hygiene for companies to kind of perpetually have all this stuff ready to go.
But again, if you don't have it, get the sales team and maybe some other folks.
They're going to have to start pulling that data from the accounting systems and probably the CRM systems.
A few months into a process.
I would make sure that my full financial model is ready to go, because whatever is in that financial model will be used to populate the raise decks or the sale decks.
If you engage an investment banker, a lot of times they're going to want to build out a model and use that model.
I actually advise against that.
They don't know your business. they're going to come in and quickly throw something together.
And you, the CFO, are going to have to be held accountable for every number in that model.
And you don't even know the model that well.
And these things can be really complicated.
So I strongly prefer using my own model and building it out to a quality where the investment bank just says hey great, that model's perfect.
Let's just use that.
We're not even going to waste your time to build it out.
If I were going to sell or do a really big raise, I would do a sell-side QOV quality earnings study before the process from a reputable QV provider.
And these don't take long.
I mean, if you're not that big, this is like four weeks and they're not even that expensive, unless you use a big name firm.
Then they become very expensive.
If you're a larger company, maybe a bigger growth equity firm, then maybe it's a six to eight week process and a couple hundred K, but otherwise get it done.
It's like an insurance policy.
It'll build so much confidence in the process. in your company.
As I said earlier, investors and buyers they love QOVs and they focus a lot more on those than a stale audit.
And as I said earlier, it tells the story of the company.
And so to me, a lot of times a good QOV will avert random issues coming up during the deal process that can derail a deal.
This might sound funny coming from finance guy but I suggest, if the company has good visual assets ready to go, have the company itself build the overview deck for the razor sale, not the investment bank.
I always feel like investment banks decks look a little sterile.
Like they have some nice visual assets to them, but a lot of times they're just kind of sterile.
So I recommend doing that internally.
And if you need to engage some really good graphic designers, go do it.
But I always feel like those are better.
This one surprises people, but the cap table is usually wrong somewhere on it.
Make sure it is 100 tied out and you have documentation to support every single item on that cap table.
Nine times out of 10, there is at least one item wrong on a cap table.
And it might even be 99 times out of 100.
So make sure it's fully tied out, buttoned up.
And sometimes legal owns the cap table.
Sometimes the CFO owns it.
So whoever you need to work with to get that done, get it done.
Yeah, I thought about that so many times, the cap table, like it's, you know, 18 tabs in a spreadsheet that three fractional CFOs before have gone through and messed with it.
And it's like, why didn't we just use one software to put all this in?
Why are we doing this in Excel?
And it's, yeah, I've never, I've never seen a clean cap table.
No.
And even when they're done in like a card or whatever, it's, it's not that the software's wrong.
It's just somebody inputted something wrong.
Maybe they, they didn't do the vesting schedule right.
A lot of times it's somebody in their offer letter was promised options.
And for whatever reason, maybe even the board approved it, but it never made its way into Carta and into the cap table.
I've seen so many different things that are just not right in a cap table.
And at some point, you're going to have to rep to that cap table in a deal.
And at some point maybe some attorneys are going to go through it item by item and ask you for support.
So make sure it's 100% tied out.
As a part of setting up a data room, lay out the files and folders and have people start to populate them.
But for me, your data room is important and it shouldn't be a dumping ground.
So anything in there should have strategic value in the deal.
And you control CFO, control the data room and don't use like a Google Drive or anything like that.
Go pay some money and get a real data room where you can track who's looking at what.
And maybe you can give different levels of access to different buyers.
Go do that.
IP is one I talk a lot to technology professionals about.
If you are a software company and you're using contractors or third parties to develop your software, that's a big deal.
You need to make sure that you have all the documentation on anyone who ever was involved in the development.
That shows that you engage them on a work made for hire basis.
Otherwise, somebody after the sale can come by and complain and say, hey, I own that software.
You owe me a big chunk of the sale price.
And then the last piece of the puzzle is i always try to set expectations for our ceo, because early on there's always a rush of initial interest from you know, large groups of people 20 or 30 interested parties and buying you, and that ceo is getting super excited.
They're down at the ferrari dealer, you know, looking at cars, and i tell them that funnel is about to narrow super fast.
So you know, dial down your expectations, the 20 to 30 interested parties.
Two weeks from now that might be eight to ten.
Two weeks after that it could be two or three.
Two weeks after that it might be zero or one and you'll start to panic.
So don't get enamored of the fact that so many people are initially looking at your stuff.
A lot of times they're just curious.
They want to see your numbers.
They want to learn about your industry.
They might even want to see if there's any competitors to yours that they should be taking a look at.
So never get too excited until the deal is literally done and the funds have been wired.
Amen on that.
I really wanted to get to this question because I, as someone who's interested in fiction writing and other projects outside of finance, I love your story around this.
So the normal question I ask people is what is something not many people know about you?
I'm not giving you that latitude.
I want to hear about your fiction books.
Yeah, I've always loved to write, you know, for being a CFO.
And, you know, we always have the reputation of not being the most creative people in the world.
Anyone who knows me knows that I'm just.
I've always been a really creative person and I love to write.
And so before I wrote the business book, I wrote two different fiction novels.
They're both available on Amazon, and they're completely different from each other.
They're really written in very different styles.
The first one is a book called Sal in the Suburbs.
It's a really funny and dark story about an 80s pop culture spewing mafioso who has to hide out in a wealthy suburb.
And when he's there he finds out that the people in the wealthy suburbs are kind of more non-violently ruthless than the people he knew from his Mafioso days.
It's a really funny book and it mines a lot of 80s pop culture movies, TV shows.
Because Sal, that's how he is.
That's what he grew up watching, and he talks a lot about stuff from the 80s that he grew up watching as a child.
My second book's totally different.
It's a book called Stuck and it's about a musician who was almost a successful musician 20 years prior, based on an album that he recorded that was influenced by a childhood tragedy.
Now, 20 years later, he's scraping by playing small bars and revisiting that childhood tragedy with every single gig that he plays, because that was the album that the tragedy gave him.
And doing that over such a long period of time it really starts to cause him to descend into some serious depression over that childhood tragedy, and so the book is really about him coming to terms with that level of depression and trying to figure out how's he going to get out of it.
It's a quick read and if you like music uh, and a good story, you'll enjoy this book.
It the book references a lot of i tried to pull in a lot of different obscure music, but sometimes it talks about really well-known music.
But part of his life is influenced by the music that he listens to.
Yeah, super interesting, uh.
So i have to ask you having written a business book and two fiction books, you probably have all kinds of ideas kicking around.
What's book number four going to be?
Are you going to go fiction again or back to business?
Yeah, it's funny.
I'm simultaneously writing two.
One of them is a fiction story.
I have three kids.
And because the books in the fiction novels I've written are a little bit serious.
My kids have never been able to read anything I've written.
And so I've started to write something that's a little more PG, PG kind of rated.
And I'm about I think I'm about 60 or 70 pages into it.
It's a really fun story.
And then I just started.
We'll see if it goes anywhere.
I'm trying to combine the two.
When I was in business school, we all read this book called The Goal, which was I joke that it was a touching love story set upon the backdrop of a factory.
But it's really.
It's a fiction novel that teaches you about operational principles of running like manufacturing.
And so I'm trying to create a new segment called Finfic.
It's financial fiction.
It's a story about a company that's going through an MA process and the personalities involved in the MA process and how everything looks from their point of view.
And so I'm trying to create something that's a fun read, where you can still learn something about business from reading it.
I just started writing it and I'm already about 40 or 50 pages into it.
That's great.
I'm picturing the accountant, which actually did have some, I'm picturing when Ben Affleck was going through all the stuff on the whiteboard and everything, you just put a little bit more educational accounting in there And well, like the guy that wrote The Martian pulled off.
There's great science in that.
Exactly right.
Yeah, I love it.
I, my kids, will be watching the TV show or movie and they'll they'll do some sort of word salad about business.
And they'll look at me and I'll be like, nah, it doesn't work like that.
I just had that the other night.
We were watching a movie together and I can't remember what the setting was, but they asked me about it.
I'm like, nah, it doesn't work like that at all.
Not even close.
Okay.
Well, I need to get to everybody's favorite question.
What is your favorite Excel function and why?
I'm going to disappoint the entire world, but I love Excel.
I do.
And you would be truly amazed at how much I've been able to accomplish using VLOOKUPs and SUMIFs.
So please do not judge me.
To me, the differentiator of Excel users isn't knowledge of fancy functions.
It's how you organize your data and your outputs.
My spreadsheets are always very clean, organized, and easy to update.
And if I try to.
If it's built where somebody else has to go in and adjust toggles or assumptions, users know exactly where they need to go and exactly what cells they can change and can't change.
And I always design my models so that if I get taken away tomorrow by the alien mothership, someone else can figure out my models within about an hour.
I am very proud that, like one of my clients, they they just got sold.
And when we hired the investment banker and they looked at my model, they said hey, all good, nothing to do here, and they used my model for the deal.
To me that's the, the ultimate in rubber stamp.
Hey, this guy, this guy knows what he's doing.
I see a lot of fancy functions in like banker models.
Sometimes I'll figure it out and say, hell, that's interesting.
But I don't know, I've been doing this long enough and it just works for me.
So I can accomplish it.
I think I can move mountains with just a couple of basic functions, starting with VLOOKUPs and SUMFAPs.
Love it.
When I was a guest on this show before I took over as host, the lookups is my answer.
And someone told me that that's how I dated myself as Beckham.
And I follow X lookups.
I see a lot of an index and stuff like that.
It's never been an issue and I can bang out models fast and they're good.
So I changed.
Well, Rick, I really enjoyed having you on the show.
Really appreciate you coming on and wish you the best of luck with your upcoming book and the ones you have out there.
And we'll be sure and put links to them in the show notes too.
So everybody will know where to find it.
Thanks.
I appreciate it.
This is a blast.
I know it's nerdy and we're a bunch of nerds, but I love talking about this stuff.
It's a lot of fun.
Sometimes it's more fun talking about it than actually doing it.
Right, right.
How do you think I got this job?
All right, Rick.
Thanks a lot.
