Posted: September 17, 2012
Unleashing the power of financial operations
It's part of a delicate balanceDan King
There are a growing number of companies being formed in Colorado, especially in Boulder and Denver. Colorado continues to be recognized as one of the best places to for startup companies. An important question to ask is “How will your company manage and balance the financial operations for success?” If you have ever created or sold a company before, this question may sound familiar to you.
The first stages of company growth are usually focused on getting product and sales traction, immediately. Ideally, the company begins generating orders. Maybe raise a seed round or Series A, with the goal of growing as big as you can, quickly.
Many companies initially succeed through hardcore sales operations and development activities. This is especially true for technology companies that can take advantage of the reduced costs of starting and managing a business in the cloud. Or, to overcome cash burn rates, companies can raise more money if the valuations are attractive.
As your company begins to become successful with sales, marketing and product positioning, there is a lingering issue beginning to form. The company finds itself annoyed by questions that are internally focused, but very important. What’s my cash flow burn? Do I need a banking relationship, accountants, insurance? What should be my pricing strategies, customer contract terms, partnerships, strategic alliances? At what point will I be paying taxes?
So begins a delicate balance between sales activities, development and financial operations. Will the need for financial operations be acknowledged now, or later?
Acknowledging the need for financial operations is very important at all stages of your company. Possibly, this role should be part of the founding management team, if not, soon after. You may be asking yourself …“Why would I need that function now? Financial operations people don’t sell to customers, create product, or otherwise generate revenue. And if they are not generating revenue, they are burdening my cash flow!” I would challenge you to think about this differently.
Financial operations are critical to other business concepts that are often overlooked. They can help preserve the enterprise value. They can help manage reputational risk. Financial operations can help the company develop relationships with legal counsel, bankers, investors, advisors and board members. In the early days of lumpy sales, professional cash flow management can go a long way. Additionally, they can help with credibility when dealing with a customer’s procurement or finance department.
Let’s take a real world example of how financial operations are critical. Say, for example, you have successfully grown your VC or private equity-backed business over the past 5 years to a point where you want to exit. Often times, your enterprise value is based upon a multiple of your revenue.
Let’s say you believe your enterprise value is $100 million. You find strategic buyers. Through due diligence, it is found you can’t clearly explain your revenue numbers, processes or procedures. Through additional diligence you find your financial operations are in disarray, and have been since day one. But that was by design because the important metric has always been top line revenue.
What happens now? The strategic buyer required a 15 percent haircut on the enterprise value due to the risk they perceive in buying your company in its current financial state. That 15 percent haircut equates to $15 million of enterprise value wiped out, gone.
Now, think of it this way. How much do you believe investing in the financial operations would have cost the company over the five-year investment cycle? Certainly not $15 million – and that’s my point. Financial operations are often overlooked and companies are impacted at the worst times possible.
Again, the financial operations role, along with being trusted advisor, fiscal leader and strategic partner, is to preserve the value you create and ensure the compliance functions are buttoned up, so surprises can be avoided like a reduction of your enterprise value at exit. This is just one example.
There are inexpensive ways to manage financial operations. Surround yourself with strategic and experienced mentors, advisors and other people who care about your business and will help you maneuver through these issues. When the time is right, you can formally begin building the financial operations function. Considering these issues early can avoid substantial unneeded frustration later in the businesses life cycle. We are in an age where expectations are to balance doing more with less. Make sure you are playing to win – rather than playing not to lose.
Dan King is a financial operations leader with significant experience in venture capital and private equity-backed technology companies in software, SaaS, Cloud and ecommerce business models. He began his career as a CPA with KPMG in the Silicon Valley and is active throughout the Colorado technology and small business community. Dan can be reached at firstname.lastname@example.org