What are the Benefits of Leveraging Finance at a Startup? Traditionally, finance has been criticized for not being needed in a startup until the company considers going public.
There is a problem with this wisdom.
If done right, finance can be both strategic and operational, enhancing a startup’s already rocketship performance.
These are just a few things a great Leveraging Finance at a Startup hire can do:
- Calculate your real metrics (yes, you may be calculating CAC or even revenue incorrectly)
- Measure your SaaS metrics reasonably (since GAAP is the only reliable benchmark – a lot of these metrics are calculated differently)
- Your cash flow has to be positive (due to lenient accounts receivables (A/R), it is unlikely you will get paid by your customers.)
- Avoid a derailment of a financing round (Series A and beyond) due to inaccurate or non-calculated key metrics.
In light of the fact that finance can have a significant impact on startups, what advice do you have for a company looking to scale?
The following is a list of tips for leveraging finance at a startup. A lot of the tips relate to sales, an essential aspect of a business that impacts finances.
1. Make sure you get your numbers right earlier rather than later.
Startups tend to work with inaccurate numbers most of the time. Inaccuracies occur when the trade-off between getting customers quickly and tracking the information correctly in a google doc, excel, or CRM is overlooked.
If you start focusing just on ensuring a few key metrics are accurate, you will succeed. Build processes and systems that enable accurate calculations as you scale. It is necessary to look at every contract you have signed if you are unable to track it properly. The more money you earn, the more difficult it is to go back retroactively and fix the faulty habits that contributed to the inaccuracies.
2. Ensure data integrity by aligning incentives.
How can you make sure Salesforce is up to date and has the correct data? Commissions should be tied to accurate data in the CRM so that if data isn’t entered, sales reps don’t get paid. The data integrity of sales reps and a culture of true data-driven thinking are maintained. Numbers should be trusted.
Also, by paying commissions in a way that aligns with the mission of the company and the success of its customers you can ensure that your sales representatives stay on course. Commissions can be paid 50% upfront and 50% on onboarding the customer by some companies. The benefit of this is that sales reps are invested in the success of their customers.
3. De-silo the data by setting up processes.
In companies that grow, different departments begin to use the same systems, and data becomes siloed. You may be using NetSuite for your ERP, Salesforce for your CRM, and various other systems for marketing. Knowing how all these systems will integrated enable the CEO to get the metrics that are important to understanding business without having to log into each system individually. Dashboards and reports are consolidated from disparate sources using multiple systems, including Looker and RJMetrics.
4. Use GAAP numbers as a benchmark.
As a result of the standards that surround how these numbers calculated, post Series B and later board members interested in GAAP-based financing. Comparing GAAP numbers to Salesforce and Heap gives you apples-to-apples comparisons. In contrast, startups may calculate ARR differently with the simple SaaS metric. Some startups will calculate their annual revenue at the start of a service, while others will calculate it when they book it.
5. Consider metrics holistically rather than isolatedly.
The failure to contextualize metrics can cause you to lose sight of the big picture and leave you feeling myopic. In most SaaS metrics, changes in one have a direct or inverse relationship with changes in another.
Finally, tie your metrics to your overall strategy.
6. Pay attention to your employees’ efficiency metrics.
CEOs of startups measure key metrics such as burn rate and revenue run rate. Many companies forget to measure revenue/employee and expenses/employee. The numbers should not be changing in a negative direction over time. A good hiring process, achieving economies of scale, improving the sales cycle, or compressing a sales rep’s ramp-up time may be core efficiency metrics.
7. Understand the sales learning curve.
Track your sales yield over time and adjust your marketing strategy accordingly as you move up the curve.
Two major errors to avoid at either end of this curve. A common mistake is to ramp up sales forces when the company has not yet been able to sell its product, causing the company to burn out before it has had a chance to market itself.
During the execution phase, a company encounters a second error. Once you have doubled your sales yield (the average sales revenue per full-time, fully trained, and effective sales representative), you are ready to scale. If you fail to hire those 5 sales reps you were planning to hire in Q2, your forecasts will affect.
8. Make sales operations a priority.
Selling is a science, not an art. Hiring a good sales operations employee should be a priority. As part of sales operations, sales performance analyzed, reports generated, compensation plans and goals aligned, pipelines managed, and sales automation processes improved. Additionally, Sales Ops ensures a metric-driven approach to sales.
9. Get paid!
SaaS companies neglect to pay attention to accounts receivable (AR aging) early enough. It should be possible to get the money you charge someone.
10. Be aware of your red customers.
In the early stages, you need a good metric for red customers. Customers who are red are likely to churn. Red customers defined by different auspicious variables depending on their industry. Make sure you can trace your green (little to no probability of churn), orange (no directional probability on churn), and red (high probability they will mix) customers. There are several red metrics, such as low engagement numbers, customers who ignore emails, customers who have decided not to renew, or who have spoken of the product not meeting their needs.
This is how Leveraging Finance at a Startup can benefit you. Follow these tips on Leveraging Finance at a Startup and get the results.