Episode 27

From Numbers to Narrative: Crafting a Compelling Financial Forecast

June 19, 2024

Speakers

Randy Wootton
CEO, Maxio
LinkedIn
Josh Aharonoff
Founder, Mighty Digits, Your CFO Guy, and Model Wiz
LinkedIn

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Video transcript

Randy Wootton (00:04):

Hello, everybody. This is Randy Wootton, CEO of Maxio and your host of SaaS Expert Voices, where we bring the experts to you to talk about what’s going on in SaaS today and what they’re seeing as the possibility and opportunity in SaaS tomorrow. Today, I’ve got Josh Aharonoff with me, CEO of Mighty Digits and several other companies, which we’ll get into, who started in accounting and joined a Big Four accounting firm. He’s been a startup founder, strategic finance guy, and is now acting as an outsourced CFO. Thanks for joining us, Josh.

Josh Aharonoff (00:39):

Thanks. Great to be here, Randy.

Randy Wootton (00:41):

Look forward to chatting, but I always like talking to people about their background and the lessons learned they had from the different stages in their career. You started as an accountant, went to KPMG in 2012. I mean, what was the passion for you about being an accounting and why KPMG? And then why did you make the shift from KPMG to your first startup, Skill Silo?

Josh Aharonoff (01:02):

Sure. So, I declared my accounting major right around the time when Lehman Brothers collapsed. I remember I went to my accounting 101 course, and my teacher was sitting on his desk holding up a newspaper and he said, “I’ve said it before, I’ll say it again. In good times, you’ll need accountants, and in bad times, you’ll need accountants.” The idea to me of, “Huh, this is a really stable career. There’s a lot of demand for it. I’ve always been good with number,” I naturally fell into it because of that.

Randy Wootton (01:31):

Oh, that’s great. Funny, because I thought you were going to go slightly differently, which is I’ve talked to several folks who went to this national law firm that says the number one deal killer is accounting errors. So, having accountants who can help you get your numbers right and get you ready for due diligence either for raising money or getting acquired, that continues to be the issue in terms of getting deals across the finish line, especially in SaaS where you have to do the rev rack and the reporting. But interesting, you were there for just always be employed.

Josh Aharonoff (02:08):

That was the thing that turned me on the most. Okay, this can make a lot of sense, but I love math, I love numbers. They just clicked for me in a way that sciences, biology never really clicked for me, and it was just a natural progression to go into the field.

Randy Wootton (02:23):

That’s great and then you were at KPMG for a couple of years, but then you decided to jump and found Skill Silo. Can you talk about that transition, what you were looking for and how you picked that specific area to focus on?

Josh Aharonoff (02:36):

Sure. So, first, I graduated from Binghamton and they have one of the best accounting programs in the country, really impressive. 90% of the people who graduate go directed at Big Four. So, I always thought in my career, Big Four is the holy grail. That’s where you want to not only start your career but grow your career. As many of you may be aware, Big Four has really two paths, audit or tax. So, I started my career in tax really after just flipping a coin, not really knowing the difference between the two. I didn’t have the best experience. This isn’t a rip specifically on KPMG or Big Four accounting. I think it worked really well for some people.

(03:13):

Whatever reason, the group that I was in, the work that I was doing, it just didn’t really speak to me, and it was like a mutual decision that we would go our separate ways. Around that same time, I was taking Spanish lessons with a woman based out in Central America, and I was using this company. It was a very affordable price, and I was learning an hour a few times a week direct via Skype before Google Meets and Zoom was a cool thing. I was just amazed at my progress and I’d always been entrepreneurial. At the same time, it just happened to be via fate, one of my really close friends was living in Guatemala. His wife is from there, and they moved there for a few years and he was also learning Spanish.

(03:50):

He said, “Hey, why don’t we start this company together? We could start with teaching languages by connecting native professionals from all around the world, eventually scale this to anything that you can learn via video chat.” I jumped at the opportunity. I very close with my friend at the time. We’re still close. I always really appreciated his mind and that was our start into the official entrepreneurial life.

Randy Wootton (04:14):

That’s awesome. You spent about two years there, is that right?

Josh Aharonoff (04:17):

I did. That’s correct.

Randy Wootton (04:18):

Then you actually migrated back into finance as a consulting firm. What was it that you learned about being an entrepreneur? Yeah, super cool, but sleepless nights, trying to raise money. What was the issues where you’re like, “No, I think I’ll go back in toconsulting. This time it’s finance consulting”?

Josh Aharonoff (04:35):

So when I went into it, I went in with this idea that I have it all figured out. I’m going to show the world now who exactly I am. It all makes sense in my head. I’m going to go and scale this company. It’s going to be simple. The stats that nine out of 10 companies fail, well, that’s nine out of 10 companies. I’m not nine out of 10 people. I’m the exception to the rule. In reality, it was the exact opposite. So many assumptions that I had about how exactly we would acquire users, how we would be able to really scale and grow, and all these different things that I took for granted were so much more challenging that I actually thought, it was the first time that I went out to validate a lot of these things that unfortunately in many ways I feel like I just fell flat on my face.

(05:17):

Although I learned a ton of lessons along the way that in many ways now I use in my career and things that I wouldn’t trade for anything, no MBA could have taught me, it also was a pretty painful experience that I had to learn the hard way.

Randy Wootton (05:29):

Well, I think that’s the thing about founders, right? They’re very successful, but in part because they’re young, they don’t know better, they’re sleeping on their mother’s couch, they have a low burn profile. They can do that for a couple of years and maybe have a couple of them. I think that’s true, or you’ve already hit it and you can go back and do it again. But I think having that experience as an operator on the front line is obviously helping you now in your career where you’re relating to folks. You founded Mighty Digits in 2019 after your tour with the consulting firm.

(05:57):

What was it that other than this experience that you had at Skill Silo after the consulting firm? Clearly, you had an entrepreneurial bug. What was it that compelled you to start Mighty Digits? What were you focused on there and maybe how did the earlier experience inform how you approach doing your consulting now as Your CFO Guy compared to what others may offer in the marketplace?

Josh Aharonoff (06:18):

Sure. So, I was very fortunate that I had someone in my private network reach out to me saying that they were looking for a fractional VP of finance. In essence, I’d worked for them 20 hours a week. The salary was close to identical of what I was making working at this consulting firm. They not only offered me the position, but they guaranteed me a contract through the end of the year. So, in many ways, me going off on my own was more secure than me staying and working for someone else. I compare that to my experience at KPMG, how I left and I didn’t really have anything figured out. I didn’t have a source of income or any customer contracts or product or anything like that, but I wanted to just go out and try something.

(06:56):

Whereas this time, it was the smallest risk possible that I just stepped into another already well-oiled machine with this huge contract that I had. Thankfully, they were very open to the idea of me going out and scaling this to be an actual company where the remaining 20 hours a week. I could find other clients, which I eventually did and hire staff. Here we are today almost exactly five years later, and we’re a team of about 15. We’re working with about 35 clients. So, I’m very grateful that I had that large contract for that seven-month period so that I didn’t have the stress of being in what I call the valley of death where you start a new venture. You don’t know how much more fuel you have to be able to continue. Because of that, I was able to focus on a lot of other things that eventually worked out.

Randy Wootton (07:40):

That’s great, Josh. I think that’s right. I think a lot of people who put out their own shingle who’ve never done it before underappreciate how much time they have to spend on just business development, meeting prospects, trying to convert them to customers, and you’re delivering your work on one contract where you’re trying to get the other contract. So, it sounds great that you were able to get a commitment for part-time work that you’re able to do some other things. Gosh, you’ve been busy, more busy than most people I met.

(08:06):

You’ve also got a media company called Your CFO Guy. You’ve got a tech company called Model Wiz. Do you want to talk a little bit about Your CFO Guy? Congratulations on your success. You have a newsletter with 75,000 people that you’re posting daily. Talk a little bit about how those two other endeavors came into being.

Josh Aharonoff (08:24):

Sure. So, about two years ago, I started publishing content on LinkedIn with the idea that I would hopefully drive more leads to our consulting firm, Mighty Digits. It took me a few months to figure things out, but eventually, things totally took on a life of its own. I felt that my message was really resonating with a lot of other finance and accounting professionals where we could just geek out over the details on revenue recognition and prepaid expenses and cash vs accrual and all of that good stuff. So, I kept posting content every single day. I have an incredible designer on my team who’s helped me put together a lot of the assets that go into the content that we share, which I think has been a very big part in all of this.

(09:07):

Fast forward now to today, over 375,000 followers on LinkedIn. I just also launched a YouTube channel on March 1st, and I’ve been posting a video every week. I think we just published our 13th video. The newsletter, we used to do that weekly, but I was just actually telling someone earlier today, the idea for a daily newsletter came about I sent over a survey to my audience asking, “Hey, I’m thinking of doing this daily newsletter. Is anyone interested?” It was the first time that I really sent out a message to my audience and the response was overwhelming. It was like this, “Hey, is this microphone on?” I didn’t realize how many people were part of that actual newsletter.

(09:46):

One person said, “Hey, I’d be interested sending a daily newsletter, but can you send me one topic on Monday, another topic on Tuesday, another topic on Wednesday?” That’s exactly what I did. So, we have accounting now on Monday, FP&A on Tuesdays, Excel on Wednesdays, Thursdays are round up, and then Friday is my experience in just growing a fractional CFO firm and being an accounting professional.

Randy Wootton (10:07):

Well, that’s great. Monday is your accounting ABCs, as you mentioned, FP&A Secrets. So, you’re covering basically for any early stage CFO or controller or FP&A folks, you’ve got specific topics. Then Excel for CFOs, which we’ll get into in a little bit, I think, into your next startup, which is the Model Wiz. We can chat a little bit about. When you describe the Thursday, I think you called it Legit Numbers, and the round up, it’s a roundup of what? What are you rounding up on Thursdays?

Josh Aharonoff (10:35):

So it’s in essence three different topics of anything related to finance and accounting. So, it could be any of the specific categories of accounting, FP&A, Excel, or anything else, and it’s just at random and presented in a more professional-like newsletter setting.

Randy Wootton (10:51):

Got it. Then I think you said on Fridays, your CFO files and lessons learned from being in the trenches and you have this great experience both as an accountant and then as an operator or a startup and then also running your own consulting firm. What are the hot topics? I think you split it between your newsletter and your social media. What are you finding people are resonating when they’re consuming the information? What are the topics they care most about?

Josh Aharonoff (11:15):

So it’s interesting. I feel like in many ways there’s overlap, and in many ways there are differences. With social media, the general idea is the more broad you can go, the larger the reaction, but the less the actual focus. So, I think accounting professionals is a more broad topic than FP&A professionals. Excel is a more broad topic than accounting. So, I think the best content that I’ve ever produced is Excel, I think about a month ago I produced an Excel piece of content that now is over 12 million impressions, which is just mind boggling to consider. So, in terms of social media, usually the more that I post something on and I try not to get too far still from my core audience, the larger the engagement, the more that it’s going to resonate with a larger group of people.

(12:00):

For my newsletter on the other hand, I try to really go deep in the specific topics that we’re talking about because these are people who are a lot more engaged. They’re hearing from me every single day via their inbox, which is really one of the most intimate ways you can connect with someone. So, I feel like there’s usually a lot stronger of a response on my emails on Fridays because that’s a lot more personal. That’s talking about my journey, my failures, my lessons learned, how exactly I find clients, how I hire people, how I manage others, and all of the other things that can be applicable for an accounting firm owner or just someone who’s working in their career who’s looking to grow.

Randy Wootton (12:36):

Well, clearly, you’re doing something right with 75,000 people that have subscribed to your email in this world where people aren’t reading emails, they’re reading yours every single day. I do think that’s such a great insight that each day is a little bit different. So, it’s staying fresh, but it’s also staying consistent. One of the pieces of feedback I had heard from someone when I started the podcast was they’re like, “The number one thing is to be consistent. Every week, have an episode go live. Even if you’re not doing it live, have it be predictable so people know that they can rely on a weekly push.”

(13:09):

I can’t even imagine trying to crank out a daily newsletter. So, well done. Talking about Excel, you also have a third part of your empire, Model Wiz. Can you talk a little bit about that and what was the problem you were trying to solve with that and how it all ties together with Mighty Digits, Your CFO Guy, and Model Wiz?

Josh Aharonoff (13:29):

For sure. So, probably the area of finance and accounting that I’m most passionate about is FP&A, being able to put together a forecast to be able to tell a story of what exactly is going to happen into the future, to be able to measure the results of that story that I once predicted against what actually happened, explaining why I was on, why I was off, put it together in a way where someone without a finance and accounting background could understand. So, I built maybe hundreds of financial models in my career, and I always thought to myself, “So much of this can be automated. I don’t necessarily know how, but the logic to me makes a lot of sense.”

(14:02):

If you think about it, there are things where every business will traditionally have a financial model. In my opinion, every business should have three statements, an income statement, balance sheet, and cash flow. Every business should have a headcount build. Every business should have a revenue build. But that’s one thing that’s entirely customized based off of the business model. In all of the clients that I’ve ever worked with, I’ve never found two revenue builds that were exactly identical. Everyone does their business a little bit differently.

(14:25):

So, we built this tool right from day one when we started Mighty Digits, that is in essence an Excel plugin that’ll connect to your accounting software, build a financial model in Excel, connecting to all the different source data that you have, so that it’s connected to this data, while also allowing you to customize everything directly in Excel. So, just about two, three months ago, we created a separate company out of that. So, now it’s been a lot of fun managing three actual distinct legal entities with Model Wiz being the third one.

Randy Wootton (14:54):

That’s great. So, help me understand, I’ve looked at the space, the FP&A tool space over the two years that I’ve been here because I had the same assumption that I think you did that having the historical data in your accounting software is helpful. It tells you what happened, and you can look closely at things like gross retention, net retention. You can look at churn, byproduct, segment region.

(15:15):

You can have all these insights for what happened, but the real key, especially as an executive and I think as a CEO or a CFO that’s trying to partner with the CEO or in your case at Mighty Digits as a fractional CFO, trying to partner with the CFO or the board, really trying to understand what might happen in terms of doing the planning going forward is what FP&A is all about in many ways to create the scenarios, not just for the fiscal year budget, but throughout the process and of the year, the unfolding calendar year. I think even more so now, you’re finding this constant state of planning happening.

(15:49):

So, there’s a bunch of companies out there in the FP&A space. You think of Jirav, Basis, Anaplan, Forecaster. Gosh, I mean they’re 50 at least. How do you draw the distinction between what you’re providing as an Excel plugin and the problem you’re solving versus what someone might want if they’re buying an FP&A solution?

Josh Aharonoff (16:07):

So in many ways, they are one and the same. I think a big distinction with what we’re doing is a lot of tools have this idea that you should replace Excel. Excel is buggy. Spreadsheets are clunky. Use instead of the power of a web app, and you can do everything that you need. We’re very much the opposite. We think that Excel is easily the most important tool for a finance and accounting function, and it’s only going to get bigger. It’s owned by Microsoft, the same company that has a partnership with OpenAI and the same company that owns LinkedIn and one of the biggest companies in the world.

(16:36):

So, our goal is to have this plugin in many ways act like an FP&A software where you can take advantage of all of the benefits of an FP&A software with things that are not easy to do in Excel, like connecting data via an API to your accounting software, refreshing that information, transforming that information while still giving you this environment where you can customize whatever you need at your fingertips directly in Excel. You can then share the output of that information with an investor who knows how to use Excel, who reads Excel for all their portfolio companies while benefiting on both sides.

Randy Wootton (17:06):

Yeah, I think that is what I’ve seen in looking at the companies. There is this split between those that are leading with a web-based ASP experience versus Excel first. So, Cube, a company that Battery invested in, is acting as Excel first and they’re almost like an ETL for Excel. I think a lot of those other companies also are focused on larger customers than you. I think when we talked, your ICP at Mighty Digits is really those early stage startups, the seed, series A. They’re small revenue finding PMF.

(17:38):

So, Excel still works. It’s not getting bogged down by having thousands of customers. I’ve been at companies where we’ve had 40 tabs in our model, and maybe that’s a question for you is do you find people migrate from your Excel plugins to these FP&A solutions when they get bigger, when they’re at $10, $20, $30 million, or because of the way your plugins work, are you able to address that scale issue?

Josh Aharonoff (18:02):

So I will say a lot of companies have solutions that are way more robust of what we offer, and I do think that it makes sense for a company once it reaches a certain size. It becomes very challenging to be able to manage all that information directly in Excel. Now, I am a believer that at the same time, it is becoming more and more easy. The idea is rather than having one Excel file that controls everything, you in essence have this database where all the information gets pushed up to and synced, and you could pull that information down. So, that you can run, for instance, a P&L by a specific department or something specific to a segment of the business rather than everything entirely at once.

(18:37):

So, our clients specifically, because we work with a lot more early stage companies, typically later stage companies, they bring things in-house, they have their solution figured out. It’s not as common. We haven’t had any of our clients ever use one of these more expensive tools, but I could certainly see it making sense once a company graduates that level.

Randy Wootton (18:53):

Great, and I think this is a great way to make the segue to Mighty Digits. We were talking a little bit about your ICP, your ideal customer profiles, early stage startups, seed, series A, small revenue finding PMF. What is the most important tool or the process for the early stage company? Maybe talk a little bit about that. We had talked about it being a robust financial model. What does that mean and what are you doing with that model? You had walked through really four stages of how people can build out the robust financial operations, and maybe we just lead into that after you set the table for us.

Josh Aharonoff (19:27):

Sure. So, I am a big believer that a financial model is easily the most important tool in a finance and accounting function because it should in essence serve as a centralized hub for all of the information related to what’s happening in the business historically, as well as what you think is going to happen on a go-forward basis. That information can relate to your actual sales and growth. It could relate to your team, how many people you currently have on your team, how many people you’re going to grow, all of your other expenses that you’d find specifically on your P&L, any cash differences that you would find given the fact that you’re using accrual accounting, which is a lot more common for early stage startup reporting on the accrual basis rather than on the cash basis.

(20:10):

But it also gives you this reporting engine where management can understand instantly all this information, prospective investors can understand all that information. The board of directors can understand all that information at each and every single board meeting, and it should give you these outputs right at your fingertips where you don’t need to transform and do all these additional information. You just take a snapshot directly to your financial model. So, I’m a big believer that that’s the most important tool because in essence it puts in these guardrails. It helps you understand when is your forecasted cash update.

(20:39):

As you actualize each month, were you close to what you projected? If you weren’t, maybe you need to do a re-forecast. So, that number for when you think you’re running out of cash, you actually have a little bit better insight into it and it’s as credible as possible.

Randy Wootton (20:51):

Yeah, and I think especially if you’re working with investors, having a deep understanding of the cash flows, not just what’s showing up in your P&L, but literally your collections and understanding, sending out these invoices, what are you collecting? What’s your historical collection? What’s your write-off? When are you getting money in the bank? Being able to put that against your burn rate to be able to put out, to your point, I think you described it as a cash outdate. Running out of cash is never good. I think it also informs your fundraising. So, when will you go get more cash? What we’re seeing is investors, they put money in two years ago and said, “Hey, raise money in the next 18 months,” and now that’s turned into 24 or 36 months.

(21:30):

So, getting super clear with your investors around the expectations for how long you have against your burn rate and do you have to adjust burn rate, which is, well, I guess there are two ways to do it. One, get more revenue. So, you’re getting super-efficient at acquiring new revenue or reducing costs and then being super clear about how long your glide path is.

Josh Aharonoff (21:49):

For sure. I would say generally every startup, let’s say before series C, maybe even longer, all of them have a terminal illness. They’re burning more cash than they actually bring in. They know that they’re going to be running out of cash. The question is when are they going to run out of cash?

Randy Wootton (22:04):

Yeah.

Josh Aharonoff (22:05):

A company who knows eight months in advance when they’re running out of cash is in an infinitely better position to be able to raise capital, to be able to take their time, to be able to speak to investors, to be able to get favorable valuations than a company who finds out two weeks before.

Randy Wootton (22:16):

Yeah, you never want to be surprised. You don’t want to surprise your investors either. I do think to your point, if you want to have any leverage in the deal in the negotiation, it’s having enough cash where you can court multiple parties. So, you can create a competitive bid process either in investing in your next round or as part of an acquisition is where you create real shareholder values. So, that cash, forecasting cash management in many ways is the most important job of an early stage CEO in partnership with a fractional CFO, which might be different than what you’d get from a CPA firm at that time.

(22:49):

So, one of the lessons learned, we’ll come back to this in a second, but one of the lessons learned you said is when you go into companies, you often find that the financial model is too basic and that you think of that there’s four stages to building a financial model. The first one we were talking a little earlier was about the revenue build and you have the inputs and the outputs. Can you talk us a little bit through that? And then layering the P&L and then layering in the balance sheet and then we’ll talk about the chart of accounts mapped to accounting software and why that last piece is jumping a huge gap in terms of knowledge and systems and technology, but that’s really the promised land. So, what’s true?

(23:22):

Usually, what you find when you walk in and someone has a revenue build, what are the components and how are they thinking about the world when they have that lens?

Josh Aharonoff (23:29):

So going back to the point that you just mentioned, the four stages of forecasting, a lot of times I’ll work with a founder and I’ll see that they’re working with a stage one forecast, which can be okay. If they’re very early stage, they know how much money is coming in and out, they know that they have at least 18 months till they’re running out of cash, you may not need all those details. The first stage I like to call is the revenue build, and this is easily the most important part of a financial model because especially when you’re pre-seed or seed.

(23:54):

The main thing investors want to understand is, “Do you have a really strong grip on how you’re going to scale this company? Do you understand all the inputs for how you’re going to acquire customers? Do you understand the details on how long those customers are going to stay with you? When those customers stay with you, do you understand the business model? Will you sell to new customers? Will you sell to customers on a recurring basis, upon renewal? Will they be upsold? And then how will you potentially book the differences between what goes your P&L and balance sheet, let’s say commission’s expense or inventory or anything else?”

(24:23):

So I like to call a stage one forecast as just having a revenue build, which many times will suffice, but very quickly a company will then grow to not only wanting to show what their revenue is going to look like, but also who’s on their team and what are the other expenses that could feed through into their P&L. So, I like to call a stage two forecast, one that includes a revenue build, but one that’s also connected to a profit and loss. At this point, a company may still be recording under the cash basis. They don’t have enough investors to say we want to record things from the accrual basis. The cash basis is a lot simpler. It may not be as intuitive as the accrual basis, but it’s a lot simpler to be able to manage.

(24:58):

So, it’s there where you’ll want to get detailed on who’s on your team, forecasting out your gross salary, your payroll taxes, the health benefits, and all the other incidental costs, and then all the other areas of your P&L like your travel meals and entertainment, your legal fees and so forth. Stage two forecast involves you having a revenue build and a P&L connected to one another.

Randy Wootton (25:16):

One comment on that, I think in SaaS companies in particular, your biggest expense is your employees. Well, 65 to 70% is what you often find. I think you’re nodding your head. Of course, you have hosting costs, primarily AWS, but outside of that, you got a little internal software, you got a little T&E. But I think getting that headcount mapping and also the model tied to it in terms of you’re going to grow, you’re going to add this many more customers. Well, that presupposes how many AEs if you’re using a sales-led motion. Oh, okay, well, now you need implementation consultants, you need customer success folks, you need support folks. So, outside of the R&D of building the product, how do you operate the machine?

(25:55):

I think that’s where when companies are growing like crazy, they often fall behind because the biggest constraint to growth is having knowledgeable capacity on staff. So, that headcount build is so important, but to your point, understanding where the revenue is coming from first, understanding what the retention expectations are second, so you know what’s your cash generating engine to offset the expenses is so important at that second stage. So, now, I mean that’s a tee up to the third stage where you layer in the balance sheet. So, now you’ve got your three statement set up financials. Talk about the balance sheet, and I think a lot of people underappreciate cash flow, the statement of cash flow as well.

Josh Aharonoff (26:37):

For sure. I do want to just comment on one thing that you just mentioned about your headcount being your largest expense. Definitely, almost always it’s going to be your largest expense, but really important to understand also, it’s also one of your most difficult expenses to control. Now many founders out there think, “Oh, what are you talking about? If someone has an issue, I’ll just fire them. They’ll be gone tomorrow.” It’s so much more complicated than that. Most likely you’re going to be giving a severance package. If you don’t do that, your team morale could potentially have a hit. You may even find yourself with a lawsuit. Whereas with a contractor, you’re working with a piece of software, you can go ahead and turn off that service. It’s a lot easier to control.

(27:10):

So, that’s another big reason why you want to really get your headcount build right, but then moving on to stage three, like you spoke about. When you attach a balance sheet to your profit and loss, you can create a statement of cash flows via the indirect method where you don’t have to actually make any changes to your assumptions around cash flows. Any changes in your income statement and balance sheet will automatically flow through into your cash flows. So, now you have a three-statement model, which is what people call it, where you could easily understand everything that’s happening in each of your financial statements, which a lot of the times is going to tie into an accrual accounting.

(27:44):

So, you may only show $10,000 in revenue in a period, but in reality, your cash flows can wildly differ from that and your actual sales can wildly differ because maybe you’re selling $120,000 on an annual subscription. So, you take a 12th of that as revenue, but the actual cash collected and the actual sale amount can be much higher.

Randy Wootton (28:03):

Right. I think getting clear if you get paid upfront in your terms and just knowing what’s going in the bank when, wicked important to our earlier conversation about “When are you going to flame out?” So then you get to this fourth stage. One of the other things you talked about in our pre-brief in terms of one of the things you found not that most surprising to you but consistently underdeveloped on the finance side is the chart of accounts. So, maybe talk a little bit about what a chart of accounts is for people who don’t know how. When you say it’s poorly designed, why is it poorly designed? And then when you have a good one, how that lets you get to your fourth stage of the financial model?

Josh Aharonoff (28:41):

For sure. I love talking about this. It was one of the earliest YouTube videos that I produced. Your chart of accounts for those who are not familiar with it, it’s in essence the accounts that show up on your profit and loss and balance sheet. So, we call those general ledger accounts, and you can call those accounts whatever you want. You can call an account salaries and wages. You can call it payroll expenses. There’s really no specific ruling on how you actually dictate what your financial statements look like, but the whole purpose of your financial statements is to give clarity to the readers of the financial statements as to what exactly is happening. The more clear your financial statements are, the better they can understand what’s happening.

(29:23):

The less clear, the more need for a follow-up meeting where you need to hop on a call, you need to explain what this actually means. So, sometimes I’ll be working with a company and they’ll have an account like other business expense. I’ll be like, “What does this mean? Is this a company retreat that you guys took or is this a random meal that you had?” You have no actual context unless you look into the actual transaction detail, which majority of the time someone wouldn’t see when they look at the financial statements. On top of that, it’s so interesting, almost all the time when I meet with companies, they’ll have an investor’s name or an employee’s name in their chart of accounts. I have to ask them like, “What’s the logic on including this person’s name in a profit and loss?”

(30:03):

It’s like, “Well, we want to be able to understand how much we’re actually paying this in person and how much actually this investor invested into the company.” Well, you could certainly still understand that. That’s what work papers are for. Those go into the details behind your financial statements, but the actual financial statements that can make its way to department owners, to banks and lenders, to investors. Do you really want them to see this random person’s salary or investment? So that’s another piece of advice that I have.

Randy Wootton (30:26):

Just picking up on that a little bit, I think for me as an operator, one of the things when I’m looked helping companies do due diligence, which I’ve done in my past, both as a strategy guy and then when I was independent, getting clear for example on what goes into your COGS, your cost of goods sold, so that you can have clarity around your gross margin because gross margin becomes one of those metrics that everyone uses to benchmark. So, if you’re north of 85% for your subscription gross margin, that’s good.

(30:54):

People aren’t going to look at you twice, but if your gross margin’s at 80% or if your gross margin’s at 95%, people are going to double click in and say, “Wait, what’s going on here? Did you overload the costs? Did you assign, or are you not taking enough costs in your COGS because your gross margin just looks funky for a web app?” I think similarly, the other area where you don’t get pushback but certainly need to be able to talk to investors especially, is about what gets bucketed into sales and marketing, R&D or G&A. They will have benchmarks in terms of, “Hey, you shouldn’t spend any more than 12% of revenue on G&A.” I don’t know if you have a specific number that you use, but if you’re more than that, that’s where you’re going to have to justify it.

(31:36):

Well, you’ve got more than that because you put the wrong stuff there. Then as I described, you’re just breaking into jail. One example of that is when I came into Maxio, we had people in a rev ops bucket. We had more people in a rev ops bucket than what our investors would say would be typical at our size company. So, 240 people, they’re like, “Ah, we go to companies your size and they all only have three people. Why do you have seven people?” We’re scratching our head. We had some other folks that might’ve been classified under finance, but they were in sales and marketing as rev ops. So, we looked closely at it and tried to be intellectually honest and say, “No, no, those people are really business operations. We’ll put them under finance.”

(32:15):

So we reallocated some of the costs and then the investors were like, “Oh, okay. Well, that makes more sense. That seems in line with what our expectations are.” So those two pieces of data, connecting the headcount, where it’s being rolled up to and then having that level of aggregation at the operating cost center level makes a big difference in terms of when you’re trying to raise money or figure out how to benchmark your next plan.

Josh Aharonoff (32:44):

For sure. fourI think for all the reasons that you just mentioned, that’s why the chart of accounts are really the foundation to your month-end close, your financial reporting, and your financial model, because the best financial models and now we’re getting into stage four where you’re actually connected to your ERP and you could actualize the model and generate all these beautiful dashboards and analyze budget first actuals, what’s happening versus what you thought would happening. Before you have a proper chart of account set up, you can’t really do all that.

(33:14):

There’s so much that is determined on that foundation, but once you have your proper chart of accounts set up, well, now you can forecast each and every single general ledger line item. Now you can do that analysis like you mentioned, where you compare general and administrative compared to total operating expenses and so forth. It all starts at the chart of accounts level.

Randy Wootton (33:33):

That’s great. You just flew by the other thing I just wanted to circle was around the budget to actuals and how important that is. Can you talk a little bit? Because it really does require you to get to this four stage before you can have those types of conversations, both as an executive team managing your business, but then also as you’re managing investors’ expectations. You go and you create a forecast. You create a budget and then you have a forecast at a rolling forecast, but you’ll have actuals at the end of each month that you’re probably trying to triangulate against both the budget and your forecast. Can you talk a little bit about that and why that is the nirvana of financial models?

Josh Aharonoff (34:10):

Budget versus actuals is easily my favorite report. I like to always say that there are three reasons why I see companies start to invest heavily in a financial model. Either they’re getting ready to raise capital and their investors want to see a plan for how exactly they’re going to use the capital they’re going to invest. They already raised capital, and now their investors want to see, “Hey, is my investment secure? Is the company doing a good job? Do we need to get involved?” Ideally, they are getting involved in a positive way. The third, which is my favorite reason, is the company wants to be able to make more informed business decisions.

(34:41):

I found that the budget for actuals with the exceptions of maybe going out to raise capital that may not be as much of a focus, but especially when you’re doing board reporting and especially when you’re trying to get the insights, the budget versus actuals to me is the most insightful report because first, it summarizes the key areas of your business. It’s not so common to do a budget versus actuals on every single general ledger item. You generally want to group those accounts into different buckets, into different call centers, different departments and so forth. You’ll also want to choose a few other metrics like maybe your total cash flows or your ending cash or your ARR, things that may not actually show up on your financial statements.

(35:19):

So, now you have these key accounts that you’re summarizing. You’re showing the actuals, which in and of itself is helpful. Now you see at a bird’s eye view the most important areas of the business. Then you see what you actually forecasted along with a dollar variance and a percentage variance. I like to include both because a million dollar favorable or unfavorable variance may or may not be significant depending on how much you ultimately forecast. If it’s a billion-dollar company, a million dollars is a great variance. If it’s a $500,000 company, we have a lot bigger issues at hand. What I love is that when you then have these variances, you start to tell a story.

(35:54):

First, why do we have these variances to begin with? You don’t need to have zero variances. In fact, you’ll never have zero variances. It’s just part of life. But are these variances because we input in the wrong assumptions? Is it because of a timing issues? Is it because we have a bug somewhere? The sooner you can analyze this report, the quicker you could take action when that’s needed and avoid a surprise like we spoke about earlier, but all of a sudden, you realize that next week you’re running out of cash.

Randy Wootton (36:16):

The only thing I was going to add, I think spot on in my experience, the other thing that’s super helpful is to have some seasonality tied in. So, quarter over quarter or year over year, so you have actuals against budget, but then as you’re representing, especially if you’re off against your budget, what happened last year? Was April a soft month last year or April’s the first month of many people’s fiscal calendar of the second quarter, do you look at the first month and the first quarter and the first month of the third quarter to see what happened in terms of bookings, which translates to revenue or other spend, or I think another one that plays out is internal software.

(36:55):

You’re often spending on internal software and the cash actually goes out at the beginning of the year or the end of month December. So, having that sense for, “Oh, well December every year is a big year because that’s how our contracts are set up.” So I do think just augmenting your thoughts in terms of budget to actual is being able to put it into context, trailing 12 months and then five quarters and then quarter over quarter, year over year. So, it can become a massive spreadsheet.

(37:20):

I think maybe the other point is that’s what you and your as the fractional CFO or the CFO and the CEO and the executive team need to spend time on is wading through that data, not spending time trying to make sure the data is right and then from that, driving the insights to better understand what they’re going to do as operators for the business and then inform the board on if you’re invested in by private companies, inform the board in terms of what’s working, what’s not, and where you’re going.

(37:47):

I think that’s the other thing is if you’ve missed in terms of a quarter, certainly, you have to tell the story for why you missed, but the best executive teams are the ones we’re able to say, “And we understand what happened and this is what we’re doing about it. These are the things we expect to change and these are the metrics we’re going to watch as we go forward.” So that combination of financial metrics and operating metrics to tell that story of business performance.

Josh Aharonoff (38:10):

For sure. I couldn’t agree more.

Randy Wootton (38:12):

So to that, I mean maybe this last part is we talked a lot about when you go in with Mighty Digits, we talked about the most important tool, the financial model, the four stages of it. We talked about why this is important in terms of you’re getting ready to fundraise, you’re deploying capital, or you’re just trying to figure out what the heck’s going on. We didn’t talk about FinOps, financial operations and how you would define financial operations. When you think about what financial operations needs to do well, what do they have to get done every month, every quarter?

Josh Aharonoff (38:44):

So far, we’ve been talking about financial reporting and forecasting, which of course are very big parts of the finance and accounting function, but you also have all these other areas like you just mentioned, the latest to the financial operations of a company. So, there’s accounts payable and procurement. There’s invoicing and accounts receivable. There’s payroll and probably a few other items that may bleed into HR or may just fly directly in a financing accounting function. The idea is with each of these functions, you want to make sure that it’s a well-oiled machine where things are being run efficiently. You’re not draining too many of the resources.

(39:19):

The worst thing that could happen is you actually have to bring in the management team who have bigger problems that they need to be solved, and you also want to make sure that things are not being done that could potentially increase your vulnerability to some error. So, a perfect example is let’s say payroll. You don’t want to miss a paycheck. It could be the smallest mistake that you make that has catastrophic impacts on things. So, there are things that you can do to have a proper payroll function where you have certain checks and balances, certain notifications go out, maybe set things on auto pay as a fail switch and so forth. That’s generally how I think of financial operations.

Randy Wootton (39:52):

Yeah, and I think the one thing we’re talking about, which we haven’t talked about today, is financial operations is responsible for the chart of accounts, getting that sorted, and so a new CFO coming in and making sure that makes sense and tracking through all the way to the balance sheet and how that plays out, knowing the business model. So, what we talked about is the financial model, which actually implies a business model. The third thing is the month-end close. What do you see in terms of best practices for early stage startups to be able to do a month-end close? Is it six business days, eight business days? Is there promise of a zero day close in the future with AI? What’s your sense on the month-end close?

Josh Aharonoff (40:27):

I can certainly see there being a promise with AI. I think nothing is off the table and it’ll only be a matter of time until we see that. I think it really depends on who exactly the stakeholders are and what is the intention behind the month-end close, because again, I think an early stage company, they may be pre-seed, they may be seed. If they don’t really have external reporting requirements, if there’s not a ton of activity going on where they have to worry about potentially running out of cash or making some misjudgment, I don’t really know how much of an emphasis I would put on having a month-end close being done by the first week of the month. It’s certainly doable. But a lot of companies when they start off, they don’t even do a month-end close throughout the year.

(41:03):

They just hire a tax professional. That person will do bookkeeping and clean everything up and just file their tax return. I think as a company grows, the more capital that they raise, the more external reporting they need to do, the more that’s at stake out of them not having their data cleaned, the quicker one needs to have an actual month-end close completed. I think the key to having a month-end close completed in a short timeframe is first real-time classification, categorization, reconciliations, not waiting until the next month for when all the data’s available to be able to do of that. Similarly, you also want to have a lot of standard operating procedures, outlining who exactly is going to do what, how exactly that’s done.

(41:40):

Not only so that there’s better alignment on the team, but teams are constantly evolving. Companies are constantly growing. When one server and someone is doing one thing one day tomorrow, they may do something else. In order to actually delegate that role, you need to have a proper standard operating procedure so that someone else can easily just step in.

Randy Wootton (41:56):

Yeah, that’s great. I think having documentation, especially when you have turnover or team is scaling, nailed it in terms of month-end close. It’s funny, I’ve always had to rely on fast month-end close in part because I joined companies at series C and beyond. So, there’s been a lot of invested capital. You have lots of investors looking for information and trying to manage it. When I was at Percolate, we had Sequoia, GGV, Lightspeed, first round capital, and so the CEO and the team and I were every month trying to figure out what were the numbers and how do we manage the distribution of the numbers to the investors.

(42:28):

They got a bunch of whiz bang Excel jocks on their side who had run you through the numbers if your numbers weren’t right or they changed from month to month and it was a huge issue. At the end of the quarter, it was a big deal because they had to do the report out for the LP. So, to your point, the more stakeholders you have, the more professional they are, the more important it comes that have your data be right and be able to be efficient in producing it. Also, I think the other thing about being a CFO in today’s world is your job is not just about month-end close. Getting the month-end close is the basics. It’s like putting the foundation in the house.

(43:01):

What you really want to be doing is building the rooms with the view on top, and that’s all about the insights that you’re able to drive. So, the sooner you can drive your month-end close, the more time you can spend on, “Oh gosh, we had some churn in this region or this segment. Let’s go figure out what’s going on there and start to game plan. What are you going to do about it?” So I think shifting from compliance officer as CFO to strategic partner as CFO necessitates being able to do month-end close pretty quick.

Josh Aharonoff (43:27):

Definitely. Like you said, it really is the foundation for so many other important things to unlock in a business. Until you have that foundation, everything is a bottleneck and it’s going to be at a standstill. So, that’s why oftentimes there is a lot of pressure to get that month-end close completed in a really short timeframe so that all of these other things that happen after the month-end close is ready can take place.

Randy Wootton (43:48):

Amen. All right. So, let’s shift to our speed round. Three questions, one is favorite metric, favorite book, favorite influencer. So, what’s your favorite metric and why?

Josh Aharonoff (43:58):

Favorite metric I would say is gross margin. A lot of people say cash flows is the best and I think cash flows is also great, but to me, gross margin really just from a philosophical perspective represents how much money the business will eventually get today, tomorrow, whenever with each sale. Those companies that have a very low gross margin, maybe breaking their backs to generate sales, but at the same time not really reaping all the benefits of a company with a very high margin, which a lot of SaaS founders are.

Randy Wootton (44:26):

I know I’m putting you on the spot, but as you’re looking at early stage, B2B SaaS companies, you have a target, a gross margin that you want them to be that’s within the realm or reasonable or what’s best in class?

Josh Aharonoff (44:37):

I’m a big fan of having a gross margin of 90% or above. I think it could be challenging in the very early stages because a lot of times you’re hosting costs, which is very much a big part of your cost of goods sold. It’s fixed. It’ll of course scale, but you have a certain threshold that until you have enough sales to be able to surpass that, you’ll have lower margins. So, it’s really more important as the company continues to scale.

Randy Wootton (44:59):

Yeah, I think that 85 to 90%, spot on. That’s one of the ones where if you’re at 90%, people are like, “Yeah, okay, cool.” Eighty-five, all right. But anything below that, you’ve got to explain yourself in B2B SaaS tech company, not tech-enabled service. All right. Favorite book and why?

Josh Aharonoff (45:14):

I love Never Split the Difference by Chris Voss. People think it is a book on negotiations and how to manipulate others, which I could see it being used for that. It really is a book on how to establish rapport with someone, how to really make sure you’re both speaking the same language, how to get you both to a mutually beneficial outcome to take away the stress from any difficult moments when you’re having with someone. I got a lot out of that book.

Randy Wootton (45:42):

That’s great. I think he also talks about that broad zone of possible agreement. It’s very rare when you’re in negotiation that it’s zero sum. Meaning one person is going to win, the other is going to lose. It’s how do you create a zone of potential agreement. You may not end up with an agreement, but if everyone gets a little win, there’s much more likelihood that you’re going to get a deal done. I’ve seen that play out on multiple M&A deals.

(46:06):

What are you trying to solve for and what are we trying to solve for and how can we make this work? So that’s a great recommendation, Never Split the Difference. Then finally, who’s your favorite influencer? Was it a person that you’re following who thinks is writing original stuff, not just putting top spin on what’s happening in the ecosystem?

Josh Aharonoff (46:21):

Nathan Barry, the CEO of ConvertKit, he has got a lot of really great content and he has also a personal brand where he just shares not only the things that are going on in his business, but also his family life, his hobbies, and I think he’s also connected with a lot of really great people. So, that’s someone I really look up to.

Randy Wootton (46:42):

That’s awesome. Well, thank you very much, Josh, for your time. Really enjoyed getting to know you through the process. Congratulations on your success and I look forward to staying in touch going forward.

Josh Aharonoff (46:50):

Likewise.