May 19-20 l Washington, DC l Omni Shoreham

Going Beyond $5M in Revenue COO Advice

Peter Bauert

COO, Parallels

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Agenda

• Lifecycles of a Company

• Common issues with earlier stage companies:

• Revenue recognition

• Cash Accounting

• Record Keeping

• Value of good supporting functions

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Life Stages of a Company

Early Stage Expansion Maturity

Re

ven

ue

Concept Refinement Scaling Optimizing

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Differences between Early & Later Stage• Early Stage

• Go-to-Market

• Define your offerings

• Find your space

• Operational

• Cash, Cash, & Cash

• Informal books/records

• Team

• Owners know everything

• No “management”

• Later Stage• Go-to-Market

• Scale your sales effort

• Segment your offerings

• Operational

• Revenue Growth

• Profitability

• Team

• Need next level of trusted managers

• Need for trust & delegation

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Why should you care?• Need to be ready to ride the wave / go through rapid

expansion phase of business

• When the demand for your offering accelerates, you want to be able to take advantage rather than to spend much of your management time on internal finance / legal / etc.

• Fixing your books / processes / team later will cost more and it will be a big headache

• You don’t want to start thinking about finance / legal / etc. when you think it is time to sell your business or raise funding

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Issues: Revenue Recognition• One of the finance issues that trips up many small

business as they become bigger is Revenue Recognition

• Four basic principle you should keep in mind before calling a “deal” revenue:

• Existence of pervasive evidence of an arrangement

• Delivery has occurred

• The fees are fixed & determinable

• Collectability is probable

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Issues: Cash Accounting• When starting a small business, it is easier to do

cash accounting (i.e., profit = cash in – cash out)

• There are several fallacies with cash accounting

• You could actually be loosing money, even though your cash in > cash out

• If you want to raise money / sell the business, your business will be viewed as “less attractive” due to cash accounting

• Investors / Buyers want to see GAAP accounting

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Issues: Proper Record Keeping• There are two aspects to proper record keeping

• Financial

• Legal

• It may not seem important when you are a smaller business, but record keeping as owner has an infinite memory

• Problems can arise when

• Someone gets hit by the bus

• Disputes arise

• Investors / Buyer wants to perform due dilligence

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Keeping it Real• Irrespective of what I just said, it is still more

important to attract customers, deliver the service/goods, and growth the business

• Business founders / owners usually do know best, but they should know their limitations

• Finance, Legal, HR, etc. should not be there to hinder the business, but to help it succeed and growth

• Make sure you hire / contract the right individuals

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How G&A staff adds value to the Business• Don’t treat G&A staff as necessary evil / after

thought, or something that you should “always” outsource

• Outsourcing has many advantages, but not building up internal competency will have long-term down-side

• There are many tasks that G&A staff perform that may not add direct value to the business

• Some of them might keep you out of trouble with authorities (IRS, EEOC, etc.)

• Other tasks add direct value to the business

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Finance and the Business• Let’s make sure we understand the difference

between Finance & Accounting

• There is a lot of insight about the business that can be gained with the right finance person; ex:

• Customer acquisition cost analysis by source

• Customer lifetime value analysis

• Churn analysis

• Etc.

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Lawyers and the Business• It’s critical for the business to have access to a

lawyer that understands your business / takes an interest in it

• A good lawyer not only helps you negotiate the proper terms regarding issues like warranty, indemnification, etc, but also pushes hard to get better economic terms

• Don’t let lawyers argue to long about who is right & who is wrong -> that adds no value to you

• Always have your lawyer net it out in terms of $ exposure.

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HR and the Business• Tactical HR (ex: payroll) can / should always be

outsourced

• Recruiting is one of the key areas for HR to help add value to the business

• The cost of hiring the wrong person is hugely underestimated

• Cultural fit can be more important than experience

• Don’t underestimate efforts around retention – it’s cheaper to keep the employees you have than to get new ones

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Summary• Building the business is the most important task

• Proper supporting functions (Finance / Legal / HR) should help the company’s goals and not be hinder it

• Don’t underestimate what support functions can add to the Business – especially insight that can be gained from Finance

• Don’t delay – you never know when you someone will want to take a look at your books / operations

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Q&A