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