#194 Financial Fluency for Startup Founders With Jeff Rudner

0:00:01 - Mehmet
Hello and welcome back to a new episode of the CTO show with Mehmet. Today, I'm very pleased to have with me someone who's specialized in accounting and finance. This is an underrated topic, in my opinion. When it comes to startups, we cover, of course, tech. We cover a lot of topics related to startup and entrepreneurship in the show. Jeff, thank you very much for joining me. If you can just tell us a little bit about yourself and what you do, Absolutely Great to be here. 

0:00:30 - Jeff
I am the co-founder and COO of Proseer. We are a modern accounting firm bringing a tailored combination of people, process and technology to startups and entrepreneur-led companies that are looking to scale. We work with founders and entrepreneurs to optimize the processes in their businesses, with the hub being accounting and finance, so that the entire team is rallied around numbers that they can trust and efficient processes. 

0:01:01 - Mehmet
That's great to know. Now let's start from the place you were telling us about, which is mainly startups. I know that it maybe looks like a complex I would say topic, but, of course, maybe you can give us your approach for financial management for startups, Because what I'm interested to know, and other founders know, what are the unique challenges that you think they often face? 

0:01:31 - Jeff
Sure, absolutely. It's a great question For startups specifically. Many founders are faced with the problem of creating something that hasn't existed before, but all companies have similar problems and similar challenges. When it comes to accounting and finance, companies need to have their financial statements available to analyze and to interpret to determine how the business is doing. They also need some sort of forecast or projection. Now, each company will be different in related to the inputs to those, but having financial statements that are understandable, that you can work with your team to know what's working, what's not working, and also share with potential investors or lenders so you can tell your story through numbers in an efficient and clear way, is super important for every business. 

0:02:29 - Mehmet
Now continue on this. What are usually the common mistakes you see entrepreneurs make when it comes to? 

0:02:37 - Jeff
financials? 

Sure, absolutely the biggest one is that they don't put value in knowing their numbers or in building a process to make financial reports, as the life of the founder is very difficult in that they're pulled in so many directions all the time, and often accounting and finance falls to the wayside because it's not revenue generating or it's not thought of as revenue generating or growth related. 

I like to challenge that thought, in that if you don't know what your numbers are, then it's impossible to make the best decisions. From our standpoint, getting accounting and finance in place, at least getting your P&L together, getting your balance sheet together and reviewing it on a monthly basis to help you understand what's your financial position, how much cash do you have in the bank, what's your runway, what's your burn rate All these are important factors that every business needs to know in order to determine whether to go left or to go right. The only way that you can do that is by having a financial foundation, whether that's a bookkeeper in-house or hiring an outside firm that can help build and manage the process for you. 

0:04:00 - Mehmet
Jeff, do you think that sometimes also some of the mistakes that they do is they exaggerate the numbers or they become a little bit more aggressive or too much optimistic? Do you see something like this? 

0:04:16 - Jeff
Unfortunately, we see it all too often. Entrepreneurs and founders are notoriously optimistic people and they want to believe that their business is outperforming. What numbers can do for you is to support your thesis, support your hypothesis and also ground you in reality. The financials are really a way to tell your story what's working and what's not, to help you make decisions and also to help outsiders understand If you're going to fundraise. Investors really want to see financials that tell the story of your business. It's important that the founders know those numbers well. 

0:05:03 - Mehmet
Great. Now, one of the things that when back in the days also, I asked a lot although I was not a founder, but I mean fun enough. I was working in university and it happened to start my career in a business school. The question that I asked that time and I think a lot of people still ask what's the difference between accounting and finance? In a very high level, Absolutely. 

0:05:32 - Jeff
That's a great question. The way that I like to think about it is accounting is backwards looking. It tells the story of what happened in the past. Finance is forward looking. It's predicting the future and telling the story of how you're going to get to achieve your North Star. Together, you tell the whole story of the business what happened in the past and where you're going. 

0:05:55 - Mehmet
Wow, I like this. It's easy, right, yeah, absolutely. Now, jeff, how your company proceed? How do you help founders navigating, actually, these challenges and because these terms that maybe they are not familiar with, maybe they heard about them how do you help them navigating all these hurdles? Yeah, I basically. 

0:06:20 - Jeff
Have a great week. Absolutely Great question. So the first thing we do is we assess the business. We look to understand on the deeper level. What does the business do? What are the drivers of revenue? What are the costs of the business? How does the company collect income? How does it pay vendors? 

We process map the entire business so that way we can determine how to integrate all of those flows into the financials. How are we going to get all the information available to provide the founder with the information that they need to run the business? What are the costs for the month? Where did cash go? And so we design the system and process for the company to pull the data through integrations into the accounting system. In that way we have semi-real time availability of numbers where a founder can look and understand where their cash balance is at any time, what bills they have to pay upcoming, what vendors or what customers they've provide service for that they haven't received payment for yet, and who they need to call and who on their team they need to empower to take action. 

And so we really like to think of the financials as the hub and the real source of truth of the performance of the business. So everyone. We empower the companies and our founder partners to look to the financials as the one source of truth in the business, and if anybody needs information within the business, we try to centralize it into the financials. So that means integrating outside, integrating proprietary software into the financials so that way invoices are generated directly from the financials. Paying bills that are centralized and integrated directly into the financial system Seems a lot more complex from outsiders, but we want to make sure that there's only one source of truth. Going back to your question previously about founders potentially exaggerating numbers, a lot of this comes from the fact that they don't have one source of truth. 

0:08:37 - Mehmet
They have a. 

0:08:38 - Jeff
CRM that tracks sales one way. They have the financials that track sales another way. They have their database that counts the number of customers a separate way. All these things aren't talking to each other and so they really can pick and choose, and there's confusion around which one is the right number to say when someone asks how many customers you have. 

By building an optimized finance and accounting function. There's only one answer to that question, because everything is talking to each other and everybody's on the same page about how many customers you have, what your revenue was for last week, what your burn rate was, what your closed sales rate is. All those things can be integrated so that way, the sales team has the same information as the tech team and has the same information as the finance and founders. 

0:09:32 - Mehmet
That's great what you touched up about, jeff, because people in sales and I hope someone from my colleagues or ex-colleagues who, because I used to work in sales for startups as well, to hear this conversation, because it's all about you mentioned something fundamental and I like it. Everyone should be aware about these numbers and what's happening, because one thing I noticed over the years not necessarily where I used to work, but I heard it from other colleagues is that people who are not understanding, for example, sometimes why is the pressure at certain moments? And actually it turns out because their runway, which is like how much amount of time before they run out of cash it becomes very critical and this is where the pressure starts to come. So I think what you mentioned is everyone is on the same page. It's something very critical and crucial there, jeff, I start to see something also recently you know fractional everything fractional CTO, fractional CMO Is it, in your case, like a fractional CFO, kind of? 

0:10:44 - Jeff
That can be thought of that way. There's different ways that we support our clients. The first and foremost is outsourced accounting For everything I've talked about today. The foundation of getting high quality information is making sure you have a high quality team in place to provide financial statements on a regular basis, so that way you can understand how the business is performing. 

So first and foremost, financial accounting. Then it goes into the analysis of what's happening, how the business is performing, helping to interpret that data for our clients. It can be thought of as financial planning and analysis. Some people think of that as CFO services and then setting the strategy going forward. You can think of that as fractional CFO or fractional finance, but it's really the solution that we provide is a holistic accounting and finance department that supports you in a way that's seamless from an internal team to get you all the information you need to make high quality and timely decisions. 

0:11:52 - Mehmet
That's great. Now you mentioned something about when you were describing the difference between accounting and finance that finance is looking into the future. Now, what are your essential strategies? I would say, or you advise your customers for financial forecasting, especially if they are growing fast, because we know when companies grows fast, this is where things can get mixed up right. So what are some of the strategies you can highlight today? 

0:12:24 - Jeff
That's a great question. So that's one of the first things actually we work on with our clients. The first step in my process is understanding where we are today. So looking at financial statements the best information that we have. If you don't have financials, let's look at some information that is available that we know we can rely on, and then projecting a North Star. 

What's our North Star goal? Whether it's one year, three years, five years, depending on the maturity of the company. For a seed stage company, you're probably only looking for one year. For a series A, you're looking one to three B, you're looking further in the future. But define your North Star, whether it's number of customers that you're going to acquire by the end of the period, whether it's number of revenue recurring revenue you're going to be earning by the end of the year. Define what that North Star is. And then what we do is we bridge between where we're at and where we are? 

What do we need to do to get from where we are to where we're going to be? What inputs do we need? What do we need additional? Do we need a new CTO? Do we need new developers? Do we need a sales and marketing team? Do we need to invest in paid media, defining what those inputs are, how much we need to spend and then what the corresponding results will be in terms of our growth trajectory to get to that North Star. And so it's step by step to help build the path for how we're going to achieve our goals. 

0:13:56 - Mehmet
That's great, Jeff. One also something that came to my mind now Regarding the, of course, whether I going to hire an accounting and finance person locally or I going to use another service, but I still believe that founders at least maybe the CEO or the co-founders together they need to have some literacy to understand the basics. So what are the basics things that they need to understand and, if they want to learn, where they can find the information? 

0:14:32 - Jeff
Sure, that's a great question. I'll answer your question kind of in reverse. So where to find information? Depending on where you're at, if you have outside investors, if you're at a C, if you're C level company, work with them, help ask them questions as to what is it, what are the metrics that you think we need to hit and what is the series A investor going to be looking at in our business so we can make sure that we're hitting those targets. Ask outsiders what their perspective is on the business and what it is that they're going to be looking for. That's one way of doing it. We always advise having a financial professional at the ready whether that's an outsourced accounting and finance function that we support or there's other companies that do that to help educate you on how your business is doing. 

Looking at the balance sheet, which is a picture of your business in a point in time and the financial health of your business at a point in time. 

So showing what assets you have typically for startups it's just cash or some receivables what liabilities you have, what you owe whether that's credit cards or you have some debt on the books and then equities, how you funded the business. 

So that's the balance sheet what it is at a point in time. Typically we look at this on month end, quarter end or year end and then the other important statement is the profit and loss statement. This tells us if we're on our journey, how fast our business is going, what our revenues are and then what the inputs are that we're putting into the business, what the operating expenses are that we're putting into the business to support that revenue, and then also the cost of goods sold, which is really important, because the revenue minus cost goods sold helps determine gross profit, which gross profit margin. We've heard a lot recently about startups and having typically historically high gross profit margins but as costs have been increasing over the past couple of years, with wages and more inputs needed, gross profit margins have been shrinking. So these are all financial terms, but it really comes down to looking at your balance sheet, looking at your profit and loss statement and putting those together to get an idea of how the business is doing. 

0:17:00 - Mehmet
That's, I think, very much clear explanation about the major terms. And yeah, as you mentioned at the beginning, it's like simpler than it looks from outside. Now, just quickly, because you mentioned about the profit margin, is there anything that is? I know that it differs, I know there is a lot of factors, but is there, for example, if it's below certain percentage, oh it's really bad, and above certain percentage, oh, these guys are doing good? I know we cannot compare everything, but from your experience, let's talk about tech startups, for example, or startups in the tech space. Is there any threshold where really things are definitely bad? You say, or OK, these guys are doing well, they're very subtle measure. 

0:17:49 - Jeff
So the kind of black and white is negative profit margins. We see a lot of startups that have negative profit margins, which means, if we just forget about the tech concept for a second, let's say we're selling t-shirts. If you're selling a t-shirt for $10, but it costs you $15 to make that t-shirt, you lose $5 on every t-shirt you sell. That's probably not a good business For tech startups. If you're selling a software that requires a lot of human support in the background or a lot of additional tech support to actually service that sale, that's causing you to lose money on every sale. That's that's something that really needs to be fixed as soon as possible, because we need to. The higher the gross profit margin is, the more money that's available to pour on to growth functions, so sales and marketing Advertising to increase overall revenue and income. But we can't do that if gross profit margins are lower negative, because there's no more money that's available to to grow the business. 

Yeah, so yeah, sorry, just to say it another way. Typically startups, as they're growing their there, as they're building out their software platform, it requires a lot of humans to support some of the functions that will be automated down the line. It's really important to know what that path is to remove the humans from that direct cost Roll to be automated in the future to really which will, which will expand your profit margins. 

0:19:31 - Mehmet
Yeah, and I think, jeff, especially in tech companies, from my experience, it's very normal maybe for the first year, second year, to be in negative and then we see them, you know, start to be a positive cash cash flow. Because you know, back in the days, many people they said, oh my god, like this company is losing money, like, but it's the normal thing. But in your experience, like I said, first year, second year, like, is there also here any I would say best I'm not called best practice, maybe like a trend that it looks more healthy, like okay, first two years is fine, but for example, five, definitely know you guys doing something wrong. Is there anything like that? 

0:20:14 - Jeff
It's funny you mentioned that so Typically well, not. Typically. A lot of times losing money is actually intentional, because startups are, once they've have product market fit, are investing so much into acquiring more customers that that the the acquisition of those customers will not pay off for a number of years. But by getting a customer in today, you're, you're, you're getting someone who's gonna have a long life with your company, is going to pay you over time and the payback will be depending on the company number of years in the future, and so that's okay For a lot of companies. That is okay because that's the design that you want that long lifetime value and you're spending upfront to realize the value of that customer over a future period. 

I just saw, actually yesterday, that Uber, a company that has been around for quite a bout of time, reported the first operating profit in its history when it released earnings yesterday. So there's no direct correlation between operating profit and overall success. As long as you have product markets fit, you can still increase the enterprise value of your company. Very, very high is increased users. What you can't continuously do is you can't continuously burn money without reason for it, without a purpose and without an overall plan to return that through customer growth and customer lifetime value. So that's the disconnect. 

0:21:59 - Mehmet
Yeah, actually this was exactly the reason why I asked this question, because I saw the headlines yesterday and I know a couple of other companies in tech like. One in my mind is also Nutanix, for example, is one of the tech companies that they kept burning cash for quite some time, but they had a product market fit. So, and the reason I wanted to get this point here is also to encourage founders not to give up if really you have a product market fit. So you need to be prepared, I would say psychologically, to be burning cash maybe, and in case of Uber, it's fascinating, it's been, I think, more. I don't know when they get started, these guys, but for sure more than 10 years plus. So, yeah, amazing. 

Now just have a couple of questions left, Jeff. So, from financial projection perspective and finance function in general, does it matter what is the intention of the founders to do with the company later? For example, is it different whether they are looking to someone acquire them versus them going IPO versus? Okay, we'll be happy if we do, for example, X amount of dollars per year? Sure, we did that. So is there any difference there in the strategies? 

0:23:31 - Jeff
Absolutely. I think it really depends on in setting that North Star so for an acquisition, typically you would form the company in a way that be attractive to a specific buyer or a pool of buyers. You're designing your systems and processes to be attractive to those future buyers down the line. You're not expecting to be self-funded or self-sufficient in the future. So that business model would be very different than something that you're looking to IPO because you really need. Under an IPO, you wanna design a company to be self-sufficient and be successful to the broader investment market, and that both of those examples are very, very different from a bootstrap company in terms of the cash needs. A bootstrap company is gonna be funded by the founders or one or two angel investors and that's about it, and so they need to get to cash flow positive a lot sooner to fund their operations in growth. And so what's your exit goal? Who would potentially buy or invest in the future Plays a massive role in defining the strategy of the business. 

0:24:54 - Mehmet
That's great. It's good. You mentioned also the bootstrapping, because I wanted to ask you about it and you answered it already. So, jeff, how does technology influence today's financial management and how do you use tech solutions into your consultancy practice? 

0:25:13 - Jeff
Great question. So the days of manually writing checks, of receiving physical bills in the mail, handing it to your bookkeeper to code it into the accounting system, to draft a check for you to sign on every Friday or twice a month, that take so much time, are long gone. A lot of companies still do that because they don't know that there's better ways. There's cloud accounting technology that is available now and that we use and we bring to all of our clients to integrate all of the financial drivers of the business or as many as we can bank accounts, bill pay, employee expense reports into the financials to reduce the amount of manual processes by up to 75%. Things that were done manually in the past are just not done. We just don't do those that way anymore. So that way we free up the entrepreneurs to run their businesses. 

So, whether it's bill pay, employee expense reports, even bookkeeping and accounting itself, we use financial technology whether that's QuickBooks Online or middle market ERP from Sage Intact or NetSuite to be the hubs of the accounting truth. And then we plug in specific best in class technology for accounts payable, accounts receivable, so collecting money, paying your vendors and then employee expense reports Typically it's ramp or expensify that all integrate into the accounting system to give timely information and reduce the amount of manual processes for the accounting team and also for the extended team. I can't tell you how many times in my prior life, outside of working in big companies that I was, I spent time filling out an expense report, something that would take an hour to compile your receipts and write down what it was for to give the accounting team can be done in minutes now. 

0:27:31 - Mehmet
Yeah, that's amazing and also what I started to see, especially in you know, because you mentioned about accounting software and you know getting things done together. So now I saw the technology get very good, also connecting with bank accounts actually. So you get the feeds, so you don't have manually, even in the software to put these things. So I use one software for my business and you know, literally I just need to put the category and that's it. And sometimes now they put even AI and you know, from the description of the transaction they can understand okay, this is probably a customer dinner, for example, exactly, yeah, so let's make the life much easier and just one last thing. 

0:28:14 - Jeff
What that allows you to do is to elevate your analysis of the financials. You're not spending time thinking about what is this bill for? Where does it go in the financials? You're thinking about, okay, that that meant that went to lunch with a potential customer. Maybe that's going to impact our future revenue. So how should we be thinking about structuring the business in the future? So it changes the perspective. 

0:28:40 - Mehmet
Collecting data points and, you know, changing the perspective. 100%, Exactly, Absolutely, Jeff. Where can you know people get more to know about you and your company? 

0:28:51 - Jeff
Sure, absolutely so. On LinkedIn. You can look me up on Jeff Rudner. On Twitter it's pro seer underscore Jeff. And then, if anyone is interested in the ways that we might be able to work together, we're offering any listeners of your show a free consultation. Just go to our website. Pro seer P-R-O-S-E-E-R dot co slash contact. Let us know that you heard us here and then we'll I'd be happy to meet you and see how we might be able to help. 

0:29:20 - Mehmet
That's great. I will put these links, all the links that Jeff mentioned. It will be in the episode description. Jeff, I have a very famous final question. Is there anything you wished I asked you and how you'd answer? 

0:29:33 - Jeff
it? I don't think so. I think we covered a lot. I'm really passionate about the startup community and supporting the future innovations of the world, and I really appreciate everything you're doing, mehmet. 

0:29:45 - Mehmet
Oh, thank you very much, jeff. I really appreciate the time and glad that you know we made it and you shared a lot, tons of information, I think, especially for to be founders, or maybe founders today, in startups. So a lot of information you shared. Thank you for the time and, as usual, this is how I end my episode and this is for the, for the audience. Guys, let me know what do you think you know? I hope you enjoyed the content. Hit me. You know an email. You can find all the social media handers up there in the new design. Also, if you are interested to be a guest same as Jeff was, I guess, today give me a shout, doesn't matter. Yes, I'm based in Dubai, but my guests are multinational, so I have guests from all around the world and we are trying to, you know, get this community, as Jeff mentioned, to foster, you know, the startup entrepreneurship and get you into the success zone. Let's say and hope you enjoyed, we'll meet again next episode. Thank you very much, bye. 

Transcribed by https://hello.podium.page/?via=mehmet