Kategorie: Investment Know How

  • Budgeting & Planning or how to explain the world with financials (b)

    Top-down: This approach is based more on market growth rates and assumptions that initially tend to be very broad. In this case do not provide cost data right from the beginning. Instead, obtain some general market information that will allow for a good ‘guestimate’ of market size and volume growth patterns. Then discuss a growth rate with your CEO/department heads and apply it to your last actual financials. Once you have determined the growth rate compare your resulting revenue to the absolute size of your market and the monthly/yearly growth forecasted for your business. If there is no obvious problem (your total revenue in Year 2 is larger than total market size etc.) you can now add the cost data to your revenue assumptions. As with the bottoms-up method, discuss the relation between revenue growth/decline and cost increase/decrease with management.

    eCFO Tips: This is a good exercise for start-ups in very fast growing markets. It will help to illustrate that if your market is growing by 30% per year and your company has top-line growth of 25% you are underperforming. If your company is not even growing in line with your target market something is wrong. Often your CEO and employees will be surprised by this analysis. A relatively high absolute growth rate is often mistaken as exceptionally good but this is not always the case. This analysis will give you credible arguments for operational improvements and structural changes.

    In conclusion, both methods will be valuable. As you can see from my description, the actual goal is not to have the most accurate numbers in the world. Instead, it is important to educate your team how operational decisions will influence your financials. Budgets/planning/ and other annoying torture methods that eCFOs will come up with, can actually help instead of distract from operational issues.

    eCFO Tips: Liquidity, controlling, budgets & planning will keep you very busy as eCFO. Once these measures have been implemented and accepted by your team, you can move on to other subjects. In my experience, this will need

    a) a great team that supports you

    b) at least a year of very closely monitored controlling

    c) constant checks if you are still in line with operational reality

    Make sure that you never implement a task that will keep you permanently operationally involved. Your team, technology and tools should be doing this work and if you find yourself constantly involved with these tasks RESTRUCTURE and make these tasks completely independent of you.

    Often this will create some problems within your department, since it looks like you are designing tasks that are distributing lots of work away from you. Therefore, ALWAYS explain why certain tasks are very important. Make sure to also explain that you will be focusing on other tasks that will help to push the business forward. It also means that if you find assignments (as explained above in point c) that are no longer relevant you should immediately terminate them! On the other hand, if certain measures lead to an operational improvement or cost savings, you should make sure that this is communicated to the employee who actually prepares the data.

    This post also concludes what I would consider to be the key operational tools an eCFO needs to have. Having covered the basic checks, controls and planning measures, we can now move to much more interesting areas. Stay tuned for more info on this blog.

  • Budgeting & planning or how to explain the world with financials (a)

    (mehr …)

  • eCFO Tips – a collection!

    May 2012

    eCFO Tips: Budgets and planning gives you, the CFO, the opportunity to teach people the relationship between financial figures, strategy and operational decisions. As a planning and supervisiory tool, financial planning and budgets are absolutely essential. In a well managed start-up you will be controlling costs through the methods described in the liquidity controls – so budgets are not used in the “traditional” way, more established businesses might be using them, e.g. to allocate resources and prevent overspending. Rather, they help you to raise everybody’s awareness of the impact their actions have on the financial results.

    eCFO Tips: This is a good exercise for start-ups in very fast growing markets. It will help to illustrate that if your market is growing by 30% per year and your company has top-line growth of 25% you are underperforming. If your company is not even growing in line with your target market something is wrong. Often your CEO and employees will be surprised by this analysis. A relatively high absolute growth rate is often mistaken as exceptionally good but this is not always the case. This analysis will give you credible arguments for operational improvements and structural changes.

    eCFO Tips: Liquidity, controlling, budgets & planning will keep you very busy as eCFO. Once these measures have been implemented and accepted by your team, you can move on to other subjects. In my experience, this will need

    a) a great team that supports you

    b) at least a year of very closely monitored controlling

    c) constant checks if you are still in line with operational reality

    Make sure that you never implement a task that will keep you permanently operationally involved. Your team, technology and tools should be doing this work and if you find yourself constantly involved with these tasks RESTRUCTURE and make these tasks completely independent of you.

    Pre-May 2012

    eCFO Tips: Controlling is all about data ANALYSIS and FOLLOW-UP ACTION. If you cannot effectively collect, store, organize and eventually analyze data you will not be able to install effective controlling measures. Nevertheless, be mindful that all too often management will focus on the process of collecting, storing and organizing data and will forget that the key aspect is the analysis and the changes/learnings/actions you derive from it! Action trumps collection!

    eCFO Tips: Be aware of cash accounts outside of your normal banking activity. Paypal, AdWords/Sense, Affiliate accounts, Amiando, e-commerce shop accounts etc. can be a significant source or drain of cash. Make sure that each employee notifies either you or your team when a new account is created. Every account that uses cash should be treated as you would treat a regular bank account. I am sure as CFO you wouldn’t allow everyone to open a bank account by themselves – why should it be different for these accounts?

    eCFO Tips: I have found a range of great SAAS products that support this process. Remember it is not your job to collect, store and prepare data for an analysis – as CFO you have to act on this data! Personally, I like the functionality of:

    a)   easybill.de for organizing my invoices

    b)   mite.com for time tracking and budget planning

    c)    highrise.com as CRM tool

    Using a SAAS tool makes it fairly easy and inexpensive to keep track of your key data. Confidentiality here is also very important but in general these tools have solid user controls and are well protected from possible hacker attacks – even though there is of course the risk that your data is stored on a server that is not under your control.

    eCFO Tips: Don’t have blind trust in your accountants – meet them at least every two months and explain your business model, each large project and what you do – only if you do that  will they be able to prepare correct statements. They are not part of your business – especially if you work on innovative projects or in new technologies such as Facebook, Google etc. Therefore, they will not have a strong operational understanding.

    eCFO Tips: Especially online focused ventures can easily create a fully functional click dummy, wireframes and a strong web presence to convince investors with more than just nice looking slides. This will help you to move your valuation discussion to a whole new level.

    It becomes trickier in the seed financing round. Here the amounts of money needed are more substantial and can often not be contributed by only the entrepreneur or FFF. I would advice to look for a partner in this stage who can contribute more than just capital. This is probably one of the most overused and equally misunderstood statements ever used. 

    eCFO Tips: ALWAYS make sure you understand what drives a financing partner. The average VC will have a three year fund raising cycle that means they have to go out and raise / pitch for new capital one year after closing their current fund. The VC world has become a significantly tougher place – many VCs failed to raise capital during the financial crisis. If an action that puts your venture in jeopardy but will help their fund raising comes up it will be clear what they will do. Be prepared.

    eCFO Tips: Call-options are funny things – you are giving away your company at some point in the future without having any indication, beyond wild hopes and dreams , of its value at the time of exit. Remember that in general there are some things are just as true for a strategic partner in the future as in the present– they will still have more lawyers than you do, they will hopefully still have a substantial strategic interest in your company and they will have cash.

    eCFO Tips: Don’t forget about online specific issues such as PayPal, Adwords & Adsense accounts, facebook ad accounts; linkbuilding accounts etc. Here you have a source of expenses and income that can come as quite a surprise.

  • Ernst & Young Article

    For those of you fluent in German here an interesting article from Ernst and Young in regards to financing phases. http://bit.ly/JOprgC

     

  • Controlling – a CFOs sole purpose in life!

    Controlling is a key aspect for each new venture. It starts out initially with a solid understanding of cash flows and moves across various phases as a business growths. In my experience the key aspects for each venture development stage can be summarized with the following headlines:

    1. Liquidity awareness
    2. Profitability measures
    3. Balance sheet optimization

    Each of these three steps requires different controlling techniques and management focus on various aspects of the business. As a venture develops it is not only these above mentioned points but also controlling techniques for each key business resource that will keep management busy.

    Also be aware that, “measures” and “optimization” have been picked on purpose – your role as a CFO will change with each of the steps listed above. You will move from making decisions that might be bad for profitability but good for liquidity to pure financial engineering actions that will optimize your balance sheet. This also requires a move in your strategic thinking from survival (liquidity), to operations (profitability) to strategic, long-term goals (balance sheet and capital structure optimization).

    eCFO Tip: Controlling is all about data ANALYSIS and FOLLOW-UP ACTION. If you cannot effectively collect, store, organize and eventually analyze data you will not be able to install effective controlling measures. Nevertheless, be mindful that all too often management will focus on the process of collecting, storing and organizing data and will forget that the key aspect is the analysis and the changes/learnings/actions you derive from it! Action trumps collection!

    Liquidity awareness

    As mentioned in previous posts this is a key aspect for each new venture but how do you actually make sure that you are aware of liquidity issues? Based on my experience you can do the following:

    Compile a weekly Excel spreadsheet that lists all liquidity in- and outflows for the next 8 weeks. Here it does not matter if it is tax, P&L relevant or a rent deposit – any payment that comes in or goes out is traced. This will provide you with a solid understanding of when you will be running low on cash for the next two months.

    This will require that either yourself or an extremely reliable employee is fully aware of all payment cycles (salaries, subscriptions, taxes, customer payment discipline etc.) in your business. It also goes beyond a simple accounting measurement since the person compiling these numbers will have to be aware of all operational aspects of your business. As your business continues to grow, it will be increasingly difficult to get every department head to provide the necessary information – make sure that you install well-thought out reporting structures early on. If people are used to providing information from the get-go, it will save you a lot of trouble later on.

    eCFO Tip: Be aware of cash accounts outside of your normal banking activity. Paypal, AdWords/Sense, Affiliate accounts, Amiando, e-commerce shop accounts etc. can be a significant source or drain of cash. Make sure that each employee notifies either you or your team when a new account is created. Every account that uses cash should be treated as you would treat a regular bank account. I am sure as CFO you wouldn’t allow everyone to open a bank account by themselves – why should it be different for these accounts?

    In addition, I would recommend that every serious CFO does the following to make sure that liquidity is well understood within the business:

    1. Check bank balance and transactions for each account EVERY day
    2. Control any payment that is made as long as the business is below a revenue of EUR500.000 p.a. / once it is above that revenue figure install a limit for each employee e.g. EUR100 per transaction which can be processed without your explicit consentJ
    3. Be fully aware of every invoice that is issued and when a customer is expected to pay

    eCFO Tip: I have found a range of great SAAS products that support this process. Remember it is not your job to collect, store and prepare data for an analysis – as CFO you have to act on this data! Personally, I like the functionality of:

    a)    easybill.de for organizing my invoices

    b)   mite.com for time tracking and budget planning

    c)    highrise.com as CRM tool

    Using a SAAS tool makes it fairly easy and inexpensive to keep track of your key data. Confidentiality here is also very important but in general these tools have solid user controls and are well protected from possible hacker attacks – even though there is of course the risk that your data is stored on a server that is not under your control.

    Profitability measures

    Once a venture has been able to either secure significant financing or cash generation has reached a point where closely monitored liquidity control is no longer a key aspect for survival, profitability moves more and more into focus. Here, it is important that the CFO fully understands all profitability enhancement techniques and makes sure that a good understanding for percentages is established. What I mean by that, is that certain key measures such as staff cost as a percentage of sales, EBIT margin, travel expenses as % of sales, etc. should always move within a certain range – once they move outside of this range you need to take corrective measures. Here a step-by-step recommendation:

    1. Reduce focus on liquidity by implementing liquidity checks every other week or even every three weeks – never completely stop since your liquidity situation might change
    2. Budget planning – there will be a whole additional post on this topic so I will stay brief here – you need to get a good understanding of the 12 months forecast. It does not matter if you actually hit these numbers. What does matter is that you can compare your actual vs. planned numbers and understand why they might be different. You can either go bottom-up or top-down on this forecast. Again the method is not that important – it is more important that these numbers are agreed upon by everybody who can actively influence them (top, middle management at least) and that they are regularly reviewed.
    3. Check out comparable companies and talk to CFOs of larger businesses from your industry. They will have a good understanding of what these percentages should be, once the business has matured. As an example: we work a lot with service agencies and therefore our HR costs should be approximately 80-90% of all operating expenses – if we are significantly below or above we are either underpaying (never!), waste too much money (very likely!) on other expenses or something else is going wrong – now it would be the CFO’s task to find out what exactly is causing the discrepancy.
    4. Make sure that you get a carefully prepared monthly P&L overview from your accountant so that you have a fairly reliable set of numbers. Make sure that you are familiar with every line item!
    5. Check, check and check again – calculate some key ratios every month. Check through each statement your accountants send to you.
    6. In the end profitability is simple – you need to make more money than you spend.

    There are two major things you can do:

    1. Earn more money (increase sales, increase prices for existing products/services and so on)
    2. Spend less (do you really need: company cars, a desk, new offices, coffee maker that can make latte, Apple computers, , lawyers etc.)

    ANY measure you take will either influence A or B – what you specifically do or how creative you get is up to you.

    Comes back to an old CFO joke: a young CFO gets hired and the old, experienced CFO gets fired. The young gun asks the old guy: any tips? The old guy gives him three letters and tells him to open each letter if the business is performing really badly and he is suffering. So time goes on and things don’t go well. The young guy opens the first letter: It says “increase sales” and the young guy goes out and does everything in his power to pump up sales – nothing works. He opens the second letter – it says “cut costs” so he cut costs like Warren Buffet himself and cuts and cuts and cuts – no success. So he decides to open the last letter. It says: write three letters!

    eCFO Tip: Don’t have blind trust in your accountants – meet them at least every two months and explain your business model, each large project and what you do – only if you do that  will they be able to prepare correct statements. They are not part of your business – especially if you work on innovative projects or in new technologies such as Facebook, Google etc. Therefore, they will not have a strong operational understanding.

    I had a long chat with our accountant about Facebook fans we acquired in our internal, generic Facebook groups for later advertising purposes. The question was, whether this wasa pure operating expense or were we actually generating lasting value that should be depreciated over time – there is no rule, no case study and no exact guideline for this. Nevertheless, if your accountant understands the concept she can apply “old” rules to “new” technologies and that might be very positive for your business.

    Also make sure that you do not only talk with the head of the company or some senior members –training and discussion should be aimed towards the employees/accountants who actually work with your numbers every day. They are the ones who make the decision how something should be booked in the first place – so they need to be informed first.

    Balance sheet optimization

    By now you should be feeling pretty good about yourself. You have conquered liquidity problems and you are running a highly profitable business. Now it’s time for the real CFO stuff – balance sheet optimization and financial engineering. Before you call Goldman Sachs and invest into derivative products I would recommend that you fully understand what you are trying to achieve – you have probably gone for the low hanging fruits of liquidity and profitability with nothing more in mind than survival and solid operational goals.

    Balance sheet optimization is far more strategic. There is no right or wrong answer to: “What should my optimal capital structure be?” “Which assets should I show on my balance sheet?” “Equity vs. assets vs. liability ratio analysis.” “Should I lease all my equipment or buy?” “Rent or build office space?” In order to be good at this you need at least a strong three-year strategy that guides your action – do you want to increase your debt level, sell the business, acquire other businesses etc. These are all questions that will determine how your balance sheet should be build. Remember that all the financial engineering is not worth anything, if it does not lead towards a specific goal.

  • Financing or getting married?

    Setting the tone…

    Financing is a fundamental decision for each entrepreneur. Unfortunately, there is no perfect financing partner and each financing process should be highly tailored towards an entrepreneur’s individual needs.

    I often compare financing to marriage – as crazy as it might sound a financing process has many comparable steps. From the initial flirtatious phase where a person goes out and looks for a date to eventually marry–an entrepreneur’s initial hunt for an investor to the final signing of documents in front of a notary has a lot of similarities. Whether you see your perfect partner on a dance floor or see a famous venture capitalist walking around at a networking event – I promise your heart will start to beat faster. Once a relationship becomes serious and an engagement looms on the horizon an entrepreneur will face a lot of due diligence questions – similar to going for your first trip with the future in-laws. Marriage is just the same – some will be great, long-lasting and highly profitable for both sides, while others will end in a quick and maybe even messy divorce where both sides wish they would have paid more attention to the wedding contract. Most importantly there are a couple of comparable lessons entrepreneurs should take from marriage:

    1. Choose your partner wisely – you might be together for a long time
    2. Make sure you can live with each other BEFORE you get married – after you signed the contract it is much harder to get out
    3. Make sure you have a complementary skillset – as with most marriages your partner will help to mitigate your weaknesses with his strengths and vice versa
    4. A good relationship requires hard work, dedication and trust – both sides need to work on keeping the relationship happy

    Before going into the more technical aspects I hope that I set the tone for financing and the importance it will have for your venture – it can be a game-changing experience and that is how seriously you should take your financing partner selection process.

    This post will now highlight different funding options for entrepreneurs and their new ventures. Aside from all the operational issues the question of a) how much money do I need and b) who should I get it from – are often the most difficult choices an entrepreneur has to face.

    In order to define some variables for the case studies below I will show my view of financing stages – there is a lot of debate and options on what stage is what so here are the definitions I found easiest to work with:

    Pre-seed:        €0 – €50.000

    Seed:               €50.000 – €250.000

    First round:    €250.001+

    Pre-seed should always be used to get a small test case going that outlines the feasibility of the project and in my opinion this should be 100% financed by the entrepreneur and her team. If an entrepreneur is not able to either raise that amount of capital from FFF (friends, family and fools) she should reconsider if starting a venture is the right thing to do.

    eCFO Tips: Especially online focused ventures can easily create a fully functional click dummy, wireframes and a strong web presence to convince investors with more than just nice looking slides. This will help you to move your valuation discussion to a whole new level.

    It becomes trickier in the seed financing round. Here the amounts of money needed are more substantial and can often not be contributed by only the entrepreneur or FFF. I would advice to look for a partner in this stage who can contribute more than just capital. This is probably one of the most overused and equally misunderstood statements ever used. 

    eCFO side note: my personal favorite and number one overused phrase is: teams – people are everything and I only invest in A team – especially if it comes from a VC or incubator team that replaces its entrepreneurs after every little bump in the road and does not care at all about the entrepreneur who put his blood, sweat and fortune into building a high risk venture. Make sure you check on an investor’s reputation and how past teams of entrepreneurs have been treated.

    … more than capital …

    More than capital for me means either excellent investor contacts that lead to initial sales, technology knowledge or direct hires. It is often difficult to fully understand how good these contacts are prior to actually using them. Here I would advise the entrepreneur to call at least three different references who can talk about their relationship and experience with the investor. Often entrepreneurs think that ONLY the investor can undertake an in-depth due diligence – this is not true. The entrepreneur should also fully understand whom she is taking on board as an investor and should make sure that her due diligence is thorough.

    …sources of capital…

    In terms of capital sources I would like to provide three sources of capital that are build on my prior experience and the experience of many other entrepreneurs I have talked to over the years.

    Venture Capital

    Pros: Venture capital from a professional VC firm or investor is a highly potent source of financing. A VC will, in most cases, have an excellent network and a strong understanding of financing processes. He (and most often it will be a he) is also a specialist in legal and financing documentation. The can provide strategic advice and will have strong market knowledge. In addition, most VCs will have access to either additional capital from their fund or alternatively have a network of financing or exit partners that ensure future capital when an entrepreneur needs to raise more capital.

    Cons: For an entrepreneur there is a dark side to all of the previously mentioned positives. VCs will have an excellent network but make sure that the network is right for you – just knowing a lot of other VCs and entrepreneurs might not be what you need. Strong contacts to marketing partners or future clients might be much more important. The strong experience in financing processes and legal documentation is the most frequently used weapon against an entrepreneur. Always remember it is a VC’s JOB DESCRIPTION to write financing documentation that will give him every possible advantage. There is no easier way to completely lose control of your venture than to sign a document drafted by a VC.  A VC will always be better in contracts than an entrepreneur is – remember an entrepreneur is generally operationally focused. A network for follow-up financing and exit partners is exactly that – a quick way to EXIT the investment and get a return. A VC will always want to exit your business in order to get returns. Remember by entering into this financing relationship you are also defining a sale of our business.

    eCFO Tips: ALWAYS make sure you understand what drives a financing partner. The average VC will have a three year fund raising cycle that means they have to go out and raise / pitch for new capital one year after closing their current fund. The VC world has become a significantly tougher place – many VCs failed to raise capital during the financial crisis. If an action that puts your venture in jeopardy but will help their fund raising comes up it will be clear what they will do. Be prepared.

    They will also have huge return expectations from their capital providers and can only use very limited leverage– so an exit is the ONLY way for them to be successful. Keep that in mind if they ever tell you that they will not push you towards an exit.

    Conclusion: VCs have a lot of money available and are highly professional, agile and focused. They will be exit-driven and push you forward as long as you generate returns. They are only in it for the money – never forget that and use it to your advantage.

    Joint Venture / Strategic Partner

    Pros: A joint venture with a strategic partner can be a great thing. A strategic partner will have deep operational experience and in most cases significant non-financial assets. Aside from capital this partner will often offer access to clients, knowledge and team members that a budding entrepreneur could never source independently. In addition, it will be a strong financing partner who is not discouraged by small bumps in the road and is in it for the long-term.  An entrepreneur can also be sure that the right exit partner has already been found. Most strategic investors will add a call-option to the financing document that allows 100% purchase of the business in the future.

    eCFO Tips: Call-options are funny things – you are giving away your company at some point in the future without having any indication, beyond wild hopes and dreams , of its value at the time of exit. Remember that in general there are some things are just as true for a strategic partner in the future as in the present– they will still have more lawyers than you do, they will hopefully still have a substantial strategic interest in your company and they will have cash.

    So try to lock in a valuation method now that rewards you for parameters you know your business can potentially reach. As an example: don’t put an EBIT based valuation into the contracts if you know that you won’t reach break even for a while or agree too easily to a “at fair market” valuation. Especially with fair market value valuations it will be hard to argue for a correct market value if this asset makes only strategic sense to your individual investor and when you have no realistic way of shopping / showing your company around to other investors when you are trying to exit. Even if you put in the popular phrase that allows for an evaluation of an independent auditor remember that this auditor will most likely be working for your strategic investor and that they will always be a more interested to work for the strategic in the future than you – magically that can influence valuations!

    Cons: Again, what is true for VCs is true here as well. Most of the pros of a strategic investor can be turned around into negatives. Most of all, be prepared to be in it for the long-term – that is true for EVERY SINGLE ASPECT of this relationship. In the beginning be aware that most strategic partners will have decision making processes that make a snail seem to move at rocket speed. From the first pitch to actual investment it can easily take 9-12 months.

    In general, strategic partners will also be huge organizations – getting to the right people at the right point of time and piercing through inter-corporate politics can keep you quite busy. In a start-up there is no time for politics and things that move you ahead in large corporations. Things like number of employees (overblown teams), budget (spending & wasting) ability and political connections (sucking up) will actually be disadvantageous for any start-up.

    You will also not be able to move in any direction you want. Certain clients, business methods and entrepreneurial shortcuts will be off the table. The strategic partner will also be sure to keep the upper hand in any contract and it will sometimes be hard to show that this is a joint venture between equals.

    Conclusion: A strategic partner can unlock assets that you couldn’t buy with money – contacts and operation experience can be right at your fingertips. It will be generally a lot nicer relationship than with your average, cut-throat financial investor but you will have to deal with a lot more politics, size and slow- moving operational structures.

    Bootstrapping

    Pros: For me this remains the true key entrepreneurial discipline. There is no better feeling than growing a company based on the strength of your team and your personal efforts. Almost nothing feels better than looking at your financials and generating substantial returns and knowing that all it took was your hard work and not somebody’s capital. You did not buy your success – you truly built it.

    Aside from this motivational aspect it also means that when it comes to making decisions you do not have to ask anyone else. Your team and you have full freedom to run the business. It also means that you can grow a business and maintain ownership of the business as long as you want. This is also true for all returns that your business generates.

    As an entrepreneur this also prepares you for making hard and fast decisions. You do not have time for waste of capital, bad employees or unprofitable clients. You have to act quickly and decisively to stay alive since there will be no capital buffer to keep you going if you run out of cash.

    Cons: Bootstrapping is hard, often prevents you from making necessary investments and always distracts from the operation side of your business. It is also only good for highly cash-generative business models such as services provider and agencies. The constant liquidity pressure will also shape you as an entrepreneur and make you hesitant to go on sometimes necessary spending sprees and/or investments.

    It will put your team into a hard place that often requires to opt for short-term cash generative measures instead of focusing on long-term value creation.

    Conclusion: Bootstrapping stands for freedom from external investors but puts severe operational restrictions on your business. It can only work for some business models and will make it almost impossible to quickly expand your business or to rapidly capture markets. For me this remains a key test of your entrepreneurial skills but most people will not be able to build a significant business without any external capital.

    …and finally

    In our business we have successfully raised capital and grown businesses using all three of the above mentioned financing methods.  That taught us that there is no perfect financing partner but depending on which venture you are trying to get funded one or the other will be a significantly better choice. Just make sure that from the get-go you understand your motivation and what motivates your financing partner. Any relationship then needs hard work, dedication and trust. Make sure that all three of these aspects are maintained throughout your financing partnership … come to that and going full circle from the beginning it might even help in private partnerships as well 🙂

    Quick Disclaimer: I have only focused on equity capital. There is a lot to be said for alternative financing or debt financing. Stay tuned for a discussion of these topics at a later stage in this blog.

  • For all start-up CFOs in Hamburg

    Please join this group: https://www.xing.com/go/group/74085.059cad/16570300 to get further information about meeting in Hamburg.

  • Liquidity – the one and only!

    It is no coincidence that the first post is about liquidity. Liquidity is the ONLY measure that eCFOs need to focus on from Day One and should focus on for the entire life of any venture. All other considerations, from profitability, growth to balance sheet optimization are irrelevant if you run out of cash.

    1st day measures

    For a new venture or an eCFO joining a new company I would recommend the following steps for the first 3 months to become instantly familiar with the cash flow profile of your company:

    1. The second you arrive make sure that all bills and invoices have to be signed by you and that you cover all cash out- and inflow channels

    eTips: Don’t forget about online specific issues such as PayPal, Adwords & Adsense accounts, facebook ad accounts; linkbuilding accounts etc. Here you have a source of expenses and income that can come as quite a surprise.

    2. Establish a spending limit – currently any expense that is above EUR50/USD40 should be approved by you – any you only. This lets you get an insight into the spending pattern of the company.

    3. Check every transaction on your bank account daily. Don’t forget about credit cards and PayPal here. These accounts can hide a lot of different transactions and you only see a summary booking in the account – always make sure you go through an itemized list of all transactions.

     Medium-term steps

    Once you have become familiar with the companies spending profile you need to establish a structure that allows you to make all other decision-makers aware of liquidity ups and downs. Your business will significantly improve if everyone is aware of what liquidity means and that “every little helps”! Make sure that people do not only focus on expenses but also on writing invoices and collecting cash as soon as possible.

    In our companies we update our liquidity estimates once every week and plan ahead for a period of 8 weeks. Depending on the type of business you run this 2 months visibility will allow you to take short term measures to either postpone spending or increase cash collections if times get tough. After implementing a control like this for a period of more than 3 months you will become familiar with your liquidity ups and downs. In addition, sending this information to the entire leadership team ensures that even people who are either inexperienced or totally operationally focused gain an insight on how to control liquidity.

    Long-term financing

    A later topic of this post will be on financing options available to eCFOs. A period of weak liquidity will be unavoidable at one time or another but a sustained cash crunch can delay necessary investments and destroy all fun related to working in a start-up. It is your task to make sure that liquidity issues are solved eventually. This is done by putting in place a strong capital structure and by acquiring additional financing options as well as eventually making your company cash flow positive.

    Furthermore we should discuss how you move your start-up from liquidity focused to profitability or growth focused once cash is no longer a problem. This sometimes can be a difficult switch since people who are focused on liquidity will often shy away from long-term investments – that said this is for a later discussion.

    Sources of liquidity when times are tough:

    We all have been there- it is the 25th of the month and you are not really sure how to make payroll?

    1. Delay payment – the only two parties that need to get their payment on time are your employees and the government. Employees are already risking a lot by working for a start-up and will generally have already agreed to lower direct compensation. Also remember, they HAVE to pay rent and you want to keep them in the company – so paying them is priority one. Secondly, the government does not care that you are a start-up. They will collect VAT and taxes no matter what – make sure you pay.  Everyone else outside of these two is optional – if you have been good about keeping payment deadlines your suppliers, landlords and even bankers will understand if payments are late occasionally – just don’t make it a habit.
    2. Friends and family – depending on the size of your business you can ask anyone and I literally mean anyone for a short-term loan to pay your payroll and taxes
    3. Your banker – most bankers have a small amount of leeway when it comes to overdraft facilities. If you have kept your banker in the loop about your business she will most likely be more supportive. Be sure to communicate clear and early when times are tough – the one thing bankers hate more than anything are surprises. If you know liquidity will be tough on the 25ths make sure you call on the 15th to alert your banker to the situation – ask for permission to use an overdraft and more often than not they will agree.
    4. Your clients – if you are in the fortunate position to already have clients, especially B2B clients, you can ask them for support. If they like your services, they will help you out by allowing up-front billing or speeding up payments.
    5. Your shareholders – if all else fails ask the owners to provide a short-term liquidity injection in form of a loan. Again this only helps if you are not the only shareholders and if other shareholders have additional liquidity reserves available.
    6. Your employees – this truly is a measure of last resort but you can always ask your employees if they can live with getting some of their salary with a delay – here you should especially focus on senior employees and management who might have some cash reserves and are not totally dependent on their full salary.

  • eCFO knowledge exchange

    So far there is only limited news for eCFOs – the guys who take care of numbers, financing, controlling structures and other administrative issues for start-ups. This blog hopes to change this – with a range of articles from people who have either already build their own businesses or are in the middle of it. I hope you enjoy readings this!