The Value of FP&A

The Value of FP&A

Transcript:

Evan Zawatsky:         … that there was a big need and plenty of opportunity, and at the end of the day, it’s just a lot more fun and exciting.

Lauren Kaplan:               Great. Great. Well, your background, like you said, you came from the Big Fours. You have the accounting experience. You also have your MBA, which helped set you down this path of seeing the value of quant, but tell us a little bit more about how you got started on learning the capabilities to do FP&A and that kind of financial analysis for companies.

Evan Zawatsky:         It’s all about starting somewhere. At the end of the day, start-ups care about what can you do for them on Day 1. They don’t have time or money to train you, unlike the Big Four who love training young, hungry people. The easiest way to start was with basic financial processes and basic accounting, which every startup agrees they need. Once you start doing that, you realize all these other needs, which is … I mean, naturally for any consultant, once you’re in with a business and you do one project, you suddenly see all these other areas that you can help with. So once I was in there, I saw there was opportunities for helping them make decisions, for setting up reporting and KPIs, for cleaning up bad processes and instituting new ones.

                                Then, of course, modeling and helping them to raise money if they’re looking to raise money. That could be not just modeling but also helping with the pitch deck, helping with the business plan. Because a lot of times, the founders are the ones who focus on the business plans and the pitch decks. But again, going back to that quantitative need that most and all start-ups have, it’s good to have someone with a different mindset and different … a more analytical mindset fill in some gaps so that your pitch deck and business plan, your whole fundraising process, can be perfect from start to finish, have every single thing that that investor’s looking for.

Lauren Kaplan:               It sounds like you can really add value on Day 1, but let me ask you this. If I were a startup, where … and I knew I needed some help and maybe I had a couple of models that I wanted you to build for me, you came and you did that. What else would you look for? How else would you look to add value to my business on Day 1 besides just that immediate need?

Evan Zawatsky:         I think it’s trying to take a step back and look at how to run a business day-to-day, then also try to see where they’re trying to go long-term. Most start-ups are going very fast from the beginning. They’re often in a crunch to prove their concept and to keep sales up just to survive. A lot of times they forego the time that is necessary to really implement a really good process, as you know ’cause you’re CEO of Nomad, so obviously you know that importance of a good process. It’s the same thing with processes that are specifically focused on finance and accounting.

                                I’ve had a lot of businesses who are, let’s say, trying to raise money and then realize that they’d paid no attention to their financials and now have to clean up for investors. It’s kinda like a fire drill mode. They come up … call me up frantically. “We have this meeting with an investor next week. Everything’s a mess. Can we clean it up?” So that’s the easiest way to show value from Day 1, and their focus is usually on raising money and so it’s a very short-term way to think. I think it’s good to have someone who is looking at the business more long-term. “How can we make this sustainable?” Not just put up these fire drills, but actually create a real business.

Lauren Kaplan:               It’s interesting. You’re talking about how do we put … what do they say? Put lipstick on a pig, right, ’cause they don’t necessarily know how good things are because they haven’t really dug into financials the way they should have. Maybe they haven’t set them up properly. You got to do a lot of cleanup, but that actually brings up this concept of vanity metrics, which a lot of start-ups will put forth because they want the company to look really appealing in order to raise a lot of money.

                                How do you instruct or inform start-ups and these founders on the metrics that are really important they should be looking at regularly that go beyond just vanity metrics, such as user acquisition? Right, ’cause then there’s also the flip side of what about retention rates? If our retention rates are really low, then user acquisition means nothing. It’s a vanity metric. So how do you get them in the mindset of understanding what are the things they should be looking at regularly and how do they keep their pulse on those things?

Evan Zawatsky:         Sure. Good question. I think it’s the advantage of a CFO is that you’re looking at the business from revenue all the way down to bottom line, so I think a lot of those vanity metrics are really focused on the top line. Like if we get X users more, our revenue will go up, which is appealing to investors ’cause investors, they want to see if your business is driving revenue forward. That’s half the way to solve the puzzle. Obviously ’cause everything below the revenue isn’t doing well, like you have a high churn rate and you’re losing these users that you’re acquiring and probably spending money, your customer acquisition cost, to actually get them. Then it’s gonna be a negative bottom line.

                                A CFO will not just look at that top line, they look at the entire business ’cause they’re forced to. If the entire machine isn’t working properly, then everything implodes and the business won’t survive until … for one more month or one more year or two more years. It’s what metrics are in the middle, what metrics can help you look at solving for a good margin? I mean, a big thing also is in the middle, like salaries. People are a huge expense. How can you tie metrics back to show me that the money that you’re investing in your people is actually having a positive ROI?

                                A lot of companies will raise money. They say, “Okay, great. We have this money. Now we can hire people and people will lead to higher revenue and a better business,” but did you actually get ROI on that one extra hire? If you hired a marketing person, what did that do for your business? Sometimes it’s really … it’s a hard question to answer, ’cause a lot of times it’s hard to show, “I did this one thing for the business and here’s how much revenue it led to.” But I think if you look at it in a … with enough of an analytical lens, then eventually you can probably find some metrics where you can get more answers than did revenue go up.

Lauren Kaplan:               So essentially assigning success to the decisions that you’re making. “I decided to invest in this person. Now let’s measure the success of that decision.”

Evan Zawatsky:         Exactly. Yeah. A really cool company that I worked with, they did a great job of doing that. They were a … They are. They still exist.

Lauren Kaplan:               I hope so.

Evan Zawatsky:         They were a food and beverage company. They were opening up a lot of various retail shops, whether it was a 20-person bar or a 100-person pub. In those pubs, they were installing cool products. For example, a beer fusion tower that had fused fruit into a beer.

Lauren Kaplan:               Wow. What bar is this? I’d like to go there.

Evan Zawatsky:         We’ll talk about it after.

Lauren Kaplan:               Okay. Okay.

Evan Zawatsky:         But a lot of these products that people were passionate about, the company forced them to think about it from a financial lens. So they said, “Sure, we agree. It’s a really cool pub product. A beer fusion tower sounds cool. What’s the ROI on it?” I mean, it was a great culture, ’cause they forced people … Even if you weren’t a financial person, they forced you to think that way to basically prove your product or your idea based on the ROI to the company. Then it made their decision-making a little bit more simple, ’cause if you and I were fighting over our projects, instead of saying, “I like Lauren better. I’m gonna give her the capital to do her project.” It’s who has a better sales pitch based on numbers that back it up.

Lauren Kaplan:               So you’re stripping out some of the politics in decision-making and trying to get down to more of the data to drive better decisions.

Evan Zawatsky:         Yeah, and once you get that … I mean, it’s a perfect circle, because not only does it help your business, but it’ll also actually if you do need to raise more money, that helps you do that ’cause it shows your investors not only is revenue going up, but we’re choosing products and we’re choosing ideas and we’re entering verticals that have the best possible ROI.

Lauren Kaplan:               Now let’s actually give our viewers a little bit of a sense of how they can do that, because some people, they may not think analytically necessarily. We’re kinda talking in higher level concepts. How would you coach someone in taking something like that and thinking analytically through it? Maybe if you have an example, you can walk us through.

Evan Zawatsky:         Sure. So it goes back to understanding the variables of the business. It’s basically like, we all took algebra when we were in eighth grade. It’s all about A plus B plus C equals D. I think some people, as you’ve gotten older and further away from those awful memories of middle school algebra, we forget that that equation still applies. So going back to the food and beverage company, there were people … I sent a team who weren’t necessarily financial people, and it was about coaching them through thinking about their business that they know in and out and just putting on paper in a variable form.

                                In that example, comparing two different types of pubs, you had a 20-person pub and, let’s say, a 100-person pub. This is about what are the economics of each one and also what is the capital required for each one. If you help someone just walking through the business, why would one of them be better than the other? What is the business? They had X number of seats. They sell a certain amount of beer. They sell a certain amount of food. That’s how it basically makes money. Then there’s a cost to it. Well, how does one open up one of these pubs? You need X dollars to do it-

Lauren Kaplan:               Right. Your rent. Your people. You have electricity.

Evan Zawatsky:         And this is-

Lauren Kaplan:               Your supplies.

Evan Zawatsky:         Yeah, and I mean, this is all before we’re getting to numbers-

Lauren Kaplan:               Right.

Evan Zawatsky:         We’re just talking about the business. Anyone can do that. I mean, especially if it’s your business. I mean-

Lauren Kaplan:               Yeah, you would hope you would know what the cost drivers are, the revenue drivers.

Evan Zawatsky:         Yeah.

Lauren Kaplan:               But let’s say that I was proposing this fruit-infused beer tower. How would I go about thinking about the type of ROI that something like that would have over something like deciding to be open for lunch on the weekends?

Evan Zawatsky:         Right, so with that example, you’d be able to tell me what the status quo is. Status quo is you sell regular beer at your bar. Why would someone … Why would a bar actually choose … How would it help a bar to have this beer fusion tower? I mean, they could maybe sell more beer ’cause it’d taste better. Would people pay more money for it? I mean, you’re offering this … The answer is, I don’t know. I would ask you that. Maybe people want it. Maybe they’ve done tests where actually people just want to pay $7 for a beer. No more, no less. But maybe there is value to it, and if the answer is, well, no one’s paying a dollar more for this beer, well then how else are they gonna add value?

                                I think eventually it may be just causing more foot traffic, because it’s an interesting idea. People want to walk in, but it forces you to think critically about your idea, so it goes from being just a cool idea that popped in your head to what will sell me on what is this gonna do for the business? Now how can we quantify the value that you just told me this would bring to the business?

Lauren Kaplan:               So what I might do is I might say, “Well, we’ve seen that infusing beers with different flavors seems to be on trend right now for these kind of places. We’ve seen X bar has increased their sales by 20% by offering a rotating menu of these kind of specialty items. We can pick the least expensive fruit, which is only gonna cost us an extra 30 cents per cup, and we can experiment and do a test for 30 days to see if it bears out any fruit, if you will. No pun intended. Because the area that we’re in, people love specialty things.” So maybe that would be the kind of quantitative analysis you could do? Would you add anything else to that?

Evan Zawatsky:         Those were all good, direct extra revenue you can get, direct cost. I think also you have to look at would there be any long-term implications? For example, if you put this tower in the bar, would that not allow the bar to do something else? So it’s the opportunity cost.

Lauren Kaplan:               That’s a good one.

Evan Zawatsky:         I mean, there’s X amount of square feet in the bar. What else could they do? Maybe they could open up a … arcade and put a little video game there. Also, with the cool and trendy thing, I mean this is why you do tests. Is this sustainable long-term? I think it would definitely sell beer right away and people are interested in these trends, and maybe they want to go there to try it out-

Lauren Kaplan:               But maybe it also takes an extra quarter of a day’s worth of labor to prepare this beer?

Evan Zawatsky:         Yeah, absolutely.

Lauren Kaplan:               And now they lose refrigerator space because they have to add all this extra fruit to their refrigerator.

Evan Zawatsky:         Yeah.

Lauren Kaplan:               So I guess those are things to consider as well.

Evan Zawatsky:         Yeah. Yeah. For sure.

Lauren Kaplan:               So we’re talking about big areas now where FP&A or analytical thinking, the CFO function adds a lot of value. Where are the areas where you’ve seen conflict, where maybe people don’t value it as much or it’s created tension in the organization where it actually can detract from the progress of the organization?

Evan Zawatsky:         I think a lot of start-ups are under a lot of pressure, especially if they took money from investors. Now they got to show something to investors that they’re getting the bang for their buck. Initially at least there’s a lot of attention to revenue drivers. Usually when you have a founder or founders, they’re hustling as hard as possible and they’re focused on revenue. They’re gonna probably hire a salesperson, hire maybe a marketing person as well. To actually stay in the business, you need to hire someone in operations. An operations person is essential because someone can sell all they want. The business will fall apart if they can’t actually execute on what they’re selling.

Lauren Kaplan:               Sure.

Evan Zawatsky:         Those all relate to revenue, and I think that the conflict is that sometimes people don’t view the CFO as a revenue driver. The CFO helps to put the house in order. I do think the CFO helps to sell the business, not necessarily directly with … The CFO is not out there selling whatever widgets you’re selling, but long-term they do help to support the business from a revenue sense because the CFO is forced to think critically about the business and to think about whether these decisions that are happening very fast, especially in the beginning are actually adding long-term value, which ultimately leads to long-term value for investors.

                                I think that’s not always understood initially. Also, I mean, there’s the reality of a budget where initially to survive, you have to sell and you have to execute some [inaudible 00:16:48] operations, and if you have only a limited amount of dollars, the other ones are required. The CFO, some see as a nice-to-have, but that’s actually has worked out well for me, because it’s very expensive to hire full-time people. Usually you need a full-time salesperson, you need a full-time operations person, and the beauty of having a consulting CFO, not to self-promote but we kinda led there, is it’s a win-win because you’re not asking … you’re not expecting the company to hire you full-time to commit, which they’re very afraid to if their budget is limited. But they do need help, and eventually they realize that whether it’s from the get-go or 12 months later when things are starting to fall apart a little bit.

                                Usually they need a little bit of help initially, and maybe a couple years down the road they do need someone full-time. But initially, it is a low risk move to hire a consultant and to help you with these projects and these initial needs that are gonna help you actually create a legitimate long-term business.

Lauren Kaplan:               We know that people generally need bookkeeping in the beginning. I mean, you have A/P, Accounts Payable. You have A/R, the revenue you’re bringing in. You need somebody to deal with your transactions, make sure you have books and an income statement and balance sheet or you also have trouble paying taxes if you don’t have those things. But if you were to look at a start-up who was starting today, what would be some of the first steps you would recommend that they do for more of that analytical perspective? Not just the bookkeeper, but somebody who has a higher level view. Where would you recommend that they start to start off on the right foot? Is that by creating budgets for the things that they’re spending money on? Is it by creating a very small model in the beginning? What would you recommend that they do to get themselves off on the right foot?

Evan Zawatsky:         Well, one big thing that goes hand in hand with financials is good reporting. Financial is step one. A lot of times financials aren’t set up in the right way that actually help the business. Financials are supposed to check the box with paying taxes and does your cash [inaudible 00:19:10] work out end of the month to make sure that the house in order, but they’re also supposed to be used to drive decisions. What I’ve seen is sometimes if it’s set up in the way it doesn’t help the business initially, it’s really hard to go back and fix that. I mean, for example, I was working with a company last year that they manufacture automobile parts, and their reporting was so useless that … it was done every month, and this was a company generating a hundred million a year.

                                They did their financial … Obviously they had to, but when it went to the desk of the CEO and the CFO it told them really nothing about the business. I mean, I was there for a few months just focused on creating a useful report that would lead a conversation between the CEO and the CFO, and to do that, you really have to understand how do they think about their business. This is where a CFO has to put on their business lens and get at the numbers, actually understand what they’re selling, what affects them, what industry affects them and how do they really want to make decisions and use these reports to make decisions.

Lauren Kaplan:               What were some of those KPIs, those key performance indicators, that you put on this dashboard? I’m very curious. What did they have originally that was so useless, and what was the end result that you created?

Evan Zawatsky:         Well, they had nine international plants.

Lauren Kaplan:               Wow.

Evan Zawatsky:         And all of them were making different parts, and those parts were going to different customers. Obviously they understood what revenue was worldwide, but they couldn’t really analyze whether a given plant was generating a positive cash flow and was … had the unit economics to really be valuable to their business. They knew they needed to do cost cutting-

Lauren Kaplan:               But they didn’t know where to do it from.

Evan Zawatsky:         I mean, so they were just throwing a dart at the board over which plant should go.

Lauren Kaplan:               Wow. So let me clarify. They were making decisions on which plant to shut down. Is that what you’re saying?

Evan Zawatsky:         That was one of the-

Lauren Kaplan:               That was the initial thought process?

Evan Zawatsky:         That was what they wanted to analyze. They felt, they had a hunch that they should do that, but they didn’t know where to start. I mean, maybe that was the wrong decision. Maybe all plants were useful and really the negative was that the SG&A at the corporate office was too high and actually the plants were doing fine. But they couldn’t really figure that out.

Lauren Kaplan:               Right. Okay.

Evan Zawatsky:         Everything was kind of lumped together.

Lauren Kaplan:               So how did you go about parsing that out, and what did you then create for them to do that analysis?

Evan Zawatsky:         Well, so initially you have to first figure out where all the data’s coming from. So you get in the weeds. You see … Anything’s possible with reporting. It’s just a matter of figuring out where the data’s coming from, and then how can we actually categorize it in a way so it becomes a seamless process going forward for whatever you set up. We had to actually understand what’s going on in the back end. Once you do … I mean, what I did in this situation was that I set it … I bring in the output with the decision makers, in this case the CEO and the CFO. We agree on what the … it’s essentially the skeleton.

                                What should that look like? Do we all agree this seemed to help the company make decisions? And then, okay. We agree on that. Now the fun part comes for I actually had to figure out how can we actually do this every single month going forward? That’s what takes a lot. That’s what took a lot of time. The first part was a little bit easier, because that was a more organic conversation. “What do you care about? What do you lose sleep at night thinking about? How would you want to assess … Before we even talk about numbers, just very simply how do you just assess a plant? What would make you choose to decide should we shut it down or should we keep it going? Or should we trim some fat at the corporate office?”

                                Once I got buy-in from there, then it was fine just to go ahead, roll up my sleeves and just make [crosstalk 00:23:32]-

Lauren Kaplan:               Get into the data.

Evan Zawatsky:         And at the end of the day, I mean, we needed a lot … much improved trending information. So you can actually see what’s the story of what’s happening over time, which they weren’t able to do. Then also do that for each individual plant instead of as a lump sum for the company. Then each plant becomes its own business, and then you can judge it independently.

Lauren Kaplan:               So what was the outcome? Did they want to make a decision while you were working with them and giving them all this information and data?

Evan Zawatsky:         Yeah, I mean they made cuts.

Lauren Kaplan:               Did they? Okay.

Evan Zawatsky:         I mean, they made cuts. They consolidated a couple of plants, and they had the better performing plant take over the worst performing plant if they were close by. Some of the international plants, I think there’s one or two, they had decided to shut down-

Lauren Kaplan:               Entirely.

Evan Zawatsky:         … totally. Then in the corporate office, they had to see … The corporate office was very inflated, based on what it was actually doing to generate value to the business, so they had to make cuts there.

Lauren Kaplan:               Wow. So they wound up seeing that they had excess expenses and bloat across the entire organization, not just one plant or the home office.

Evan Zawatsky:         Yeah. Yeah. For sure. I mean, some plants were worse than others. I mean, they still need to run a business, so they can’t shut down all the plants.

Lauren Kaplan:               Of course.

Evan Zawatsky:         They were forced to make very tough decisions, and so it was a matter of how do we use reason and logic and analytics to actually make an educated decision instead of it being arbitrary?

Lauren Kaplan:               That makes a lot of sense. We’re actually starting to get close on time, so I want to see if we have anybody who’s asking questions. So far, we don’t have any questions just yet, which is okay. So let me see if I have any remaining questions for you. I guess last, but not least, for the folks who are watching that are interested in actually going down this path and becoming part of this FP&A functions, VP Finance role, eventually become a CFO, how would you recommend that this person goes about doing that? What are the kind of things that are required to be successful? How do they get these skill sets? What do you recommend in that regard?

Evan Zawatsky:         I mean, so the first one is obvious, right? You have to be meticulous with numbers, be reliable, be that person who people trust when you give them either a statement or a set of analytics. That’s the most clear one, right? It’s like you have to have the foundation to gain that trust with your colleagues, but I think what people in FP&A sometimes don’t pay as much attention to is to understand the business. I mean, it depends on the organization. Sometimes the FP&A role is a little bit separated from the decision makers. Some businesses are better at connecting the two, ’cause they should go hand in hand. But sometimes it’s a little bit more siloed.

                                If you’re going down the CFO track, people have to see that you have a genuine interest in the business, that you’re able to think about it critically, understand the industry and the market that you’re in. How are those outside forces going to affect your business? The cool part about the FP&A role is that you have the first access to see how those outside forces affect your business. There’s always a connection. It happens very slowly and … It’s like a snail. It happens very, very slow, but …

                                Like, for example, with Blockbuster. Obviously they spiraled downhill, but there was a point probably 10 years ago … I mean, Netflix was first starting, when someone in FP&A didn’t notice that trickle that was going down and down and very slowly. I think that sometimes the FP&A, you can easily just do your job, report the numbers and call it a day, go home and go to sleep. No problem. But the question is who’s gonna be that person who actually looks at it critically, brings it to the attention of the decision makers to the C-suite or whatever you want to call them and actually will give recommendations based on analysis?

                                The fun part about the FP&A role is that you’re not just giving recommendations because you think something is cool or interesting or you just want to see what happens. You’re actually giving recommendations backed up by deep analysis. You’re essentially a lawyer proving your case, only you’re proving your case with numbers instead of [inaudible 00:28:05]. That’s what I find fun. I don’t know if other people find that fun as well, but if you can master that, then you become critical to the business because now you’re a thought partner along with the CEO. The CEO may be the visionary, but he or she’s going to look to the CFO to think about it more critically, objectively and just roll up their sleeves and do their job and to see if that vision aligns with what’s happening with the numbers.

Lauren Kaplan:               So practicing that analytical mindset as much as possible, being curious about a business, about the drivers that are going to impact cost and revenue on both sides of the profit equation.

Evan Zawatsky:         Yeah. Absolutely.

Lauren Kaplan:               It’s funny. Some people tend to be very focused on thinking about what are the drivers and the industry factors that are also going to impact my revenue. So maybe Blockbuster said, “Oh, well we can cut our cost by doing X, Y and Z,” but they were failing to notice the industry trends that were impacting their revenue and causing them to go down, which in this case was people preferred to just get CDs or DVDs in the mail and not have to go to store, and could just drop them in the mail to send them back.

                                Very cool. Any other parting thoughts before we end our tenth session of Founder Sessions?

Evan Zawatsky:         I can lastly say that for me, one of the best decisions ever was to go from that big company and Big Four background and jump into start-ups. I think there’s more risk with it. There’s not as much stability, but the journey for me has been a lot of fun, and if someone was thinking of making that leap, I would recommend it with my whole heart.

Lauren Kaplan:               Awesome. All right. Well, thank you so much for being here and helping us knock this into the double digits. We’re here every Wednesday at 5:30 if you guys want to join us on a weekly basis, continue to learn more about the value that finances can have on the value and the growth of your business. Feel free to join us and ask questions along the way. We’re eager to hear your thoughts. Thanks, everyone.

Evan Zawatsky:         Sounds good.

 

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