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Posts Tagged ‘financial reporting’

Anaplan…& Implementing a Robust Forecasting Platform: Billings & Revenue

March 24th, 2017 Comments off

For the first few years at Cylance there was not a huge reliance on our forecasting platform and the need to put a pricey tool in place. There was simply no need to spend a six-figure amount when our business was still an entirely domestic story and the core revenue stream was still Professional Services. While we implemented NetSuite within our first few Quarters as a company, we opted for the NetSuite as our core platform so we could then bolt on additional modules as needed. We opted for their forecasting module almost immediately, but for a very basic forecasting function. As a Professional Services story, we only had a basic need to forecast gross labor hours, utilization rates, hourly cost rates, as well as estimated billing rates. At this point, we still did not have any consideration to Product revenue, and in the absence of, did not have any considerations for revenue recognition at that point. Considering that our Services revenue was not invoiced until completed, it was a very straightforward modeling exercise.

Fast forward to the launch of our Product offering and we knew it was going to necessitate a jump to a new platform as we were already starting to see some weakness in the NetSuite module. This new phase required an entirely different level of forecasting considerations for which there was no historical activity and for price points that had not been previously seen in the security sector. Would we actually realized, and stabilize, at a pricing level that would be many multiples over the incumbent first generation AV offerings. With consideration to the Product forecasting;

  • Average price per node on an annualized basis
  • Billings distribution by contract length…12, 24, and 36-months
  • Flexibility to easily adjust the anticipated weighting of billings
  • Subscription or Perpetual agreements (very few perpetual, but still present)
  • Robust deferred revenue modeling as a result of signed contracts
  • Sales staff hiring and assigned quotas.
  • Implementing any “seasonality” consideration into the model
  • Existing quotas, annualized growth, as well as ramp up period for new hires.
  • OEM, Consumer, and Government assumptions.
  • International entities & expected exchange rates for a consolidated USD view
  • Contra revenue accounts

It’s pretty easy to see that, even the short list above, there was going to be an entirely new level of complexity to our forecasting efforts, which could not be accommodated in our original module. After meeting with one of our key investors and discussing some of the options available, Anaplan seemed to emerge as a strong candidate and we made the decision to move forward. It was time to put a more robust tool in place as we started moving towards 9-figure revenue goals.  Even with the move to a new forecasting tool, we also had an entirely unique challenge as in developing a the components of this Forecast without a wealth of historical performance metrics. This meant that we would be constantly updating the Forecast as we compiled more Product transaction data. Fortunately for us, we saw a relative level of stability in our average PPN and our contract lengths. The two most difficult elements we had to work through during the implementation was the buildout of the deferred revenue forecast and the buildout of the revenue forecast that was supported by a detailed hiring plan and the assigned quotas for each one of those individuals. This was not going to be a simple spreadsheet exercised based on modifying a few cells and voila’…you have an annual number! The goal was to build a platform that would hold up to the scrutiny of our investors as well as easily identify & bridge any performance shortfalls that were realized versus planned.

In taking one example of where Anaplan excelled was in the modeling of our domestic revenues through the quotas that were assigned to each of our sales staff. While a painstaking exercise, there was an itemization of every existing sales staff, as well as those who were recently hired, or planned to be hired. There were individual quotas assigned to each one of these individuals. For those new hires, there were additional considerations to a ramp up period as they learned our tech, the inner workings of the Company, as well as seeding their existing network in their new employment. While these assumptions were usually conservative to reflect a few Quarters of nominal contribution, most were ramping extremely quickly. However, were we going to see the same level of immediate success as we scaled from a few dozen to sales staff to a multiple of that? That’s where we would have flexibility in Anaplan to adjust the model accordingly. From a billings and revenue modeling perspective, the only limits in Anaplan would be those that we placed on ourselves. However, we also had to be careful that the levels of planning detail we opted to incorporate would be important in the planning of the business and not turn into an exercise of planning paralysis.

The second painstaking, but worthwhile effort, was the buildout of the deferred revenue model. With the help of one of Anaplan’s premier implementation staff members, this was efficiently tackled and resulted in a clearly mapped Forecast that was easily trackable after any changes were made to new sales hires, quota modifications, or changes to average contract lengths. It was no longer the “black box” that we were challenged with on our prior platform. The additional benefit of the new Anaplan deferred revenue forecast is that it was easily audited and reviewed against the underlying assumptions. This would have played a pretty key role in our prior financing round in which there was a divide between the models presented by investors and our internal view…on the older platform. As one investor had noted during those efforts…”We’re familiar with that module and it is a bit of black box…”. A nice affirmation of our decision to move to Anaplan, but we were not yet fully deployed on Anaplan to supply the new view.

With respect to our choice to move to Anaplan, we also chose to work directly with the Anaplan implementation team as we wanted to keep our entire efforts and focus inside the Anaplan camp. I opted not to risk having a point of weakness between Anaplan and the efforts of a 3rd party reseller for implementation. It was a great decision and the Anaplan team was fantastic. In the end, the primary goal of moving to Anaplan was to be able to provide complete transparency to our investors, provide them the confidence that there was a robust set of underlying assumptions in the Forecast, and to allow for an intelligent dialogue on the integrity of the underlying Forecast. That once unbundled, it would be easy enough to see where any weakness might be occurring if there was a shortfall against Plan. We’ll jump into the cost of goods and operating expenses in the next round…

Thanks for reading.

Jeffrey Ishmael

When Processes & Systems Are Put To The Test…

January 21st, 2015 Comments off

Part of the enjoyment that I get from working at a “start-up” is that we essentially have a blank canvas on which to build the company, configure our systems, and define processes. Processes that are both needed, as well as in the best interests of the company. Essentially the establishment of a back office configuration that will support increasing growth as opposed to legacy decisions that are still carried out within a larger enterprise that are simply no longer adding any value.

However, until you’re tested, how do you know the decisions you’ve been making will be positively affirmed and be of value to the organization? From an operational point of view we’ve had a number of touch points that have tested our systems. Whether it’s been the growth of our employee base, the successful completion of our Series-B fundraising, or our accounting audit….we’ve had multiple opportunities to test our systems.

From an operational point of view, I’ve chose to run headcount in a VERY lean manner and instead invest in systems that would support the highest level of efficiency. I’m probably working with the smallest Finance & HR team that I’ve had at any company, yet we’ve continued to successfully respond to due diligence and audit requests that typically involve the generation of hundreds of supporting documents to validate what we are reporting. While tedious, we have the systems and processes in place to respond to these requests.

We’ve also had to strike a very fine balance between implementing system enhancements and the need to run the day-to-day operations. We could have easily put Commission and Deferred Revenue modules in place earlier, but with a focus on cash management and time resources, we’ve waited on multiple implementations until it was right for the business…not for what was convenient or bragging rights of extra system horsepower that ultimately sat idle in the garage.

The challenge we’ll continue to embrace moving forward is how lean we can continue to run while providing top tier business intelligence to the rest of the team and responding to the needs of our outside vendors and partners. While we might be currently smaller in revenues than most of the other companies I’ve worked with, our trajectory is on plan and we have a great operational foundation in place to support it. The satisfaction I get from testing our systems and processes isn’t much different than the Sales Director who gets that purchase order…it feels like a win. It’s great to be working with a team that’s always focused on the test and ensuring that daily efforts put us in the strongest position possible.

Thanks for reading…

Jeffrey Ishmael

Proactive, Reactive, & The Need To Balance Resources…

March 13th, 2014 Comments off

As we’ve recently come off a successful Series-B fundraising effort that included our original partners Khosla Ventures and Fairhaven Capital, as well as our newest partner Blackstone, it really affirmed the delicate walk we’ve managed over the last 18-months. With the initial $15 million in funding we received we knew what our mission was and the support structure we would need to have in place to make it happen. This consideration was not just to the staffing we would need to bring on, but the systems we would have in place to support our decision making.

I still remember the amusement I had when, fresh off an SAP implementation, I was given my laptop with QuickBooks installed. While that was fine for the first few months, that certainly wasn’t going to be our longer term solution. Nor was I going to pony up the dollars for an Oracle or other similar platform. With a commitment to be surgical about our spend, we mapped out what system would be needed to support our sales efforts, service deployment, as well as our financial reporting….all of which needed to be integrated. We were trying to be as proactive as possible, but new we’d have to pivot at points along the way.  We successfully brought Salesforce.com online, and with the hire of a VP of Sales, who developed the necessary criteria to report on our bookings activities. We then integrated our services management platform, which then final rolled into our financial reporting system.

However, as the business continued to mature, we found ourselves having to react to changes that forced us to pivot. We reached a point that it was necessary to extract ourselves from an early PEO commitment and bring all of our payroll and benefits administration in house.  Although we did not originally commit to the HR module, the time had come to add this on and react to our expanding business. This obviously meant more time and more money…that precious commodity we were so diligently managing. We continued to walk the path of being proactive on the critical elements, but reactive on those that we could push until the moment we actually needed to spend and weren’t creating any risk to the business.

Our earlier decisions on whether to spend proactively or reactively were put to the test during our due diligence efforts. Our earlier efforts to invest in systems have allowed us to continue operating in a very lean manner operationally. With myself and a one analyst, we were able to manage through the onslaught of document requests, additional modeling, and review of systems to achieve the final sign offs that led to our Series-B funding. Although there were some smaller operational elements that we could have fine-tuned in advance, it was a derivative of our decision to operate in a lean manner. Those elements are obviously being addressed moving forward, but do not affect our ability to service our employees, customers, or business partners.

Even now with a fresh round of funding, we will continue our prudence with spend and walk the delicate line of when we should be proactive or reactive. While it’s always preferable to head down the path of proactive decisions, it’s not always best for the company if the deployment of those resources aren’t necessarily mission critical and have an extended window for return. The one certainty…this period of early stage growth will continue to be a target rich environment!

Thanks for reading…

Jeffrey Ishmael

Life In The Start-Up Lane: When “Standards” Keep Changing…

September 25th, 2013 Comments off

As I’ve mentioned in some of my prior posts, whether it’s just another day in Finance or within the life of a start-up, there is no normal day. Take that a step further and you’ll likely find that there is no level of “normal” reporting that you can rely on to measure what is happening with the business.  At least not the “standard” level of reporting that you would have relied on at a prior company, which was likely much larger and more mature. As we are about to kick-off our sixth fiscal Quarter, the reporting that we relied on two Quarters ago is far different than what we are using now, and what I expect to be using in another few Quarters.

Part of the challenge within a start-up is balancing the integration of new systems while developing the rest of the business. This is not a sequential sequence of events, but a series that run parallel, often forcing business decisions based on experience and gut instinct. This is probably where I highly value the time that I spent in equity research covering 20 different retail and apparel companies. Monthly comp sales unleashed a flurry of data that had to be quickly assessed, reported on, and subsequently disseminated to clients. It had to add value, and above all, it HAD to be correct. Making business decisions in the absence of data, or at least incomplete data, is a very uncomfortable position for most folks.

So how do you measure the business when the standards are constantly changing? The absence of standards is not indicative of an absence of accountability or transparency, but part of the evolution that naturally occurs within a start-up. Yes, there is a Budget that is developed and based on certain assumptions, but it’s not long before that Budget becomes a distant reference point as you begin compiling data and assessing the potential trends that are developing within the business. However, one to two Quarters of data certainly is not a “trend” within a start-up, but it sure helps in refining the assumptions used in the Forecast. As with our business, while we are cognizant of the metrics that we will ultimately be using to measure our performance, some of those metrics are simply meaningless at this point since the business is still young and there isn’t enough data yet collected. That doesn’t mean that we’re not tracking our bookings, revenues, margins, and other macro indicators, but the detailed view is in a bit of a holding pattern at the macro level until we can drop down to the next level for more meaningful reporting.

As our business continues to grow and prosper, I absolutely expect a fundamental shift in our reporting abilities as we collect more data. We’ll move from the “spirit” of building the business to “fine tuning” the engine and driving increased performance through the data distributed to our key internal stakeholders. In these early stages of a start-up, it’s a delicate balance between giving the teams the latitude they need in developing the business, tracking their activities to the Budget, and determining whether their invested time and expenses will deliver an ROI in the immediate future. In the initial phases, that ROI may come in the form of customer satisfaction, referrals for new projects, potential new hires, and if all are executed properly….bottom line profitability.

Living the day-to-day life of a start-up is not the black & white mechanical structure most are used to working under. It necessitates the development of comfort in change and knowing that will be the case for quite some time. However, at the end of day, just take a step back, look at the evolution of your bottom line results, the trend in customer engagements, customer feedback….and you’ll know exactly how well you’re performing.

Thanks for reading…

Jeffrey Ishmael

Performance Metrics In The Absence of Standards…

August 20th, 2013 Comments off

One of the things I enjoy so much about my position and working within Finance is that there is no “average” workday and each day brings a new challenge and opportunity to drive the operational and financial performance of the company. One of the challenges I enjoy is developing a level of performance reporting to help the executive team measure the business and make the necessary decisions. What this does not mean is merely distributing the standard financial or accounting metrics that are spit out of the system on a daily or a weekly basis. There is simply no value added if that were the case.
What I am referring to is really rolling up the sleeves and measuring what makes the company tick and understanding its pulse. In the case of a start-up you can virtually throw the majority of the standard metrics out the window until you start assembling enough data to actually provide some relevance to figures. In the early stages it’s too easy to take a number out of context and start making assumptions about whether it’s good or bad. The one thing to keep in mind though is that once you start moving outside the standard working capital ratios, you have to be very mindful that not all measurements are created equal. While there are standards in place for revenue recognition, as well as the key spends that need to be rolled into your cost of goods sold, or the treatment of R&D spending, there are other elements where it’s a coin toss between classifying them in your cost of goods or rolling them into your operating expenses.
I came across this during my time with DC Shoes where I started to compile a benchmark study on gross margin performance with other companies in our space. Partly to show our corporate parents how well we were actually performing in contrast to their constant criticisms, but also to see what the performance trends were over the prior few years. The revenue part came together quite easily, but as I started to dig into the gross margin portion of the equation it appeared that there was a significant variance in performance within my peer group. As I started to review the cost elements that were being included it became quite clear that it was not an apples-apples comparison. Additionally, while there may have been some transparency in the elements that were being included, there were no figures cited that allowed for adjustments and the viewing of equitable figures.
In the absence of reasonable comparisons I turned the mirror inward to review our own results over the last 3-4 years and found that was also a challenge as well. I had inherited a collection of financial results that had been modified on a somewhat regular basis….either at the directive of corporate, or at the decision of prior management teams to include/exclude certain costs. Trying to have a clear story about our own performance was equally difficult. This situation makes it extremely challenging to communicate a company’s progress to the Executive team in a clear message, not to mention, it basically condones the constant change of reporting standards that makes reporting, accountability, and planning a huge challenge.
While having GAAP or IFRS standards for every calculation on the income statement or KPI scoreboard is not the answer, the Executive team shares a responsibility to have consistency in the reporting that is produced and understanding the business well enough that an internal set of reporting standards can be deployed and used to measure performance. It doesn’t do anyone any good in the end to have a continual string of asterisks noting changes in your reporting. The only thing that will drive improved performance is accountability supported by accurate and consistent reporting.
Thanks for reading…
Jeffrey Ishmael

Discipline #1: CFO as the Freedom Fighter

May 18th, 2009 Comments off

            As I tabled in my post from last week, one of the hardest disciplines to work into the day-to-day activities is to continually find ways to challenge myself and grow as a professional. As a part of a 7-part series, I discussed my continue reference and affirmation of Jeremy Hope’s book, Reinventing the CFO. Jeremy discusses 7 primary disciplines that he believes apply to the current CFO. The first discipline mentioned in his book is the CFO as Freedom Fighter.

 

            The primary belief behind this discipline lies behind the overwhelming levels of information and reporting that are available to the CFO, and expected to be reviewed as part of the decision-making process. Hope’s book specifically discusses how senior executives use “powerful IT systems to drill down to increasing levels of detail and demand instant answers to irrelevant questions”. Essentially, this comes back to the concept of analysis paralysis. This is ultimately a constant and increasing flow of information, which ultimately results in a significantly delayed or non-existent decision.  Hope also believes that it’s the responsibility of the CFO to “call a halt to this insane data-induced micromanagement”.  Hope further believes that the “CFO has to overcome the resistance of a number of people with vested interests in preserving the status quo”. He further comments that “These are often people whose skill is in spinning, fudging, and manipulating the information so that higher-level managers see and hear only a customized version of the truth”. Hope suggests that the CFO should:

         Rescue Managers from information overload

         Simplify systems and reports

         Focus on truth and transparency

         Avoid unnecessary tools and systems

 

With respect to my own approach, I have always tried to deliver reporting to my internal customers in a manner that will give them the necessary data to make well informed decision, but letting them know that further details are available if absolutely necessary for further supporting key decisions. Depending on the situation I am in, I will usually run a bit of a “diagnostic” to determine if the current level of reporting is really adding value to the existing management team. What I don’t want to do is put my team in a position where we are simply being kept busy generating a volume of reports that are not being used in any meaningful manner by management. My view is that Finance is present to drive results in the organization and the only way that we will be successful with that is providing reporting that will result in decisions that will improve productivity, justify elimination or expansion of product lines, or support longer-term strategic initiatives.

 

At my current company, I started my engagement at a time that I would have considered late for most Budget calendars. However, it was also a small enough company that I knew we would be able to respond quickly to changes and could still finalize a Budget before the end of the year. Coming into the company, I found a GL that was entirely too detailed for the type of business that was being operated, had been only mildly enforced during prior budgeting efforts, but not in any serious level of internal accountability. While I would normally choose to have as much detailed info as possible, I felt that we needed to take a number of steps back, budget at the 40k foot level, implement that Budget, and ultimately, perform to that Budget with the requisite levels of accountability.  I would then expand the level of detail and expectations going into 2010 once we had reestablished a solid foundation.  I also wanted a Budget that was not so complex that it couldn’t be easily followed by all employees.

 

Once the Budget was finalized, I took the step of providing a much higher degree of transparency than had previously been present in monthly reporting. In fact, much of the financial information had not been shared with the wider employee base. The view I adopt is that unless all parties in the game know what the ultimate goal is, then how can you expect that those goals will be achieved? To further clarify, I certainly don’t provide the same level of transparency to general staff that I do with the Board or key Executives. Nonetheless, all employees know what our key goals are.

 

I’ve had too many experiences at prior companies to know that having a high degree of information overload will virtually paralyze the decision process, and depending on the availability of the information, can serious cloud the accuracy of the data. I’ve also had enough experiences to know that increased levels of transparency, tempered for the specific audience, will result in a higher degree of involvement and belief in the end goals. Although I have also found that shared information can also result in undesirable situations, this is more the rare exception than a norm.  No question, the CFO is in place as a Freedom Fighter for management to execute at the highest level.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

As the IFRS World Turns – & continues turning. . . .

April 21st, 2009 Comments off

     It’s been quite a few months since I’ve touched on the topic of the pending IFRS conversion. I’ve just continued watching from the sidelines as to how it would develop as the entire global finance system worked its way through the existing meltdown.  Since I had the “luxury” of working through an full-length IFRS conversion during my time with a France-based company, I was provided with a great insight as to the merits, and difficulties, of such a conversion.  Through the majority of my posts during Q2/Q3 of last year I discussed the significant challenges U.S. companies would have going through such a conversion and whether the U.S. was truly prepared to cast aside a financial reporting structure that had been developed over decades, rigid in it’s application, for a system that was principles-based and open to the interpretations of those applying the “Standards”.

     Interestingly enough, the discussion boards are heating up to call for the SEC to discontinue its mandate of having U.S. companies adopt IFRS. In a recent article on CFO.com, finance executives have “cited concerns over whether the U.S. legal culture and auditors could handle a more principles-based accounting language, getting their staff up to speed on IFRS, the integrity of the IASB, and whether the international rules are truly bettern than U.S. GAAP”.  Some are arguing “that an outright adoption of IFRS, rather than convergence, may be a better route”. I will still take the position that while the current structure of IFRS is a quantum leap over what previously existed before, it is not strong enough to outright replace the U.S. GAAP system. 

     As in my posts from last year, there are still a number of questions that have yet to be answered, and are even more relevant now considerating the developments of the financial markets over the last year.

-Are we really prepared to enter into a 3-year moratorium on new accounting standards to work through the conversion? (consider that most significant changes in standard are born out of crisis…)

-Does the IASB have enough ful-time, technically capable, and independent staff members to support a broad-based U.S. conversion effort?

-What is the U.S. education / university system doing to bolster the number of qualified graduates with the proper IFRS knowledge base?

     There are countless questions which need to be addressed, which are over and above those centered around a comparison of the two reporting platforms and how they will be enforced. I have not read about these questions being addressed and would like to see articles quantifying the developing support in each of these areas.  With all this said, while I don’t believe that we are realistically looking at a conversion window in the near-term, I’m certainly going to continue keeping my IFRS knowledge up to date with any developments happening across the pond.

Thanks for reading . . . .

Jeffrey Ishmael

Reporting transparency w/ Employees: Why not?

January 6th, 2009 Comments off

I have had a number of comments/questions regarding the level to which employees should be aware of financial results and how much detail should be shared with them. My view, if you are not currently a public company, is that you should operate as one and provide the same level of reporting transparency.

As we kick off what will most certainly be an interesting ride in 2009, there is no doubt that we continue to find an environment of constantly changing dynamics. While I chose to push the completion of our Budget until the final few weeks of December, I have already found that there are potential material changes that arose during the Holiday break, which will likely impact our Q1 and Q2 results. Although it would certainly not allow us to achieve our budgeted results for 2009, we still have the ability to effect additional changes to maintain our profitability in 2009. However, these changes, and our profitability, will not be achievable unless the entire employee base is aware of what needs to be accomplished and are engaged in that mission.

Even our smaller entity has not been immune to the employment adjustments that have had to be made sector-wide even though we achieved higher sales in 2008. We are in a very difficult environment and need to plan for the potential continuance of these conditions. With the adjustments we’ve made it inevitably creates a sense of uncertainty. We have lost some employees to competitors. There’s a very real cost to that turnover and the loss of tribal knowledge within an organization. I also acknowledge that while I can identify the key areas that need to be addressed for savings initiatives, it’s the smaller day-to-day spending that the wider employee population can effect and create additional savings. Smaller areas not necessarily seen by management. It’s our employees that will help achieve our aggressive forecasts and our return to profitability this year. It’s our employees that will develop our new product lines and marketing materials to continue growing our market share. It’s our employees that make this company a great entity to work with.

With those few thoughts in mind, why wouldn’t I share our financial targets with our employees so they can see the map that we need to follow in 2009? How do you work towards an end goal if you don’t know what the goal is? If the employees of larger corporations have this luxury via 10-Q and 10-K filings, then why shouldn’t they have this available at a smaller entity where performance levels, I believe, are more crucial? Simply, there’s no reason not to share it and I’ve realized solid results by initiating “internal transparency” in the same manner that I work with key external stakeholders.

Thanks for reading . . . .

Jeffrey Ishmael

Are you resorting to “performance enhancing” measures?

July 17th, 2008 Comments off

Waking up today to get the latest news on the Tour de France, I was shocked to see that the young new star, Ricardo Ricco, who is only 23-years old and has already had some amazing stage wins in both the Tour and the Giro, had tested positive for EPO. With all the crackdowns, suspensions, and increased testing that has been going in the sport for the last 2-years, you would think that todays riders are smart enough to steer clear knowing that testing methods have gotten more aggressive and more detailed.

Does this sound familiar? It’s so easy to draw correlations to the world of Finance in which the stakes can seem so high that some are willing to take any risk for what could potentially be a huge payoff. Even at a more generic level, you have to ask yourself what “tricks” you might be incorporating into the achievement of your recent financial results. Can you close out the month and feel proud of the results and that the results will hold up to more detailed scrutiny, either by the auditors or someone who might end up replacing you? The hope is that in today’s environment you are not having to resort to short-term crutches to achieve results and make up for a lack of performance out of your control. As finance professional, we are truly the gatekeepers and need to make sure that we are playing an honest game.

Thanks for reading . . .