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Scaling the Finance Capability Pyramid, with Andrew Lynch
126 Plays1 year ago
Andrew Lynch is a well-known X (formerly Twitter) finance thought leader with experience in companies of all sizes and a wide range of industries industries. In this episode of the First-time Founders Podcast, Andrew explains the building blocks of a finance function (as illustrated in a recent SecretCFO newsletter https://www.cfosecrets.io/p/first-foundation-finance); how a first-time founder should think about recruiting a finance leader; and his experience implementing the Entrepreneurial Operating System (EOS).
For more detail, you can check out this twitter thread where Andrew first shared his Finance pyramid, including specific tactics and actionable steps to get your Finance function in good shape: https://x.com/andrewglynch/status/1589605703118987266?s=20
Interested listeners can reach Andrew via https://twitter.com/andrewglynch or his LinkedIn (https://www.linkedin.com/in/andrewglynch/) and Rob (https://www.linkedin.com/in/robertliddiard/) at Rob@mission-group.co.uk (or to book some free time with Rob, visit https://www.eosworldwide.com/rob-liddiard).
Andrew’s newsletter: https://www.netincome.co/
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Transcript
Introduction to First Time Founders Podcast
00:00:00
Speaker
Hello, and welcome to the First Time Founders Podcast, the show where we talk about how to start a business from nothing and grow it into something meaningful. I'm Rob Lydiard. I was the co-founder, CEO of a software business called Yapster, which was acquired in December, 2022. I'm now a professional implementer of the Entrepreneurial Operating System, or EOS.
00:00:19
Speaker
which means I work with entrepreneurs and entrepreneurial leadership teams to hit their growth aspirations, start hitting numbers, aligning around a vision, executing with more discipline and accountability, and frankly, being a little bit less chaotic and more healthy as a team, because we can be a little bit crazy in startup world.
00:00:37
Speaker
That's my day job, but in my spare time, I love to speak to other entrepreneurs, entrepreneurial people and business people working with or for entrepreneurs about the first time founder journey and the mistakes that so many of us make along the way so that hopefully we can help others coming along into the entrepreneurial ecosystem, maybe get to where they're trying to get to just a little bit faster and maybe with just a little bit less frustration and pain.
Guest Introduction: Andrew Lynch
00:01:02
Speaker
Today, my guest is Andrew Lynch.
00:01:04
Speaker
Andrew's a really well-known personality in the small business online community of Twitter, now X. Andrew's also the founder, the host of an SMB UK Slack community where I've met some amazing UK small business owners and investors. He's a great guy. And most recently, a couple of weeks ago, he was credited by
00:01:27
Speaker
a chat called The Secret CFO, another ex-personality, for a visual illustration of what a good, capable finance function looks like, both for startups and at scale, kind of five-level pyramid, which is kindly agreed to come on to, because he's my famous friend, to come on to this podcast to talk us through, so that first-time founders can begin to understand what a great finance function looks like,
00:01:51
Speaker
where they are maybe on that curve and maybe some of the actions that they can take to get to a better place with a more sophisticated finance function to help them deliver whatever their vision for their business may be. I think you're going to get a lot of value from the episode. So without further ado, my conversation with Andrew Lynch.
Andrew's Career Journey
00:02:13
Speaker
My famous friend Andrew Lynch, welcome to the First Time Founders podcast, mate. Thank you for doing this. Thank you, mate. I'm excited to get started. Looking forward to it.
00:02:22
Speaker
So when I say famous, of course, I mean, you were credited by name with the diagram in the secret CFO's weekend newsletter a couple of weekends ago with your pyramid of what an elite finance function looks like. It was a sort of visual diagram. I'll include a link in the show notes. For the uninitiated, would you mind giving people a sense of who you are and how you came to be an authority on what great SMB finance looks like, mate?
00:02:46
Speaker
Yeah, happy to. So like I say, I'm Andrew. I guess was an FD, an SME here in Nottingham for a couple of years until I recently leapt to join a sort of fast growth PE backed company and an FP&A role, financial planning and analysis. So yeah, my career,
00:03:04
Speaker
I'm 35 now, so my 13-ish years of my career has been almost all finance. I joined a grad scheme on a finance role and started learning about debits and credits and journals and balance sheet recs and all that exciting stuff. Did that for three years, moved to a startup in the US for a year in more of an ops role, moved back to the UK, worked at 1SMB in an accounting role and then head of finance.
00:03:30
Speaker
then a big Fortune 500 public company in a different finance role than an SME in a different finance role. And now finally, what is currently an SME and probably won't be in a couple of years time in
The Finance Pyramid Model
00:03:41
Speaker
a different finance role.
00:03:42
Speaker
So yeah, I've sort of done a decade plus in finance roles from right junior roles, doing the balance sheet recs and posting journals and figuring out what trial balances up to FD leading a company and designing what the finance control environment looks like and the budgeting and the reporting and the accounting and dealing with auditors and dealing with tax accounts. So yeah, it's given me a sort of decade of experience across
00:04:07
Speaker
three-person startups doing 100K in revenue in a year to, I'd say, 25 billion a year, Fortune 500 company, and a couple of stops in between. So, along that way, I guess, I've accumulated some useful knowledge about finance. I don't profess to be an expert in everything. If I ever need a tax calculation or some VAT advice, there are people I go to because people are a lot more knowledgeable about that than me.
Layer 1: Transaction Processing
00:04:32
Speaker
because a few years ago, and this is obviously how we got connected, but I started sharing some of this on what was then Twitter. This is now X, although I still call it Twitter. And, you know, slowly but surely over time, amassed a small, a modest, but, you know, healthy following. Just talking about, you know, this is what finance looks like at an SME. This is what I've seen from my career. This is good. This is bad. Look at this company, P&L. Isn't this interesting? And, you know, for whatever reason, people want to listen to it.
00:05:01
Speaker
My experience following you has been that you, and it makes sense when you give that kind of whistle-stop tour of your career, you've seen enough of good to be authority on that and also enough of crap to be an authority on that too, which is perfect for SMB commentary, given that we do see the good, the bad and the ugly. So would you, if you're happy, for the purposes of this conversation, I would love it if we could explain what your finance pyramid kind of looks like, we can sort of verbally talk to it, and then we'll almost talk through the layers so that,
00:05:30
Speaker
first time founders listening can kind of hopefully by the end of it can picture
Layer 2: Reporting
00:05:35
Speaker
what a finance function should look like and hopefully have some ability to roughly diagnose where they are on the good to crap continuum at each kind of at each level. Does that work for you?
00:05:47
Speaker
Yeah, happy to. So I guess I'll start by explaining what the pyramid looks like for people that aren't watching this back. And again, I'll take some credit for this, because I guess I designed this particular version that Secret CFO picked up. But I'm fairly sure I adapted this from an old head of finance that I used to work for back in my early days. And it always kind of stuck with me as a good way of
00:06:12
Speaker
and picturing it's not quite the sort of value chain of finance but it's not a million miles away but it's more the reason it is a pyramid is because you need to make sure like the level below it is nailed down before you move up to the next level.
00:06:28
Speaker
So if you think about big blue pyramid with five layers so starting at the bottom we've got transaction processing above that what I call reporting above that budgeting and forecasting above that analysis and insights and then above that what I call strategy so you got five layers from one to five.
Layer 3: Budgeting and Forecasting
00:06:49
Speaker
So go through them kind of each in turn. So first and foremost, the bottom layer of the pyramid is what we call transaction processing. This is the most boring, the most likely to get swept up by AI in the future. And I don't want people to think that because it's the bottom of the pyramid, it's where you should spend the most time. It merely represents the fact that to do anything else interesting, you have to get transaction processing right first.
00:07:15
Speaker
And when I say transaction processing, the things that should be coming to mind are, is my payroll run on time? And are all my staff getting paid the right amount on the right payday without any cock-ups, either from me or from my payroll supplier, double payment? Oh, bugger, I missed off that new starter, forgot to pay them, missed off someone's expenses, all that kind of stuff. Are you getting your payroll right? Are you paying your expenses, all that kind of stuff? Because first and foremost, if you get that wrong, either, you know,
00:07:42
Speaker
you'll stick an extra zero on the end of someone's pay and then you'll never see them again. Or, you know, I don't know about you, Rob, but you know, I like what I do. I like my job. I wouldn't do if I didn't get paid at the end of the month. So make sure your payroll is right. Your team should, you know, turn up to work every month. It's the one bit of finance where literally everyone in your business really, really cares whether it's right or not. And they will immediately tell you if it's not. So you've got to get that nailed on.
00:08:06
Speaker
And what we'll do is we'll sort of go through
Layer 4: Analysis and Insight
00:08:09
Speaker
it and then I'll probably come back and we'll share some mutual horror stories of different misdemeanors at different levels because I think most startups generally will get their people paid roughly, like write enough for people not to all leave. But it's gonna be really fun when we come back to this and talk about how dangerous being quote average can be at each of these levels where it's not so bad that an unsophisticated founder would notice.
00:08:33
Speaker
but it's bad enough to really damage their business. So it makes sense. We won't dwell on that now, but I think that's probably where we're going to spend most of our time with each layer, right? Yeah, sure. So yeah, transaction processing, you've got, first of all, are almost half getting paid on time and are they getting paid correctly? Similarly, again, depending on your business model, this may or may not be particularly important, but
00:08:54
Speaker
getting all your suppliers paid on time-ish or close enough that they're not putting you on stop and you know ceasing to do business with you. Again if you're say a SaaS business where the vast majority of your cost is your own people, slightly less important although you might still have you know a marketing agency or a fractional CFO or an AWS bill that you need to pay
00:09:19
Speaker
If you're not paying it, you're going to get cut off. For a lot of those services, getting cut off might not matter too much. If it's something like your hosting bill, it might be absolutely critical to the success or failure of the business. Your supply is getting paid on time or on time enough that it's not causing an issue for the business.
Layer 5: Strategy
00:09:37
Speaker
Are you getting cash in from your customers, particularly if you are selling on credit terms? So if you're selling on net 30 terms, are your customers paying those invoices and are they paying them on time? And again, if they're not, it doesn't take very long for that to go wrong such that you end up either going out of business or again, welcome back to a horror story. But as I've heard, an MD or a CEO,
00:10:02
Speaker
kind of on their knees in a customer's meeting room begging for an invoice to be paid early because payroll's going out in two days and if we don't get your invoice paid, we're going bust. I've seen some horror stories in VC backed companies with not actually billing and collecting until it matters. It's insane. It's too late, so yeah, we'll definitely come back and dwell on that.
00:10:21
Speaker
So what's the next level? So next level is reporting. So again, if you're getting your payroll done, you're getting staff and suppliers paid on time, you're collecting cash in, and ultimately, obviously, you need to be inputting stuff into your accounting system or your bookkeeping system or something. And assuming all of that's done correctly, you can then do reporting. So you can produce a P&L, you can produce a balance sheet, you can produce cash flow statement.
00:10:47
Speaker
you can file your VAT returns, you can do your stat accounts and your corporation tax. But again, that's only possible if you are correctly inputting stuff into your accounting system or your bookkeeping software. Zero dynamics, NetSuite, there's 50,000 different versions of it. But
00:11:05
Speaker
that's still like garbage in garbage out like if you're not putting stuff into that system correctly or at least correctly enough then your P&L won't make any sense or you'll file a VAT return wrong or your corporation tax will be late or it just costs you a ton because you need to end up paying you know a third party accounting company or bookkeepers to to fix all that for you.
Startup Finance Pitfalls
00:11:26
Speaker
So you can only really get an accurate picture of your P&L if you're putting the transactions in right and you're capturing them and this is where things like
00:11:35
Speaker
your scorecard and your weekly L10 in the kind of EOS framework comes in. It'd be really nice to be reporting that every single month on time, but to do that, you need to make sure people are capturing that data correctly somewhere. Without the good data, you can't do the reporting without a reporter. You can't actually do anything about it.
00:11:52
Speaker
So that's why that reporting sits on top of transaction processing. And then next level up after reporting, you've got budgeting and forecasting. So let's say, you know, you've been doing this for 18 months or so. Now you've got a pretty accurate picture of what your monthly P&L looks like.
00:12:11
Speaker
Thus, you can start to forecast what's it going to look like in the future. So if I'm looking at revenue by month and it's going up 5%, my clock went month over month over month, I've probably got a pretty good idea. If I forecast that out till the end of the year, what does it look like if it keeps going up 5% a month? Revenue has been growing while our people costs have been steady because we're a software company, so we're fixed at 15 people, but we're just signing more and more customers and it's adding to our MRR.
00:12:40
Speaker
Great. Again, dead easy to forecast. What happens if we keep growing revenue 5% a month and people cost stay the same? And the lease goes up next month. So whacking that extra office cost. Great. Now I've got quite a good forecast of what my P&L and what my financials are going to look like over the next 6, 12, 18 months. And equally as importantly,
00:13:03
Speaker
three or four months from now, I can check. Did that performance happen in line with what I was forecasting? So again, because I've got the good reporting, I can do the forecasting. Once you're in the forecast, you can report against the forecast and say, did we hit that 5% month-on-month revenue growth that I'd forecast? If so, great. If not, why? Or even if so, why? And could we have got 10% a month revenue growth or 50% a month revenue growth if we'd done something differently?
00:13:29
Speaker
So again, you need that transaction processing leads to reporting, leads to budgeting and forecasting. Then next up again is the analysis and what I call analysis and insight. And it's really built off what I was just saying there. So we forecast that revenue would continue to grow at 5% month over month because that's what it had been doing in the past.
00:13:52
Speaker
and actually it grew at 10% a month over month. And you go, well, why was that? We changed the pricing, was that we've had seat expansion in particular customers that already existed. Is it because churn's gone down? Which of these factors is causing revenue to go up?
00:14:12
Speaker
do we need to do anything about that? Or is there anywhere we should be putting more or less of our time, money, energy to change that growth trajectory? So you can kind of dig into not just how is the business performing, but why, and then what do we do about it?
00:14:29
Speaker
So that's the kind of analysis and insight piece. And then ultimately in the kind of strategy piece. So again, on top of that, I should keep using the revenue growth as an example. And, you know, I've seen my revenues grown 5% month on month, I've seen that in my reporting, I forecast that it will continue to do so. Actually, it's slowed and it's only going up 1% month over month. Okay, I figured out because that's,
00:14:54
Speaker
because we've exhausted all the customers in this particular segment. Now we need to expand into this other segment. Well, we don't really have the capability to do that yet. So either to continue on that revenue trajectory, we might need to buy a competitor in that vertical. We might need to invest in a new sales and marketing team or a new value proposition to specifically target our customer segment. We might need to redesign our product or feature set to match what that new target market needs.
00:15:22
Speaker
All of these are kind of strategic big business decisions that like sit with the board or the exact team or ultimately usually the founder to make that kind of call. Again, the financial side of that, having done all that analysis and insight, that forecasting, that reporting gives you the confidence in those numbers to say, okay, well, let's say we acquired a competitor. What would we have to pay? How much would it cost to integrate them?
00:15:51
Speaker
What does the combined P&L of that organization look like if we were to do that? Would we have enough money to service the debt that we might need to take out in any acquisition? Would I need to raise equity financing to do it? If so, cool. I've got a couple of years of good financials here and solid business case.
00:16:06
Speaker
and I can demonstrate why that's an important thing or why that's a good thing to do. All that kind of stuff, putting in place a long-term forecast for what your P&L might look like in five years if we acquire this competitor and this competitor, build out these functions, take this equity investment, and then we exit in 10 years, look at what these numbers look like. Again, all of that is only possible if you've done all the stuff below.
Hiring Finance Roles
00:16:33
Speaker
But you can see the journey from
00:16:35
Speaker
bloody hell I'm not even getting my payroll right or I forgot about these nine invoices that I was supposed to input to long-term strategic plan you know NPV counts on investment decisions deciding to do M&A activity there's a big gulf in between those and you have to kind of step your way up to those and hook the levels of that pyramid. They sound so simple when you describe it like that but like real talk what percentage of accountants would you say working in SMV startup land
00:17:05
Speaker
are just not that good. Like I bet the average sort of a bit like the average non-technical founder, like meet someone that can just do the most rudimentary coding and assumes they're the cleverest person in the world and could easily like mix it with Silicon Valley's very best. I think a lot of founders, particularly like business sort of sales oriented founders do the exact same thing with anyone that's a accountant. You don't need to guess what percentage of crap, but like just like
00:17:33
Speaker
anecdotally, like, is it a minefield? Like, is it really dangerous trying to hire accountants without being thoughtful? A little bit. And I would say, you know, I'd have the same problem if I tried to hire a developer, you know, like, I know how much I know, which is probably 5%, less than that 1% of the total, you know, available knowledge in that field. So, the level to which I can make a good hiring decision. And even if I do manage to make a good hiring decision, like, can I manage them? Or can I set objectives? Like, it's just really hard.
00:18:01
Speaker
It's hard at the very least knowing the kind of big picture context of what does good look like at each of those levels and how do we ascend and move up the levels and ultimately kind of where do I want to get to. So if you don't have that kind of big picture view, like you say, it would be like me, I'm going to end up showing my ignorance here, but say I'm trying to build out my software engineering function.
00:18:23
Speaker
and I in an interview contest if someone knows you know an if loop or a when or a while loop and can they write an if statement can they get something to print out to the console and if they cannot go great this person knows how to code like bring them in but that person might know absolutely nothing about like software architecture or deploying to AWS or you know buying versus build decisions when you look at it internal tooling like that might be way beyond that person's level
00:18:52
Speaker
but it's also way beyond my level, so I don't really know how to assess it, and I don't even know what good looks like for a leader of that function, if you know what I mean? It's just really, it's just hard. It is hard. One of the things that worked for me eventually was a combination of discovering EOS and then also just trying all the wrong ways of everything, was the Charlie Munger inversion technique. You're like, what would a really bad accountant or a really bad CTO look like? What are some of the things that they would likely do that would be signals for that?
00:19:20
Speaker
Yeah, should we start with that then I mean what's the most fun to start a strategy or to start transaction processing. I mean the most fun is always to start the top of the pyramid and work down. Let's, let's describe the most incapable.
00:19:34
Speaker
like over promoted CFO for a subscale B2B software company. I mean, like, I've seen instances in the past of someone who, you know, nominally has the title FD. They are, you know, the finance director reporting into the managing director or, you know, CFO to CEO. But in reality, they are at best a sort of financial controller. So they know how to do
00:19:59
Speaker
that returns, and then I had to do stat accounts, and then I had to do a corporation tax filing, and then I had to do bookkeeping. And they might actually be very, very good at those things. Okay. But they don't have the like strategic lens on things. So like far and away the most for me, like the most important thing about the finance function to remember is that ultimately it is a support function. Like it's very easy for me to
00:20:27
Speaker
produce the monthly P&L every month, obviously, and see that the numbers are going up and think that it's me that's making the numbers going up because I'm the one putting together the P&L and the numbers keep getting better. Well, yeah, but in reality, that's the output of all the different things that the people in the business are doing, and the P&L is just there to keep score. But the
00:20:48
Speaker
So the monthly piano to me as the fd or the head of fpna or the financial controller it shouldn't be a surprise it should reflect what i knew was going to happen in the business because i'm already talking to sales and i know that you know in the final discussions with them that these three key prospects and i know the pipeline looks healthy down here i've already spoken to marketing i know that they're planning a big
00:21:12
Speaker
PR event this month. I've spoken to HR and I know employee turnover stepped up a little bit and we've got a couple of vacancies. So I'm expecting to see savings in our people costs against, you know, what we've budgeted. I should know all those things are going to happen in February, like a month ago. And so when it comes to like early March and I'm producing the Fed P&L, I should already kind of know what it's going to look like because I'm deeply integrated with the rest of the business. I'm supporting them and I'm partnering with them.
00:21:39
Speaker
to a degree where I kind of know what's going to happen, if that makes sense. Yeah, it does. It sounds like that's kind of the difference between good or capable and average, right? Because you said, you know, you've got a sort of a capable controller, but maybe just perhaps not quite where they need to be on analysis insight and strategy.
00:22:00
Speaker
presumably there are times where they're actually not where they need to be on strategy analysis and actually not a capable controller either. How's the first time founder would I?
00:22:11
Speaker
know that? Or is there any way to know that before your suppliers start complaining that they didn't get paid and you start realizing that the cash isn't coming to the bank that it should be?
Challenges for First-Time Founders
00:22:22
Speaker
This is if you're even monitoring the account properly, which a lot of VC-backed companies, actually, or some of the founders in VC-backed companies don't. Sure. Do you have any views on that? I mean, I know I'm really trying to drag you to the most sort of like the scummiest part of the finance profession in startups, but
00:22:38
Speaker
I feel like if this podcast has any utility, I feel like it's covering some of these things that are glossed over elsewhere and yet a weirdly disproportionate number of first-time founders fall into these traps.
00:22:48
Speaker
So this is a couple of things that come to mind. So first and foremost would be when you reach the point at which you need to hire for this role full-time. And again, whether you call it financial control or whether you call it chief accountant, whether you call it CFO, whether you call it VP of finance, probably your first full-time hire into the finance function isn't going to be the first person who's ever done any finance work.
00:23:13
Speaker
like early doors when it's just you or you and your co-founders, probably one of you is in putting a bunch of stuff into zero or QuickBooks online, or you've got BookKeeper that's doing it. There's probably one or two of you that are keying in payments on your online banking to actually pay your suppliers or to pay your payroll.
00:23:29
Speaker
Yeah. Obviously, there does reach a point in which you need to delegate those duties. And far and away, the most dangerous of those and the biggest risk area is the keys to the castle. It's giving someone the ability to make payments out of your bank accounts. So one way to control it is you don't delegate that to anyone for a while at least.
00:23:54
Speaker
So you might have a bookkeeper or a VP finance or financial controller who is in charge of doing all the bookkeeping, pulling the P&L and the balance sheet together. And then what they might do, for example, with payroll and supplier runs is most ERP systems, not payroll systems, will either integrate directly with your online banking or produce a CSV file that you upload into your online banking.
00:24:20
Speaker
and most online banking allows you to separate the permission to upload the file from the permission to approve that payment file. And you should always, as much as humanly possible, keep those two duties separate unless they both sit with you, the founder, in which case, presumably you're not going to steal money from your own company. Although again, that does happen.
00:24:42
Speaker
okay so that's really interesting so actually i mean one of the things i definitely did many times across many functions um not just finances misunderstood the difference between abdicating and delegating yes you know and a lot of people that are have the type of personalities that start companies and not massively detail oriented people and they're they're also
00:25:03
Speaker
if not outright risk seeking, as you know, like they're at least they have some risk blindness, generally speaking. And so it's hugely tempting to abdicate because you so desperately don't want to do any job that requires you to really pay attention to like, at least on a repeating basis.
00:25:19
Speaker
So I was really guilty that it sounds like what you're saying is if you want to know if you've mishired in finance, you actually need to stay involved in the process in the simple bits that would show you that it's just not working in the way it's supposed to. Otherwise, how would you know that things logged incorrectly and not done? You wouldn't know, would you? Exactly. To certain degree, and again, up to a growth point, you as the founder or the CEO or the MD should stay involved in that.
Delegating vs. Abdicating Financial Responsibilities
00:25:47
Speaker
Even if you've got the money not to, right? Even if you've been given the investment to go hire somebody that in theory should be able to do all of this better than you ever could. Yeah, absolutely. And, you know, you can hire that person and, you know, mate, again, you can decide on kind of your own risk tolerance to a certain degree, but you could do something like
00:26:06
Speaker
Let's take a really simple finance team structure. Say you've got a financial controller and working for them, you have a bookkeeper or an account assistant, call them whatever you want. So it's probably the workflow for something like a supplier invoice coming in should be the account assistant puts that supplier invoice on the system.
00:26:26
Speaker
the financial controller notes that that needs paying and so sets up the payment and then you as the founder or the CEO approve that payment on your online banking. So at that point you've got three people involved in the payment of an invoice and it requires the coordination of all three to defraud the company.
00:26:47
Speaker
Because again, the most common fraud scenario and things like this is dummy invoice from a supplier that doesn't exist with an employees or an employee's family members bank details on it. So this person puts the invoice on the system. Someone else or that person can approve the invoice and make sure it gets paid. And someone else just approves the payment on the back end.
00:27:11
Speaker
either deliberately or because they didn't spot it. So you can put in place controls at different levels of that. And one of the easiest ones is that segregation of duties so that it's impossible for one person to take a supplier invoice all the way from here's a PDF attachment on an email to there's some money in someone else's bank account. Putting in place at least a couple of people in that process reduces the risk. Obviously it doesn't eliminate it, but it does reduce it significantly.
00:27:39
Speaker
Got it. And actually, in my experience, I mean, I actually do know people that have been defaulted. So it's good advice. I know even more people that have just been sitting on top of really negligently run finance functions in startups that they only realize later. And I would imagine some of those checks and balances at least give you a chance of
00:27:55
Speaker
that type of nonsense going on. Andrew, in the startup world, at least in recent years, there's been such a pressure to grow fast that it's been really tempting for founders, particularly first-time founders, to just go out and sign as many customers as they possibly can. They'll have a rudimentary CRM set up, but then they'll have pretty weak
00:28:17
Speaker
like product data config and CRM driving things like zero in their accounting systems. What's the easiest way? Is there a conventionally accepted easiest way for a startup to be good at understanding its own business from a transaction process reporting perspective? Because it is quite confusing, isn't it? If you come out of even like Deloitte or one of the big accounting practices and get swept into a startup, that doesn't mean you know how to set up the tooling, right?
00:28:47
Speaker
to your little finance cockpit to make any sense whatsoever. Yeah and if anything like it's often the opposite because working at a big company you see such a narrow part of you know even if you work directly in the finance function for example you see such a narrow part of that finance function you know you might have
00:29:07
Speaker
accountant who's responsible for you know a tiny tiny part of like fixed assets accounting and depreciation so they get really specific on that one technical area but don't see you know anything else we might have someone who's been a you know phenomenal um you know management consultant and his advice is big fortune 500 on strategic moves but then like you say on day one of the start of them sat with a laptop in starbucks going out you know what's a p and l or what's a
00:29:32
Speaker
You know, how do I make sure my inventory on my new e-commerce store gets tracked accurately? Or like new users in a B2B SaaS is classic, right? Yeah, absolutely. It's amazing the number of startups. I have no idea how many users they've got. Yeah. So some of these are just like difficult problems. And some of it is the problem of trying to integrate one system with another. To a certain degree, I've got a bit of sympathy
00:29:59
Speaker
Sometimes you don't necessarily wanna do all the work to make sure that my CRM speaks perfectly to my accounting system, to my payroll system, because actually all of those systems are going to change that much in the next 18, 24, 36 months as you go on that growth journey.
00:30:13
Speaker
Yeah, it doesn't make sense to optimize them too soon.
Choosing a System of Record
00:30:18
Speaker
What I would say is there's so much software out there now from CRM point of view, from bookkeeping and accounting, from a BI point of view, all of which have open API keys. So for a lot of integrating, say, a CRM with an HR system, with an accounting system,
00:30:38
Speaker
it can often be as simple as copying an api key out of one system going into the settings of the other system paste it in there click and you know you're good to go. I've seen some very good setups where to a certain degree it depends on which system you want to drive which other system so for example if you take like zero as an accounting system for example
00:31:00
Speaker
that has in it the ability to store a bunch of customer data, customer names, customer IDs, drive all the invoicing, but you don't have to. You could use something else, something like FreshBooks, or you could even use a completely different CRM, or depending on what your billing software is, you may be using something like Stripe to handle your recurring billing.
00:31:23
Speaker
you can just have Stripe be the system of record for all your customer data. So all the customer IDs, names, numbers, contact details, emails, billing profiles, rates, set all that up in Stripe. And all you do is Stripe pushes data to your accounting system that just says, revenue for the month was x. That's perfectly possible. You've really just got to make that call at some point and decide, OK, this is my system of record. This is what I'm using to drive it. And it's this system that
00:31:52
Speaker
pushes data to all the other systems. So if we make a change in this one, it will be replicated elsewhere. But that's the one we use, and that's the one I want my sales team to use, and that's the one I want me as the founder to be looking at on a daily or a weekly basis to see how that sales activity is tracking.
00:32:09
Speaker
You can do the same thing with, you know, if you're setting up a new e-commerce store with Shopify, for example, like Shopify works great with zero, but you use Shopify as the place where you're doing all the, you know, reporting and MI and all the info on your customers and your transactions and your purchases. And all that does is like push just financial data to zero. So you zero is like the kind of system of record for the financials, but not necessarily for all the customer data.
00:32:36
Speaker
So again, I guess with the recurring theme here is you can you can delegate but don't abdicate, right? Because this, this is quite often a sort of cross functional thing with your technical technical lead. I mean, if you're a technical founder, then brilliant, but you'll probably have a point of view on this. And I suppose at that recruitment stage, given how important transaction processing and reporting is in the foundation of solid finance function, I assume you're going to want to be having a conversation with
00:33:03
Speaker
the finance people bringing in whether they're fractional or it's an employee about what their capabilities are and what their point of view is on how these things should come together to drive our reporting.
00:33:15
Speaker
our data capture and our reporting methodology at the beginning. Again, it just wasn't something I even thought about when we founded my software business in 2015, Yapster. I mean, we didn't, we didn't grow so quickly that it mattered. Actually, it was fairly straightforward to keep on top of, you know, our customers as they came in, they were typically long term contracts, three year contracts where we do user based billing, but annually rather than in real time. And so straightforward to keep on top of.
00:33:39
Speaker
But I've seen other businesses where they've got the opportunity to price dynamically and I know that they haven't set up the infrastructure really to support that.
00:33:52
Speaker
You can borrow tips and tricks for hiring a finance lead as you would for any other function or really hiring any other role, which is firstly, is there someone who's been there and done that before? OK, cool. That's probably a pretty good signal. If they have worked at a company that they have scaled from half a million in revenue to 5 or 10 or 50 or whatever, that's a big green flag. And then secondly,
00:34:20
Speaker
What's the level of detail and specificity? They can talk about that kind of stuff, but potentially even if they haven't been there and done that, but could they sit in front of you and say, okay, Rob, I see what you're doing here, I see what your business model is. My recommended approach would be A, B, and C. I know that because this bit of software has this specific quirk that actually isn't that big a deal and will work quite well for you. It integrates really nicely with this other bit over here.
00:34:44
Speaker
And when it pushes data to this third system, that integrates really nicely. You can pull this reporting and push it into this other app that I've used a lot. And if they can talk a lot about that level of detail about what they would do or what they plan in an interview setting or even over email or over a coffee or something, again, normally a green flag. Whereas if someone's a little bit more vague or
00:35:06
Speaker
Gives you an answer a bit like I just gave you, like, it should theoretically be possible to do this. Or it's really important to make sure that we're doing this, this, and this. That's a little bit of a, not a red flag, but a yellow flag. So I was thinking, again, this goes for finance people just as much. It goes to really any other role. How much in the detail is that person comfortable to talk? And that hints at, firstly, how well they know this stuff and how closely they've been involved with that kind of stuff in the past.
00:35:35
Speaker
Because if you've been through one of these implementations or scale ups or roll ups, you've got some battle scars and you know what you're talking about and you've been through the trenches and you've been sat in meetings with implementation consultants from this company and this company and you've had to figure out why.
00:35:52
Speaker
this data field doesn't perfectly map to this one or, you know, all that kind of stuff. And you just you kind of learn that through muscle memory. So you should be able to talk about that coherently, like in an interview setting. And the only other thing I'd say about hiring that finance person is when you come to do that for the first time, and you're hiring that first full time, you know, first FTE on your payroll,
00:36:15
Speaker
They're probably not the first finance person you've ever interacted with as a business. You would have probably had some kind of local accounting firm or audit firm kind of help you do your stat accounts or help you do a tax return or a VAT return or something. Just pay one of those guys to sit in on the interview and tackle the technical stuff. Or if you've been working with a fractional CFO or something like that, get them involved in that recruitment process and get them to handle the more technical side of it.
00:36:43
Speaker
you can interview them from a sort of culture fit, job fit point of view and get them to handle the technical assessment and then just see what they think afterwards. That's well worth paying for. I agree. Anyone that follows you on X would know that you are a massive geek and you love systems and you absolutely could have bored all of us endlessly with your opinions on all sorts of systems and interactions and APIs. But I appreciate you just sticking to the summary level from the purposes of a podcast. And I think that the takeaway for attention short
00:37:12
Speaker
first-time founder, sort of visionary types, again, if people were not paying full attention, is you need to do competency-based interviews, right? If you don't already have a strong point of view about how the data moves through your business and then drives accurate financials and reporting, you damn well better check the person you're bringing in has a strong point of view on that, that you can then verify. What you can't do is talk at a summary level where you don't know, and it turns out they don't know either,
00:37:39
Speaker
And then just hope that it's all magically going to turn into a coherent finance function with sort of solid bottom layers of your pyramid. Because that simply doesn't work. Exactly. If I think about like, again, kind of mapping into some of the US frameworks we have. So when you're hiring or looking for someone, you always talk about right person, right seat. Yes, the founder can evaluate are they the right person? Are they a culture fit? Are they a values fit? Do I like them? Which sometimes important, sometimes not. But you know, are they a culture fit? Are they a right person? You can certainly do that.
00:38:10
Speaker
and in right seat we mean do they get it, do they want it and do they have the capability.
00:38:14
Speaker
you can probably assess whether they want it or not and how enthused they are about that role. You are much less likely to be able to assess accurately whether they want it and what they have the capability to do that. So it's particularly those two strands. Exactly. It's those two strands that you're really looking for external help from. So you can check if they're the right person. You need someone else to tell you if that's the right seat for them. So that's kind of the broad way I'd be thinking about it.
00:38:42
Speaker
Yeah, that's really helpful. How do you know as a finance person where you are on that maturity curve? I suppose it's just a self-awareness and being a part of the finance community and sort of having a sense of what good looks like, right? Like being aware of what you don't know. Because I can imagine it could be quite intoxicating being the most financially literate in an advanced and illiterate bunch. Yeah, true. And this is where
00:39:12
Speaker
to a certain degree, some of this is like, personal preference of that finance person, like, you know, don't get me wrong, I like being like, you know, the big kid in a small, you know, the biggest person in a small town sort of thing, or the big official. But, you know, purely from a like a personal career growth point of view, you also want to be surrounding yourself with like high quality, high caliber people. So there is a bit of that trade off, you know, in any one individual's career, I think,
00:39:40
Speaker
If you're trying to assess your own company or your own finance function, for me as a finance leader, if I'm looking at this pyramid, there are certain things that I would address in here, for example, by the US framework. Some of these things I was looking at in an L10 on our weekly scorecard for the finance team. So if I think about the transaction processing, I had a metric for both my accounts payable and accounts receivable, which is what's the percentage of your ledger that's over 90 days old.
00:40:11
Speaker
Oh, that's interesting. Yeah, so I know all these supplier invoices, the longest payment terms we have for suppliers is 60 days. So if it's still on the ledger and it's more than 90 days, I would like what's going on. And to a certain degree, you get, again, this is where you get into a little bit of a balance that like,
00:40:29
Speaker
I don't necessarily want that to be zero because that means we're getting in everything and just paying it immediately, which also isn't necessarily correct. But again, same on the accounts receivable side. What percentage of the ledger is more than 90 days old? Is that more or less than it was last month, the month before, the month before? Are we getting better? Are we getting worse?
00:40:47
Speaker
We had a couple around like total age creditors and total age debtors. One on there that's just like the daily cash balance. So one of the super simple controls that we used to have at a prior company was it was my job first, 9 a.m. every morning was to log on to the online bank and just text the MD what the bank balance was.
00:41:08
Speaker
dead simple report, you don't need to complicate any more than that. But he has that, you know, in his pocket by 905 every morning. And he's got a good idea of where it's at. And if you're talking about earlier, right, about this sort of don't abdicate, you've referred to EOS a couple of times. That's actually super interesting. If you're happy to take us around that, that EOS, I get entrepreneurial operating system for those aren't familiar with
Aligning EOS Framework with Finance Functions
00:41:31
Speaker
it.
00:41:31
Speaker
And the model is illustrated in a wheel. Vision, people, data, issues, process, traction. You've alluded to the data scorecard there. It'd be awesome just to hear you kind of riff on those key components and
00:41:48
Speaker
how the finance function interacts there, I suppose in the company in the leadership team more broadly, and then and then running like their team if they have one. I think people get a ton of value out of that because it, it sounds like the fact you keep referring back to it is like this is probably the way that a relatively junior finance person that's just been catapulted into a startup and leading finance can can do a good job
00:42:12
Speaker
not withstanding the lack of experience, because that's exactly the role EOS plays for the average first time founder across all functions, right? It's like you paint by numbers and it just brings some degree of greatness out of you. Yeah, yeah, absolutely. Yeah. I'll talk through the sort of different, like I said, the spokes on the EOS wheel. And obviously, I know EOS is a subject pretty close to your heart. Likewise, so the SME that I was finance director for a couple of years, we implemented EOS.
00:42:40
Speaker
Probably about 6 months after i joined and then so we were kind of self implementing for about 12 months and then hired an implementer for the next moments and it was a transformational it really really.
00:42:53
Speaker
Yeah, there's no better word for it transformed the trajectory of that business in the best possible way. And as I've since moved on from that business, but continues to go from strength to strength in my absence, which is fantastic to see. So yeah, if I think about the sort of six EOS components, so firstly on vision.
00:43:12
Speaker
So again, for the benefit of the audience who maybe aren't as familiar with the OS, part of the vision is saying, as a company, what's our big 10-year vision? And then as part of, OK, if that's the 10-year vision, what's the three-year target? So where do we want to be in three years to be well on the way to achieving that 10-year vision? And the 10-year vision can be industry-leading, best-in-class vertical sass for this particular market.
00:43:39
Speaker
So it can be a little looser. But part of the time you get down to say the three-year vision, EOS does push you to a certain degree to be quite concrete about what that looks like. How many people is that? What kind of revenue are we doing? What does the office look like?
00:43:55
Speaker
And what is the piano look like which is where we get into that kind of budgeting and forecasting thing so if you're trying to set a concrete three year vision of wanna be this many heads this revenue number this profit number we wanna raise this much in funding like is that anywhere nearly remotely realistic.
00:44:14
Speaker
And you don't want to be too realistic, because it should be an aspirational target. But also, it needs to be within the realms of possibility. You can't say, we're $1 million now. And in three years, we want to be $100 million, making $99 million profit, because we're only going to hire three more people.
00:44:30
Speaker
That's a bit unrealistic. So we've got to come up with a somewhat meaningful figure. And then off the back of that three year vision, okay, what's the one year plan, which nicely maps to a lot of the stuff we see in what really good FP&A, so financial planning and analysis is what my role is now.
00:44:48
Speaker
a big part of that is getting the the board and the exact team the leadership team to align on you know this is our long-term financial plan and off the back out this is what we're going to do in the next 12 months which traditionally equal the budget.
00:45:00
Speaker
So it maps really nicely to EOS. So you've got to have an idea of where you want to get to in three or five years to inform where you want to be in the next year, to then inform where you want to be in the next 90 days and how you're tracking against that. So that vision and goal setting exercise in EOS maps really nicely onto what's really good financial planning, long-term financial target, short-term financial target tracking against that and making sure we're moving towards that.
00:45:25
Speaker
It's interesting, when I first subscribed to the Secret CFO newsletter was when he did the FP&A series, I think it was one of the first series actually. And it was really exciting because it's not like I didn't know I had any passion for FP&A, but because I'm so passionate about the entrepreneurial operating system, I'm really passionate about seeing visions actually delivered. And of course, seeing a vision actually delivered means
00:45:50
Speaker
It sort of has to be realistic to begin with, and then you have to execute with discipline and accountability. But I see the world in pictures and words, not really in numbers. I'm not a wildly logical person. And it took me quite a lot of cycles to, you know, setting bad rocks, setting visions that then turned out to be undeliverable to get to a place where I was more able to do it. And actually, the only the breakthrough for me was when I stopped advocating finance and started delegating it properly, where we had to set
00:46:19
Speaker
recurring monthly meetings for our whole leadership team, it's actually after our CFO left, to, to go line by line through the PNO and our management accounts to make sure that nobody
00:46:29
Speaker
didn't understand a single line or tab of it, which I'm ashamed to kind of admit, but it was critical for us in really understanding our numbers, which then meant we really understood our operating initiatives, which then only then did we really understand our vision. We could have saved years and a tremendous amount of pain had we taken a kind of finance first perspective to vision setting earlier on. So it's interesting what you're talking about really resonates with me. Yeah, because I mean, you know, ultimately,
00:46:58
Speaker
the two things you've got as a company are people and money and the people cost money. So ultimately what you have is some money and we're going to spend it on things that will hopefully generate more money in the future. So how you choose to deploy that money is ultimately like the
00:47:16
Speaker
you know, key decisive thing in how the company grows and what the company trajectory looks like. So having that really close link between okay, where do we want to get to? Okay, what is that going to require in terms of resources in terms of people in terms of investment?
00:47:31
Speaker
And are we actually doing that? And are we doing a bunch of other stuff that is, you know, doesn't need to be done to keep the company going, doesn't need to be done to keep the lights on? Isn't attracting any additional revenue? Isn't saving us money? Isn't reducing risk in any way? Or like, what the hell are we doing with it? Then like, get rid of it. And you can only really do that by, like you said, being really, really close to the numbers. It's so true, actually. So that takes on to the next couple of components, people and data. And we can almost deal with them together. Because of course, in people, it's, as you said earlier, making sure you've got the right people in the right seat.
00:48:01
Speaker
And then in data, we want to have a scorecard that gives us an absolute pulse on the business at leadership team level, then every team. And of course, ideally, we have every employer with a number are measurable. Do you want to talk from a finance perspective about I put slightly put words in your mouth, but I'm assuming a great finance leader.
00:48:19
Speaker
kind of knows what good looks like from a numerical output perspective for each of the people that are on the accountability chart. It's your fault. And I think that's fair. And obviously, as a finance person, particularly in an SME environment, the data side is like the one closest to my heart, but it's also the one that is the most likely to sit with the FD or the CFO or the controller. Obviously, the bigger the organization you get, the more likely you are to have
00:48:47
Speaker
take your engineering team or an i team or add a whole army of like business analyst turn out power points and tablet dashboards and that kind of stuff that happens at a certain scale in an sma and. The finance person is almost always the the finance team and a couple of people in the finance team are often some of the most you know and.
00:49:10
Speaker
number literate people or data savvy people in the organization so a lot of that data work tends to fall to the finance function again not always and that's not a given and like to your point about what's a good or a bad finance function like if a finance person is uncomfortable taking on that data role it's not a great sign but certainly obviously in the like SME where
00:49:32
Speaker
where we implemented EOS, the design and production of the scorecard, at least initially kind of fell to me. And then to a different spoke on the wheel, I ended up writing a process and kept someone else. But defining the quality of the data sources, what are the metrics we want to track? What are the numbers that are actually going to move the needle on this business? And is where the combo of a finance person's kind of data savvy plus the commercial awareness and the commercial now understanding the business model
00:50:02
Speaker
understanding the market, understanding the drivers of business growth coming. In your career, are there any areas and measurables that you felt least comfortable with sort of earlier on? So for me, for example, I was always pretty comfortable with sales and marketing. It took me time to get to a place where I had a strong point of view on product engineering measurables. And actually some finance measurables other than like amount of cash in the bank and runway drop dead date.
00:50:32
Speaker
What about you? Did you just come out of the womb with a strong point of view across the whole business and what measurables they should have? Or have you found that you've had to develop that awareness and confidence as well? No, I think I came out of the womb with it fully format. I knew it all. Yeah, certainly. Obviously, from very early in my career, and frankly, even before, I just got a bit of a nerd. I was always pretty hot on the finance stuff, seeing a balance year ratios.
00:51:00
Speaker
margin percentages, all that kind of stuff, free cash flow, EBITDA. So that's all relatively straightforward. And again, if you've got either a reasonable bookkeeper accountant or fractional CFO, a lot of that you are probably getting already or you already know about, or if you're not, you should be.
00:51:19
Speaker
Um, I think certainly, like you say, some of the more, I was gonna say operational metrics, but again, that, that applies more to certain kind of business models than others, but particularly in, you know, a SaaS company, things like, um, you know, product testing velocity or speed of engineering development and that kind of stuff to a certain degree, um, are slightly harder to pin down as to what exactly that number is. Um,
00:51:46
Speaker
What would be your recommendation, Andrew, for somebody that is used to being an expert, they don't have a strong point of view yet on one of those areas?
00:51:56
Speaker
but it clearly is critical for the business, right? If you're gonna serve as a leader in it to like, just push through the discomfort until you do get a point of view. Kind of, yeah. Like firstly, you know, particularly if it's like product or software engineering, I'm assuming if you as the founder don't have that strong background, then you've got a functional leader who does have that strong background. And so I would be pushing them to tell me what good metrics are and what good looks like.
00:52:25
Speaker
And then I'd probably be going out to my network to kind of sense check that and going, does anyone know a good product manager that I can speak to? Yeah, my product director is saying this, this, and this, does that kind of make sense? Oh yeah, yeah, I know that maps to what I saw at Uber and Facebook and all that kind of stuff when I was, oh good, yeah, good. And then go back to the product director and go, yeah, yeah, like your plan, all makes sense, thanks.
00:52:48
Speaker
I'll give you a good worked example. For a long time in Yapster, we didn't collect user satisfaction scores because there was a bunch of semi-intellectual navel gazing within our team about the accuracy of NPS and how it fluctuates based on what day of the week it is and when you last had some uncontrolled outage or whatever.
00:53:12
Speaker
And what happened is it meant that while we were pondering what the right measurable was for user satisfaction, we just didn't have any. I was out talking to customers and users all the time, and I could feel that we needed to do better. But better wasn't really defined. There was no baseline. And actually, it only took us a couple of weeks to just put a simple capture in the platform that then presented on
00:53:35
Speaker
I don't know, a month after first login and then every six months thereafter until they left their company and therefore left the platform. And it became incredibly useful because it was baseline and you could see it by customer and you could see it going up and down trends over time. And the lesson for me was not to get too clever and to not allow subject matter experts to kind of fob me off with all of the complexity between the different choices that they could make to legitimize not making
00:54:02
Speaker
not making any. And it was a real lesson for me that I had to form a point of view if I wanted to sit in the big seat. This sounds like the, so what I'm picturing in my head right now, this is like the KPI equivalent of like the mid-wit meme. So like on the left, you've got like, just track NPS. And then someone's like, no, NPS, you know, doesn't capture this, this and this. And like, it's not as accurate. And then, you know, the ninja on the right, it's just track NPS.
00:54:27
Speaker
Yeah, I mean, because if people really hate you, they're going to press one like we fucking hate you. Like, you know, if they think you're awesome, they might press five or they might not. But you know what? Knowing how many people press one, pretty fucking valuable, it turns out, if you're the one going out and trying to get that customer to stick with you or find ways to alleviate the pain, you know, that some users are experiencing. I think we like that there are probably exceptions to this rule, but I would say that a
00:54:56
Speaker
not a bad metric, but an imperfect metric is still better than no metric at all. If you're flying a plane in the clouds and you've got no controls whatsoever, or you've got one that says your compass direction, but it's five degrees off or whatever, it's still better than nothing. It gives you at least some level of insight into what's going on.
00:55:19
Speaker
whether it's your metric scorecard or you've got a bunch of Tableau dashboards set up or some specific reporting coming out of whatever tooling you've created. It's not fixed in stone. It doesn't have to be like that forever. You can iterate and iterate and iterate. The business we put EOS into was a fairly simple wholesale and distribution business. We buy stuff for a price and we sell it for hopefully more than that price. In the meantime, it sits in the warehouse. It's not a complex business.
00:55:47
Speaker
But our scorecard went through a lot of iterations, some metrics we put on there first time and we kept them there forever, weekly sales, daily cash balance. Went on the scorecard first time, never left, made perfect sense. And there's others that we iterated over time and we put it on for a little bit and then we were tracking it and we're going, actually, that's not really giving us what we need.
00:56:05
Speaker
But at least we tracked it for 90 days and figured out that it's kind of useful, but not in these situations. OK, stick it on the issues list. Is there a metric that looks better? How do we refine that? Ideally, we'd be able to get this. So in your example of customer satisfaction, ideally, you'd have a direct brain link to every single appster user. And you could see what the blended average of satisfaction with the app was in real time at any given moment.
00:56:33
Speaker
impossible so how close to that can you get and you might start off you know if ideals like way way over here on the right hand side of the spectrum and you're here well like you can move a couple of steps closer to that and you might never get to that perfect nirvana but you can at least come up with a metric for now that does some of the job if at some point stops serving a purpose or you need to refine it or you need to change it you know you're allowed to do that but yeah certainly having
00:57:00
Speaker
Yeah, an imperfect metric is better than no metric. The only exception to that would be where it's massively misleading or completely wrong, which is where you might get into a debate about particular stuff. But for the most part, having something's better than nothing, for sure. I agree. And you've alluded to issues, the fourth component in EOS. I agree. You start somewhere and then
00:57:21
Speaker
The level 10 meeting you've also referred to as part of the traction component. So for those that don't, level 10 meeting is just a meeting that happens at the same time, same place every week and follows a set agenda. It's called a level 10 because most people rate their internal meetings like a three or four, i.e. a piss-poor use of their time. When you follow this agenda that EOS prescribes, the goal is to get to a place where everyone that's participating rates it at 10. And Andrew, I found the same thing. You put things up on the scorecard,
00:57:51
Speaker
they were either raw, it was either the right metric and showing that we were not performing well enough and it would go on the issues list, or we'd be suspicious about the metric itself, which would go on the issues list. And then you'd get to the root cause, you try and solve it, maybe come up with a process fifth component. And you just keep tweaking those things until you got to the promised land, right? And you do that on a weekly and quarterly cadence in the meeting pulse. Was there an AMS you didn't like as a finance leader?
00:58:21
Speaker
It's one thing that doesn't quite fit into the, as well as a couple of things that don't quite fit into the EOS framework. The main thing that comes to mind is that it's kind of
00:58:32
Speaker
it's somewhat natural for a finance person to want at least some element of that like traction process anyway, because, you know, my, my life and my career is run by that kind of monthly reporting and quarterly reporting cycle anyway. So it's kind of built deep within any accountant, you know, month end is a thing. And at the end of every month, I'm gonna have, you know, these eight tasks to do to produce the prime months P&L and balance sheet and
00:58:58
Speaker
Then at the end of the month, I got stuff to payroll or whatever. So a natural traction component for me in any business would be like a monthly P&L review. In some businesses, you might call it an MBR, a monthly business review. In other companies, you might call it an MFR, a monthly finance review.
00:59:15
Speaker
You might call it the P&L review, whatever. But most finance people, if they've worked in any organization of any size, will naturally have a tendency towards, at the very least, a monthly cadence of meetings to review results, plan what to do next.
00:59:30
Speaker
and possibly a sort of either quarterly or half year or the very least annually cycle of planning and budgeting for next year. So what have we achieved this year? What do we want to achieve next year? Okay, how do we make sure we've got the resource in the plan to do that? So that kind of traction stuff is kind of already built into the sort of finance mindset. The EOS doesn't really have a place to put in a meeting, for example, that is just me communicating. This was the P&L last month, and this is the forecast for the rest of the year.
01:00:00
Speaker
It either means I need to create a totally separate meeting for the leadership, or I need to shoehorn it into another section of that weekly L10 that you mentioned. But as you and I know, that weekly L10 has a very strict agenda, and EOS recommends that you follow that strict agenda every single time to get in that kind of organizational habit.
01:00:22
Speaker
which makes perfect sense for the purposes of a weekly leadership team meeting, but where do I show everyone the P&L and the forecast and where do I talk people through? You know, you've overspent on this, this, or the cash flows looking like this. You kind of have to carve that out separately. It doesn't quite fit in the framework, which annoyed me a little bit.
01:00:39
Speaker
Yeah, no, I can understand that. It's interesting, actually. When I did the the US implement a certification and training where you go really deep beyond what I learned doing it for Yapster, I had some of those same questions. What really helped me was them saying that they recommend we don't take anything away from EOS because we might break it for a client and that wouldn't be fair on them bringing us in.
01:01:01
Speaker
But they're comfortable, the teaching is that it's fine for organizations to kind of add to EOS, like often through that sort of, and they often think about them as processes. So it might be a finance process, which is what augments the meeting cadence. So you might have, I mean, in our business, we also did the monthly P&L review.
01:01:21
Speaker
it was a separate meeting and it was totally critically important. And also EOS Worldwide themselves have augmented their meeting pulses to reflect the fact that their private equity owned now and they therefore have board meetings. There's a blog, I'll send it to you actually, I'll put it in the show notes as well because I think it's really interesting, where it recognises that
01:01:47
Speaker
EOS was designed for organizations where the leadership team have sole authority to effectively do whatever they want, so that the things that are decided in the quarterly gets done. But of course, in an EOS, in a PEBAC business, they do need to check that what they're planning on doing aligns with the majority owner.
01:02:05
Speaker
AEDPE fund. And there's this brilliant blog by Mark O'Donnell which explains how the process is supplemented to work well for companies with boards.
Adapting EOS for Finance Needs
01:02:13
Speaker
So for me, Andrew, I agree with the frustration, but I actually think that the EOS teaching, even though it's not laid out in traction, kind of allows you to cover that by extending rather than changing. Yeah, that makes sense. Listen to me defending it as a card carrier EOS evangelist now. Yeah, that makes sense. So the only other thing I want to get your perspective on this is that
01:02:33
Speaker
There have been times, for example, in that weekly L10, that leadership team meeting, where so part of the EOS process again for the listeners is each of your leadership team members runs through their priorities for the 90 days, their goals, what they call their rocks.
01:02:49
Speaker
And they merely report whether something is on track or off track. And there are times when I've heard someone say, yes, that is on track. And I know for a fact, it is not. Maybe it's something like a sales goal. And I'm looking at the sales forecast. And I go, well, you're not going to hit that. Or there's some project. And I know that they haven't figured out how to interact it or integrate it with the finance system, something like that. But someone comes to that meeting and says, yeah, that's on track.
01:03:17
Speaker
EOS like for better, for want of a better phrase, EOS doesn't provide a way for you to hit that like bullshit button. Like I don't believe you, or I want to pick up on that unless I guess you kind of directly call it out in the meeting. And it likewise, I guess doesn't really have any place for kind of progress updates, you know, just to keep the leadership team informed to say, this is on track because A, B and C have happened this week. And again, whether that takes place in separate meeting or a progress update email,
01:03:48
Speaker
you can add to it. There was a couple of teething problems, but issues that we had when we were implementing. I found the same thing in the App Store. We supplemented the rock-setting process. In EOS Pure, it says just set smart rocks. We just took the definition of smart and said,
01:04:10
Speaker
we need rocks to be scoped in such a way that we can understand where someone is in their kind of rock plan. Our rock setting was done pure, so we just set something that everyone agreed was smart, but the first phase of doing their rock, which then went to the to-do's for those that are listening, that's like, a to-do is something you can get done in a week, a rock is something you get done in 90 days, quarter to quarter. And the first to-do that people took was to scope their rock in such a way that it could be illustrated in a hill chart
01:04:40
Speaker
Hill chart is going up to the top of the hill is figuring things out. Coming down the other side of the hill is making things happen. It comes from Basecamp. I find it's a really good visualization of where someone is in a complex project.
01:04:51
Speaker
And so then that enabled us, because I found the same thing. Someone would say on track, I'm thinking, I think you're off track. You need an integrator willing to call bullshit. And they can't really call bullshit if they can't see where in a rock deliverable someone is. So I agree. So for me, that was just supplementing the process. And I actually found the same thing for get it and capability on the people analyzer. So the people component you referred to earlier.
01:05:18
Speaker
we found when just saying someone does or doesn't get it without a granular definition of what getting it means was actually really difficult to have performance-related conversations, quite difficult to put someone on a pip if you couldn't be specific about what get it means. And so again, we just extended the process. We didn't think it really took anything away from EOS.
01:05:39
Speaker
we just had role definitions where there were kind of three bands, forget it, across the relevant role attributes, and we just scored people quarterly, numerically for that, so. I agree. I think for the average SMB, like particularly the really unsophisticated end, the founder just kind of knows and their hunch is okay. For more analytical tech businesses, investor-backed businesses, I agree with you. Rocks, Scorecard, a lot of these areas actually need some thought and documentation underpinning them.
01:06:08
Speaker
Yeah, and I'll add to that your point about the gets it, wants it, and has the capability. Gets it definitely is fleshing out as does, I think, capability. Well, I can't remember whether EOS calls it capability or capacity, but I always call it capability because I think it's a better effect for this. Yeah, they call it capacity, but I know what you mean. Because I always think about capacity as like another time to do it, but not the ability. I'm sure I can't like capability.
01:06:35
Speaker
But certainly like, again, if I just think about it in simple kind of finance terms, you tend to in a lot of finance function, obviously, you've got like different job levels, but often they're denoted by someone's title as well. So you might have someone who is a management accountant, by which they mean, they've qualified, they've passed all their exams, they've done this, this and this. And that, you know, brings with it a certain level of pay and seniority, because that's also what's expected in the market.
01:07:01
Speaker
and below that you might have some like assistant management accountant or account assistant or something which is someone who either isn't qualified or is studying to become qualified. So it's a really simple criteria that you can put in place to say that level or like
01:07:16
Speaker
by capacity or capability for this specific job we mean these five things and for this job you know we denote that at a slightly different level and we say capability means these criteria and again that might be different cross-functionally but again if you think about say
01:07:34
Speaker
a sales function. What does a biz dev rep look like compared to an account manager, compared to a senior account manager, compared to how to sales? Someone's got to be comfortable writing really good cold emails and cold calling and getting the leads in. Someone's got to be comfortable.
01:07:52
Speaker
Picking up that lead and driving that sales decision forward and closing it and then at the next level someone's got to be capable of setting a sales strategy, setting a go to market strategy, designing what that acquisition funnel looks like, talking through the value prop and all that kind of stuff, target market, marketing materials.
01:08:12
Speaker
just completely different capabilities, although they're still sales roles. They're just at different levels and different levels of experience, and therefore the capability required is different. Mapping those out for people firstly makes it super explicit what's expected of them now, and also gives them a clear path to like promotion and advancement, which most people are really grateful for. Yeah, I agree with that. So I like capacity, but I don't disagree with your analysis. So for me, we would just, we,
01:08:40
Speaker
We encompassed a lot of that in get it, but like we just had kind of your natural disposition. You're almost your genetic encoding and then also your acquired attributes, but capacity covers some of that as well. But the reason I like capacity is in a.
01:08:57
Speaker
Like, just life happens, shit happens. And people's capacity goes up and down sometimes. Some of it is a one-way escalator that comes with experience. But for example, my wife, just under 2 years ago, had our first child, right? She's a marketing director in a technology company.
01:09:14
Speaker
and was at startup. And so she rushed back from maternity because we needed her to the startup. She was at Yapster pre-acquisition and then she got a job at another place. And she'd be the first to say that she rushed back and her capacity was massively lower because she came back too soon. She's brilliant. We really needed her, but it was just different. So it was different because she wasn't sleeping, but also now had this new priority, whereas previously,
01:09:42
Speaker
just the job had been number priority one, one, two, and three, and now wasn't. So it kind of redefined how she did the role and how we'd shaped the role previously. And it was really nice to be able to say, well, like, you still get it, you still want it. And your capacity, your capacity has been temporarily reduced, like, quite rightly, while you've you bring in a new little human human being into the world, with someone else who's who had a sick parent,
01:10:07
Speaker
example, in a completely different role. And so again, you'd see some, some capacity drop. But as a leadership team that cared about each other, you would need to have an open and honest conversation around whether the business could, could carry on with just that one person in seat with their diminished capacity, or if we now had an issue that needed to be resolved with some extra cover for that person. And so I found that really helpful. And I'm not sure how
01:10:35
Speaker
Like it's those things are really awkward to talk about, right? One of the great things about EOS is it makes you have awkward conversations in lots of places.
Addressing Leadership Challenges with EOS
01:10:43
Speaker
And like, I don't want people to jump to the conclusion that like, you know, Rob's wife still got what the role was, still wanted it, but didn't have the capacity to do it. So, you know, she's out. We need to hire a new marketing director. It's like, what's the, okay. Given, given that, um, whole, you know, is that a, something we just live with for six months?
01:11:02
Speaker
And if so, what's the knock-on impact? And are we all okay with that? Fine. Or what additional resource do we need to put in place? Or what do we need to move around? Or what else do other members of the leadership team need to pick up? So yeah, like I say, EOS in many ways has the
01:11:20
Speaker
the kind of toolkit and provides the framework to bring to the forefront these often somewhat awkward conversations, which are almost always the most important. However, awkward you feel the conversation is probably correlates quite well to how important it is to the business. Yeah, agreed. Thank you for linking the finance pyramid to your experience in EOS because I do think that
01:11:46
Speaker
Good finance people are so critical in all businesses clearly, but in startups and particularly in sub-scale founder-led businesses where we're now in this quite difficult environment, they're completely critical. And when they lean on EOS, I feel like it
01:12:03
Speaker
It gives finance people a real unfair advantage in a way to step into true general leadership and the language of businesses numbers, clearly. And I think it creates a really nice bridge for numbers people to actually lead organizations more effectively. Yeah, I completely agree. And it's also one of the areas where
01:12:25
Speaker
Firstly, again, not to stereotype finance people too much, but a lot of founder CEO types tend to come either from a product background, software engineering background, or sales and marketing. Very few hardcore SaaS founders are probably going to come from a management accountant role at an SME, which is fine. But it also means as a startup SaaS CEO or founder,
01:12:53
Speaker
it's unlikely you are going to have much experience in finance and it's also something that to a certain you just kind of requires time and experience to understand it. It takes three years to be or in some cases a couple of years to like become a qualified accountant to get jotted to know what you're talking about and a lot of the good practices you see are really just a function of having a few years experience at a much bigger company and then figuring out okay what's the scaled down version of this that this you know
01:13:22
Speaker
10-person startup needs and what's the slightly more scaled-up version of a 30-person company and a 50-person company, 100-person company needs. So it's just the kind of experience that's quite difficult and quite uncommon for a founder to have. So like I say, it's really important to be able to know what good looks like, to be able to hire in either on an interim fractional basis or permanently, like that support.
01:13:48
Speaker
And then if you get that really, really strong finance support, just give you the confidence to drive forward. When you've got confidence around the numbers, you know how much you can afford to invest in growth or invest in sales and marketing. You know what the short, medium, and long-term future can look like if you hit those goals. So obviously, I'm slightly biased, but I think that's where finance has a really, really strong role to play in start and world and in particular with EOS as well, because EOS just puts all that
01:14:18
Speaker
tooling alongside it that allows finance to play quite a big role. Yeah, I mean, I love seeing finance people move into that integrator position. I just think that if you're a financially literate integrator, you really can take on the world. And if you're a mad dreaming visionary,
01:14:34
Speaker
having that person that you're riding shotgun with that is operationally disciplined, willing to have hard conversations, but can really understand how your dreams get expressed in operational initiatives and measurables. It's just a game changer.
01:14:51
Speaker
going right back to the start of the conversation, what does a really good finance person look like? The best of the best. Secret CFO is a great example of this, can play at both ends of that spectrum. So they can make sure you've got the right control environment, so you're not paying dodgy invoices or your banking system. And they can also say, okay, what's the strategy? What's the long term vision? What's the right go to market? How do we position ourselves correctly?
01:15:14
Speaker
and being able to play out both ends of that pyramid and all up and down that pyramid is what a really, really good finance person looks like. They like to say they're such an asset when you find them. Amazing. Andrew, thank you so much for doing this. I'm going to link your Twitter or X account in the notes and your LinkedIn profile. Are you happy for people to reach out to you if they're interested? Yeah, absolutely. I'm on Twitter or X as Andrew G. Lynch. Find me on LinkedIn, Andrew Lynch. That's about it. Oh, AndrewLynch.net. If you want to check out the blog or anything like that, it's all good.
01:15:45
Speaker
and read your random deep dives into these company financials that you just like to look at for the weekends. Yeah, touched on that very briefly. I wrote sort of, I guess the way I'm thinking about it now is like season one of a newsletter, because I wrote like eight editions in about eight weeks last summer.
01:16:00
Speaker
and then got completely burnt out. So I'm thinking about where next season is. But yeah, if you want to go to netincome.co, you can read my newsletter and deep dives on fascinating company financials. Well, that's Center Parks, some ludicrously profitable software company up in Edinburgh.
01:16:17
Speaker
I love that one. That one was good. That one was good. What else did I do? Oh, the Portaloo rental guy from Essex. There's a couple of others in there in the mix. But yeah, check it out, netincome.co. Brilliant. I'll put all those links in. Adji, thank you so much. Looking forward to seeing you again. Pleasure. Thanks, Rob.