Episode 6: Preparing the CFO offices at Growing Companies

Madhurima Gupta:
Hi! Welcome to the Mid-Market CFO Circle podcast powered by RadiusOne. I’m your host, Madhurima Gupta. On the Mid-Market CFO circle podcast, we bring you peer insights and technology trends, predictions, the potential cost of not implementing automation and emerging technologies for digital transformation, and overcoming pressing business- IT challenges for the office of the CFO. Today we have with us DanPiscatelli. He is the founder at Hurd House Advisors, where he offers fractional CFO services geared towards startups, getting their offices back, uh, their back offices in order, and mature businesses considering exit strategies. Dan has over 20 years of experience as a CFO with expertise in mergers and acquisition, financial valuation, planning, and implementation. On that note, let’s welcome our guest to the show. Hi Dan, how are you doing?
Dan Piscatelli:
I’m great. Thank you for having me.
Madhurima Gupta:
It’s great that you could take the time to have this conversation. So Dan, since I’ve already introduced you, I wanted to actually dive right into the different sets of questions that I have for you. So I want to understand first, right. What are the key responsibilities that a CXO holds in a startup with regards to their finance department?
Dan Piscatelli:
Sure. I think, uh, you know, you step a little and think about the founder and where his money comes from. It’s either through his, his own, uh, nest egg, uh, friends and family, angel investors, strategic investors, or even institutional investors, depending upon how far along their path they are. Um, and that’s really to protect the assets of the company and to provide really time accurate information, um, including KPIs to those investors so that they know where their money is and, and how it’s performing. Um, I think, you know, a really another important part of it is they have to protect and safeguard information. And so whether it’s information about the company who’s invested in it, if that’s private, um, they’re customers sometimes they hold, they have information that’s, uh, private as well, and then also their employees. And so, uh, people don’t think about it, but when you have HR records, you have all sorts of information that’s private around your employees.
So, you know, I think it’s really important there, but also there’s this kind of unspoken, um, not only to the investors but important to the employees, an unspoken contract that they’re gonna be kept appraised of, of what’s going on. You know, people join startups, obviously hoping to join a unicorn, right. Um, but that doesn’t always happen. And many times, uh, startups are kind of skidding along the bottom around with their cash. And so, you know, it’s this unspoken contract to really keep ahead of what’s going on with their cash and to fund well in advance of cash crunches, and to be able to have the insight into their cash flows so that they can predict what’s going to happen, be ready to go out and raise money when they need to, and also keep their investors aware of what’s going on in the business.
Madhurima Gupta:
Absolutely. So since they want to make sure that their books are in order, their cash flow looks good. I think it is really important for any founder to make sure that all the money that is due is collected well in time. So is that something that you see founders prioritize as well? Or is there a gap there?
Dan Piscatelli:
I think there’s a gap. Um, you know, founders are very bullish about their businesses. They think that, you know, they have an MVP put in place and that they’re gonna go out and sell to everybody and everybody wants to sell. Um, and that’s usually the number one priority in startups is to get money in and get contracts in place. And those contracts are important when you go to raise money. Right. But the problem is, is that they’re always hunting for the big whale or fishing for the big whale. Um, those big companies usually, uh, crunch you and, and, uh, have really bad payment terms. And so they have to keep track of those, uh, those contracts. But they also have to be aware that they need some of these smaller to medium size fish out there to help pay the bills as things go along.
Dan Piscatelli:
And it’s down in that space that I think startups can get in trouble. Um, a lot of times people look for a new vendor when they’re extended, overextendeding their credit with their other vendor. So you gotta be able to be aware of what’s coming in as far as a contract and also understand the credit worthiness of those, uh, new customers. Um, keeping that in mind, you know, without a good solid function in the finance department, whether it’s policies and procedures or a software tool, um, that can help you, you know, do the dunning, um, for payments. Also, check on credit and maintain a credit policy, and constantly look at the creditworthiness of your customers. Sometimes you’re gonna find yourself in a cash crunch.
Madhurima Gupta:
So in your experience, right, I understand that you’ve worked across manufacturing companies, technology, startups, right. What are the top challenges that they face in their growth stages?
Dan Piscatelli:
Yeah, I, I think it’s this, this balance between growth, uh, and cashflow, um, also keeping a pulse on what’s going on in the company. I also think creating clarity around policies and procedures in the business is really important. And especially around financial, uh, the financial wellbeing of the company, as well as that fiduciary duty back to your investors. And I think, uh, one of the big challenges that they face is this kind of balance between, do we go at revenue for, at any cost or do we step back, make sure we’re doing things slowly steady as she goes and with, uh, a real goal in mind,
Madhurima Gupta:
If you talk about manufacturing companies in particular, right. Uh, when they are growing and let’s say they are eyeing a growth of maybe five times in the coming two- three years. At that point, if you have to consult and tell these companies, what are the key areas that they should be on top of and optimizing, then what would these areas be?
Dan Piscatelli:
It starts everywhere from originating your contract all the way through to collecting on them. And so part of that is, first of all, get a really good contract written, um, make sure that, uh, what you’re going to be delivering is well delineated in there as well as your service level agreement, depending upon what the product is that you’re shipping out the door. Then you have to manage your vendors really well. And so, um, not over ordering inventory, um, kind of timing your payments to your vendors, just like these, the whales might do with, uh, your cash collections as well. Because you can find yourself spending a lot of money on inventory, manufacturing costs, and sending product that’s finished out the door and then waiting much too long to get the money in so that you can pay your vendors. So you wanna avoid getting into a cash crunch in those periods
Madhurima Gupta:
Now, um, you know, apart from manufacturing companies, um, what about other companies that you are dealing with, is there a checklist that you can probably give our listeners, uh, that’ll essentially help them optimize at the CFO office while they’re I group?
Dan Piscatelli:
Yeah, I don’t know if I have, uh a necessarily a special checklist. Um, I think, you know, some of the mistakes that, uh, startups make, um, whether they’re manufacturing or a tech company, is not getting the house in order early enough. Um, a lot of companies go out and raise money. They hire a friend, who’s a lawyer. Um, they’re not using a lawyer who’s used to taking on, uh, investment funds. And so I think finding a good lawyer is a good thing. Also, I would say finding, uh, someone with experience in the venture world and in growth and in startups. Much of what you’re gonna find as far as reporting, um, some of the hoops that you have to jump through for investors, it’s not just gonna be something that someone off the street who has no experience. And I, I don’t mean off the street, but, you know, even a seasoned CFO is really gonna have that experience dealing with these companies.
And I’ve seen it in everything from, uh, manufacturing companies all the way up to startups. So I think it’s really important, first of all, get your house in order, make sure that your investments are coming in right according to like the national venture capital association contracts, standard contracts, um, hire somebody, you know, like me. Um, I have a lot of experience and I think a fractional CFO, while you only might use me a half a day, a week or a day a week, uh, at your initial stage, I’m gonna help you get set up. I’m gonna get your policies and procedures in place, and then I’m gonna help you make decisions around when you bring on all these great software tools that are out there on the market, you know, you can bring on software and it’s not gonna solve your problem. You have to tell the software what your policies and procedures are. Procedures are as well as your tolerance is for risk. And so I think building the foundation, getting some help, and not just thinking it’s very simple because it really isn’t. At the end of the day, you can find yourself two years after starting the business with a huge tax liability or a chart of accounts that doesn’t work for your business. Um, no KPIs in place. And you find yourself out of control.
Madhurima Gupta:
If you talk about, uh, you know, you mentioned software, right? It is a good, idea to first have your office in order, and know what problems are you looking to solve?Right, so now let’s say that a company is with you already, right? So I’m building a scenario here. Uh, and now, you know that, Hey, my back office is in order and now I want to solve certain problems. Right. So what has your experience been in terms of startups wanting to build solutions in-house versus outsourcing them? So, you know, when I say outsourcing, it could be in terms of giving away to an agency, or it could also be outsourcing it to a software per se, right. So that you don’t have to do it yourself and you just get the software and that software does that job for you. Right. So what do you see startups inclined towards?
Dan Piscatelli:
Well, um, first of all, I, don’t recommend building an in-house solution. So that’s just my first answer. Um, those that have, and I’ve worked for few, um, that have gone out and done things that, you know, they, they’re not optimized. And so, you know, they might go out and build a piece of software, um, for, you know, bringing in business and, uh, taking in subscriptions. Right. And so, uh, as part of that, they might just have a, uh, somebody come in, uh, sign up and then send them over to a credit card collection system. It dead-ends there. As the finance person, I want to know the contract term, I wanna know who’s buying this. I need to know the state so I can look at things like sales tax. Um, I want it to go back into my accounting system. So when you go in and say, just put a credit card payment portal on your website, your sub-optimizing at that point, I also think that you know, again, I don’t think it’s a good idea to go out and try and clue together little solutions. You’re much better off going out and buying a prepackaged solution that integrates with your other ERP systems, whether it’s your financial systems sales.
I mean, sales plays a big part in, uh, in customer service play a big part in collections from past due accounts. Um, so you need this ecosystem where both finance sales, marketing, customer success for the CEO’s department so that they know what’s going on in the business, can exist and share information easily. But also to make sure everything flows through the system smoothly. Um, nobody wants to be in a finance department doing bookkeeping. And so finance people are getting more and more expensive. There’s harder and harder to hire today. And I think with, um, with remote working and with, with what’s going on in the market around these people, you really need to put them at work, looking at the business, not doing bookkeeping.
Madhurima Gupta:
You make a really good point there. It’s actually, uh, one of the things which is not directly related to the topic, but, um, you know, in general, I’ve seen even with the customers at HighRadius that we listen to, or we talk with, um, often they are concerned about bringing in a software, uh, to solve their problems, especially if they are advanced tech, right? So if there are solutions that use artificial intelligence or machine learning to solve a certain problem, one of the primary concerns that come in is will this replace my employees? Right? Or, um, a lot of companies actually don’t look at it from the perspective that, Hey, today, if you’re able to manage your X collections with two employees tomorrow, when you have 4X collections, are you gonna hire another four people? because that’s gonna be more expensive, right? So instead of doing that, get a software, let that do the, you know, repetitive work for you, in an organized and error-free manner. Right? So that is something that kind of gets left behind. They’re more concerned about, Hey, will my employees be easily trained on the new software? Right. So that kind of becomes a hindrance for them in our experience to accept a software that offers automation. So, so Dan, is this something that you’d say is not the right approach or not the right way to think about it, because if you onboard a software, there is a possibility that your employees are better engaged. What is your opinion on it?
Dan Piscatelli:
Yeah, I, I think you’re empowering them to actually be, uh, involved in the business and provide advice. Um, you know, I’ve had clients where I’ve gone in and replaced, uh, everything from credit and collections to bill payment systems. I’ve eliminated headcount. We’ve been able to, you know, go from having clerks that, uh, aren’t engaged to clerks that might be learning up and engaged more so with that, you know, that head count that I’m not spending on the back office function, just pushing paper. And I mean, literally pushing paper and writing checks and dialing people and constantly checking on credit. Um, we have people that are engaged, excited to come into work. Heck if somebody told me there was a tool that was gonna make me save 60% of my day or more, um, that was gonna automate a lot of the processes that I should be doing. And a lot of times I’m not able to do, like going back and checking that credit on a regular basis. I think I’m gonna say, raise my hand and say, train me. I would love to be able to do it. It only makes sense, you know, at the end of the day, if you have an employee that doesn’t wanna do that, probably not the right employee for you to begin with.
Madhurima Gupta:
Got it. Now, um, if we kind of move to software again, I wanted to understand, um, at what stages in their growth trajectory do startups consider implementing commercial off-the-shelf software, right? Like accounting software. It could be a QuickBooks or Xero, or maybe an ERP software, which could be, let’s say NetSuite or Sage intact. What stages do you see startups using these software?
Dan Piscatelli:
You know, my recommendation is as early as possible. Um, especially from a finance standpoint, um, I would also get somebody in early so that your, again, your chart of accounts are set up your policies and procedures are there. Um, so you need to build a good foundation, go out and get a good, solid piece of software, um, that you can do for financial reporting. Um, get your chart of accounts in there, policies and procedures, and that builds the foundation for future growth. When you have the volume of collections that hopefully you’re gonna have, and that you have the volume of bill payments that you’re going to have, um, you’re gonna have to integrate into your HR, you know, getting back to that responsibility around keeping that data private. HR is a big task, and I think, you know, some of the software out there is really been valuable and, and, and can save you time.
Um, so instead of going out and hiring all these people, the software can be brought in and, and help you out very early in the game. Um, again, I go back to the idea of getting in people that might be fractional, HR people, fractional CFOs, um, those function while they’re very higher, very expensive to hire they’re available in this fractional basis. And they’re gonna help you set up the growth, uh, or the basis for growth so that when you go out and you buy the, the software, that’s gonna help you with collections and credit and bill pay and HR and subscription management, you’re gonna have the foundation there and you’re not gonna be going back and recreating the wheel it’s painful to do. And I’ve done it many times.
Madhurima Gupta:
Got it. So starting right. And with the right kind of softwares in the right kind of guidance becomes key in ensuring that your startup in the financial area doesn’t see issues, you know, when you are actually going and showing your books out to everybody to get investments. That’s the point.
Dan Piscatelli:
Exactly.
Madhurima Gupta:
Right. So I think, um, are there any parting thoughts that, um, Dan you’d like to share with our listeners in terms of, uh, maybe how should they choose what software to use or while they’re automating their finance function and at what point should they reach out to you?
Dan Piscatelli:
You, I think, uh, fundamental is, is get your house in order, as we just talked about, the foundation is really important. So do it early. Buy the software, that’s gonna save you on headcount. It might cost you a little bit more, talk to the vendors. The vendors understand you might be a startup and might not be able to afford their fully loaded package. Um, don’t be a, don’t be intimidated, learn as much as you can about your different options out there, go with the ones that are gonna be strong and, and you partner early on, and that’ll partner with you as you start to grow and get to be a large company that you want to be.
Madhurima Gupta:
So that was awesome. Thank you for your time today, Dan. This was helpful and I’m sure our listeners are going to, you know, learn a great bunch and hopefully, they’re not gonna do any mistakes that you rightly pointed out. And for our listeners out there stay tuned. We’ll be back with more.