This interview is taken from an episode of the Spend Culture Stories podcast. In this episode, Jim Gellas, the VP Finance of Kruze Consulting and former Head of Finance at Xero shares the biggest red flags to look for when it comes to internal controls in a scaling company, and how to prepare your people, financial processes, and systems to scale with your organization.
About the Podcast:
Your company culture might attract talent, but your Spend Culture will make or break your company. Spend Culture Stories is a podcast that helps finance leaders learn the tactics, strategies, and processes to build a proactive Spend Culture. Learn how to pick the right tools, implement the most efficient processes, and how to develop the right people to transform the Spend Culture of your organization for the better.
From Seed to Series B: How Startups Should Build a Finance Function
Jim Gellas is a CFO for seed to Series B startups at Kruze Consulting, a CPA firm specialized in startup accounting and finance.
Kruze Consulting provides Startup CFO Consulting to over 150+ startups in Silicon Valley, LosAngeles, and New York City. The firm handles all things Accounting, Finance, & HR: interim CFO Consulting, financial modeling, annual taxes, venture debt consulting, 409A reporting,bookkeeping, AR/AP, and Seed/Series A/B Fundraising Preparation.
Prior to his role at Kruze consulting, Jim was the Global Head of Finance at TrapX, a cyber security startup in the deception space, with offices in the U.S., U.K. and Israel. Before that, he was the Head of Finance (North America) at Xero, where he facilitated the global company’s expansion into the US market.
In this episode, Jim shares the biggest red flags to look for when it comes to internal controls in a scaling company, and how to prepare your people, financial processes, and systems to scale with your organization.
Speakers: Jim Gellas, Kruze Consulting
At what stage do you think is the right time to bring in a CFO? And what does this role of the CFO look like?
CFO is the Strategic Leader, the Protector, and the Accountant
Jim Gellas [00:10:50] So, there are three main areas where CFO has responsibility. It’s the strategic leader, the protector, and the accountant.
And when a business has enough moving parts where a professional can add topline value, think that’s when they need to consider a CFO hire.
Relationship Between a CEO and CFO
Jim Gellas [00:11:10] The role of a CEO is to have boundless optimism about what their company can do, and be, and achieve. And the CFO’s role on some levels is to act as a counterbalance to that by asking the right questions to make sure that the CEO doesn’t bring the organization out past its keys.
So, a CEO has a vision of we can go do this, and this and that. And the CFO has to just ask the questions of how do we do that with the resources that we have in an efficient manner.
My role as consulting CFO, I guess I really am providing leverage that CEO, drawing upon my experience to see down the road and around the corners of where a company is going so that way to make sure that it’s proactively prepared for those milestones and events and is not caught on its heels, but instead is forward on its feet and can hit those events in stride because it’s taken the steps with sufficient time to be ready for them. And this could be around people, processes or technologies.
Typical Size or Growth Path when a CFO is Bought in
Is there a typical size or a typical growth path when you be brought in or is that very much organizationally dependent?
Jim Gellas [00:12:44] It does depend on the company. An example, I would say for software startup companies, it’s typically around Series B or C that they’re bringing in a financial leader, and that’s usually a Head of Finance or VP of Finance. And it’s not until later stages where you’re bringing in someone with the title of CFO.
That’s a little contrast to medical device companies or companies in biotech where they’re much more regulated environment. You’re dealing with FDA trials and so forth. And it’s not uncommon for those types of companies to have a CFO before they’ve even released a product.
They could still be in trial stages, and they have a CFO, and they might even do an IPO and become listed as a public company before they have any commercial operations. So, it does depend on the company and what their particular needs are.
Areas of Risk as a Growing Company
Going back to your current role in consulting with Kruze, and when you do take on a new engagement or a new client, how do you approach that when you first go in? What are the first things that you look at?
Jim Gellas [00:16:23] You have to evaluate your biggest areas of risk. What’s a company’s cash position and how long is its run way? Is the company making money or is it still drawing on investor money to fuel growth? What areas are optimized and which ones are ripe for improvement?
Generally, procurement is in an area where, procurement meaning purchasing and spending of money is an area that can benefit from process and structure. And that’s not because people don’t care.
In fact, on the contrary, I found that most people with spending responsibilities and companies tend to be very mindful and concerned about how they’re spending their company’s money.
But there are certain approaches that can be architected, such as volume purchase discounts or extended payment terms, or other things that are a responsibility of the finance team to really introduce.
Yes, absolutely, kind of looking at those processes, seeing what operate, like how they’re operating now, how they’re using their cash and how you can look at those, improve those and help them to get to that next level. Are there any sort of big red flags that you see or is there ever a situation where you’d say, no, we can’t go any further with that or we don’t know how to help them? Has that ever happened?
Jim Gellas [00:17:43] Yes. There was a time, not so much on a consultant side but I once joined a company where the previous leadership had made a lot of bad business deals to get in a lot of high prestige logos with the intent of being acquired for the company. And the economy turns south. And as a result, the M&A market dried up along with their operating plan.
And so I was brought in to turn around the company and I took stock of its business model and realized that the economics were completely upside down. We were giving away much more than we should have with to our relationship partners.
And so I had to put things in different brackets. And I put our top four relationships into a high touch bracket, traveled the country, and renegotiated all of our agreements to more favorable terms
A Negative Confirmation Approach
And then I let a rebranding of the company and created a new revenue stream. All these actions brought the company and the profitability for its first time in its nine-year history. I was so excited to have turned the ship around.
However, thecompany still had some crushing debt and there is no way to get around the cash needs for those obligations.
And the company also had neglected its internal technology infrastructure and as a result, we weren’t able to make the business moves to create new products and different offerings that we ultimately should have. And the company went up folding.
Advice to Companies on Developing Healthy Spend Cultures
For companies who recently raised their recent round, is there anything, any advice that you would give to them in terms of managing the spend and using that money well?
Jim Gellas [00:20:17] Yes. So, I’ve definitely heard of companies where they get a big funding round and all of a sudden, they’re flush with cash. And you see the headlines all the time of these startups throwing big parties and so forth. And there are startups who have not been as mindful of their spend and have come really close to the brink of folding and running out of cash. But ultimately, they are able to pull a rabbit or two out of a hat and make it through to the other side.
Those companies that have gone through that gauntlet of having a really bareback expenses and really take a hard look at every dime that goes out the door have come through stronger and much more disciplined with their spending than they might have otherwise.
I think the challenge for companies today, when they have funding, is to operate with that spending discipline early on without having to go through that gauntlet of almost losing all your cash and going out of business.
And I think how companies do that, the right approach is to have departmental budgets that are agreed upon, that are regularly reviewed against actual spend. And this is critical. It keeps the organization in line with its planned resource allocation, assuming the top line is performing as expected.
And the sooner that a company can build this muscle into their actions, the better off they’ll be in a long run because it just creates that discipline of spend and review on a regular cadence.
Typical Spend Culture of Companies
And so with your role in Kruze, what would you say is a typical Spend Culture of the companies or I suppose in relation to what we talked about earlier and how different the organizations are? Is there a typical spend culture that you would see?
Jim Gellas [00:22:28] I think it depends on again the company and where they are in their life cycle. So, most of Kruze’s clients are Seed through Series B companies. So, they’re earlier stage and they’re outsourcing their entire finance and accounting function to Kruze.
And a lot of them are still trying to find product market fit. They haven’t quite validated the revenue model yet so they’re still quite disciplined, I think, in their spend because they don’t have much coming in on the top line.
Once companies start to really validate that revenue engine and then want to achieve high velocity of growth that they’re directing spending to achieve that. And that’s all on customer acquisition cost, customer success, and making sure that customers have the right experience in the product and want to talk about it to other people and come back again when it’s time to renew.
Spreadsheets Are Not Enough to Manage Spending
What would you advise to use in terms of technology when it comes to managing spend and setting up those operations more efficiently for when they grow?
Jim Gellas [00:23:43] I think the most important thing from a technology and spend perspective is to have a tool. Excel is great, but in some ways, it’s also one of the biggest curses because people try and do everything in a cell.
So, find a system that meets your needs today and can grow with you to where you’re going to be tomorrow. And let this system do the work.
Take things out of email, put the communication streams in the system where they are subject relevant, and the system should be doing the work. And so it can be a PO system, for example, POs, purchase orders are a step function improvement in a company’s procure to pay process.
And in general, when we talk about systems and we’re considering internal controls, properly designed and implemented. Internal controls are going to protect the company from reasonable and expected risks from where the business is in its life cycle and resources.
So, you’re not going to implement public company spending controls in a Series A startup, although you might ultimately evolve toward them.
The Importance of Purchase Orders
The introduction of purchase orders is one of the more significant internal controls that you can introduce. And these are critical in keeping spending under control, because they force costs to be managed and approved before they occur.
Prior to the introduction of purchase orders, it’s a reactive posture on spending. People are going to spend the money and you kind of pay it. And you’ve either gone below budget or over budget but there’s no opportunity to be proactive in that spending. So, their question, step function change in a company is a system of purchase orders.
Advise when Choosing and Implementing a Tool
What advice would you give when choosing a tool and also when to implement a tool?
Jim Gellas [00:25:47] I think it’s important to start with clear requirements of what you want the system to achieve and outline those in a document. And then as you do your evaluation, constantly come back to that requirements document and say, does it achieve this, this and this? Okay, good.
Once you’ve identified the population of solutions that can achieve your needs today and tomorrow, what are the costs? How are those cost structured? How will your data flow from that system into your other systems?
Right now, it’s 2019 and there is no reason at all for people to be keying in data from one system into another. Our system should be talking, they should be connected. Let the APIs and the servers do the heavy lifting. You want to make sure everyone plays nice together on the playground of your tech stack.
Absolutely. And in the industry and age with so much technology out there in the landscape changing overtime and so quickly, there’s so much either to be considered and there’s so many ways to help in your organization to work easier, I suppose, and more efficiently. And like you said to everything, to play nicely to make everything easier for everybody.
How do you think the industry is changing and how do you think technology is affecting in the accounting function?
Jim Gellas [00:27:08] Yes. There’s no question, we are going through monumental changes in the accounting industry. And I think we see it most pronounced in the different types of CPA firms out there. There’s the old guard who wants to keep doing things the way they’ve always been done. And then you have a new breed of modern finance professionals who are embracing technology, connected systems and automation. And when I was at Xero, we had a saying, let the servers do the work.
I’ve recently read a stat that the average business today is using a hundred and twenty nine apps and there’s all kinds of improved telemetry, operational efficiency, and strategic insights that come from these tools that weren’t there five years ago. These tools enable people to do more.
At the same time, the pace of change is accelerating. So, those who aren’t on board and embracing the new way of working will quickly find themselves left behind and irrelevant.
And this is a shift in mindset for accountants who really were debit equals credit and producing financial statements. And now all of a sudden, a sophisticated, capable finance professional suddenly has to be tech savvy and tech oriented as well. You have to be mindful of data and data flows. And will these systems work together? How do we implement new systems? That’s all outside of the standard and historical view of what an accountant does. But if you’re not doing those things, if you’re not leveraging technologies today, you’re doing your organization and yourself a disservice.