FP&A F'Ups

I’ve tried this at least five times, all without luck. It’s common to look at revenue and hosting and say, “Hey! Well, would you look at that! They’re both going up… the more sales we do, the more hosting we seem to pay for!”

But I’d chalk this up to correlation, not causation. Your AWS or GCP spend is tied to user activity, which is kinda-sorta attached to revenue.

Different products consume different amounts of compute, and therefore have different gross margin profiles. You learn this when you evolve from a single to a multi product company.

Also, you might have a large volume of free users who are trialing the product, and using your compute resources today, but haven’t paid for anything yet. Therefore, the hosting costs will front-run the revenue you (hopefully) close later on when free users convert to paid.

Work directly with whomever is closest to hosting spend at your company - if you’re big enough you will have someone who’s full time job it is to manage infrastructure.

They can help you understand the drivers behind compute. You may discover it’s not always paying customers. You have to strip it down to activity

This is a perfect example of me getting out of my finance bubble and out into the org to talk to to the people who were living our GCP dashboards every day.

They knew which activities drove more compute, and I could then use my lens to translate which of those actions were actually linked to revenue, by product line.

Your total effective commission rate is the total $’s you pay to people when a sale is closed, divided by the deal’s value.

In addition to individual sales reps, channel sales reps and product specific sales overlays are common at many software companies.

The idea is that sales overlays do the blocking and tackling for unique quota carriers to get the ball over the goal line.

That’s why you minimally need a unique sales rep’s quota-to-on-target earnings ratio to be 4:1 (and ideally grow to +7:1 over time).

I’ve seen an 8% target commission rate balloon to 15% after you layer in the other people linked to the deal.

Pull a baseline of all people at the company and put their base salary in one column and their variable target at 100% achievement in the other.

Sum the variable commission column across the entire org on a quarterly basis, and divide that by your operating plan’s quarterly revenue target.

This is a super easy one to forget. It’s common to budget for a “new hire” package that includes the person’s laptop, any equipment they need to work from home, those uncomfortable tee shirts made by Gildan, and a knock off Yeti with a logo that will come off in the dishwasher.

As any good accountant will tell you, laptops can usually be capitalized on the balance sheet.

But they are still a significant cash outlay at scale.

And…most existing employees need a new laptop every two to three years.

After experiencing this first hand and begrudgingly approving existing employee laptop refreshes (“That blue screen will go away, don’t sweat it!”), I decided to take the forecasted total employee count at the end of each quarter, multiply by 5%, and multiply by ~$1,500 for refreshes.

I figured that would work out to an annualized new refresh rate (above and beyond new hires) of just under ~20% if the company headcount was growing.

Some of your open roles at the start of budgeting season will get filled before the new year starts. It’s just the course of life.

It’s hard to keep the status of “open” roles on your radar when you are so focused on the heads that will be joining in the subsequent calendar year.

There’s a tendency for open roles closed in the November / December time frame to have slightly different salary info than you expected, and not make it into the budget with 100% accurate information.

There’s also a tendency for people to get onboarded, but somehow the “open” role they filled never gets closed out.

Draw a line in the sand and create a “baseline” on one specific day. Ideally you do this 1x per month throughout the budgeting cycle and refresh your model

Maintain a fully burdened placeholder for all open roles at all times.

Do one final refresh of all salary data right before you bring it to your board for approval, as some of the roles you hired in that dead-zone probably came in more expensive than you anticipate (it happens).

And make sure to do a final tie out of any open recs that were filled so they don’t stay open in the new year, effectively creating a net new head to the plan.

News flash - it’s not as cheap as you think to hire people from other countries.

The USA has a +20% benefits uplift (e.g., a person paid $100K actually costs the company +$120K), while places in Europe, like the Nordics, can have up to a ~40%(!) uplift.

Common costs baked into this “uplift” include Vacation, Healthcare, Local Taxes, Federal Taxes, Payroll Fees, Pensions, and 401K matches.

At startups it’s usually easier to budget for benefits using a round percentage uplift off an individual’s on-target earnings. This is because some of the benefit lines are really hard to estimate (bi-monthly local canton taxes in Switzerland, anyone?) and would require a false level of precision.

Now, these are rules of thumb, NOT scientific. The rates are fully baked estimates. Here’s what I’ve used in the past to make sure I’m budgeting enough on benefits:

A lot of companies build their marketing pipeline to align with one of these criteria, but rarely both.

Why is it important to look at both? Well, Online Advertising is going to contribute a different amount of pipeline towards Enterprise sales goals vs SMB sales goals.

And the customer acquisition cost associated with each segment is going to be different. You are going to have a more expensive Account-Based marketing plan associated with Enterprise clients compared to high velocity SMB clients.

It’s critical to build your marketing pipeline not only along segment lines, but also link it back to sources.

Work with your marketing leader to come up with:

And to bring it full circle, you can then budget dollars against each of those sources.

Contractor spend can sneak up on you - one moment you’re happy you are delaying full time hires, the next you are trying to figure out how to unwind all the third party contracts you spun up.

Although they might not show up as a full time employee in your headcount, and therefore make your efficiency metrics look a bit better, they still cost money at the end of the day and can be unexpected lead balloons to your OPEX and FCF.

As a check I like to take the total amount I’m spending on third party contractors and divide by the average salary for the department they are “serving”.

Exchanging one expensive head for multiple less-expensive heads rarely results in as “great” of savings as you think.

I worked at a company where we ended up spending millions of dollars to create a Backoffice in Eastern Europe. Within three years the market rates for salaries and benefits for those employees had jumped about ~40%, and the labor arbitrage was really slim.

Stress to leaders that hiring two employees for one will throw off your productivity metrics.

The only place I have seen this work out OK is when you are trying to move towards a lower cost sales motion and are hiring BDRs and inside sales reps in-lieu of enterprise reps.

Why does it work in this situation? Because the Enterprise reps also get a dedicated System Engineer and BDR, which you won’t need anymore. So you are actually trading, say 2 for 2, instead of 2 for 1.

Otherwise, don’t do it. Trust me.

Travel budgets at most companies get out of whack not because reps are taking “too many important customer meetings”. It goes bad when:

Break the travel budget into Internal and External buckets

This one is funny, because we always seem to remember to include our own company’s price increases within our topline revenue forecasts, but forget to include the nearly inevitable price increases our own vendors will punch us in the face with.

So before you pat yourself on the back because you built a super slick budget that scales Miro licenses with the product team’s hiring plan, you also have to remember that the price will probably go up per license next year, unless you are on an ironclad multi year plan.

Take whatever last year’s budgeted price per head is and increase it by 4% to 5%.

If it’s usage based, step up the the forecast by an additional by 2% to 3% per quarter to give yourself some wiggle room.