FP&A F'Ups
FP&A paved my road to CFO.
Running the company’s budget gave me a secret weapon, a super power of sorts. I was allowed (even encouraged) to run around the org and ask leaders tough questions about their departments. It was my job to understand how the business makes money (and spends money) from every imaginable angle. FP&A was my golden ticket to learning how company’s organize their resources for success, and I was like Charlie in Willy Wonka’s chocolate (SaaS) factory.
But this doesn’t mean the road wasn’t full of its share of screw ups and full blown fuck ups.
Here are ten boobytraps that new (and also existing) FP&A leaders should be weary of before submitting their first annual budget. No matter how good your CFO is, there’s a good chance these items can slip through the cracks when you are moving at warp speed. I know because they’ve all happened to me at one point or another, and you can avoid paying the price.
#1. Using revenue growth rate as a proxy for hosting spend growth
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.
Tip:
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.
I cannot stress this enough - allocate your hosting budget by product line.
Life hack: Also figure out how much of your hosting spend can be parked within engineering as OPEX. This is fair game if there’s compute associated with the environment where the building takes place. This may add up to 10% to 20% of the total AWS bill and give breathing room to your gross margin.
#2. Underestimating the impact of sales overlays in your budgeted commission rate.