How Long Can You Realistically Put off Your First Audit for?

This week we have the following CFOs answering your reader questions:

Today we’re covering:

Let’s get into it!

Chris from Zeta:

It is not a “business book” but it’s a powerful, emotional read about a father’s relationship with his autistic son. Autism has touched our family’s life and it’s a cause we support. The book is called “Born Lucky” by Leland Vittert.

Michiel from Remote:

Since you’re headed to Australia, you need a book that’s as dense as a 10-K but a bit more readable. My pick is "The Signal and the Noise" by Nate Silver. It’s about forecasting, probability, and why humans are generally terrible at predicting the future. The lesson that stuck with me is that adding more data doesn't necessarily lead to better predictions. In the world of finance we are constantly bombarded by noise: a one-off churn event, a weird month of AWS spend, or a competitor’s stunt. The job of a finance leader isn't to report every data point but to filter out the static so the CEO and the Board can see the actual signal. 

Chris from Zeta:

While it may seem early to bring on an auditor, I believe it is a worthwhile investment to do it sooner than later. The auditor can be a valuable advisor and business partner in addition to serving their functional duty. Their perspective across industries and seeing how common challenges are overcome is invaluable.

Michiel from Remote:

Audits are about as fun as a root canal, and they cost significantly more. You can delay a formal audit until it’s mandatory or you need it for e.g. a fundraise. But the real question to ask yourself is whether there is anything in the numbers that you feel uncomfortable about. Why is your board asking this now? Is your revenue recognition a little shaky? Are you unsure about your tax strategy? It’s better to get some advice on this now than to have it blow up during due diligence.

CJ from Mostly Metrics:

I’d say after $20 million you’re lucky to get away with any year you don’t have to get an audit done. $10 million is honestly a bit early. I’d try to get away with another 12 months if you can. Buuuut if you are a total mess when it comes to rev rec, then it’s better to take one on the chin now than have an entire additional year of hard re work.

plus, remember - in your first audit they also do an audit on the year before that for a baseline. So it’s 2x the work.

Chris from Zeta:

The weekly sales pipeline meeting is THE MOST important cadence a company has. To get the highest ROI, I suggest the following:

Michiel from Remote:

If your VP of Sales is running circles around you, it’s because they’re playing ‘Storytime’ and you’re playing ‘Accounting.’ Sales leaders are professional storytellers, that’s why they are more fun at parties than us finance folks… To take back control, you need to turn the pipeline review into a numbers game. Ask AI to build you a dashboard or scorecard specific to your sales process, and require that to be filled in before the meeting. Quantification of each potential deal (size, close date, probability) and pipeline coverage is key… After a few months, you’ll be able to compare this to reality to properly calibrate this meeting.

Chris from Zeta:

Ultimately, your goal is to land, expand and extend with your customers. I would make the unit economic trade of concessions up front, for the opportunity to retain a customer longer. Customers tend to become more profitable the longer they are on the platform. Your sales incentive structure should be something you leverage by promoting the importance of near term AND long-term value + profitability of the customer over time.

Michiel from Remote:

Multi-year deals are a great tool to prevent customers from shopping around, but "First year free" is a slippery slope. Beyond the revenue recognition headaches and the hit to your working capital, this can indeed signal low quality. Instead of putting hard guardrails around it, you can also change the sales incentives. Put more weight on the first year, and less on the outer years, or cap the commissionable discount. When the "easy win" results in a smaller paycheck, your reps will find ways to defend your premium pricing, and only use this structure when absolutely necessary.

Chris from Zeta:

It’s not too soon to make this hire. The FP&A role you are considering can wear many hats and therefore give you the capacity to do more. You can scope the FP&A role to be the hand and glove with your accounting team, provide dedicated support to your business counterparts, and serve as your center of excellence for KPI/analytics. Each of these tasks you were probably taking on as your 2^nd or 3^rd shift. You don’t ever want to lose the skill to dig into the work yourself, but this gives you a greater chance of going from spending time “reporting the news” to “making the news.”

Michiel from Remote:

Your most important job is to build a good team. As your team scales, you must keep a high bar for quality, but you’ll have to accept that not everything will be done your way. As a first step, ask the senior analyst to own the model with your supervision. Then afterwards, hiring a head of FP&A should help you in partnering with the rest of the organization. Don’t worry, you’ll still be busy with board decks. That never goes away…

(P.S.: I secretly run my own little model on the side, just to have an alternative view and challenge the FP&A team. Please don’t tell anyone.)

Wishing you don’t get run over by your CRO in the pipeline call this week,

CJ