In this interview, we’re talking with accounting and financing expert, David Wagstaff, from Eprenz. David started multiple businesses, has successful exits and has been part of the management team with a startup that raised over $15 million in angel, venture and private equity funding. He has been CFO and Director of Operations at mid-sized organizations. He is passionate about social enterprises and helping entrepreneurs succeed. He Founded the Eprenz which now has over 60,000 members and founded, grew & sold two consulting companies
Here, David shares with us his financial insights for profitability and discusses growth challenges for businesses.
What are some typical mistakes you see companies make with finances and accounting practices?
Typical businesses have their challenges depending upon the type and the size, so it really varies depending upon whether they’re a scalable startup looking to go huge, or whether they’re a business that’s looking for work. The challenges are quite different depending upon what type of business they are and where they are in that process.
For example, say it’s a stay at home business and the financial decisions made can generate the quality of life. People can be afraid to spend money on marketing and spend money on growing the business, but if they don’t spend money on growing the business, sometimes that could be devastating to the business. Even as a little bit larger business, the same challenges can exist.
As companies get bigger though, they usually have more of that process in place and they have more people in place that are good at business development. They may face other kinds of hurdles, like how quickly should they grow expenses or should they add another management person on board that might cost a few hundred thousand dollars a year? It’s not one size fits all.
Why do you think that it’s marketing that takes a hit more often than not?
It’s something that’s really tough as a small small business owner. It’s tough to spend money because that comes out of your pocket. The other side of it is, if you don’t spend the money, then you end up killing the business. It’s a little bit of a catch 22, but it’s not always the same for every business.
What are the important factors, financially, for a high growth business to succeed?
It depends on the industry and the type of business, but generally you want to understand how much each customer is contributing, and how much it’s costing you to attract and retain a new customer. There’s a number of challenges businesses can have as they scale and ultimately they can spend more money acquiring customers than what they are worth.
For example,I worked with one of the top five banks in the US. They had a business line where they were spending more money on an insurance product every time they sold it than they were earning. They were losing money with every additional sale. They’ve been pushing this product hard and they thought if they just sold more of it, they’d be more profitable. That’s the idea of economies of scale. It doesn’t work if you’re negative on your contribution towards profit, meaning expenses are exceeding the cost of the lifetime value of the customer.
Are there any more challenges high growth companies face? And what can they do to overcome or help with these challenges?
I think companies need to get a deep understanding of what the drivers of profitability are. It’s important to understand how expenses relate to revenues; that includes your sales onboarding your customers, your servicing of customers, customer turnover, and staff turnover. Really, almost any aspect of the business can be an issue, depending upon the type of business, and the specifics of that business. You really have to have a good sense for what issues there are, and then you can make the decision after that.
How can high growth companies leverage their financial and accounting data to become more profitable?
Understanding the data is really, really important. If you understand what’s happening on each of your drivers of profitability, then you can make a smarter decision. Ultimately they can be more profitable by knowing whether it’s revenue or spend side, and how they relate to customer data.
What is the major distinction between a bookkeeper and accountant, and the CPA?
A CPA is a certified public accountant. CPAs typically work in tax, an accountant is a broader category than someone who is certified, and a bookkeeper could be a CPA or an accountant. Typically there are lower requirements for a bookkeeper than an accountant or a CPA. The reality is, these words can be synonymous and it can get confusing because not all bookkeepers are CPAs, but not all CPAs and bookkeepers.
How should a high growth company structure their financial team?
It depends a lot because every business is unique, and you have to understand the dynamics of the company. A common structure is to have high growth and a small team. For example, it could be a team of one person in the finance function, or they could have outsourced people. Sometimes there’s more of a recording function, which is more like the controller’s function, but sometimes there’s more like the financial analysis side which is also considered the financial team. The controller side is doing more the debits and credits, and the financial side is doing more the analysis on things. In any case, the CFO typically brings both sides together.
What is the support that a financial consulting firm can provide a high growth business?
A typical company for us, that is really energized and doing well, probably starts off with $750,000 in revenue. They built some success because their owners typically know the marketplace and they’re good at sales or good with customer skills. When they’re beginning to grow, some of the things they want to look at are how are they attracting customers and also is there a way to grow faster through strategic partnerships, or is there a way to bring on board maybe a full-time professional sales team if that’s appropriate for them?
For any business, I would look at what things are driving sales, and then what things are potentially the issue. They also want to be aware of a likely roadblock or issue that will stop them later, and what are the key issues that they’re facing. They should then try to handle those issues, making sure that they understand their strategy for the long term as well.
When is the right time for a high growth company to get a CFO or head of finance?
Typically if they’re really looking for a full time CFO, it’s important to realize a CFO quality individual in the US is gonna be a fairly expensive resource, potentially a few hundred thousand dollars a year. The business needs to have enough income and work to support a full-time person. It does however depend on the business. Sometimes it can be a really small team and a CFO is an important aspect, or other times it can be outsourced until they have around $8-$10 million in revenue.
What are the advantages of outsourcing a CFO vs. having one in-house?
For many smaller businesses, $500,000 to $1,000,000 in revenue, they can’t afford a full-time person. Rather, it’s important to have someone at their side that really understands the depth of the financial situation so they can understand their budget and make good decisions. This is done typically on a part-time basis until the business is big enough that they can afford a full time person.
Typically, the shift from part-time to full-time becomes evident when it aligns with practicality. For instance, a company may already employ a bookkeeper and a part-time CFO, or have someone handling the day-to-day transactions. In addition, they might engage a CPA for tasks such as tax management. When a business finds itself allocating a substantial budget to their part-time personnel or multiple individuals, it’s a signal that they may be prepared to take on the full-time commitment, considering the potential risks for consulting firms.
Can you delve more into the entrepreneur side that you were mentioning before?
Eprenz is a platform that is built to really support 100,000 entrepreneurs, to make a meaningful difference in entrepreneurs’ success. Today, around 90% of small businesses fail in their first 10 years and we’re out to change that.
We offer things like mentorship, so that someone can get advice at a very, very low cost, or even free. They can also have peers to talk to. Sometimes as an owner, you have a simple question, but you don’t know who to ask. We also offer a leads group, where people can connect online with other businesses all over the world that might be interested in their services. It’s a good way to get to know other entrepreneurs, and also have that kind of trusted referral source.
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