February 28, 2018
Overcoming 5 Common FP&A Reporting Challenges with Institutional Investments
In a perfect world, investors, board members and executives would have full confidence in companies’ financial statements. However, when a privately-owned company takes an investment from institutional investors, their FP&A and accounting departments typically need to respond to new demands outside of their normal work flow.
Here are five common challenges we’ve seen FP&A and accounting teams face both before and after closing the funding round.
Revenue Reporting Quickly. Most private companies that have not received institutional investment may feel that their monthly close cycle finishes within an acceptable amount of time. However, even during the due-diligence process, investors will likely demand key financial results, such as revenue, much sooner than the monthly close process is equipped to deliver. For example, investors often want to know how the company is pacing against its last revenue forecast well before the month ends.
Articulating Unit Economics. It is important that your company can articulate what your variable and fixed costs are in a clear fashion. This may sound like “Business 101”, however, sometimes understanding your unit economics as well as the volume that your current cost structure can support, can pose a challenge. For example, when a SaaS software company is asked, “how much does one new customer cost”, they often find the question difficult to answer because they have not considered what incremental sales, marketing, customer support and/or IT costs are incurred with a new cloud customer, nor how many new customer acquisitions their current infrastructure can support.
Supplying a Multi-Year Forecast. Even private companies that regularly forecast their business may not have had to deliver a 5-year forecast that communicates the company’s long-term business plan. Forecasting beyond the current fiscal year presents new considerations such as:
- Long-term price and cost inflation
- Annual employee attrition rates
- Impacts from potential regulatory changes
Supplying Variance Explanations Efficiently and Effectively. After a forecast or budget is delivered, your investors will expect timely and succinct explanations of significant variances. Often, private companies with less developed FP&A processes lack tested variance templates that can help focus investors on the right areas with the right level of detail.
Version Control. One associated challenge with reporting your variances is remembering which forecast or budget version was last communicated to each investor group. Moreover, after external funding is received, the speed and frequency of forecasting increases, adding to the number of versions under management. Sorting through, finding and verifying these versions can be time consuming, stressful and can often lead to costly reporting errors.
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So how do you prepare for these new challenges? Follow these quick tips to set your company up for success.
- Deploy a ‘Flash’ Revenue Reporting Process. Companies that can report their projected revenue for the current month on at least a weekly cadence are in a much better starting position to respond to new investor demands. Develop at least a semi-automated process that can project total company revenue for the current month on a weekly or daily cadence.
- Streamline the Monthly Close Process. Ideally, if a company can reduce its monthly close process by one business day, that will pay large dividends down the road in many areas. Having a shorter monthly close process will allow more time for internal review before having to report key results to your potential new equity partners.
- Discuss what your company considers to be variable and fixed costs. Work with your operations managers to verify what level of business activity they can support and when additional investment in infrastructure would be needed before embarking on the fundraising process.
- Adopt a 12-month rolling forecast format. Companies can help prepare themselves to deliver longer-term forecasts by getting themselves in the habit of forecasting at least the next 12-months on a regular cadence. A rolling forecast that spans the next fiscal year will be better prepared to extend into years 3, 4 and 5 as it would have already crossed the ‘chasm’ of the next year.
- Set Time Aside for an Annual, Multi-Year Planning Session. At least once per year, set some time aside for your executive team to formulate a multi-year strategic plan. This planning period, usually in the summer for companies reporting on a calendar year, will help shape both the long-term and the next annual plan.
- Segment Variances. With respect to variance reporting, it is easy to get lost in line-item variances and not provide enough context to your investor audience. To avoid this, segment your variances by key focus area, key customer account or by variable and fixed costs. Understanding what your typical monthly variance percentages have been for the last 3-6 months for both revenue and cost, can provide added context to your investor audiences.
- Invest in Cloud Solutions. Modern, cloud-based financial planning platforms are usually equipped with effective version control functionality, and they are also great at helping you create variances reports quickly. If your company has an opportunity to invest in a capable cloud-based financial planning software at least 6 – 9 months before the funding raising process begins, you should closely consider this path.
Bringing It All Together
Taking on an external investment can help your company grow and transform. In order to provide your investors with the additional information they need, your FP&A and accounting processes will likely have to perform at a higher level.
We’ve helped CFOs and their teams streamline the adoption of these changes within their financial reporting and analysis processes to deliver stronger, more transparent insights. If you have questions about your FP&A or accounting processes or need help preparing for investment, we would be happy to chat. Get in touch today!
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