Tag: cash flow
If you are growing at a rate of less than 50% year over year, you should consider viewing 2017 as the year of flat headcount.
As budgets are settling down and getting approved for many of the companies I’m on the board of, I’m seeing a general trend of much less headcount growth in 2017 than in 2016. In some cases, companies got ahead of themselves. In others, they need to integrate all the people they’ve added. In some, they feel like they have a critical mass of people and want to march to get profitable on current headcount. And still others are profitable and have realized significant operating leverage in the past two quarters that they want to continue.
While there are different reasons, many of these companies are being a lot more targeted and selective with where they are adding people. These are generally the companies between 50 and 200 people who have growth rates that are 50% or less. But I’m also seeing it in companies with larger growth rates (100% year over year – yup – we can to that and only add 10% new people.)
I hadn’t really thought of it as a trend until I reviewed a board deck this morning and it’s called out as a feature. I agree that it’s a feature. A company with $10m+ of revenue that is growing at 50% or more can often get profitable within 12 months if it focuses on its operating costs. Headcount is almost always the largest increasing operating cost.
I see a nice second order effect in all of these companies. Given the focus on getting profitable, they are now clamping down on other discretionary costs around the system. That money you’ve been wasting on a PR agency – delete. That extra space you thought you might need, but don’t – sublet. The outsourced recruiter you’ve been paying a retainer to – gone. There’s a long list of operational efficiencies that go along with the focus on getting net income and ultimately cash flow positive.
While this isn’t a universal truth, nor should it be, it definitely feels like a trend, especially as companies start putting a lot more focus on ICDC as part of their growth strategy.
I’m stunned by the lack of financial literacy of so many people in so many contexts. The commentary by politicians, economists, and the media on the European debt crisis and the US debt ceiling dynamics is appalling. The general media and blogosphere commentary on the financials of high growth companies, especially those who have either recently gone public or filed their S-1’s, range from perplexing to just plain incorrect. And more and more entrepreneurs who I’m exposed to who are presenting their companies for financing have a complete lack of understanding of their financials – both current and projected. Of course, some of my fellow board members don’t understand how to read financial statements either, which doesn’t help matters much.
In my experience there are four specific things that people struggle with.
- An inability to read the Balance Sheet, P&L, and Cash Flow statements.
- A lack of understanding of how the Balance Sheet, P&L, and Cash Flow statements fit together.
- A lack of understanding how non-accounting metrics (e.g. bookings) impact the financial statements.
- A lack of understanding of GAAP (Generally Accepted Accounting Principles) and how to use the financial statements to help normalize out all the weird things GAAP makes you do.
I used to think it was all a GAAP problem. GAAP is complicated, continuously evolving and changing, and often creates more ambiguity that it resolves. But unless you actually understand how to read a financial statement, GAAP doesn’t even come into play. And by financial statement, I don’t just mean the income statement (or P&L) – I mean the income statement, balance sheet, and cash flow statement, along with understanding how they interact with each other.
If you understand how to read the financial statements, then you can start to solve for the GAAP challenges. You’ll be able to understand things like the implications of deferred revenue on cash flow, stock option expense on net income, and the actual equity dynamics of the balance sheet.
While there are so many things about this that I fantasize about (e.g. “the media would actually learn this stuff” and “accountants would make GAAP simpler and clearer vs. more complex”) the only thing that really matters in my world is that entrepreneurs understand how to think about this stuff. So, in the spirit of Fred’s MBA Mondays series, I’m going to write a series of posts that describe how my brain processes the financial statements of a typical high growth company with a goal of adding on to the great base that Fred has created.
I’m open for suggestions as to whether I should take on one that is newly public (e.g. the S-1 and historical financials are available), or a private company (I’m open to volunteers, although it’ll mean you are publishing your financials – at least at this moment in time.) If you’ve got suggestions or want to volunteer, just leave a comment.