- May 12, 2023
Start-up CFO strategies for financial success
Vikas Ralhan, CFO, Loconav, provides insightful perspectives on CFO strategies for achieving financial success in the start-up world.
Developing sound financial strategies and practices is crucial for the success of any start-up, and the role of the CFO in this process cannot be overstated. From prioritizing financial stability and sustainability to creating a culture of innovation and effective cash flow management, there are several strategies that can help startups achieve financial success.
To gain further insight into these strategies, we spoke to Vikas Ralhan, CFO, Loconav.
Below are the edited excerpts:
Q. What are some key financial metrics that start-up CFOs should track to measure the success of their business, and how do these metrics differ from those used by established organizations?
Vikas Ralhan: Start-ups are meant to disrupt stereotypes, innovate the status quo, and often introduce new methods and products to the market. As a result, the role of a start-up CFO is crucial in supporting these new initiatives while balancing compliance requirements and building metrics for growth and new capital raises. In essence, a start-up CFO is responsible for three main areas: Finance (functional), Future (strategy), and Facilitation (business partnering).
To achieve success, start-up CFOs must track and analyze several key financial metrics. Here are a few such metrics that are particularly important:
- Revenue tracking: Monthly Recurring Revenue (MRR) and Annual Contract Values (ACV) for SaaS company and Product Revenue (non-recurring, but with a run-rate) in case of Market Place. This metric helps forecast future revenue, develop operating plans, measure performance against forecasted numbers, and understand the gap between management MIS and reported GAAP revenue.
- Another critical metric is gross margin, which represents the percentage of revenue that remains after accounting for the cost of goods sold. This metric is crucial for assessing a start-up’s profitability and sustainability.
- Net cash flows, or burn rate, is also a vital metric for growth-stage companies. CFOs should monitor operational cash flows (surplus/burn) and investment cash flows (R&D, M&As, capability building) and understand how the quality of cash flows shifts from (a) to (b) while moving from seed to profitability. Width and depth of runway (cash in hand/average monthly burn) is another lens that empowers a start-up CFO.
- Customer acquisition cost (CAC) represents the cost of acquiring new customers, including sales and marketing expenses. CFOs should aim to keep CAC as low as possible to maximize ROI.
Overall, financial metrics used by established organizations tend to be more complex than those used by start-ups to measure their financial health and performance. These metrics are designed to provide a comprehensive view of the company’s profitability, efficiency, and overall financial stability. With a longer operating history and an established track record, established organizations have the ability to use more sophisticated financial metrics to assess their performance.
In contrast, start-ups typically focus on metrics that are geared towards growth and profitability, such as monthly recurring revenue, customer acquisition cost, and burn rate. These metrics allow start-up CFOs to monitor key areas of the business and make informed decisions about resource allocation, forecasting, and growth strategies.
While both types of metrics are important for measuring the success of a business, they serve different purposes and are used in different ways. Established organizations use complex financial metrics to assess their performance comprehensively, while start-ups focus on metrics that are more geared towards achieving growth and profitability.
Q. How do you balance the need for financial stability with the desire for rapid growth and innovation, and what strategies do you use to manage cash flow effectively?
Vikas Ralhan: Financial stability is crucial for a business to scale and innovate. It provides a foundation that enables businesses to experiment and invest in medium to long-term initiatives. Businesses with financial stability tend to operate in a more balanced manner than those that are net-loss businesses and burning cash.
To measure and manage financial stability, I deploy three principles and corresponding operating methodologies. These principles are designed to provide a comprehensive view of a company’s financial health and guide decision-making towards achieving financial stability:
- Prioritize financial stability and sustainability as a core value of the business
- Implement sound financial practices, such as budgeting, forecasting, and cash flow management, and periodically review the plan
- Monitor and control expenses, invest in revenue-generating assets, and manage debt levels
- Encourage the team to create dollar value for each action and pursue the same
- Focus on creating a culture of innovation and continuous improvement
- Ask each team and their leader to come up with one idea every month to either improve customer service, cost optimization, or potential business use cases. This exercise will force them to zoom in and out, leading to short-term benefits and ensuring an uptick in enterprise value creation.
- Ensure that investments in new products or services are grounded in solid financial analysis and planning. Create a return on investment (ROI) driven business case document for every material transaction, and set a benchmark for mandatory business case documentation that must be independently validated.
- Practice effective cash flow management
- Recognize that nothing is more important than free cash flows, which includes having visibility on mid-range cash flows and maximum control over their destiny.
- Develop a habit of daily 30-minute cash flow reviews of operations and a weekly review of the overall cash flow situation. This will help ensure that any potential issues are identified early and that corrective actions can be taken promptly.
By implementing these strategies, businesses can achieve their growth objectives while also maintaining financial stability and sustainability.
Q. What are the biggest financial challenges you face in a dynamic industry such as yours, and how do you stay ahead of these challenges?
Vikas Ralhan: The logistics sector in India has become a significant contributor to the country’s GDP, with a projected CAGR of 10-12%. With the introduction of new logistics policies, the entire industry is poised for growth and new opportunities, especially in the area of digital transformation of ground operations powered by IOTs, Robotics, and Deep-Tech. India’s vast logistics landscape presents immense opportunities for developing AI solutions that can be exported to emerging and developed markets. The recent policy changes, the introduction of PM GATI Shakti Masterplan, E-way bills, and Rail-Road infrastructure upgrades have created a favourable environment for growth.
As a Logistics Tech start-up CFO, tracking specific key financial metrics is critical to ensure the financial health and success of the business. By monitoring metrics such as revenue growth, customer acquisition cost, customer lifetime value, gross margin, and cash burn rate, CFOs can make informed decisions and ensure the long-term success of the business. By identifying areas for improvement, making adjustments, and keeping the start-up on track to achieve its goals, CFOs can help the company thrive in the fast-paced and competitive logistics industry.
Q. Loconav has recently raised funds from investors. Please share your insights on the fundraising process and how you strategically manage these funds to support the growth of the company?
Vikas Ralhan: Securing funding is a crucial task for any business, but before planning to raise funds, it’s essential to ask the question of why external funding is needed and how it will be used. This will determine the quantum of funds needed and the type of investor group that should be approached, whether it’s for PMF testing in new markets, customer acquisition, growth, or scaling.
The fundraising process involves identifying potential investors, pitching the company’s value proposition, negotiating terms, conducting due diligence, and closing the deal with formal documentation. Startups can choose to raise funds through various sources like venture capitalists, angel investors, crowdfunding platforms, or tapping the capital market via IPOs.
Once the funds are secured, it’s crucial to manage them strategically to support the company’s growth. This involves allocating the funds towards key areas of the business, setting specific goals and milestones, and regularly tracking and reporting progress. Maintaining strong relationships with investors and keeping them informed on the company’s progress can build trust and support for future fundraising rounds.
Overall, securing funding and managing it strategically are critical for supporting a company’s growth. By accelerating growth, expanding operations, and achieving goals, startups can maximize their potential.
Q. In a fast-paced start-up environment, how do you balance the need for financial control with the agility to make quick decisions and pivot when necessary?
Balancing financial control with the need for agility and quick decision-making is vital for success in a fast-paced start-up environment. To achieve this balance, I deploy the following practices:
- Establish clear financial goals that align with overall business objectives. At Loconav, we prioritize growth and stop-loss analysis and review them on a fortnightly basis.
- Measure every action and build a strong analysis to prioritize financial data and business case analysis for every material action. We conduct scenario analysis to provide all stakeholders with a 360-degree view of proposed actions.
- Implement agile financial management processes such as regular financial reporting, budgeting, and forecasting to ensure that the company is staying on track financially. However, the most critical aspect is acting on insights derived from data and analysis.
- Stay lean and agile by prioritizing lean and agile operations to minimize costs and maintain financial flexibility. At LocoNav, we review both sales and expenses equally to ensure profitability and scale. We keep expenses variable to have maximum control over their correction whenever required.
- Empower cross-functional teams to make quick decisions and pivot, when necessary, by providing them with the necessary financial information relevant to their duties. This empowers and makes them responsible for the outcome, increasing ownership and commitment.
Q. Can you share some of the ways you are using technology and data analytics to drive financial growth and success for Loconav, and what impact have these strategies had on the business?
Vikas Ralhan: In the world of software start-ups, technology and data analytics are essential tools for driving financial growth and achieving success. Through the use of data-driven decision-making, start-ups can streamline their operations, gain a competitive edge, and manage their finances more effectively. By automating processes and optimizing pricing strategies, start-ups can also scale quickly and efficiently. One important aspect of leveraging technology and data analytics is the ability to forecast and analyze cash flow, which can help start-ups reduce costs and improve profitability.
Here are some specific examples of how start-ups can use technology and data analytics to drive financial growth and success:
- CRM and funnel analysis for customer acquisition and CAC analysis
- CRM and ERP for revenue optimization, auto-renewals, and prevention of leakages
- P2P modules, cost trackers, and cost corrections
- Budget vs. actual tracking, followed by corrective action on deviations
By utilizing these tools and strategies, start-ups can achieve faster growth, increased profitability, and greater operational efficiency. The use of technology and data analytics is essential for start-ups to stay competitive in a rapidly evolving industry and achieve financial success.
Q. What role do you believe financial leadership should play in guiding a start-up towards long-term success, and what advice would you offer to other CFOs in similar roles?
Vikas Ralhan: The success of a startup is heavily reliant on the expertise and guidance of its financial leadership. As a CFO, I recognize the critical role I play in developing a comprehensive financial strategy that aligns with the company’s objectives, and in overseeing day-to-day financial operations, such as budgeting, forecasting, and reporting. In addition, I am responsible for cultivating strong relationships with investors and lenders, keeping them informed of our financial performance and growth potential.
In order to excel in this position, I prioritize sustainable growth over short-term gains and remain nimble and adaptable in response to evolving market conditions. Effective communication and collaboration with other leaders within the organization are also crucial, as is a commitment to remaining abreast of new technologies and emerging trends. As a CFO, I embrace innovation and maintain an open mind to new ideas.
To fellow CFOs, I advise maintaining a steadfast focus on the company’s financial goals and developing a robust financial strategy that clearly communicates those objectives throughout the organization. I also recommend prioritizing transparency and accuracy in financial reporting, building strong relationships with investors and lenders, and staying up-to-date on emerging trends and technologies to stay ahead of the curve in driving long-term success for the company.