Breaking Down Annual Planning with CJ Gustafson of Mostly Metrics

Speaker A: A marketing team that's being built from scratch. You're going to start with more people costs and program costs, and that's because you actually need somebody to go out and spend the program dollars. You need somebody in the seat to actually make decisions on what you're going to spend it on.

Speaker B: Welcome to the Roll Forward, a uh, podcast for the next wave of finance leaders, especially those looking to transform their roles by making smarter, faster and more profitable business decisions using the power of technology and a forward looking approach to finance. Uh, listen in to learn how to get out of the back office trenches and become a more strategic partner within your organization. Hello and welcome to another episode of the Roll Forward podcast. My name is Joe Michalowski and this episode is brought to you by Mosaic, a strategic finance platform that transforms the way business gets done Today. Very excited, my M guest, CJ Gustafson, CFO of parts tech, but probably better known as the man behind the Mostly Metrics newsletter. And now the Run the Numbers podcast, which I've been very much enjoying. So, cj, thanks so much for joining me.

Speaker A: Thanks for having me on. Joe, you. You told me we were talking about annual planning, so I strategically had four coffees before this to get pumped up. And I mean, this is like, this is like my super bowl, man. This is like my Super Bowl.

Speaker B: I. You know what? I've. I've heard this. This is like a finance person's favorite thing to say. I've heard that board meetings are finance is Super Bowl. I've heard that planning season is finances. Y' all are like on a four championship per year cycle. And I'm here for it for you guys. That's great.

Speaker A: I love it. Thanks for being here for it.

Speaker B: I luckily, uh, know nothing, so I'm glad you are here to inform all of us. But before we get to all the planning seasons up, do you mind giving everyone the quick background about yourself? I gave a very tiny intro. I'm sure you will do a much better job of explaining who you are.

Speaker A: It was a very kind intro. Thank you. So my name is cj. I'm the CFO at a series C startup. It's a marketplace for aftermarket code car parts. And, um, I'm a CFO now. But it's kind of funny how I got to the position because I started on the other side of the table. So out of college, I did M and A consulting where I learned all about business models, how companies, you know, allocate resources to bring a product to market and sell it. Then I went over to the private equity side for a couple cups of coffee and I learned how to actually buy and sell companies, which was pretty neat, and how to, you know, fundraise, which was informative for me because now I'm on the other side of the table, you know, asking for those dollars. And so I made the change to the operator realm. And that's where I've been helping to grow software companies really for the last, you know, seven years or so. And a lot of that is deciding how many people to hire, you know, what we can buy, what we can't buy, and then coming up with a long term plan that, that plays all that, you know, backwards. So excited to be here. But you know, once again, I, I'm not a CPA by trade, so don't ask me any tricky balance sheet questions. Joe.

Speaker B: I think one reason so I, I'm very happy that people enjoy coming on the show and I think one of the reasons that I try to ask insightful questions, but I don't really throw any curveballs because I don't know what curveballs to ask. So if there's like some deep seated balance sheet question out there, I'm probably not the guy that's going to find it. So I think you'll be okay. But if I stumble across one, don't get too mad at me because I might just get lucky and just come up.

Speaker A: Let's do it. All right, man.

Speaker B: Well, we said that annual planning would be the big topic. We're recording this, by the way, on, on Halloween, my least favorite day of the year. I don't know if you're a big Halloween guy, but I, I hate this day.

Speaker A: Uh, why? You don't like candy? What's the deal?

Speaker B: I love the candy. I, I never liked dressing up. I was never like, just not into the Halloween spirit. So I, whatever the scrooge version of Halloween is, like, I'm that guy. So I'm happy to be here recording with you and not talking about Halloween, but we're like late into the planning season process, so a lot of this is going to be like, yeah, a

Speaker A: couple of people about to have a major panic attack if they haven't started yet.

Speaker B: Joe, seriously. So, you know, a lot of this is like, hey, like, maybe we can clean up some of our stuff that we've been working on. Insight for the future, Insight for maybe like reforecasting sometime at the beginning of the year. But I'm excited to dig into it nonetheless. But before we get going, just to set it up like Give me an overview of your ideal timeline and like, what the basic like stages of the process are and then we'll kind of dig in after that.

Speaker A: Yeah, I'll give you the tldr. So I think it's usually a three month process from soup to nuts. I hate that saying. I don't even know why I said it.

Speaker B: I don't really understand that saying.

Speaker A: No, yeah, me either. But, uh, we'll do another podcast on stupid sayings. So I think it's usually a three month process with the board meeting that you're presenting it at for approval as the backstop. So you kind of got to put a date on the calendar and work backwards from that. And I break it into working with three different audiences. So it usually starts out the CEO and the CFO up front and they're trying to figure out like what, what field are we going to play next year's game on. And then you're going to work with the department leaders for input to validate that what you wanted to wrap your arms around is doable. And then what yard line you're going to start on and what yard line you're going to hopefully end on. And then the board comes in at the end and gives you the check mark to say, hey, that totally underlined. That totally aligns with, you know, our investment thesis and what we underwrote.

Speaker B: Totally. I love that. Well, we are going to spend the majority of this kind of digging into what those individual pieces look like. And so I want to start, you said upfront CEO, cfo, kind of like the pre plan. So what does that part look like? What are the guardrails you're trying to put in place? How do you go about setting the stage for a successful planning season?

Speaker A: So I think it starts with the relationship really between the CEO and C cfo. Sometimes the CEO already has the plan in mind and other times it's the CFO you know, taking out a piece of paper. And usually you're not starting completely from scratch. So I say that a bit in Jess because you do have a five year plan out there that's probably within 10 to 20% of where you'll land. But you know, taking out that piece of paper and figuring out the realm of what's possible. And I call that the tops down budget. So that's where you're setting the guardrails really of where you're going. And guardrails in my mind that CEO and CFO have to align on at the start are three. So you got revenue, which is how much you make productivity, the ratio of people to that revenue, and then profitability or burn, which is how much you make or lose. And so the CEO and cfo, I usually draft out some questions just to get us talking about it, because it's one of those things where it's like such a big process. You're like, where do I even start here? So the first question I always ask is like, listen, how fast do we want to grow our revenue next year? Like full stop? Like, let's just align on that first. Is it faster than last year? Is it slower? By what rate do we even think the board's going to accept? Then I usually ask, how much money can we spend to get there? And this is a bit of a leading question because I usually know the answer, but I need to get the CEO's reaction. And a lot of it will start with, well, how much money do we have in the bank? And then the next question is, are we planning on raising again next year? And I really do stress to people that if during the annual planning process you should be thinking about the implications of a fundraise if you're a startup. And then the next question is, how many people will we hire to get there? So I'll usually throw a number out there to the CEO, like, hey, 150 people. You think we can do this? What we're discussing with revenue, with that many people, just like a quick gut check. Not highly scientific, but this is my starting point, right? Just to anchor to that, to work off of and then, you know, how profitable do we want to be? So you know, are we under pressure to get, to break even? How is that looking? So that's usually where I start.

Speaker B: I have my follow up question. I just thought about this. Uh, again, we're like at the end of October, but when we were talking like before we hit record, you said that usually starting this process in August. And so, you know, that's great. I think it's a lot of like really insightful answers about how to like sort of set that stage with the CEO. But how, how difficult is it to start, you know, five months before the end of the year? Like you don't know what the number. You're basically only have numbers for six months, like as far as the books close. So like what are you assuming with your numbers? Are you just assuming that, you know, we'll hit plan for the rest of the year? Are you just kind of like making a base assumption there? Like how do, how do you go about.

Speaker A: That's A great question, because it's something that I wrestle with because you know, you're in the eighth month of the year, you probably only have six and a half, seven months of hard data. But you got to remember that we've been reforecasting. That's like the beauty of some of the newer tools, like a mosaic where you're like refreshing at the end of each month what the plan is going to look like. So people are like, you're flying blind. I'm like, well, I have some information and I have like a pretty good gut feel of where this quarter will end too. So maybe I'm only slightly blind on three months here. And remember that like most boards ask for a long term plan, right? So annual plan is like one Lego block in that three or five year plan. So I know to a certain extent, like, you know, I'm just making up a number. Maybe they expect you to hit between 30 and 35 million next year. Well, I can start the process at least with knowing that range. So I also think that like people will wait until they have all the information and guess what? That never shows up, especially in a startup life. Like, like news flash, like you got to move with 80% of the info and that you wish you had and you course correct along the way.

Speaker B: Such a good point. I was telling you that I remember hearing horror stories from our founders about annual planning basically going through January. Like, okay, we're still scrambling. We're already a month into the new year and we just can't figure out that's probably what it is.

Speaker A: It's like pick your poison. You start with less info than you wanted or you have a conniption at the end because you haven't got there yet.

Speaker B: Yeah, exactly. So I, I love that it's a, I think it's a really good takeaway. Is kind of like being able to work in that gray area. I know it's not a, probably not the best feeling for a finance or accounting person who is really numbers driven, but yeah, startup land, gotta be able to do it right.

Speaker A: Yeah, you gotta get comfortable in that gray area. Yeah.

Speaker B: All right, let's move on to that like top line plan. The sales capacity. I want to hear how you think about like, okay, we've set our guardrails up like we're moving on. We're talking revenue. Let's figure out what we're going to hit and how we're going to get there.

Speaker A: On the sales side, we're talking dollars, baby. All right. Yeah. This is like my Favorite model to build. Like M. Most people, like, on weekends they'll like tune a car or like, uh, work on their golf game. Like I work on old, you know, capacity planning models, uh, you know, in my garage.

Speaker B: Let's get you a hobby, cj.

Speaker A: Yeah, I'm quite the hobbyist. My wife thinks I'm super interesting. So sales capacity model. This is essentially trying to figure out do I have enough feet on the street or butts and seats, they say, to hit the targets that we've established, right? So reps don't just show up on day one. Now I wish they did. I wish they would show up and just start knocking deals out of the park. But I mean, like, hey, let's be realistic. They need time to learn about the product. They also need to establish a pipeline. So like qualifying companies out there who may buy and, and you know, depending on what segment they operate in, you can assume differing lead times for ramp. So you may say, you know, a small business rep, they need three months to go from zero to a hundred percent productivity, a mid market rep, six months, enterprise nine months. And you can ramp them in your model in either a linear or a curve slash exponential fashion. Like if you just picture the line of like the speed at which they, they, they get to 100% and you then want to add up the capacity or the ramp percentages across all your reps. So I have every rep and also the placeholders for reps, like, you know, SMB hire number one in northeast, like in brackets. And I, I put in a start date for them and I add up all the capacity, you know, through the columns to say how many dollars can the org have as a possible output?

Speaker B: I have a question about ramp time. So when I started Mosaic, we were like, I again had no finance background. I'm learning from our founders, like all this like, finance kind, uh, of metric information, packing it all into my brain. And the one use case that our co founder, Joe, who I would bug for content all the time that he always talked about Mosaic, was sales rep, ramp. I guess this is a real pain point for him at Palantir. And he was just very proud of like Mosaic's ability to give like real time insight into that. So my question for you is like, how big of a difference can it make in your plan if you know, say, you know, a gut assumption of just three months, like of rep time or ramp time, but you find out it's actually, you know, four to five months, like if you're planning around three. And the reality is Much longer, much shorter. Like how much of an impact can that have on your plan?

Speaker A: It will totally kill your plan. And this is actually why, you know, the inside baseball is a lot of hedge funds who are trying to look at public companies and if they'll hit their revenue target, a leading indicator will be how many sales reps they have on board. So they're actually like creating models in the background to say, like, do I really think workday can, you know, hit 100 million in revenue this quarter? Well, ah, you know, according to my back of the envelope math, they don't have enough people to even sell that many, you know, uh, seats. But back to the scheduled program, I think like how you fight that is through over assignment. And so keep this on the down low. I hope there aren't any VCs listening. But there is this thing called over assignment where companies will take anywhere from 10 to 30% uplift from their board plan to the operating plan. And remember, the operating plan is what you're actually giving out in quotas to the rep. So that's their target. So there is a bit of wiggle room in between. And the reasons why you need an uplift is because A, the economy may suck, you didn't anticipate it for that and deals take longer to close. You B, reps just don't get up to speed as fast as you thought, or C, it's harder to hire them and you said, hey, I needed, you know, this person in June and they don't show up till August. It's like, damn, well, I'm two months off now on what I needed. So typically the enterprise segment has the most risk. That's what I always think about. And therefore it should receive the most cushion. So you may only have like a 20% uplift for SMB. So if you had $100, you assign 120 to the field, but it may be 130, 135 for Enterprise.

Speaker B: Makes sense. I think 100% accuracy. Any like forecaster plan is uh, a total myth. And this just sounds like one of those areas where being more conservative or just kind of assuming that it might be a little worse than it will be is probably better for the planning process than kind of going in rose, or was it rose colored glasses? Whatever the optimistic term, uh, might be,

Speaker A: things are never going to go exactly how you planned it. So you think about, well, what are the surface areas for risk of where this could arise? And usually those levers, you can toggle them depending on like what your view of the economy is going to be. Or like, maybe you're launching a new product and there's just like a lot of unknowns around that. I've had that happen before where, like I'm saying in my P and L, that 20% of the revenue is going to come from a product that hasn't even launched yet. It's like, well, maybe I should have a bit of an uplift to safeguard against that. That, and that's like something on our side that we can control more of. But then there are always, you know, exogenous factors that, that you can't always control for. So you try to hedge it totally.

Speaker B: All right, so we talked about kind of planning out the reps, but we know that reps are not kind of on their own. I think in when we talked about this or when I saw the outline from the webinar we did together, we called them like pod ratios. So talk a little bit about the, the headcount and the resources that come with a sales rep that you need to also plan for in this part of the plan.

Speaker A: Yeah, so the pod. Think about each rep or each like mercenary who's out there holding the bag. So the term is called are you holding the bag? That means you have a quota. Like you have a number. That's the atomic unit that you're doing your math around. So each one of those reps may have a quota of say a million bucks. And maybe they're on Target earnings is 200,000. I want to make sure that the on target earnings, you know, maybe you're starting out and it's only a 3 to 4x ratio of OTE to quota. But usually as you get bigger, it should become 5x7x to make sure that the rep can not only pay for themselves with the deals that they have to bring in, but the surrounding pods. So think about it like you have a systems engineer who's going to help with the technical part of the sale and the implementation. You have a BDR who's passing them leads and then you have the person's manager who's going to help them strategically to close the account. Remember, those people don't have individual quotas. They're what you call overlays. So there are a lot of mouse to feed. When you start to look at the surrounding pod and each segment has a different ratio. So there may not be any BDRs, you know, linked to SMB reps. It's like, hey, hey, eat what you kill. Go out there, good luck, pat on the back but for commercial, maybe every 2 reps shares a BDR to pass some leads. And then for enterprise, the big dogs, every enterprise rep gets one bdr. So different ratio depending on uh, the different segments that you're in.

Speaker B: Makes sense. I want to. So we could probably spend the entire podcast just talking about this part of the plan, especially since it's favorite. Everyone loves the money part, but we do need to keep moving. But before we get there, I want to ask we focus this whole part on sales capacity planning. And if there's one thing I've learned is that that is not the only way to plan out a top line. So can you give a quick overview of how you might approach planning this part of the annual plan without sales reps? So maybe like a PLG model or something? Something that isn't sales capacity related?

Speaker A: Oh yeah, that's a sexy question. Plg, the soup du jour. So I think that you have to work off some sort of assumption for inbound leads from the ecosystem because most PLG models, they have some sort of way to get past leads from a channel partner or some way they're embedded within the product. So I think you're looking at what's my capacity not for reps, but for registrations coming in from each of these sources. And then you have to extrapolate that out to say, hey, I know that, or I have a pretty good grip on it. How do I estimate how many people I need to configure on the platform once the registrations come in? So this is actually the case for the business that I'm at now where it's a channel inbound PLG model. Uh, it's a long string of words. But what we need are configuration specialists and we monetize the customers after we get them configured through a usage based motion where their spend ramps up over time. So, so what I'm looking at is, hey, can one rep configure 100 new shops per month? And how many registrations do I need to get there? Do I need 200? And that's the math that I'm doing. So it's a bit different than the dollar perspective. But I'm still working off the rep as the atomic unit who's doing the configurations.

Speaker B: That's a really, that's a really interesting point. I don't think I've ever. We talk a lot about modeling just because when we came out with Top Line Planner, it was like the big focus is like, all right, how many different ways can I think of building this top line model. And it's a really interesting way to think about it where like the, the logic doesn't really change. Like it's basically the same as a sales capacity plan but without the rep part. It's like you have to put in a new variable for the rep and like everything else kind of falls into place in a similar fashion. So it's really interesting. I haven't heard anyone explain it that way. It's cool.

Speaker A: Nice.

Speaker B: I want to move on. And we talked about in you mentioned inbound and so that like sets my ears off because I am the marketing guy and I want to move on to the marketing side of this. I know you said sales was your favorite. This will be m my favorite. I want to know how you work with marketing to come up with a plan. We talk like we're thinking a year out and so a lot of stuff in marketing just isn't so cut and dry. So how do you work with your CMO or VP of finance or marketing, whatever it may be to make sure that this part of the plan goes smoothly?

Speaker A: And they're both links. I'm glad you brought up sales capacity model first because you kind of need to come up with a draft of that before you get to the marketing portion. Here's why. And by the way, so the fastest way, if they're finance people listening who are building a plan to ingratiate yourself and get free beers from your CMO is to help them build a great marketing pipeline model. And so what's counterintuitive about this is it corkscrews backwards, right? The sales capacity model, that's kind of like forward looking of like what you can achieve. And you know how much gas is in the tank. This is working backwards to out figure, figure out how big the tank needs to be. And you're basically figuring out what your sales target is and then grossing it up mathematically, step by step to get to a number of registrations or MQLs that you're going to need to hit that goal based on conversion rates. And then what you're doing is you'll assign a cost to each of those registrations after you gross up to that number based on source and by segment. So don't forget you have to break it down into those two lanes and then that'll get fed to the reps to say, is this enough to feed the reps to hit those goals? And it'll also inform your CAC payback period. Because you're going to want to come up with an assumption for Those registrations of, hey, how many bucks is it going to cost me for each one of these? And, you know, at most SaaS companies, it's probably assumed that you'll need anywhere from like, 200% to 350% of your new ARR target and marketing pipeline. And that's going to depend on the sales engine and geography. So we talked about, like, SMB capacity earlier. We talked about SMB ramp, uh, time. Sorry. For pipeline coverage, you may only need 2x, because those come in quick and they get closed quick. But enterprise, you may need 300 or 350% coverage. And that's something that you're going to want to calculate ahead of time and space it out based on how long it takes to close a deal.

Speaker B: I love this. So I am not our VP of marketing, but I'm going to put my VP of marketing hat on from it. So I'm chatting with you. Uh, we kind of come up with this model and I come back to you and I say, like, okay, to, uh, generate, you know, whatever leads it, you know, for I. I won't get into ads because ads is kind of like dollars in, dollars out. Let's talk about something squishy.

Speaker A: Like.

Speaker B: Like my thing I do organic. And so, you know, I don't know, like, oh, if I do six articles this month, it'll generate this much traffic for sure. And so I come up with a budget and I say, like, okay, I need to invest 30k in an SEO per month or something. And you say, that's way too much money. We can't afford that. Like, how do you go back and forth on something that is so squishy without a real, like, dollars in dollars?

Speaker A: Well, I think that's why you got to run. It's a great question. You got to run experiments throughout the year to kind of figure out, well, what's my main channel to hit here? And I joke with my cmo, like, if we figure out that X works, we're going to punch that lead source until our hand bleeds. Because if it's the cheapest, most efficient way to get leads, you want to milk that cow and then move on to the next one. And so you should have, like, in your head a couple ideas of, if I put 25 cents in, I get a dollar out. Uh, here for this one. And that's the part that you're building the foundation of your plan on. But for the squishier parts, like you mentioned, it may be like a more optimistic goal. And you're parking dollars There as your experiment for next year to see what you can get out. So what I always go back to is which lead source is most reliable for me and how many dollars does it cost. And then what I do is for the ones that are less known is I assume less of a return on that or I even almost, you know, chalk that up to like icing on the cake if we get it. Love it.

Speaker B: And then my other follow up question I want to ask is planning out new ah, headcount in marketing. So like marketers are always going to say like I need, you know, there's infinite number of channels and things we can do marketing. And so it's like I need more people to accomplish X, Y and Z. Yeah. And it's not as simple as like the sales capacity plan where it's like, oh, we want to hit this revenue target, we need this rep in seat. So you know, from the finance side, how do you think about kind of approving marketing headcount versus maybe giving more budget for contractors or like third parties or something like that?

Speaker A: Yeah. So like a marketing team that's being built from scratch, you're going to start with more people costs and program costs. And that's because you actually need somebody to go out and spend the program dollars like you need somebody in the seat to actually make decisions on what you're going to spend it on. But in general, like let's say you're ramping, uh, up the speed. You're just adding a few people each year. The split should never really go more than 60, 40 in any direction between people and programs. And as a rule of thumb, so this is like super high level. We're going to give a couple of ratios here at SaaS companies that I've worked at, we try to make total marketing spend one third of total total sales spend, which is very heavy on people, the sales portion and then within that 1/3 about half to 60% will be programmed. So these are things that I look at not like going in but coming out as a sanity check to say how much are we spending on marketing? And uh, the point about contractors is very astute because a lot of SaaS companies when they're starting out, they're like, I don't know if I need like a full time web design person, a HubSpot admin for, I don't know, marketing ops. You should definitely put placeholders in the budget. This is what I do. I put a placeholder in the budget for X thousand dollars for these initiatives. And then we say if it works and it, and we think it's a full time job and the dollars start to add up to something that looks like a full person. Then in the following year, let's put that in as a full time headcount. But let's start with contractors first.

Speaker B: I love this. I'm learning a lot, just learning a lot. Honestly, my, my finance folks might be mad at me at uh, coming out of this because I'll be.

Speaker A: So you're gonna secure the bag for next year.

Speaker B: It'll be so much smarter. My marketing team will love me. Side note, for everybody, you should just put a Ryan on a Ryan Wein Miller on your headcount plan because that is our guy who does all the growth and all the somehow has time to do everything and can do all of our like HubSpot ops stuff. So he's a finder. Ryan Wein Miller. You can just kind of accomplish a whole bunch of things. Give that guy a raise, be able to always. We always give Ryan a raise. I have no decision in that. Shout out to finance people who can, uh. All right. You mentioned kind of wrapping into the uh, wider P and L and I want to move into that. And so when you worked on the webinar for us about planning season, there wasn't like a dedicated section just for R and D. And so I guess it'll kind of fall into, into this. So, you know, we've got our top line, we've got our revenue, we've got our marketing engine. How do we go about planning out the rest of the pnl, including kind of that R and D side of the house?

Speaker A: Yeah, I mean at a high level, when it comes down to headcount, 70 to 75% of costs at tech companies walk on two feet. So you want to get this right and if you don't, your budget's probably going to be pretty off just with the amount that's weighted towards it. And it's not only the majority of your costs when you look at payroll, it's also the driver of the indirect cost too. So like the software licenses will be linked on a per head basis, the, the office expenses, the rent. So it's less about to me like matching dollars in the model to people and more about using the people to come up with the dollars in the model, if that makes sense. You may have an idea of where you want your cash burn or profitability to shake out, but to validate that, you need to build from the bottoms up, starting with employees. And so what I always do is I work off of what I call max headcount budgets with my leaders and this actually gives them less ambiguity, like they understand how many people they can grow to and it allows them to make better decisions on their own without coming to me every time saying, hey, can I hire this person? Like, yeah, I said max of 12. So just like for Q4, don't go over 12 or in for Q3, you know, stay below 10. That's the backstop that we work off of. So like total team size I think is really important.

Speaker B: Yeah.

Speaker A: You had asked about R D in particular, right?

Speaker B: Yes.

Speaker A: Oh this, this is a spicy one. So what I ask my R and D leaders to do an R and D for me is a combination of products. So your PMs and your designers and your TPMS and then your engineers, which are back end, front end APIs. I ask them to just give me an export of all your people down the left hand side and then in the columns put the products that we have either existing or net new. And do me a favor and just ballpark. It doesn't have to be exact but like go through and be like, Joe, work. Joe the engineer works on product, uh A with 25% of his time with 25% on product B, 50% on product C. And then what I'm going to do is I'm going to multiply out basically the cost of labor that we have on each of those products. And what that allows me to do is see like hey, order of magnitude. Are we like over rotating on how much we're investing in certain things? Like wait, I thought, you know, this product was good to go and it was all done. Why do we still have X amount of dollars dedicated to it? And what I'll also do is I'll take the amount that we're spending on those net new products and I'll compare that to my five year forecast. So like, I'm not saying we have to bring the product to market, you know, next week or anything, but like I gotta have a number for revenue if we're investing that much now. And I think a lot of people forget to do that in their budget. Like they'll spend all their time in the sales capacity model, the marketing model. That's great, that's like your revenue for next year. But guys, we're trying to like incubate an engine here for multiple years. So if you don't have like a new product in the hopper that's going to feed into that maybe two years out, then you're really setting yourself up for, for a uh, major slowdown.

Speaker B: Top line, do you have a weight of like sense checking? So I, I'm thinking, and maybe it's because I'm so far removed from anything product development related, but I'm thinking like, like as a finance leader you don't know what the engineers and what the product team need to accomplish X, Y and Z. And so do you have a way of sense checking? Like they say we need you know, 40 new engineers to get to get these three new products out the door. How do you sense check like what to approve and what not to approve when you don't have really? Like I assume any.

Speaker A: Yeah, I'm not technical, I can't code, but I can ask a lot of questions like I'm number one in the company at that. And what I'm usually asking around is like how many people are you dedicating to this product versus that? And then I'm also saying what year do you expect this to come live? Because I need to take what I'm learning from the sales team and match that up what I'm hearing from the product team to say like are we even on the same page here as a company of what's coming out down the line? So that's usually what I do. But a lot of it's just a conversation and asking them like I'm, and it's not like I'm trying to hold back budget or anything. I'm just like brokering budget with them, um, resource wise of what are the bets we're making. And something that I didn't say at the beginning is when you start out with talking to the CEO. You should also make a list of what your major initiatives are throughout the company. So we always try to come up with five and those should cascade down to each department lead who can make a goal against each of those five. And usually you'll have a couple in there about new products coming to market. So if I go through and cost it out like we were explaining before and I know that you know, initiative number two is to get product XYZ to market, but we're spending all our money on product 1, 2, 3. It's like, hey guys, hold on here. This does not match up. So do I know how to code it? No, but I, I have a pretty good idea of how to put the poker chips on the table in the right spots.

Speaker B: Yeah, I love, I love the breakdown of kind of allocating dollars to different product lines and other follow up question I have is like I, I guess originally, uh, I wanted to ask how to balance growth plans with investments in R and D, but I think you've kind of covered that. So the way I'd tweak it is do they always move in lockstep? So like we're investing in sales, so it's going up into the right and we're increasing our product investment at the same sort of clip. Or are there times where you kind of need to step on the gas on the sales side or step on the gas on the products? Like how do you think about the relationship between those two sides of the house?

Speaker A: They do not match up in reality. There are some years where you go deep into building like two, maybe three products and those are not going to pay off for a while. And that's why having a good relationship with your board is key because you have to explain to them why you're investing now, why you're burning cash to develop these, and how you're going to come out on the other side. So there's a major, uh, timing aspect to all of this. You wish it was the case where revenue was scaling at the same pace of R and D investment, but that's just not the reality. And so a lot of that is messaging around why you're doing things at a certain cadence.

Speaker B: Love it. All right, I got one more, uh, sort of like planning the rest of the P L question. I want to know like, what are the. We talked about headcount and we could probably spend a lot of time talking about headcount, but I want to know like, what the pitfalls are that people fall into when budgeting for the non people. Cause so like, where do people go wrong? What are the mistakes everyone needs to avoid? It's October 31st. Crunch time.

Speaker A: Yeah.

Speaker B: Better go back and fix these things.

Speaker A: I think seven years in a row I forgot the budget for laptop refreshes. So

Speaker B: if I'm working on 201111 inch MacBook Pros, like we're just

Speaker A: believe it or not, those things do break because you end up coming up with a new higher budget. And it's like, hey, every person that comes in, 1500 bucks or 2000 bucks for a laptop, a monitor, blah blah, blah. But you forget about the existing people on that. Laptops break and maybe they last three years. So hardware refreshes, write that one down. Take it from someone who never writes it down. Another pitfall is starting out with bad data around bonus percentages for people. I see this a lot. And it starts with crappy data at the Start of the planning season because you don't take time to validate it on the payroll or with hr and you end up putting in too low of assumptions for the accretion accruals each month. And then you discover that it should have been a way bigger hit, like part of the way through the year when one employee says no, my bonus percentage is 10%, not 5%. And then this is a big one. Implementation costs. So for any software you're buying, you gotta ask yourself if there's any one time implementation costs that you should also put a budget in there for. A lot of people just stop at the uh, hey, this software is $10,000 a year, but what if it's a $15,000 one time hit for implementation costs? That's a pretty big miss if you don't know about it, even though you only pay it once. So keep an eye out for that. And then this isn't a real dollar cost. But implementation takes a lot of bandwidth from people. So I always caution for companies to only take on one major IT or software implementation per quarter. So I tried to implement NetSuite and Hyperion and Workday all in the same quarter. This was like four years ago.

Speaker B: And what you doing?

Speaker A: No, no work got. No work got done that quarter. So that, that, that's a lost quarter in time.

Speaker B: Oh my gosh. I have never done any of those implementations, but it doesn't matter. That sounds like a nightmare. I'm glad you're through it. You survived.

Speaker A: It almost killed me, Joe.

Speaker B: I bet it did. Honestly, that's crazy. All right, I love all those answers. I think everyone should write those down, especially the laptop refresh one. It sounds like that's particularly painful for you every year, so I hope someone's taking notes somewhere. All right, we've got uh, I guess in my head I'm like, all right, so we've got like our top line sales plan and we've got our marketing engine and we've built out our people costs and our P and L. And now we have all of these perfectly built puzzle pieces and they will just seamlessly connect at the end. And you have your plan. I assume that's not how it goes. So talk to me about bringing it all together, uh, into one unified plan that you can actually present to someone.

Speaker A: Yeah, well, you did all this work, but now you got to check that it actually makes sense. So if you remember at the beginning we said you got to do a tops down to see what's possible. Now what we're doing is the roll up from the bottoms up using the inputs from everybody. These could totally be wildly off. Like, I've done it sometimes and people are asking for twice as many heads as we thought we could do it with. At the start, it's like, okay, well, we're going to have to sharpen our pencils here. We're not really done yet. And so what you need to follow out of this are two P Ls that both tie to each other. So the same amount of revenue and costs, they should link up. And so one of these is by department, so you'll have sales and marketing, R and D, G and A. And then the other one is by expense type. So you'll have like across all departments, total salary and benefits, total rent, et cetera. And I like to print both out old school. Yes. I own a printer and I'll check the monthly ramp in revenue and expenses by month. So I'll just eyeball it to see how they're increasing. And this is where you start to find, like, alligators in your model that are popping up. Like, why would our marketing budget go down going into Q3 if we thought it was going to raise every period? And this is where you start to pick out pieces that you have to go back and do better on. And you also want to calculate your forecasted CAC payback period. That's dropping out of this. A lot of people set A. I've done it too. I don't know why it always happens, but you set a target for CAC payback period. Hey, we're going to stay under nine months next year. But then you forget to check it at the end and maybe it's pumping out 11 months. It's like, well, I know from the start that I've messed this up because it's too heavy in cost or too light in revenue. So those are some of the other sanity checks I do in the P and L. And I also look at ARR per head. So that's my productivity metric. So you remember how we sat down with the CEO and we were going to look at revenue growth, productivity and burn. Those are the three things I'm saying. Does that match up to what I thought I could triangulate at the beginning?

Speaker B: This is all great. First of all, never heard anyone talk about alligators in the model. I actually, C.J. i don't know where you're from. And in my head I was like, C.J. lives in Florida.

Speaker A: Immediately I was like, I'm, um, a Florida FPA man. Yeah.

Speaker B: Are you really that was.

Speaker A: I'm in Naples, Florida, right now.

Speaker B: Oh, my God. I had no idea. But that makes so much sense. The. The alligators and the model, it's like they are.

Speaker A: They hop out of nowhere and just bite you.

Speaker B: I love that. I've never heard that. And it's great. I. I will use it forever, and I'll attribute it to you for sure. What? So we talked about kind of, like, finding out that we're. We're just way off. Whether it's dealing with those alligators or just kind of like going back to what we said in the beginning for the guardrails. How many back and forths are you doing? So, like, you're probably going back and forth in each of the sections we already talked about. Then you bring it together, you find out again, like, you're just not matching up. So, like, what does the back and forth process look like? Like, how many versions of this are you creating? I, uh, I'm sure it's painful. I'm sorry if it's a little triggering, but.

Speaker A: Yeah. When I was using Excel, this was like, four years ago. We got up to model version 112.

Speaker B: I remember 112.

Speaker A: It was bad. And the model was so big that when you opened it, you could go to the other room and make a cup of coffee yet, like a. A granola bar and come back and it would finally open. It was like a 50 meg file. But now we don't do it in Excel anymore, which is nice. But, uh, it's differing levels of back and forth. Because some departments, like, check, that was easy. Like, and they're even shocked. They're like, approved. I'm like, yeah, approved. Other ones, it's a much difficult conversation. And, uh, those are the ones that sometimes you need to get more people involved in what I call an interlock. And these should happen throughout the process of, like, sales is saying they're bringing this to the table, marketing saying they're bringing this to the table. Does that match up? Okay. The other one is between product and engineering. So what's the ratio of PMs to engineers? Does that match up? Okay. It's usually when those things don't match up, you have to have, you know, a more nuanced conversation with that leader. But I would say it's, you know, probably half the departments end up having to have, like, another back and forth of, hey, can we, like, delay this? Like, I'm not saying I can't give it to you, but can we push it out a quarter? And then there's usually probably two or three conversations with your CEO where it's not like, do you agree with this or not? It's presenting the findings and reporting back and then getting comfortable with it to then have the same story. So you're talking about it thematically the same when you get to the board.

Speaker B: I heard all of that. I really liked it. My eyes still kind of twitching over the version 112 in the spreadsheet. Because I, uh, don't work in spreadsheets. Luckily, nobody would want me to. It wouldn't go well. But that. That would kill me. I think that would kill me. I don't.

Speaker A: You guys can use that in a marketing advertisement. Put it on a banner, you can quote it.

Speaker B: Version. Let's see. CJ was on version 112 until he finally got out of spreadsheets.

Speaker A: Yep.

Speaker B: Don't be C.J. or be.

Speaker A: Don't be me.

Speaker B: All right, C.J. uh, honestly, a, uh, 40 minute masterclass of, of the annual planning process. And again, I'm sure we could spend an entire episode going into any one of these areas. But I really appreciate you just burning through what felt like a very meaty topic. A lot of great takeaways.

Speaker A: So I appreciate that we could do this again. We left a lot of meat on the bone.

Speaker B: There's so much, man. It's just, it's a huge topic. And so I know, you know, it's tough to fit it all into one, but I appreciate you going through. But I do have two non planning season related questions for you that I want to get to. And the first is an ode to your own show. I want to ask you what does your finance tool stack look like? Because in true run the numbers fashion, we need to know.

Speaker A: I love it. Time for me to rep my stack. I've never got to do this before. This is fun. So FPA Mosaic. I don't know if you've heard of them before, but, uh, not, uh, once. All right, they're great. It's streamlined our processes and got us away from version 112. And if you need to do sales capacity modeling, it's like, it's brilliant. So shout out mosaic. Then for ERP, we're using NetSuite, which helps us keep the books clean and makes us feel like a big grownup company. And then in terms of payments, we're using Brex. Helps us with virtual credit cards too, which are nice. You can slice one for somebody if they're taking their team out to dinner or something. What else do we get? We, uh, got for headcount. And this is somewhat on the HR side, but we use Greenhouse for recruiting, which allows me to do the approvals as a finance person. And then we got Hibob hooked up, which is great for tracking, you know, how many people we got on board. And then we use Travel Perk for. For the travel portion. So that's the stack I'm repping a day. Oh, and I forgot one of my favorite tools of all time, Sigma. So that's where I look at all of our analytics. We have Snowflake as the underlying data warehouse. We use DBT as the infrastructure, and then we got Sigma on top to give me all my spicy reports that I check each day.

Speaker B: I love this. I want to. So, uh, I'm glad that I got to play along with the, uh, rep your stack. It was fun. But I also want to know, is there anything on your finance tool wish list? I already said Mosaic. This is not, uh. This was never going to be a pitch for getting Mosaic, but I'm curious, like, this space is just really exploding, like, uh, whether it's specialized tools or platforms. And I'm curious, is there anything that you're like, oh, man, like, that's. That's on my list of things to get in place someday.

Speaker A: I'm very intrigued by where the BI space is going, as I think FP and A and BI are merging over time to become one. Anything that can give me signals on the business faster than me having to close the bottom books is big. And then on the procurement front, we started using Tropic, and they've been great because I don't have time to negotiate every deal. And it's also information asymmetry in the sense that the vendor has done way more deals than I have with companies of X ARR size, and who needs Y number of seats? And so I can rely on their, you know, wealth of knowledge to go out and get me the best deal. So I'm so pumped about that because it's given me hours in the day back. So shout out Tropic.

Speaker B: Love it. All right, cool. I'll check them out. All right, cj, Last question. I ask everyone that comes on spoiler alert. I'm turning this into a little book, and I'm going to make it. I think I'm going to make it a physical book. I'm almost up to 50 episodes here, and I ask everyone that comes on, what is one thing you know now that you wish you knew at the start of your finance career?

Speaker A: Listen more. I would try to Blind people with my science and my numbers. And I would get silence in return. And I would often be like, I just blew their socks off. Like, I am the man. But it would really be because I just hit them with a barrage of numbers and they didn't even know how to like interact with me at that point. I was like a human robot. And I thought it was impressive. And it wasn't. That was actually putting friction on the relationship where they felt like it was a one way conversation. And what I found out is like, it's about getting into the business and asking questions, then listening. Like, uh, step one is to get out into the business, get out from behind your spreadsheet. Step two is to ask questions. Step three is to shut up and listen to what people will tell you about the business. Because you'll be a lot smarter about how things work and how your company makes money when you get input from people throughout the organization, whether that be marketing or hr. And my favorite people to talk to our product. So I would talk too much and not listen enough. And you need to collect information from people, not just give information to them.

Speaker B: I love it. Look how far you've come though, CJ. You're hosting a podcast. You're like Mr. Audience over here. You're one with the people. Like you are.

Speaker A: I'm a man.

Speaker B: You are a man of the people

Speaker A: now I'm a man of the people. You really are just trying to balance this balance sheet.

Speaker B: I love it, man. Well, thank you so much for indulging. What is my favorite question? You will get a shout out in the book that I'm very excited to put together. So I can't wait. But I will respect your time. Although I could probably chat with you for a very long time. But it was really great having you on, man. I want to turn the floor over to you. Where can people go to subscribe to all the things you're doing, to follow along, to work with you however you, uh, would like. The floor is yours whenever you'd like to promote.

Speaker A: Thank you, sir. MostlyMetrics.com, newsletter Twice a week, MostlyMetrics.com if you like business models and financial metrics and then run the numbers podcast. I interview world class CFOs and startup operators and we make finance and business fun. Go get it. Thanks for having me on, man. This has been a blast.

Speaker B: It was fun. Cj, you're, you're great at this. I highly encourage people to go listen to run the numbers. Making finance fun is no easy task. And you do it. All the things really help me, so.

Speaker A: You're too kind. Great.

Speaker B: Well, it was great having you on the Roll Forward. We'll do it again sometime. But for now, enjoy your Halloween, sir.

Speaker A: Thank you, sir. I appreciate it.

Speaker B: Thanks, cj. Uh, thank you for checking out this episode of the Roll Forward. This show is powered by Mosaic, a strategic finance platform that transforms the way business gets done. If you enjoyed what you learned in this episode, make sure to follow the Roll Forward wherever you listen to your favorite podcasts or visit Mosaic Tech Podcast to get immediate access to all of the latest episodes.