March 10 2020 - New York, NY

Growing a Finance Department - Person by Person: Michael Tannenbaum

Thomas:
Welcome back to another episode of Brex in the Black. We have Michael Tannenbaum, CFO, Brex here with us and today we're going to talk about growing a finance department person by person. Michael, take it from here.
Michael:
Thank you for having me. So I think the most important thing is the framework. A lot of what I talk about is the fact that when you're doing a startup, you can't approach it exactly the way you would if you're a CFO of a mature or at least established company. So at least a framework that I use, is to solve for what you need day one and that you don't have an understanding of or time for. So when I started at Brex, I had been the VP of Finance before at SoFi, I kind of knew how to do most of the core tasks.
Michael:
And those functions don't always have the same person, but for the first hire, they can be the same. And so staff accountants typically have some experience, ideally at a big four, meaning Ernst and Young, PWC, Deloitte or KPMG or really frankly, any good firm. Doesn't have to big four, it can be a regional firm. They have some sort of audit experience and they know what audited financials look like and what the standards are for accounting. You bring those people on and that is kind of where you typically grow from. Obviously if you yourself have an accounting background and you're not solving for that and you don't have a finance background and you need that, meaning more budgeting, planning, modeling, fundraising, sometimes he'll hire for that first. So again it's about what you have versus what you don't have and how to add.
Thomas:
And when you're hiring there, I think Brex's case was very particular. The founders as we've mentioned before, had finance background. They came from FinTech and you came on very early on. What should a founder that's more of on the technical side be looking for in their first hires?
Michael:
Yeah, I recommend looking for somebody in the beginning that has some finance background. I think that accounting is more easily outsourced then is finance. So you need to have someone who can help. Maybe it's finance and ops, maybe it's just general business, but you need to have someone who can help set up the process, who can think about the business and understand it and translate it into accounting. Translate it into a P & L and help establish how you want to perceive the business. So that person was me. But if you are a technical founder and don't have this experience, I think you do need somebody in-house.
Michael:
Doesn't need to be a CFO, doesn't need to be full time, their role, but that can help translate the business into numbers. And then you can continue to add more accounting and a finance staff. So I think earlier in a company's lifetime, you typically would hire someone known as the controller. So the controller is the person responsible for the monthly close. So I've gone and talked about monthly close in other episodes. But that's where at the end of the month you make sure that all of your accruals, all of your processes, all of your checks and reconciliations with bank accounts have happened. So you can be sure that your finances are up to date and current. And the controller typically manage that process and should really have some accounting background, whether it's undergrad degree or work experience. Ideally both.
Michael:
Later as people grow, they hire what's known as technical accountants. I've seen a lot of confusion about people not understanding what technical accountants do, but they can be very important, especially in more complicated industries with sophisticated financials, FinTech being one. And so what technical accounting does is they take accounting guidance and they research it and make sure that you're presenting your financials in accordance with guidance, and guidance changes. For example, leases have always been off balance sheet and are now coming on balance sheet. So meaning that if you have lease obligations for over 12 months, which many people do, you actually need to recognize the future value of the payments of the lease on your balance sheet and that's new. And so a technical accountant would help you figure out how to do that. And they would write a memo that would, memos are super-popular Brex as we know, write a memo explaining what guidance they look to and why we're recognizing this way.
Michael:
I've talked also previously about things like gross revenue versus net revenue and knowing a good example is Uber. A rider paying $10 for a trip, some of that goes to Uber, some of that goes to the driver. Does Uber put the full $10 on its income statement as revenue or only the 20% or so that goes to it? Deciding that and what the accounting rules say is the realm of technical accounting. So you typically bring that person on later, especially as you're starting to be audited by big four. Then more on the finance side, you tend to have roles like FP&A which is Financial Planning and Analysis. Those people will take the monthly close data from accounting and then translate it into actual versus budget performance, explain what is happening. Those people often come from investment banking backgrounds.
Michael:
So there's not too many structural differences between B2B and B2C, in the sense that people are broadly expecting, you know, ultimately some form of profitability and growth, some combination of that. I think that there for B2C, the early traction and sort of product and engagement is kind of more relevant. Whereas revenue unit economics tends to come later because there's more precedence and B2C world of people monetizing later.
Thomas:
What are some KPIs to judge a finance department by?
Michael:
So one that we do here is the number of business days for a monthly close. We do six, so within six business days into the month we have the month close and the flash prepared. And so that's one way to make sure your team is staying current. I think another KPI, I wouldn't say it's necessarily a KPI, but the quality of your audit, so getting what's known as unqualified audits or audits that don't find material weakness, is a way to know your financial control and accounting processes are working.
Michael:
I think that obviously success fundraising is a good indication of the finance department and their success they have there. And then I think the overall company understanding and fluency with the financials of the business, visibility into financials and understanding those and being able to explain them clearly to most people in the business is a way you know the finance team is doing its job.
Thomas:
So as the finance department starts scaling and you're bringing on more and more people, how do you know it's the right size?
Michael:
Yeah, this ranges across Silicon Valley. I think that you always find finance teams are working hard. I've never been at a company where the finance team is not stretched for resources and for time, especially because finance is not necessarily a group where you see immediate revenue from. And so people typically don't invest in it in the beginning. I think that the right size, the way I kind of see it is that series B finance department, which is kind of where you first have one, typically is somewhere between two and four to five people. And as you grow, at least to me, it's going to depend on from there how complicated your business is. So if you have multiple entities, if you're like Brex and you have a regulated broker dealer subsidiary, which requires its own financials, we're basically doing two.
Michael:
If you are in a business where there is FinTech and you have capital markets and lending and debt and covenants, that's all going to add increasing complexity. But I think in a core sort of B2B SAS or consumer tech business, I think four to five people, series B, thinking about adding one to two for every additional not a fundraising.
Michael:
And that's it for Brex in the Black growing a finance department person by person. Michael. Thank you.
Michael:
Thank you.
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