I hoped you enjoyed the first edition of this newsletter on Uncertainty & a post-fixed costs economy. Today I want to talk about something very pragmatic: finance hacking.
I recently stumbled upon this masterpiece on the future of CFOs by Seema Amble & Angela Strange, partners at Andreessen Horowitz, from whom I’m going to unapologetically borrow the following chart:
Compared to my own early experiences of the CFO position, this painfully hit home. A lot of the job is tedious and consists of menial tasks: initiating wires, checking account balances, claiming payments, reconciling invoices. Not only are these highly unpleasant, they are also time-consuming and divert you from focusing on high value-add, strategic tasks.
Then I remembered this tweet by Lambda School founder Caleb Hicks, and figured if it was true for technical stacks, then it definitely is also true for finance stacks. And so I went on to build my own finance stack on AirTable.
And this is what finance hacking is about.
Finance hacking - what the hell?
You’ve probably already read or seen articles and events sponsored by audit firms with dramatic titles of “Hacking Finance”. These often tackle topics such as the blockchain revolution in finance, the latest developments in the FinTech space, or other issues impacting financial services as a whole. While those topics are of course themes of interest for me with Chasing Paper, that’s not what I want to talk about today.
For me, Finance Hacking should be to CFOs what Growth Hacking is to marketers: A custom-built automated system that boosts their company.
Let’s tease out that parallel: growth hacking is not necessarily better than traditional marketing. Yet it is adapted to what startups are: in order to grow on a limited budget, you need less saturated acquisition channels and unorthodox methods. It is not about acting like a magician with a bag of tricks; it is about building an automated system that acquires new customers, retains them and sustains the company’s growth.
This is precisely what I think is lacking in the finance space: A discipline that uses custom-built tools to create an infrastructure or system adapted to the specific financial needs of the business. ERP solutions are too heavy for fledgling businesses and spreadsheets are often too messy to keep track of all that is going on. Finance hacking offers a third way, leveraging great products to build the system your business requires.
This means finding the combination of tools and setting them up properly given the dynamics of your business. It is:
(i) an investment of time and resources into semi-scalable automation. It’s only semi-scalable because upon reaching an enterprise level of maturity, the intricacies of your finance operations will require external support and guidance provided by ERP suppliers. However, I’m convinced that you can use basic tools for a very long time before needing that kind of heavy machinery.
(ii) making you a de facto product person. I highly recommend spending a bit of time reading about no-code tools before diving into finance hacking.
(iii) departing from textbook finance and accounting and getting creative. That probably means you should have either solid experience or great external advice (from lawyers, accountants or auditors) before engaging in it. Learn the rules, master the rules, bend the rules.
Before giving examples from my own experience at The Family, let me address two caveats:
This is not about FinTech products or reinventing the wheel. Amazing software companies are already building great products to assist with lots of financial duties (Spendesk for expenses, Payfit for payroll automation, Qonto for banking, Alan for insurance, Carta for cap table, for instance). This is more about combining these powerful tools and tying them together through a custom infrastructure that lets you focus on what’s important.
Again, this is aimed at small companies. I can’t pretend to know anything about running a business with thousands of employees, and I’m sure that by then finance operations require a bit more than no-code options.
Finance Hacking in action
As I mentioned, we have built a finance stack at The Family using AirTable, Notion and some spreadsheets (because sometimes they work just fine). It is important to remember that everything has to be tailored to the actual business model. So let’s dive quickly under the hood of The Family:
Our main activity is dealmaking. We take shares in companies in exchange for advice and leverage. It is not liquid. We are self-financing through other activities (content, events, sponsoring, investment opportunities), many of which are oftentimes non-recurring.
The group is composed of several entities: some are operational, some are holding companies.
We are working with multiple currencies in different countries.
Each entity has one or several bank accounts with different banking providers.
Each team member is free to interact with suppliers / customers as they see fit as part of their daily job.
Translating that into finance operations, it means we’re interacting with multiple counterparties (clients/suppliers), through various group entities sometimes based in different countries or paying with different currencies, engaging in diverse business activities. It is complex.
So step by step, I built an infrastructure to keep track of it all. Here’s what it looks like.
Payables: tracks for each supplier past and present invoices, total owed, through which entities, invoice numbers, etc. This is semi-automated (invoice information is manually entered and automatically categorized).
Receivables: tracks for each client pending and past payments, through which entities, delays, etc. This is automated (invoices are automatically fetched from the invoice generator, payments are tracked through bank transactions or can be manually triggered to improve speed).
Counterparty: a complete CRM of all clients & suppliers, automatically fetching what is owed/due and through which entity. Data only needs to be entered once.
Invoice Generator: allows every team member to create invoices needed for their daily operations and send them to their customers. It automatically fetches client data, bank account numbers, currencies, etc.
Owners: list of all team members. All counterparties have one main owner, who receives automated Slack notifications each time something happens for the counterparty involved. This also allows us to view headcount by entity.
Bank transactions: comprehensive list of all cash flows, in, out or within the group, tied to the right entities, counterparties, bank accounts, currencies and buckets. This allows for very detailed cash flow analysis every month. For instance, we could instantly know the change in our travel spend between Feb and Mar 2020 (-100%, lol) or what business line brought in more cash for a given month. This is manual (and painful), but the ultimate goal is to automate it through banking APIs, which will require an upgrade of our banking infrastructure.
Structures: list of our group entities, with all necessary information (country, tax ID, up to date headcount, etc.).
Bank accounts: list of our bank accounts, with all necessary information (currency, IBAN, bank, address, etc.). This is used to feed Invoices. My goal is to also havea live cash position there through banking APIs at some point.
Buckets: list of all earning/spending categories we have (travel, legal, team, SaaS, etc.). This is automatically suggested based on the supplier and manually validated.
And since I assume you’d rather see it in action, I made a video. Of course, since I made a copy and deleted all the specific data, automations, etc. it’s quite underwhelming... but hey, it’s done, it might as well serve and give you a sense of how this whole thing works.
This is all still a work-in-progress, of course. The main thing to remember here is that your finance hacking should be specific to your own company and business needs. Tailor it using the right tools, and you will become an augmented CFO.
The Augmented CFO
Why go through the pain of building your own infrastructure if a mix of off-the-shelf products, accountants and elbow grease will get you through the day? I believe there are several benefits.
Value add & mental health: By going from menial tasks to more automated tasks, you will be able to focus on things that bring more value to your company and that require strategic thinking: things like financing rounds, non-dilutive financing, financial engineering (our next edition will focus on payables and how you can get creative with them), cash pooling or other cash facilities, etc. And a big plus, you will have much better mental health by avoiding tedious daily tasks with no value add whatsoever, like invoice reconciliation.
Speed and outlook: Finance hacking allows you to move from a slow pace to a fast pace. Once in place, your monthly cash-flow analysis routine can be a walk in the park. Heck, you could even automate financial reports (something I’m working on). It also facilitates work with external parties such as your lawyers or accountants.
Another great thing is that it allows you to shift from the backward-looking, accounting perspective (working on last month’s data) to the forward-looking forecasting perspective, since all the information you need is there instantly, or at least daily.
Financial design: Implementing finance hacking allows you to reduce the distance from design to real-life application of new financial policies. For instance, it took us 24 hours to be ready to manually review all payments when the Covid-19 crisis hit.
From cost center to profit center: This is directly related to the value add comment above. Finance operations, however important, are usually support, non-core business, they don’t bring in additional revenue. So if you manage to build an infrastructure for yourself that is swift and automated, at minimum you are improving ROI on the finance business unit, on average you’ll probably have more time to pilot and forecast company operations, and in best case scenarios you’ll have multiple routes to increasing company revenue (through content, events, advisory, whitelabelling ... ).
It was important for me to introduce Finance hacking, as it will be a regular theme of this newsletter: I want to share hacks, tips or tricks and hope you will enjoy sharing yours too. Let me know what you think or would like to hear about more.
Let’s make this thing participative: reply or comment this article with your best finance hacks: tools that you use, automations that saved your life, etc. I’m super eager to hear about it!
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Before I leave, as a music & arts lover, and because finance doesn’t have to always be dull and corporate, I’d like to end each of these editions with a pop culture reference about cash or finance. For this first one, a song I had on replay this whole week:
“You know me, I only think about funds (...) I just wanna make the mu la la (...) I ain’t got time for a honey, but I got time for this money” 💸