Thoughts on Preparing for a Board Meeting
How to tell the financial story effectively
“The purpose of a storyteller is not to tell you how to think, but to give you questions to think upon.” — Brandon Sanderson (science fiction and fantasy writer.)
‘Tis the season’. For Board meetings. Most private companies hold their Board meetings 4 to 6 weeks after the end of a calendar quarter.
I am currently helping four clients create slides and back-up materials for their upcoming Board meetings in early May.
In each case I have been thinking about how to tell the financial and operational story of the business In a manner that is informative and thought-provoking for the Leadership Team, for investors, and for all employees (when some of these slides are shared in the next All Hands meetings).
Board meeting preparation is stressful and time consuming, but also helpful. Helpful because it acts as a forcing function to take stock of the business, looking both backward and forward.
How the Finance Leader Can Prepare
When pulling together the slides for a Board deck and creating the analysis to go in the slides, I think about the following:
Executive Summary: A one to two page overview on the state of the business. This should be both quantitative and qualitative.
Write this last. Use learnings from doing the other preparation to excerpt the key nuggets.
Be sure to highlight both challenges (what went poorly) and wins (what went well). Investors expect all their businesses to face some struggles, and thus want adversity to be discussed openly.
Businesses are a collection of people. Be sure to present team changes, as well as areas of underperformance and missing capabilities in the organization.
Finally the macro environment obviously has an impact on the business. And perhaps more so in this past quarter than many other recent quarters. Highlight what you are seeing in feedback from customers and prospects, vendors, the recruiting pipeline, etc.
Cash Situation. Cash is ‘king’ again. In most companies that are burning cash or have meaningful debt, cash and cash generation is the most important thing right now. Include the following:
How much cash is there in the bank(s)?
What is the average monthly burn rate (for the past quarter and previous quarters)? Which direction is this trending in?
How many months of runway does the business have? What does that imply for when you need to be back out in the market raising cash?
Treasury strategy. This would likely not have mattered a great deal until the SVB failure. Coupled with materially higher interest rates, investors want to know about diversification / risk management, availability of funds, and yields on cash.
Efficiency Metrics. While businesses must grow to create value, efficient growth or growth of cash flow is more important than simply revenue growth. Efficiency metrics that I like to track and report on include:
Burn multiple. It speaks to the overall efficiency of the business.
Gross margin. What is the cost of serving an additional dollar of revenue? Cost of goods sold should be fully loaded to reflect all the costs of serving customers and delivering the product / service. Higher gross margins allow for more funds to be spent on sales and marketing or research and development. If there are two very different classes of revenue (i.e. software and hardware or software and services), report gross margins separately and understand their mix.
ARR / FTE. Battery has been promoting this as the most tangible metric that is actionable by employees. I agree that a metric related to people costs make sense, as headcount related spend is typically over 70% of a total SaaS company spend. As companies move towards more 1099s/fractional workers and outsource work to foreign locales, I wonder how best to normalize this metric and compare it across businesses.
CAC Payback and Magic Ratio. I use fully loaded CAC payback (in gross margin months) to understand how quickly the company earns back its investment in a new customer. Magic ratio is my way of understanding the efficiency of the total revenue function (new logos, upsells/expansions, and renewals.)
Quality of Revenue. This is about the stickiness and concentration of revenues.
Retention metrics — logo, gross, and net — are really important. GAAP accounting standards make it hard to measure retention well, due to the timing of when items like refunds, credit memos, delayed renewals etc. hit the financials. So some effort should be made to track this separately, even though it can be time consuming and hard to automate perfectly.
Concentration. How many customers are more than 10% of revenue (the public company threshold for disclosure)? Businesses with high revenue concentration (big ACVs and small #s of logos) can be very successful, but they are harder to forecast. Early in their life small changes in the timing or size of new logos makes a huge impact.
Growth. We’ve all probably heard the phrase, “you can’t shrink your way to greatness.” It is a quote by Seth Godin and the subtitle of a book by Tom Peters. So you have to report on both overall growth and the drivers of growth.
How much growth came from new logos vs. organic sources (expansion and upsells)?
How did price increase influence growth? What about more quantity (expansions of seats / usage) within existing customers?
Are there additional products / modules that existing customers bought?
Is there a product mix issue that is relevant? Do you sell a high margin product (software, data, content) and a low margin product (e.g. hardware, services)? In these situations the mix change can mean a big difference between revenue growth and COGS growth.
Performance vs. Budget. While it matters how the organization performed compared to the same period in the prior year, I believe that performance vs. budget is far more meaningful. Be able to answer these questions.
What did we expect to happen? And what actually happened?
Why were their positive or negative surprises?
Are these one-time (non-recurring), temporary (timing) or permanent changes?
What does the performance against the budget for this quarter imply for the rest of the year?
Should we make any changes in our spending or investment patterns based on what we have learned so far?
Leading Indicators. All financial metrics are lagging indicators. They tell us what has happened and not what will likely happen. Investors care about the future because future performance is what impacts the value of the business. So every Board presentation must include leading indicators. Some are just the CEO’s view of the business climate. And others will be created jointly by the finance leadership with the revenue, product and people operations leadership. Some things to consider in your preparation include:
Pipeline. Both weighted and unweighted. Split be segments if that is relevant for your business.
Traffic trends for freemium or B2C businesses. Visitors, trials etc.
Historical data on conversion rates and sales cycle lengths.
Usage metrics for all customers — both absolute level of usage, frequency of usages, and breadth of usage across the organization.
Customer health scores and how those have changed over time.
Employee engagement scores and the trend here.
Overall turnover. Although most companies like to split between voluntary (employee left) and involuntary (termination), I prefer looking at the total turnover rate. It speaks to how good a job the company is doing at hiring and retaining the ‘right’ talent.
Great finance leaders are excellent storytellers. Board meetings, investor presentations, and All-Hands meetings are all times for storytelling. The story told by the finance leader needs to incorporate both non-fiction elements (about the past and current situation) and some fictional elements (about the plausible future direction).
The preparation you do for a Board meeting should ideally lead to you (with the CEO) using the data to inform where to make changes and where to stay the course. Great businesses are built through conscious leadership. Board meetings are a good way to resurface the important drivers of business success, and then consciously use the deep dive into financial data and metrics to reaffirm or change course.