30 ways a CFO can create value for a recurring revenue business

When discussing value in the context of a company, it refers to the measurable worth or impact that the company generates for its stakeholders, including shareholders, customers, employees, and the broader community. It’s a broad term that encompasses the six areas that will be outlined later of Strategic leadership, FP&A, Performance measurement, Investment, Risk and Operations.

I particularly like the quote from Chris Tottman recently "get there quicker or burn less money to get there and raise more money at much higher prices with a much easier funding experience".

While scaling the business we want to delight our customers and provide a great Service (the often missed 4th letter of SaaS), but we need to be effective how we do that. The current debate is whether that needs to be a "human" or will a well taught AI "human characteristics" do? I have to say nothing beats hearing feedback from customers and enjoyed attending the Customer council. It can really reduce the risk of building products they don't want and find quick wins on what they do. We too often assume we understand the pain points but actually what the customer really values can be entirely different.

So what about recurring? To get excitement from investments you should at the early stages be looking to double and double again to get the value you want. Investors will always look to value recurring revenue at a multiple but not one off.

So a little maths:

Step 1: Define the Variables

• Previous Year's Revenue (R?) = ￡500,000
• Revenue Growth Target (RG) = 100% (targeting ￡1 million in revenue by the end of the next year)
• Churn Rate (CR) = 5% annually
• Year-End (current) = ￡1 million (with 100% growth)
• Year-End (forecast next year) = ￡2 million (with 100% growth)

Step 2: Calculate Average Monthly ARR Growth

Since revenue grew uniformly from ￡500,000 to ￡1 million throughout the year, the average ARR during the year was the midpoint between the starting and ending revenue:=750,000

Step 3: Calculate Lost Revenue Due to Churn

The churn is 5% of the average ARR, not the final ARR, because churn is spread across the entire year: =0.05×750,000=￡37,500

Step 4: Calculate Retained Revenue

Retained?Revenue=Ending?Revenue?Revenue?Lost?to?Churn=1,000,000?37,500=￡962,500

Step 5: Calculate New Customer Revenue Required

To achieve 100% growth, you need to reach ￡2 million total revenue. Since the retained revenue is ￡962,500, the amount that needs to come from new customers is:

New?Revenue?Needed=2,000,000?962,500=￡1,037,500

Step 6: Calculate the Percentage of New Customer Revenue

Percentage?of?New?Revenue=(1,037,500/2,000,000)×100=51.9%

Value:

Based on this level of growth, market conditions, intellectual property, user base, network effect, scalability the business could have increased its value to "15X" or ￡30 million.

A CFO needs to be an enabler of effective revenue growth both for existing and new customers. They also need to ask the difficult questions about what is working and what is not to ensure healthy margins are maintained.

So let's look at 30 key areas that a CFO can help create value in 6 key areas:

Strategic Leadership

1. Data-Driven Decision Making: Leverage financial data and KPIs to drive better decision-making across departments. Example: Using customer lifetime value (CLTV) metrics to refine customer acquisition strategies.
2. Revenue Growth Strategies: Partner with the CRO (Chief Revenue Officer) to optimize sales and marketing spend, ensuring better ROI on demand generation.
3. Scaling Efficiently: Ensure that operational scaling aligns with financial models, preventing overspending during growth phases.
4. SaaS Pricing Models: Support the development of pricing strategies that reflect both customer value and the company’s growth goals.
5. Cross-functional Partnerships: Work closely with product, marketing, and customer success teams to align business objectives and budgets.

Financial Planning & Analysis

1. Optimizing Cash Flow: Manage working capital by optimizing billing cycles, reducing Days Sales Outstanding (DSO), and negotiating favorable terms with vendors.
2. Forecasting & Budgeting: Provide accurate, real-time financial forecasts that account for dynamic changes in the market or sales pipeline.
3. Capital Efficiency: Ensure that capital is allocated efficiently, using metrics such as Return on Invested Capital (ROIC) and customer acquisition cost (CAC) payback period.
4. Expense Control: Monitor operational expenses rigorously, identifying areas of inefficiency and implementing cost-saving initiatives.
5. Scenario Planning: Run financial simulations to guide decision-making, particularly during periods of uncertainty (e.g., funding rounds or economic downturns).

Performance Metrics & KPIs

1. SaaS KPIs: Track essential SaaS metrics such as churn, net revenue retention (NRR), and monthly recurring revenue (MRR) to drive growth.
2. CAC vs. CLTV: Ensure that the company is acquiring customers at an efficient rate by comparing Customer Acquisition Costs (CAC) with Customer Lifetime Value (CLTV).
3. Churn Reduction: Collaborate with customer success teams to lower churn, improving retention rates and reducing revenue loss.
4. Product-Led Growth Insights: Help the organization adopt product-led growth strategies by providing financial insights into product usage and customer expansion opportunities.
5. Unit Economics: Ensure healthy unit economics to guide scalable growth, balancing revenue per customer with the costs associated with serving that customer.

Investor Relations & Funding

1. Fundraising Strategy: Lead or support fundraising efforts by presenting solid financials and a growth story that resonates with investors.
2. Capital Allocation: Optimize the allocation of raised capital towards high-ROI projects, ensuring efficient use of funds.
3. Valuation Management: Protect and grow the company’s valuation by highlighting strong financial metrics and a compelling growth narrative.
4. Investor Communication: Ensure transparency with investors by regularly sharing financial results, key milestones, and growth metrics.
5. Debt vs. Equity Financing: Strategically decide between debt and equity financing based on the company’s growth stage and market conditions.

Risk Management & Compliance

1. Regulatory Compliance: Ensure compliance with financial regulations and industry-specific standards to avoid legal and reputational risks.
2. Risk Management Framework: Develop a robust risk management framework to mitigate financial, operational, and market risks.
3. SaaS Revenue Recognition: Ensure compliance with SaaS-specific accounting standards for revenue recognition
4. Cybersecurity & Data Privacy: Collaborate with IT to ensure that the company's financial and customer data are secure, safeguarding against breaches.
5. Exit Strategy Planning: Develop financial models for potential M&A or IPO scenarios, ensuring that exit strategies maximize shareholder value.

Operational Efficiency & Process Optimization

1. Tech Stack Investment: Lead initiatives to streamline the company’s tech stack, ensuring that investments in tools like ERP or CRM systems provide a strong ROI.
2. Automation of Finance Operations: Automate routine finance tasks (e.g., invoicing, payroll) to increase efficiency and reduce errors.
3. Expense Management Platforms: Invest in platforms to improve transparency and control over expenses, reducing unnecessary spend.
4. Outsourcing Non-Core Functions: Consider outsourcing non-core finance functions to reduce overhead and focus on strategic tasks.
5. Cost-Effective Scaling: Work with operations to scale the business efficiently by identifying cost-saving opportunities without sacrificing quality.

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You may not need me as a CFO now but lets start the conversation. I am looking to continue to build long term relationships. I have worked with CEO's and CFO's multiple times. I love the changes and potential disruption that technology can bring.

You can reach me via

Website: ?Empower Your Tech Business | London (cfovalue.uk)

LinkedIn: Robert (Rob) Tearle | LinkedIn

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Email: [email protected]