There’s a tension inherent to the CFO role to which few can relate. The CFO must, on the one hand, be the naysayer; in managing the bottom line, he has to be pragmatic, skeptical and ever-cognizant of the worst case scenario. At the same time, he has to put on a happy face and join with the CEO in nurturing a positive corporate culture and motivating the team toward ambitious execution. This is especially true in early-stage companies, where young teams are built on a foundation of inspiration and shoot-for-the-moon energy. CFOs often find themselves at the nexus of these powerful competing tensions – increase burn vs. manage for cash flow, hire specialists vs. staying lean, etc. – resulting in a special brand of CFO loneliness. (Queue violin music.)
This tension was one of the themes that came up at our recent CFO dinner, which featured NYC Tech CFO extraordinaire Tim Bixby. Tim led two successful tech IPOs, first at LivePerson in 2000 and then at Shutterstock in 2012. Needless to say, he’s got a boatload of experience under his belt, and he dropped some serious knowledge – ranging from budgeting to forecasting to modeling – on a captive audience of 18 CFOs from the city’s leading startups.
On the notion of CFO loneliness, Tim suggested that the best way to mitigate this condition is by bringing other senior members of the team into the inner sanctum of your numbers. Create some transparency, let them see the big picture and help them understand the interdependencies of various functions. Tim pointed to hiring decisions as one common battlefield where tensions arise between CFOs and their C-suitemates, and suggested the revenue-per-employee model as a straightforward way of alleviating those competing interests.
Commonly reserved for larger or public companies, revenue per employee (RPE) ratios are useful for comparing the overall health and efficiency of companies – usually those within the same industry and at similar stages. The numbers help to zero in on on the ROI of each hire, helping management control against recklessly adding headcount in a way that doesn’t drive the core metrics of the business.
Smaller companies typically do not think in these terms. They are often pre-revenue and hiring rapidly to fill key positions – factors that make a quick glance at a revenue-per-employee model less meaningful. However, Tim suggests that these are useful figures even for nascent companies in hyper-growth mode, as they can to create a shared framework for making decisions about if/when to bring on new team members. The result is that the CFO is no longer the Grinchy naysayer, but rather the superhero who can both manage the bottom line and be supportive of a culture of growth.
At Shutterstock, Tim told us, he always had a good view of revenue per employee and how it had tracked over time. Having this number in his back pocket made it easier for him to respond to hiring managers with a simple, positively phrased question: “I want to support you in hiring this individual. Let’s look at how/if he/she might add at least $X to the P&L in the next year.” This approach makes it easy to either justify the hire or shut down the request; it helps hiring managers focus on the right hires and more clearly articulate their hiring requests.
In using this model for early-stage, pre-revenue companies, it’s important to note that many won’t have a precise metric in place just yet, and that metric will often be in flux in the early days. But the specific number itself is less significant than having the framework in place, which then gives you a baseline to try to improve upon. If you’re adding employees, you want to make sure that your revenue per employee increases over time. If you continue to hire and you haven’t moved the needle on revenue, that’s a sure sign that you’re making unnecessary hires. And at that point, the CFO will be able to more comfortably push back against hiring requests.
Being the financial watchdog is a heavy burden, especially when it comes to balancing competing tensions of pragmatism and optimism within an enthusiastic startup culture. Tim’s approach to hiring – while seemingly nonintuitive for early-stage companies – offers a diplomatic, data-driven approach that takes some of the Negative Nancy pressure off of CFOs and allows everyone to look at the numbers from a more objective, rational standpoint.