CFO 4.0 - The Future of Finance

234. The CFO as a Storyteller: Making KPIs Count with Matt Topham

• Hannah Munro • Episode 234

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In this episode of CFO 4.0, Hannah Munro is joined by Matt Topham, Director of Practical CFO, to explore what makes a modern CFO truly effective—from KPIs to strategic decision-making.

Key topics covered:

  • Matt’s unconventional journey to CFO
  • The realities of working as a fractional CFO and identifying clients ready for change
  • How to use KPIs like productivity, overhead rate, and LTV to CAC to guide decisions
  • Why speed and imperfection often beat precision in fast-moving environments
  • Managing cash, growth, and risk
  • Practical tips for new CFOs on building meaningful KPIs and driving strategic clarity

Links mentioned: 

Hannah Munro:

Hello everybody and welcome to this episode of CFO 4.0. My name is Hannah Munro and today I'm talking with Matt Topham, who is the Director of Practical CFO Limited. So welcome, matt, fantastic to have you on the show.

Matt Topham:

Thanks for having us, hannah, good to meet you.

Hannah Munro:

So just tell us a little bit about what you know about your history and how you got into the role of CFO.

Matt Topham:

I think I've got a slightly unusual history, if I'm going to make sense, in that I had no idea what I was meant to do in school. I didn't do anything, and so I went off and did a load of stuff that included working for myself really early on, and essentially that's where I worked out how somebody might make some money and how somebody would run a business, and then later I ended up studying and qualifying and going into practice and all of those things, but it all comes down to those things that I learned when I started.

Matt Topham:

It's about how do you try and help somebody do something, how do you try and sell something, how do you make some money out of it? How do you get paid the money and thing? How do you make some money out of it? How do you get, how do you get paid the money? And, essentially, those really simple lessons that I learned early on are the ones I'm still trying to work out now, and those are the. Those are the things we're trying to help clients with. Where do we make money from? How?

Matt Topham:

do we make it better? How do we take the pain away? How do you make it simpler?

Hannah Munro:

and obviously, um, you guys work as a fractional CFOs. You work with businesses of varying different sizes. What do you think is the biggest challenge with being a fractional CFO? You work with businesses of varying different sizes. What do you think is the biggest challenge with being a fractional CFO in today's market?

Matt Topham:

I think the biggest problem is actually finding clients who care enough. It sounds terrible. I think people really misunderstand what a CFO does, really understand what an accountant will do for them, what a finance department will do for them.

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And therefore the expectations are very mixed up.

Matt Topham:

So I think the big challenge for us is trying to find clients who actually are trying to answer a question, who are curious, who are trying to improve, because actually, if you want me just to do the numbers and send a set of annual accounts, I'm not right person, definitely not right.

Matt Topham:

I mean that might be a byproduct of the date of the day job, but actually trying to sort out this afternoon's problem and I think one of the really sexy things about being a cfo is actually it's a uh, it's a discovery each and every day, right? So you wake up in the morning not knowing the questions people are going to throw at you and work out, you know, trying to work out how to work out what the answers are, and those might be tools and tricks that you've learned elsewhere, but it might be something completely blue sky and you have to go and sort it out and work it out. So actually it's quite interesting, but you've got to work with the sorts of people who have those problems, because if somebody has a very stable business, that's doing the same thing. You don't need strategy and you don't need insight and you don't need amazing differences because actually you're doing the same thing does that make sense?

Hannah Munro:

it does, and that's interesting, isn't it? Because it's it's less about do they need those strategy and those insights, but almost do they have the want to grow the business.

Matt Topham:

You've got to have people that want to go on that journey with you the want is really, really interesting thing, and I think sometimes we uh we work very, very well with businesses that are that are high growth and my history has always been high growth and sunday times tech track and all that sort of stuff.

Matt Topham:

So there's this on the one hand, businesses who are trying to do something, who are trying to grow faster, who are trying to make it faster and leaner and smarter, but actually all all those attributes of having lots of opportunities and not having any money, those look like turnaround as well. So actually, if you've got a business that's under pressure, a business that's trying to get out of a terrible event or in a cycle of pressure, those are actually the same skills that we get with the growth stuff. It's right who can I pay tomorrow? Who can I? What can I do today in order to make it better? What do I stop doing? It's about speed of decision making. It's also there's a in a nice way, there's a lack of accuracy as well, right. So I think sometimes people are are locked into. Well, I can't make that decision, so I don't have perfect information no but you probably know enough.

Matt Topham:

And there's this whole bit you know this, this whole finance thing we struggle with, where you can have perfect information but it's almost useless by the time you get it right. Or you can have good, impactful, early information. That's going to be imperfect but you can do something about it. And if you, if you're a state of mind where actually you can take an opportunity, you can take enough of of information and you can have enough structure and enough inkling, I guess that the information is good then actually you can make decisions much, much, much, much smarter. I was going to say actually, sometimes the smartest thing is not to make decision right. That's the hardest one in the world.

Hannah Munro:

But well, I I find that really interesting because, um, and we're going to explore some of that, but in terms of like, should we make decisions? What decisions should we make? And I think that's the whole conversation itself. But I want to jump on your one of the points there, because I find that fascinating, because we talk a lot in accounting generally about materiality, but I don't find people applying it to decision making. They will literally wait till they've got the penny at the end of you know that everything's given to them before they move forwards. And actually that's a real key point, isn't it? Speed and agility, and it's so easy to kind of get bogged down and to avoid making decisions because you don't have the level of detail that you want to make that decision really safe. So how do you approach that, both with you know, maybe an existing accounting team that you're working alongside, or with owners? Is that a conversation that you have with them, or is it almost something that you've had to get over yourself personally?

Matt Topham:

It is definitely something I've had to get over personally, and I remember sitting down 20 years ago in practice and doing somebody's books and somebody saying you remember sitting down in in no, 20 years ago in practice and and doing somebody's books and somebody, somebody saying you're getting lost in the detail, right, and I was definitely that person. I couldn't see what was going on. I couldn't quite see, you know, couldn't quite see where I went from there. I think the tricky bit here is some of this is actually just good old-fashioned experience, right, and some of the businesses we've looked after, or some of the businesses I've looked after as an employee, went through some terrible times. Generally, I would like to point out there were external things that were done to us, but actually they're remarkable learning experiences. When stuff's going wrong, do you know what? It's a fantastic learning experience.

Matt Topham:

And now, years later, I look back on that stuff and say, actually do you know what? It's a fantastic learning experience. And now, years later, I look back on that stuff and say actually do you know? Anything that I made is probably not as bad as some of those situations.

Matt Topham:

So on the one hand, there's a calmness and there's a lack of being phased by stuff. Somebody brings you something and you go. I can see why you think the end of the world is nigh, but actually we've got a bit of time just to take a breath and just sort ourselves out and that's learned. I don't think you can necessarily be trained into that in a short period of time. I was talking to a competitive firm a couple of months ago who wanted to acquire the model of how to grow CFOs on a rapid basis. I just don't think it's necessarily possible.

Matt Topham:

I think you can be a really good accountant on a rapid basis, but that bulk of experience, those tools and tricks and tips that you learn from different places, the mistakes you make in different places that's what gives you the spurs in order to try and make a decision. So on the one hand, that's about personality and it's about experience, but I think there is something that can be learned and I think there is an approach that can be learned, because actually I think it's about experience, but I think there is something that can be learned. I think there is an approach that can be learned, because actually I think it's kpi led right.

Matt Topham:

because I think if you're starting to look at the big picture stuff and if you're starting to look at the themes, the story within the business, I think the cfo actually is the chief storyteller, because actually we're trying to understand what's going on the business, whether that's in finance or elsewhere, and trying to pull that together into some sort of cohesive story about why we're fulfilling strategy or why we're pushing the same direction.

Matt Topham:

And if you're trying to wait until you get the last decimal space to calculate a KPI, actually it's irrelevant, isn't it? Because aren't KPIs, by definition, broad brush? You know they are impressionable, they give you a view of where you're going as opposed to be targeted into detail. So I think you know it is also interesting that I see lots of people who are unable to process a kpi, unable to pull them together, particularly about sales and marketing kpis, because actually I just don't know the answer to that one function, not appreciating that actually it's probably okay to take a guess at it in the first instance and come back and colour in the detail, because if you wait for it all to be perfect, back to your point.

Matt Topham:

Actually, you're never going to make a decision.

Hannah Munro:

So let's explore that, so you know. You're going into an organisation that perhaps either doesn't have fully formed KPIs or is in the early stages. How do you approach figuring out what KPIs are important for them and what information you need to have access to to start making good decisions?

Matt Topham:

So I think, in the first instance, the three most important KPIs that we worry about is, first of all, revenue volume. We actually need enough sales, and so the growth of sales, or the volume of sales, is always relevant. And that's not a very hard thing to look at. There should be even basic invoicing that then says this is what the first number looks like, and actually the next one I'm most interested in and it's a really, really high level one, but it's one of the most powerful is productivity and simply dividing the gross profit number by the cost of the people in the business. You don't need a long calculator, you don't need a big spreadsheet to work that out, and actually it's one of the most powerful, and it gives you an inkling as to where the organization is, and there are nuances. You can do other things with it. So now I come back to. Our history is running things like software businesses, and I would argue that anybody running a software business is actually running two separate businesses.

Matt Topham:

They're running an operational business that is about servicing clients today, and then they've got a whole dev team that is about building a product for tomorrow.

Matt Topham:

So when we do the numbers, we disaggregate those payroll numbers and I would have an operational number that then says revenue, gross profit, all the rest of it. But divide that gross profit number by the operational payroll number, gives you a number and it gives you an idea of the maturity of the business. Now it would also give you an overall view on where the business is, particularly against the benchmarks. If you use the entire payroll number, right, but if you're, if you're, if some of the the business is about investment and discretionary spend for tomorrow, just take it out right, because it's a complicating factor and what we quite often find is that when we come, when we turn up, we start to start to look at that, that that as a kpi, the productivity numbers are obviously tend to be reasonably poor. By benchmark they almost look like consultancy businesses, despite investing significant sums into product. Hang on a minute is to run faster and be smarter and to be able to get greater throughput, get more revenue through at lower cost.

Matt Topham:

How can you look like a consultancy business if you're investing in technology and at that really basic level that starts to pull apart the maturity of the business, it starts to pull apart some of the systems and processes and it starts to pull apart the product strategy, which is a really powerful thing to have done for a really high-level KPI right. And that's a 10-minute conversation with somebody.

Hannah Munro:

You mentioned benchmarking as well, so how do you, like you mentioned, what does a SaaS company look like versus a consultancy business? Can you take us through what typical benchmarks are and what we should be thinking about there?

Matt Topham:

Yeah. So I think from a really really high-level perspective, I go back to productivity and I go back to overhead rate. So they are really really basic KPIs and very, very easily benchmarkable from anybody else. So you go and look at the accounts If I went to go look at a small company as a benchmark you can probably work out what you think revenue is and what you think operating cost is and what payroll is from the notes in the accounts as opposed to the numbers.

Matt Topham:

So you can do this, even when it's a relatively small benchmark, you build up that um, that, that um, that, that little panel of information. But a high level productivity and an overhead rate probably give you a really, really powerful insight as to what somebody's doing even down to things like average salary rates.

Matt Topham:

If somebody's a bit bigger, they're probably publishing what their overall salary bill is as well as the number of employees. You can start to gauge how senior the group of employees are. That's a really useful one. It's a little bit difficult. It's a little bit harder, rather, to see beyond some of those numbers, some really hard KPIs. And so this is where actually being fractional a bit or having worked in practice for a bit is probably useful, because then you see the desperate detail of lots and lots of clients. So when I come down, when I sit down to look at some high level KPIs, I know what benchmarks are, because I'm working with those people every day.

Matt Topham:

And then, of course, it's very useful. I get my calculator out and I say well, your productivity rate is 1.7 times, for example. Um, actually, we see this, you see, routinely. See, in the market, 1.5 is your industry. You're doing fantastically well, well done. Let's move on and think about something else, because that's a win. We're actually. Look, we see, we see project businesses routinely, um, uh, with, with productivity rates of 1.5 times, so that's gross profit of 150 pounds for every 100 pounds worth of payroll cost. We see, um, 150, 1.5 times, that's gross profit of £150 for every £100 worth of payroll cost. We see 1.5 times being routine, is the number that you're pulling back, but you're a software business and you should probably be four times. What's going on? What's your average salary rate or what's your processes look like?

Matt Topham:

Or actually, are we desperately immature and we're still inventing things for the first time and that's okay too, right, but you just need to be on the road somewhere and move and make some incremental improvements into, into being better and best. Does that?

Hannah Munro:

make so absolute sense, and I think it's a really interesting because productivity isn't a KPI that you hear a lot about. Right, it's something and we obviously we build a lot of dashboards for varying companies of all different sizes, and that's not something that we commonly get asked, but it's a great one. So what other KPIs should people be thinking about at that top level to kind of figure out where to dig deeper?

Matt Topham:

Well, I think there's a couple of interesting bits here, so I think some of this is about the KPIs you should use, but also the KPIs that are dangerous to use.

Matt Topham:

So, in agency land. As an example, a typical KPI is revenue per head and everybody gets it and it's really easy to calculate and it's brilliant. But actually, if you think about the unintended and it's any consequence is that you are disinclined to hire low cost people, no, inexpensive people, because it disproportionately affects your number, and you only hire expensive people because actually expensive people tend to be, have have high billable rates and an agency that increases revenue but it doesn't increase profit. So what are you trying to do? I think it's a really interesting one. So if you use productivity, then or gross value added, using the technical name as we use it actually you can start to benchmark that agency spend or that agency headcount more rationally.

Matt Topham:

And I think one of the other interesting things that productivity starts to do, if you use it at this level, finance stops trying to tell people who to hire. You can say to operations actually I know you need a budget because we've grown and we're getting to the age of our productivity rate. We're becoming too productive and that is definitely a thing. Right, we're becoming too productive. You better start hiring people, you better start thinking about it, but you don't. Often I've seen finance say oh, actually we better go and hire X, y and Z, because we're becoming we're short on headcount. I think look at this from a productivity perspective. You give a budget to somebody who's the expert, you let them get on with it. Because, actually because, actually they're the expert, it's a really useful one.

Matt Topham:

We do see the overhead rate being quite interesting, and so we have a slightly different oh, definitely a thing. But if you think about this right, we all focus on the lack of productivity where we've got too many people or they're too expensive and they're not creating enough. But there might be technical reasons for that, because we're trying to do something for the first time, or we're trying to build a pipeline or a process or a structure, or things or regulations are changing around us. I think the converse of this is that so often, particularly in an early startup business, everybody runs around being super productive and super and doesn't do lots of things. That never happened.

Matt Topham:

Right administration doesn't happen, and so you and so you end up going up the productivity curve very, very quickly.

Matt Topham:

But it's unsustainable and what usually happens is you end up super productive.

Matt Topham:

Then something terrible happens, like there's a VAT inspection and it turns out nobody's done the VAT properly, or there's a compliance thing, or HR falls apart or something, and actually the organization starts to panic and it hires a load of people to fix the thing and you end up going up this productivity curve in some sort of wiggly line where you end up super productive, unproductive, super productive, unproductive, be a lot easier to be ahead of that line and go.

Matt Topham:

Do you know what? I think we're coming becoming too productive. Something's going to happen unless we spot what's going on. Let's work out what it is and that's higher in advance, and then what happens is that you end up on the upper side of the of the productivity line and you just maintain it and if you come back to, if you are going to value a business and this is most of most of what we want to try and do for most of our clients, who are how we're raising investment and growing you wouldn't want a wiggly productivity line where you go through boom and bust. You'd actually want a nice, smooth, predictable line.

Matt Topham:

So simply by getting that bit, right improves your valuation because you're more predictable, you're more scalable, you're looking more organised.

Hannah Munro:

So you mentioned earlier the concept of overhead rate. Tell us about that as a KPI.

Matt Topham:

So we again like to keep it really, really simple, and I think the bit that's controversial is that we tend to look at all of the non-staff overheads and divide that number by the payroll number. Most people would probably look at an overhead rate compared to revenue, for example. We don't think that's necessarily relevant, not least that revenue is an accounting concept and payroll isn't right. So what we tend to find and this is based on having done it for years is that expensive payroll require expensive overheads and they're always in proportion. So if you have less expensive people, they have less expensive offices and less expensive expectations. If you have really expensive people, they have expensive offices.

Matt Topham:

Like I tell you, the answer is overhead rate is generally about 50% of the payroll and if that number is substantially lower, then actually you have to start to worry about the scalability of that organization.

Matt Topham:

So typically in a startup land, for example, you might end up with people scrimping in the garage scenario where people are just making it as they're going along on a couple of bits of wood for desks right, Great, they might have an overhead rate of 15% of payroll, for example, but they can't scale at that.

Matt Topham:

You're going to have to raise some money in order to go and do something. So actually it's a useful signal. It's a really really quick KPI to have a quick look at, but quickly you get to the bottom of where's the operational maturity of that organization. And one of the interesting things that happened post-COVID is that overhead rate fell from about 50% to about 35%. But what we found is that whilst people have an overhead rate saving, actually they have poorer productivity because the chances are people working from home and, um, they are having to get, have team days and pick people out of the office in order to get together in order to build the community, which is important and and no, I'm not saying it's not, I'm saying it's actually that's more expensive than actually having an office.

Matt Topham:

So there's an interesting thing that's going on there that the overhead rate starts to signal the ability of an organization to scale, to hire more people, to grow faster. Or it might be a signal that the business is under pressure, because it tends to be the first thing that people cut let's get rid of the offices. Let's not do that thing. Let's not travel. Let's not do that thing. Let's not travel. Let's not do that. No, we have spend loss in sales and marketing, for example. So if you have an organization that is desperately struggling, you will probably find the overhead rate is very, very low, which is a warning signal to how much the organization is struggling.

Hannah Munro:

Does that sort of yeah. So let's just explore that, because I can imagine that that rate would vary depending on the industry, because you have more people-based organizations.

Matt Topham:

That's the weird thing, that's interesting it is because you always end up. So I think the interesting bit is, you might end up with a technology business that ends up with relatively few people for the operation, but actually it needs smaller offices then and it needs a smaller T&E bill than it's. You know, all of that stuff is within scale of the people, and so and I also come back to, if you've got expensive people, they have nicer offices. So whenever we've done the number, it's remarkable, it's within scale, and, apart from that drop of post-CO-covid drop, it's been remarkably consistent. So I think it's an interesting thing.

Matt Topham:

The only thing I would do, though, if it's a b2c business, I would exclude sales, exclude sales and marketing from the open, and so by b2c I say actually many b2b sales businesses have a b2c looking sales operation. If that's the case, exclude that from the number, because it's not, it's not part of the genuine, the genuine overhead rate, and then, actually, the benchmark is not 50, is 45, but I tell you that's, that's what. That's what it looks like. It's fascinating that's fascinating.

Hannah Munro:

So even with manufacture, because I would have thought manufacturing with all the investment in that goes below a bit dark, doesn't it?

Matt Topham:

so all the machinery kit, all of that goes, goes below the line. So you know, I think there's an interesting issue there with uh, with, with, with other kpis. So you know, really, in fact, I drafted a business plan a few days ago with, so a local power generation company. Um, and actually the first time I can almost ever remember I've got a return on capital and I don't usually bother because I don't have clients who have big estates and these people have built power stations, so they've got a lot of kit, and so actually return on capital has become important for a client for the first time. That I remember for years. What tends to be more relevant are things like sales and marketing efficiency. How do I find clients? How do I win clients?

Matt Topham:

You know, ltv to CAC, I think, is a hero KPI. It almost encapsulates the entire business in one KPI. Now, okay, it doesn't, because it excludes revenue momentum and it excludes cash. But actually LTV to CAC tells you a huge amount about the organization and it also challenges strategy, which is really really interesting because it goes to the heart of OK, what's my long term value? Well, that's about the average order value. It's about my profitability. It's about my tax strategy, because there's this tax involved in the selling. It's about my stickiness and my repeat rate. Right, so everything that is in the in the top end of the organization is in the long-term value piece. And what's my customer customer acquisition cost? Well, that's about channels and it's about efficiency and it's about use of technology. Um, it's also about um, how do you, how do you use the technologies in order to have stickier customers and stop being in a commodity business?

Matt Topham:

So one of the clients we've been working with for a few years now, when we, when we started to talk to them, they were, they were effectively in a commoditized b2c business and you'd say how sticky are you? I know, why do your customers come back to you so well, they probably because they're used to us. Interestingly, three or four years later, that's a technology business, it's not a commodity sales business anymore and it's now starting to talk to its competitors about selling its technology into its competitors because it doesn't want to be in the commodity business anymore. And that all started with LTV to CAC. What's my repeat rate? How often does somebody want to buy something? What's my profitability?

Matt Topham:

Oh, actually, well, if you don't sell them the commodity. You sell them the technology which they were building anyway in order to have a smarter business. If you manage to sell that as the thing, it's higher margin, it's stickier, it's got better valuations for your exit and you're not actually competing against your competitors anymore. Isn't that here a place to be? But it's all within ltv to hack right and it's really interesting and one of the other things we find it come back to we were talking a little while ago about um. So often people won't won't calculate something because they don't know a bit of the answer. So when we calculate ltv to cap with a new client, we'll actually state all the calculations line by line. So everybody's clear, right, and often something like customer lifetime is known when we turn up, because nobody's ever done a cohort analysis.

Matt Topham:

That's okay, it's not that hard, we do it right. We're probably the last people in the world who should do it, but we'll do it. But we'll state all of those things and if we don't know what the customer life is actually, we'll start with what you think it is okay. Well, let's start with two and a half years, then three years, if that's what you think it is. That's what we'll put in. We'll just state it is that thing and we can come back and challenge it later. But if you don't do anything, you don't do anything. If you can do something, it's better than nothing and do you know what that resonates?

Hannah Munro:

because a lot of the customers that we've worked with, especially when they first start to look at numbers, that LTV number, feels really what's the word? It's almost intimidating to start calculating as a number. So you mentioned, obviously, making an assumption around lifetime, and how do you get around things like how much an average customer would buy in that lifetime, you know, in that period? What are some of the things that you get around with, perhaps with assumptions?

Matt Topham:

I think there are two separate parts to that. So I think the first is you start with a simple assumption about where you start, and so if your average basket size hasn't changed for a long time or it changes very slowly along that length of time, the chances are people aren't changing massively, changing their buying behavior so whatever your basket size is, whatever your basket size is, um.

Matt Topham:

Often we would end up um with in a business planning exercise. We would make some real assumptions about known, unknown assumptions, about changing the basket size right, because it becomes part of the strategy. It becomes important. So you say, okay, I've got a basket size right, it becomes part of the strategy, it becomes important. So you say, okay, I've got a basket size of X at the moment, but I have a strategic intention to make it 25% bigger and I don't know what I'm going to do yet. But there's my business plan and as I get closer to it I can work out what 25% is.

Matt Topham:

That's okay, right, you don't have. This is not. I think the interesting issue here is that it feels as though there are people who have grown up auditing things, which is fantastic and it's a skill I never did. I'm not held back, but if it doesn't quite add up, that's OK, because I'm trying to get the big picture right. This is the difference, I guess, between a technical drawing and a bit of impressionist art.

Hannah Munro:

The blobs are roughly in the right place and that works for me roughly in the right place and that works for me and I think it's that's that sort of understanding you know how much clarity you need in that picture to make a good decision in the first place. That actually helps you move forward. So finding, like you say, that balance and when is good, good enough, exactly exactly, I think.

Matt Topham:

The other interesting point I think you mentioned, um, long-term value. I think a lot of people are scared by long-term value. I think a lot of people are scared by long-term value because it implies failure. My customer only last year, my customer only asked 18 months. Right, okay, you are where you are, just accept it. The question is what you do about it. So I think you know quite often then, um, owning the issue ends up meaning you have a bit of a chance of solving it. But this leads into the next piece. Then that's not pretend every decision we make is perfect. That's not pretend every decision we make is right. That's just test those assumptions and be open to the fact it's a mistake. Finance is built on mistakes. That's why we have controls. So that's just think of those controls in terms of our KPIs. Actually, does this smell right? Are we growing? Are we running out of money? It's interesting that, from a planning perspective, quite often people will focus on the profitability of a thing, this is what my unit revenue is.

Matt Topham:

This is what my unit cost is. This is the profit I'm going to make. Okay, great, fantastic. Now tell me when you get paid or when you have to pay for something. That's a really interesting exercise because nobody ever knows, and it's quite often we turn up and people realize actually they have to spend um on all of their costs before they ever get paid. So the faster you grow, the faster you run out of money. Okay, that's interesting. I had to challenge that, and it's often people have done the first bit and never done the second bit. So you know, back to um owning the problem. Most businesses, um, can't change their history. Just accept what you can learn from your history and therefore you can do about it and that's interesting.

Hannah Munro:

So it's not just about, maybe, the margin contribution that you're getting from an item, it's also about the cash flow contribution and how that impacts it as well.

Matt Topham:

Yes, oh, definitely well look, it's the old adage that cash is king, right, and so, um, it's. In a perfect world, it'd probably be best to be cash generative and loss making, wouldn't it? Wouldn't it, because you'd end up with all the money and no tax and in a perfect. Yeah, I'm not, I'm not saying that's the strategy, right, but I think it's. But you know, quite a. Come back to ltv, to cag.

Matt Topham:

So we were working with a software business recently who had an incredibly long lifetime. We did a, we did a um, a cohort analysis, and I think the lifetime is six or seven years. It's incredibly sticky. Then you restrict the value and this is an ordinary thing that you would end up doing in the calculation. You restrict the income to a year and actually the LTVD CAC is sub one. So they pay more to acquire a customer than they're worth in the first year because the acquisition costs in the first year. The faster they grow, the faster they run out of money, even though strategically they're going to be hugely successful because they've got such a sticky product. Knowing that and then throttling your growth actually is the way that you manage to make sure you don't run out of money. But that's a really interesting problem to have. We've come across that a few times over the years where actually growing too fast would become a problem.

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Matt Topham:

But actually you'd end up running out of growth or you'd have to. You know you'd have sold one to everybody and the product life is so long you'd never sell another one and it sounds stupid but actually that's a real thing and so insightful business planning and absolute clarity about how it plays into the metrics gets you to deploy in an operational fashion, really, really helpfully now for the 1 million pound question what is the best finance software for your business?

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Hannah Munro:

So how do you figure out what's the right pace of growth for a business? How do you look at it? What's the process that you go through to figure out? Should we slow, should we speed up? What's the optimum?

Matt Topham:

I suspect the optimum is about affordability. It's about how much cash you've got.

Matt Topham:

And I think the tricky bit here is trying to look at where somebody's on the strategic journey, and we always think of company growth a bit like the seven ages of man, you know, the one with the quick-crouching man and standing man and running man. Yes, think of it on those sorts of bases, because actually I think people forget they're on a journey and the business changes over a long length of time. Right, if you're a seed business and you haven't proven something yet, going for massive growth is going to maximize your problems. Automating everything is going to maximize your problems. Nail what it is you're trying to do in an efficient fashion. Right, go and find some users who are using the product. Then worry about monetization, for example. Right, be clear about what it is you're trying to prove at any one time. And so often we sit down with that seed business and they go right, okay, I'm going to start billing people next week. You haven't actually got any users yet. Should we see if people want to use your product and see if we've got any product market fit? And then let's think about monetization, because if you're going to go to an investor, the first question is who, what? Who wants it? They prepare to pay for it is something else, right. So back to absolute clarity. But what it is you're trying to try to achieve, if you're trying to um, if you're, if you're, if you're going for your a round, for example, and you're looking for that million pounds worth of arr, that's going to answer your throttling question how much cash you've got today and how much support you've got from assuming that business is probably going to be loss-making and it's going to need investor support in order to grow. You should be absolutely clear about what you're trying to get to, how long you want to be in that sweet spot of having the retained ARR whilst you're talking to your A-round investors. So clarity and this doesn't have to be some amazingly complicated strategy, it just needs to be whiteboard, it's right.

Matt Topham:

Who am I? At which point? What are my deliverables? At which point? What am I trying to do? Am I trying to go for revenue growth? Am I trying to have user acceptance? Am I trying to go to another country? Am I trying to? Am I trying to? And there will be a parallel for every single business that's out there, and for many of those businesses, growth might not be the objective. It might be profit maximization. It might be for some of the. We work with some charities and we work with some social businesses. Growth is not what it's about. Profitability is not what it's about. Sustainability is really, really important and then trying to maximize utility to the users. So clarity about what you're trying to do is the name of the game.

Matt Topham:

How fast you can do it is how much cash you've got in the bank.

Hannah Munro:

So let's talk about growth in that way. So thinking about, I guess customer acquisition cost right, because I've seen some people do this really well and some people do it really badly in the past. Um, and I think that's the joys of being a consultant is you kind of get to look at with an outside view as to what's going on, what's your view on how to do it well, so I think the first thing is to be absolutely clear about what your customer acquisition costs are.

Matt Topham:

That sounds bonkers, but usually when we turn up, somebody will use the media spend and use that as the customer acquisition cost, and they've got 20 people at the back who you know, who all work in sales and marketing and they don't include those salaries. Well, they definitely, definitely part of your cost, right? Definitely, and that's one of the first things to have a look at, because quite often when we turn up, you've got an expensive team spend and a really reasonably low media spend. You think, well, actually, if the balance was the other way around, more eyeballs would see the thing you're doing and so it would be a smarter way to deploy the budget. But that's a sales and marketing problem. Quite often we see poor channel identification, actually being clear about what your channels are or even what the levers are in those channels.

Matt Topham:

Now I mentioned that B2C business that we were talking about. That business had two channels. It never, ever kept the number separate, so it wasn't clear about what the acquisition costs in those channels were, and actually it turned out it was really, really close to a complementary channel that didn't have the same sort of scale of acquisition cost, but it never really fed it Because it wasn't really clear about what the channels were. It then couldn't quite say it couldn't make it to that mental leap in order to say do you know what I should be selling to that channel? Because in that channel I don't have such high acquisition costs, whilst the margin per unit is lower, actually the profit of the contribution is higher, and so it's absolute clarity about that matrix.

Matt Topham:

That then says right, who am I doing for whom where? How do I attribute those costs into the right buckets? And am I clear about what the contributions and what the repeat rates are that might be different in the different channels, what the basket sizes might be in those different channels, and it doesn't have to be massively complicated. Let's put it into context. I think that exercise is probably 20 minutes a month. That transformed that business from being where it was to oh, actually, look at that, we're giving all that away. If only we did that. Am I making sense?

Hannah Munro:

Yeah, no, that's fascinating and I think that's a really interesting piece about thinking through the channels and that goes back to your strategy. If you try and lump everything in, you can start there. But actually that sort of delving into the, the different channels, the different approaches, and, yeah, I've never understood why people have a customer acquisition cost that doesn't include sales personally, but that's uh, that's always something I find interesting. It is interesting.

Matt Topham:

It is interesting, I think there's also is it's having the right KPI for the right place in sales, right? So I think in enterprise sales, for example, the KPI is actually about channel management, it's about setting targets and it's about managing the salespeople in order to try and get the right volume of work through. That's not enough to be de cac. But let's not pretend the same exercise isn't happening. It is, it's just happening with a different mechanism. So you know, I don't think that. I don't think the logic is particularly complicated.

Hannah Munro:

It just happens in a different place. How, like, how do you approach a long sales cycle? You mentioned enterprise sales. Now sometimes those sales cycles can be what some of them are over a year. It's crazy. How do you approach the because and then you're spending on marketing? You know the year before. So how do you approach the customer acquisition costs in those instances?

Matt Topham:

I think, realistically it's. It's a question of um, of not being an accountant and and being a bit broad, a bit broader brush, I guess. And this is. We talked about mistakes made early in our career.

Matt Topham:

I remember we were running a mobile marketing agency a few years ago and we used to hire salespeople and we used to sack them after three months and we'd hire another one and then sack them after three months and you think these people can't sell. What we didn't realise is actually it took six months for the person to get into post and build the network and start to sell effectively, and so actually what we were doing was just undermining our new salespeople with our crisis of confidence. I think you have to be absolutely clear about are the buttons within the industry you're trying to sell. So if your expectation is that it's going to take you 12 months to sell something, then the issue is to make sure that you're comfortable, that things are moving through the channel successfully, moving through the funnel successfully. And if you go, look at one of our business plans, our enterprise business plan, start with how many people have you got, how many meetings do you think they're going to take? What's the first stage of the meetings and what's the? How long does it take um to to get to second stage and what's the conversion rate? And we'll build a channel that properly. And that's what is part of the financial plan, because it starts with um setting some expectations about, about what we think enterprise sales look like, but it also gives you a tool to manage those people.

Matt Topham:

We thought you were going to do 20 meetings this month. You only did six. What's going on? Oh, you couldn't find enough opportunities. Okay, well, actually now we need an XDR in order to go and book you an outload of opportunities. The issue is about trying to manage the channel, trying to manage the pipeline, as opposed to look at the financial KPI and saying I trying to manage the pipeline, as opposed to look at the financial KPI and saying I'm spending 10 grand a month on that salesperson and they haven't sold anything. I didn't expect them to sell anything. Therefore, it's okay, I've been playing a long game, but do I have the confidence that that person is doing the right things?

Hannah Munro:

Yes, because they're being managed and I have the right KPIs so we've talked a lot about getting good kpis right in order to enable us to make good decisions. I just want to flip maybe the conversation say once we've got good kpis, how do we go about making decisions?

Matt Topham:

well, I think if we've got good KPIs, decisions become obvious and they become a bit more opportunistic. I think the danger with not having good KPIs people don't quite know what decision it is they're trying to make. So let's go back to this enterprise salesperson that we've got. If we've got good KPIs, if we can see what other people are doing within the channel, the meetings rate, the conversion between stages, if we've got somebody who's standout and not as good, actually that sounds like a training decision or it's a bye-bye decision. Or, to turn it around, maybe we've got somebody who's a hero that's actually standout better than anybody else. Let's find out what it is they're doing so we can tell everybody else to do it better than anybody else. Wow, let's find out what it is they're doing, so we can tell everybody else to do it. But so I think I don't think that becomes a complicated, a complicated set of decisions to make, because the opportunity has now been presented to you.

Matt Topham:

There is a very great danger, I think, in having and some I'm sure you've seen this, where it's people this 400 kpis, well, actually just giving yourself a problem to try and solve. Work out what the six important ones are, the four important ones, and we haven't talked about cash because, fundamentally, that's probably more important than anything else. We can make a lot of mistakes if we've got a lot of money in the bank, and so, actually for most of our clients, we keep it really really simple and we're looking at runway and we're simply saying how much money is in the bank, what's your average EBITDA loss in a month? How many months have you got less? And that then leads to your funding strategy, and your funding strategy probably leads you to the things that you need to achieve. So, for example, if I've made my promises to my existing investors that I've got a million pounds worth of ARR by the time I get to my next funding round, if I've only got six months of runway, I better make sure I'm doing it or I'm setting some expectations.

Hannah Munro:

Yeah, I think cash, particularly in, I think, in SaaS it's a big, it's something that everybody keeps an eye on because you're always looking for that next investment round, but I think sometimes in more traditional businesses, you don't see as much focus on it perhaps as you should. What's been your experience around cash flow and KPIs?

Matt Topham:

I think it's interesting. You're right. So there tends to be a mentality in technology businesses that there's always around, around the corner. Um, I think I think one of the practical issues that I found is that businesses that had too much cash tended to be lazy I certainly have had that when I'm in the real estate business.

Matt Topham:

I came came to london to look after um was exactly that. It always had six or seven million pounds in the bank, and so the subsidiary businesses didn't really make a profit. They were never really under any pressure in order to go and do great stuff, because somebody could always bail them out. But then, getting to the bottom of their numbers in a robust fashion, bringing in some simple numbers, treating them like an investment, actually started to sort some of that stuff out. But having too much money is a real problem on occasions because, um, the pressure to make a decision smart, a smart decision, and quickly, is just not there yeah, the consequences aren't as impactful to making bad decisions yeah, yeah, exactly, exactly, exactly.

Matt Topham:

I think. I think you know it's. It's unusual. There's a management team who has a lot of money in the bank, who still has drive in order to go and do the really smart stuff. But we do have some of those clients. You know it's great. I mean we're working with somebody at the moment, um, who has multiple millions in the bank and has made substantial investments into in in ca, but absolutely is worried about recovery rate for B2C, for example, and getting paid by. Every single shekel possible is being paid and that's not because they're mean, it's because actually they've recognised that their business deliberately is about really really smart margins.

Matt Topham:

It's about massive operating efficiency. It needs to be really really smart at a profit level and it needs to be paid for it, and if it doesn't do that on every single microtransaction, the big picture doesn't make sense, and that's the sort of culture I think you need in that sort of business.

Hannah Munro:

So there's been some amazing takeaways from this session, I think to both perhaps a refresher for existing CFOs and also those new inter-role to really think about the levers within the business that you're operating role and the KPIs aren't established. What would be your top tips to getting into that initial KPI setting and decision-making cycle?

Matt Topham:

So I think the first thing is absolute clarity about the strategy. What are you there to do? What is it you're trying to achieve? How does the business do its thing? Because I think the the, the couple of kpis will really really fall out of that of that clarity. Um, if you're trying to, if you're trying to grow, for example, that will set set an implication for a certain set of kpis.

Matt Topham:

If you're trying to be sustainable, it's different. If you're trying to, you know, go back to, if you're running a charity, as opposed to technology businesses, you're you distilling what it is you need. What the organization needs, what your users need, would be fundamentally different. And it starts with what's the purpose of the organization? Why are we here? What does success look like? Am I trying to exit in three years' time? If so, then what do I need to do? We'll work backwards, because those will then start to generate what becomes important.

Matt Topham:

Um, and by conversely and one of the things that we get, we we often go on about, I have mentioned it this time around we go on about it really, really useful to know what's not important. Our view of a business planning is to tell you the three or four things that important, but also not what not to worry about, because if you a leader, you've got a million things going on all the time. Right, let's just take some of them out of your head. Let's focus on what's really, really important. So a really really simple three-statement cash flow, I would argue, is what every single CFO should sit down and do as their first exercise. It should lead into that strategy piece, but it should be absolutely clear about the operation of the business. And should lead into that strategy piece, but it should be absolutely clear about the operation of the business. And if you don't know how the levers are, then go and talk to the people who are organizing the business and it will give you the context and the experience in the business you've just joined in order to go and pull some levers right. If you get the business plan right, you're clear about what's important and what's not important, which means you can start to advise other people, or you might recognize that the business is sailing off in the wrong direction and you need to start listening to some challenges. So I think you know I love business planning.

Matt Topham:

Business planning is an amazing thing. It's incredibly, incredibly insightful. It's not something that's done in a darkened room by the finance money. It's an organizational thing, and if it's done efficiently, then everybody shares in the benefit. Quite often we do business planning by locking an entire management team in a room, because everybody shares everybody else's assumptions and view of the world. Oh, are we trying to achieve that? I didn't realize. I didn't realize that we had an operational problem over there. Or I didn't realize that technology did this thing and it broke that thing.

Matt Topham:

Or I didn't realize that I had a legal claim over here. Really really interesting. Um, and with big strategic differences, um, it also starts to set the priorities for which organizer, which part of the organization, will lead success in the organization. And that could be sales, sales growth, or it could be technology efficiency, or it could be operational efficiency, or it could be, it could be, it could, but they will end up being a hero something. And, as a new CFO, actually trying to get that into a piece of paper is really really interesting. Pulling some levers One of my favorite functions in Excel is goal seek. I don't know if you ever use it. If you build your forecasts in the right way, go and do some planning, go and pull some levers. Use the goal seek button in order to work backwards from what you need fascinating amazing and I think everyone is now starting to google.

Hannah Munro:

What is the goal?

Matt Topham:

sick function, so we might, we might be like fantastic.

Matt Topham:

There's a skill to using it, because you have to. You have to build the functions in the right way, but effectively, what you end up doing is saying, right, make that number the one I want it to be. And if you're trying to get to the bottom of, for example, revenue growth, think about that person who's just joined the organization as a seed plus and wants to get to AARM. Right, how do I get to a million pounds worth of AARM? Well, build your forecast in the right way and it might be enterprise sales and conversions and use your goal sheet button to work out how many salespeople you need in order to get there. And that's a sobering thought right.

Matt Topham:

Actually, you need to hire another 40 people. Where am I going to find them? How am I going to afford them? How am I going to train them? How am I going to onboard them? Interesting.

Hannah Munro:

Absolutely so. Thank you so much, Matt, for all of the things that you talked about. I think there's some absolute gold in today's session. If people want to learn more about you, your organisation, where is the best place to find you?

Matt Topham:

So we are at pcfocouk. That's probably the simplest place to go and have a look. We have some examples of some of the stuff that we do. There are some spreadsheets and things or tips and tricks that people can download from the website. So, or indeed, just grab me and ask a question.

Hannah Munro:

Amazing. Well, thank you so much, matt, and for anybody that's listening that's interested, I will block the links that Matt has just mentioned into the show notes, so they're nice and easily accessible. Thank you again, matt, for sharing your knowledge and insights. It's been a cracking podcast and, yeah, hope to have you on again soon.

Matt Topham:

Good to speak to you, thank you.

Hannah Munro:

So, for me, one of the most important things about any transformation project is the partners that you work with, and whilst I'd love to list off a whole host of reasons why ITAS is the perfect partner for your transformation project, why don't I let our customers do the talking for us?

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