Financial Clarity: The Startup CFO's Guide to Forecasting & Cloud

Megan - 00:00:35: Today my guest is Rich Zhou. Rich is a visionary leader with a passion for driving digital transformation. He founded Aquifer Growth to help businesses achieve their full potential through innovative design and strategic growth solutions. Aquifer Growth is a digital growth agency based in Toronto, Canada, dedicated to helping businesses scale through optimized website design, user-centric UX slash UI, and comprehensive SEO strategies. At Aquifer Growth, they are committed to delivering exceptional results through expertise in SEO and digital growth strategies. They focus on client success and strive to transform businesses by optimizing their online presence and driving sustainable growth. Aquifer Growth specializes in creating user-centric website designs and comprehensive SEO strategies that drive measurable results. With their expertise, they help businesses scale, attract high-quality leads, and dominate their niche in search engine rankings. Rich, thank you very much for being my guest on today's episode of CFO Weekly.

Rich - 00:02:12: Happy to be here, Megan.

Megan - 00:02:13: Yeah, today we've got some interesting topics. We're going to be talking about the evolving role of CFO and how that evolution necessitates a trifecta of finance strategy and leadership. We'll also touch upon financial planning in an ever-changing world and the adoption of cloud across F&A and the role that plays in being able to scale. Rich, I'm looking forward to learning about you and your experiences with these topics, so let's get started.

Rich - 00:02:39: Amazing.

Megan - 00:02:39: First, and just so that we have some idea of who you are and where you've been, can you start out by just telling us a bit about yourself and your career to date?

Rich - 00:02:48: Definitely. I started my career roughly over a decade ago in traditional finance. The exact thing you would probably expect from someone out of business school or MBA. Started in the capital market as a banking space, eventually moved on to corporate finance, which has a lot of FP&A and eventually found my first startup experience at a fintech company here in Toronto that grew to roughly 280 to 300 people from all the way, I don't know, five people in the beginning. I was a 26th hire. So I was the first financial hire they've had. And I was acting as the controller over there or CFO and amongst other hats that I've had to wear, which was a very typical startup experience, so to say. Five years ago, I left to start my own business called Aquifer CFO. We offer something unique on the market called Plug-in finance department. And what that is basically exactly what you hear it to be. It's bookkeeping, FP&A, controllership, fractional CFO, the entire scale of the finance department at your fingertips without having to hire one in-house. So you simply pay us a monthly fee will attach to your operations, as well as work with their management and executive team to really harness the power of numbers, so to say. And that really resonates with companies out there that are scaling past their first $1 million, but they're still a bit too small to hire an in-house finance department. Maybe one day they will. It's just very expensive to do so at where they are right now.

Megan - 00:04:31: And what is behind the name Aquifer?

Rich - 00:04:34: Yeah, so Aquifer is a body of water that runs underneath the ground that supplies most of the communities in this world groundwater for drinking. And it's also essential for biodiversity ecosystems to thrive. Where that name came from is I used to spend a short amount of time in the mining sector. Wherever there was an Aquifer, you couldn't mine there. Basically, you had to backfill it. You had to route the water somewhere else because it would just be detrimental to the environment. Because it's just so crucial for communities to thrive. We thought of it as a way to communicate that there's something that is important in the foundation, which is financials. And I think a lot of founders don't pay attention to that. A lot of business people don't pay attention to that because I think in the business realm. The marketing, the sales, whatever that drives the top line numbers, which is revenue, is always prized more than having the right financial controls and the risks adjusted for. So we came up with that name because it just kind of like resonates to our, what we're trying to do and communicate to people out there. Just like it might not be cool and shiny and sexy, but it's in the background and it's running and everyone needs it.

Megan - 00:05:51: Yeah. It's the lifeblood of any organization.

Rich - 00:05:54: Yeah, definitely.

Megan - 00:05:56: Tell us a bit about the product and who the ideal customer is.

Rich - 00:06:02: So the product, it is essentially perfectly timed for a business that is starting to make enough money where the founders are starting to manage the business holistically. What I mean by that is suddenly you're probably making north of $1 million a year and you're starting to think about, well, how do I grow immensely? Right. And so that's going to probably lead to a decision to hire multiple people, engage in a marketing campaign, create partnerships. So big moves. And the question is, are you able to pay for all that, right? Before that 1 million mark, I think a lot of founders out there, they just simply log into their banking and check if there's still money in the checking account. And if it's positive, they're good. And so running a business was no different than running your own personal finances. But once they get past the one million mark, something interesting happens is that you start wanting to do things that most of these medium, large enterprises have running campaign ads, renting a beautiful office, hiring five, six people, hiring an HR person, maybe hiring an ops person, hiring executive assistant. So all these decisions require knowing what your monthly accrued revenue is, knowing how much cash flow you have, right? You don't want to be out of money. Like if you overhire, then you just simply can't make payroll. So that's when they start noticing that, hey, I'm going to need some better help here. I can't just simply hire a bookkeeper online or go to my year end tax accountant that's in my neighborhood and tell him or her to file it at December 20th before the holiday. I'm going to need to know my numbers on a monthly basis. And so typically our clients are anywhere between $1 million to as large as $40 million annual reoccurring revenue. And $40 million seems like a lot of money, but it really depends on the industry or the sector they're in. You would be surprised how many large companies I've met where they're making a lot of money and then they're relying on a bookkeeper and they have most of their numbers on a Google Sheets. So a lot of shocking revelations we've had over the last five years of running this business.

Megan - 00:08:25: Yeah. So I'm just curious, like when you started Aquifer app, what need, how is it that you saw this hole in the market? And what was the hole?

Rich - 00:08:35: Yeah, I saw this hole when I was hired as the first finance hire of this fintech company called Koho Financial. They just raised $8 million in a very hot market of 2016. They raised that $8 million on napkin math, which is simply just writing a number on a napkin in a coffee shop and you got the money from investors. That doesn't happen anymore, especially after a lot of these startup blowups that we've had, like a lot of fraudulent ones like Theranos. In the crypto space, we had FTX happen. So investors now want readily available numbers. When I was hired into Koho, there was nothing in the finance space that was even tangible to work with. I remember the CEO just had this simple napkin math model that he raised $8 million on. There was a general ledger, which we used was Xero, one of the competitors of QuickBooks Online. But other than that, there was no monthly reporting. There was no financial model to really simulate how this company or this business really runs, from a detailed perspective. And so the biggest problem I faced was to first go and figure out what's going on. I was also the person that was paying our vendors. So I was acting as a finance department all in one person, right? And I had to get all of this sorted out because we were also burning cash at a very alarming rate, which meant that we had to raise a Series B. And for Series B, for a lot of people to know, it's generally a much larger check size. You're probably looking at $30 million and up. Some of these Series Bs can reach $100 million, depending on the growth of your company. But Series B investors tend to want to see financials. And they want to see that FP&A financial as well. And so that's where the first hole was really discovered. What really led me to believe that I could expand this business was that I met a lot of other founders that said, hey, look, you did this for Koho. Can you help us do it on the side as part-time? And so I would do these things on the weekend. And when I started my business, those very founders that got me to do work for them on the weekend turned into much more frequent clients. And that's really how I was able to bridge having employment income to having a steady amount of cash flow that I can live off of when I started this business.

Megan - 00:11:08: And you have a really unique perspective on the role of the CFO, having founded multiple businesses. So how is it that you see the role of CFO evolving, particularly when it comes to balancing finance strategy and leadership in today's fast paced environment?

Rich - 00:11:23: Yeah, so I think that the CFO role has definitely evolved to a much more respected role since 2016. I think 2016, even 2017 and the years leading up to those years, you could easily raise money in all over North America, especially Silicon Valley. It was always about the product. It was always about the people behind the product. It was about the passion and the vision. It was never about the numbers. And then people said, we can always make the numbers work. Now, not just having these horrible startup failures happen in the last few years to change investor mindset. What also happened is we have high inflationary impacts. On the labor that goes into startups. The cost to hire a developer has insanely increased over the last five to 10 years, simply because of the amount of startups and the whole bull run up to all the way to probably 2022 or 2023. So developers straight out of school, they can earn as much as 110,000, 120,000 with no working experience. They were heavily sought after. And in Silicon Valley, your average, just average developer costs 300,000 a year. And so what that tends to happen is that most of the startups are having higher burn rates than ever before in the startup history. And what that does is puts a lot of pressure on the business to create something that's innovative and something that's valuable, that essentially allows them to raise even more money from investors at a higher valuation. What that also means is that the chances are typically against you. It is very difficult to have that kind of level of innovation in that short amount of time because that burn rate is just so high. Every capital rate, as you see on the news, that's for roughly 18 months of burn, which is very insane. If you think about it, like some startups like have $50 million raises that last 18 months. They have to turn that $50 million into something at least 5x to 10x. Of what it is to make that more palatable to get to the next series. And so it's getting harder and harder to be successful. The key is how do we control the cost while we... Outlast our competitors, outlast the big players that we're trying to disrupt. And that's through better financial management. There's no other way. Your developers are what it is. It's going to be that price. You're going to have to pay them. Marketing costs, it is what it is. You do and other startups are bidding for the same 19 to 39-year-old bracket that's online, which are your potential leads or customers. Your cost per click is higher than ever before. So you're basically all doing the same thing. The one thing you could do better is to pick and choose what you put your money towards. And I think that's where the CFO role is now looked at something more essential. And also having a CFO earlier in your startup life cycle is going to be much more beneficial than ever before.

Megan - 00:14:45: And with your experience in both finance and technology, how do you see cloud adoption reshaping financial operations?

Rich - 00:14:52: So I think cloud adoption is great for a lot of the innovations that could happen in financial data display or organization. Years ago, well, many, many years ago, you really had everyone operating their own financial software. And whatever you bought today was what you're going to have for the next five, 10 years. Nowadays, if you look at QuickBooks Online or Xero, these general ledger software is there online, right? And what's great is they always have these updates. And a lot of these updates have to do with using a bit of AI or pattern recognition to help you accelerate the bookkeeping, the financial analysis, and so forth. Currently, there's a lot of cloud dashboard softwares out there that's really trying to attach the general ledgers like Xero and QuickBooks Online. To offer those insights at a more live time sequence than ever before. Before, you probably had to wait like a month or two or three months to really see what the financials were for this particular month. I was like a quarterback, which is always not as useful as you want it to be because you're already like three months out and you kind of want to know what it is today. And so there's a lot of good data softwares out there that present you the data as of maybe last night or last week. It depends on what your accounting and data cycle is. So I think cloud computing has really made the whole work of getting financials ready a much more, I would say, much more smooth transition than what you had previously in the past. And also people can use it. That's the whole point. It's no longer about just looking at the last year and then, oh, great, we did horrible last year. And then you file it over to the IRS. It's no longer about that.

Megan - 00:16:40: And at Aquifer CFO, you assist businesses with their accounting and financial complexities. So what are some of the most common challenges that you see small businesses face when managing their financials?

Rich - 00:16:52: Yeah, so the great question, I think, depends on the industry. If you look at CPG businesses, small or big, everyone has an inventory cost accounting issue. And it's really sad to see small CPG companies getting plagued with that issue because if you sell products, whether it's a sweater or you're selling grains of wheat or whatever that's online or direct to consumers or other businesses, what tends to happen is you have inventory. And a lot of small businesses don't know how to manage that inventory accounting because it's not easy. It's a lot of transaction volume, especially if you have different SKU counts, right? If you have a different color vest, for example, that's a different SKU, right? And if you apply discounts, how much you sold it for, also what was the cost you incurred to make that vest? There's a lot of data out there that I know big companies, they have the money to pay for a subledger. That's what we call subledger from a company that maybe makes it, for example, SAP, MicroStrategy, they make subledgers. Oracle makes subledgers. But what if you're a small business? What if you're a startup? You don't have millions of dollars or hundreds of hours of time every month to dedicate an individual to make this subledger and migrate the data over. You simply don't have that. So what we often see is startups in the e-commerce CPG space because they have multiple channels of sales, whether it is Shopify store, Amazon, or Walmart, or any other retailer. They tend to struggle with knowing what their cost is, which is actually very, very risky to not know, especially in that space. So that's the CPG side. You know, there are also millions of other startups in other sectors, whether it's fintech and so forth. I think they struggle with a lot of this transaction volume data, even if you don't have inventory. For example, fintech firms, whether it's crypto or challenger banks or the payment processing firms, they deal with possibly hundreds of thousands of transactions per day or per hour. And so the question is, how do you put them together? How do you put it into one final number and have that as a journal entry in your general ledger? That's what a lot of these businesses struggle with is how to handle big data.

Megan - 00:19:19: And I'm curious, Aquifer CFO, does it replace the need for CFO for small businesses or is it just a tool in their tool belt?

Rich - 00:19:27: It depends on what they're looking for. I think we've helped a lot of businesses be that finance department. So in most of our engagements, they don't have a CFO. They don't even have anyone in the finance department. It's just us. And we work with directly with the CEO and founder. We might work with an operational manager because, as you know, everything affects numbers. So we kind of need to know everyone in the company. There are some engagements where we do have a CFO. And what tends to happen is that CFO is going to do more of that strategic work where it involves having meetings, talking to investors and so forth on a day to day. However, what most scaling startups struggle with is the volume of work. So we are that workforce that makes sure the daily bookkeeping is done. The month end is closed. The taxes are prepped. The models update it so that the CFO, which tends to be a much more senior individual, more costly as well, is utilizing his or her time at doing something else that adds way more value to the startup than having to do bookkeeping or invoicing a vendor. And so basically there's this great divide of work. We do the hands-on grunt work, so to say. And the CFO does more of that strategic work.

Megan - 00:20:46: And last question about the product, but is it something that sits on top of like a QuickBooks or a Xero or does it replace it? And is it both a platform and a service?

Rich - 00:20:59: So we currently, funny enough, we don't have a product, so to say, in terms of a SaaS kind of product, we don't have that. And the reason why I'm going to say here is that every business is so unique. And I have an issue with a lot of the products out there that a lot of them create these dashboards and they promise they can replace Excel. They can replace this. And we've demoed over maybe a hundred softwares out there. And there's not a single one of them that has every feature to accommodate every type of business out there. How we approach it is we don't sell ourselves as a product provider. We sell ourselves as a service provider. We go there, we do the accounting, we use Excel and VBA, which is a Visual Basic Automation for Excel to create what we need bespoke to your business. And we layer on other SaaS platforms that help automate the daily and monthly process. For example, there are some great payroll softwares out there. QBO and Xero dominate the space for small businesses and startups. There's also Oracle NetSuite for a bit of a bigger clientele. There's also great receivables and payable softwares that you can kind of like whitelist all your vendors and it's just a click of a button and it's going to send a wire to your provider. And there's a lot of other softwares just like HR, for example. If someone goes in, wants to take vacation, it automatically calculates how many vacation days are left in terms of a dollar amount. And we can then integrate that into our software ecosystem. And it does that journal entry automatically by itself. So going back to your question is that the cloud computing, how is it beneficial? Is that it allows for integrations between different softwares and each software is a specialist at what they do. However, to bring everything together and still don't have that bespoke accommodation for the business. I haven't seen a solution that could replace Microsoft Excel. And I think a lot of startups out there, they're either led to believe the software could do it. And then now they're stuck paying that fee and they're constantly messaging customer support. And they've wasted a lot of time and money on it. Or they're hiring individuals that don't have that financial modeling expertise on the Excel level. And that's really hurting their business or reporting processes, simply because they don't know how to handle the volume of transactions.

Megan - 00:23:34: And when we take a look at something like financial forecasting, how do you advise businesses to approach their forecasting? Particularly like, seems like everything these days is so uncertain. So first of all, how do they approach forecasting? And secondly, what role does technology play in forecasting these days?

Rich - 00:23:54: Yeah, so forecasting really depends on having finite amount of levers that founders should understand. And to understand that means that you're going to have to go into detail and look at those invoices you're getting. Look at all those profit share reports you're getting and find out how you're being charged, how you're making money. What is, for example, the impact at a user level? If you are in the game of selling SaaS software or direct-to-consumer software, it's really about the users. If you're in other industries, like for example, real estate, then you need to look at how your debt is structured, what is the occupancy rate, how much revenue per square footage. So you need to really go down into detail. That's really the first part. I've seen founders before we engage with them simply take their... Total revenue number, and then apply like maybe a 10, 20% monthly growth rate and just drag it to the right on Excel. And I can tell you that investors are not going to buy into that. I can tell you that that's not going to help you manage your business either, because that whole number has a million things that went into it. And you need to start dissecting that at the unit level. That's the first part. Second is after you've done that, and then your accounting is all up to par, along with a great software ecosystem. You can get a lot of great dashboard softwares to just simply hook it up and display this in fancy charts and so forth. And it does a lot of good things for you. One, it could just alleviate a lot of this pain point as an upper management, look at all those metrics. Really, you can just focus on the five to 10 metrics that matter at a OneLogin Dashboard. The other thing is you can give access to investors on how well you're doing by letting them go into the dashboard as a view only individual and check on the numbers. What that tends to do is really allow them to understand if they want to participate in the next series round. And they don't have to ask for financial and do all this stuff all over again, which then further pushes the turnaround time of getting that series funding closed. So there's a lot of benefits to having that. Out of my clients, how many of them have it? Very few. Very few. Because I think there is a lot of problems of how they're making those transactions. There's a lot of problems of them hiring us a bit too late. We've been in business five years. I can tell you that over 80% of our clients have hired us with two to three years of backdated financials that they haven't cleaned up, let alone file taxes to the IRS. And so a lot of our engagements for the first eight months to a year, depending on how big they are, it's about catch up. And once they're done the catch up, we can then start on the present month and work forward to that day where they have this beautiful dashboard for the investors.

Megan - 00:26:59: Yeah, so many companies do something a little too late, but when is the right time? When should a company be reaching out to you?

Rich - 00:27:07: I think that 1 million, 1 million mark. I think that is literally the right time. I don't know why the 1 million mark stays in my head, but I've seen it. Every time they hit 1 million, they start doing big things. And then the worry comes. It's like, can I sustain this on a monthly basis? And we have different packages that service companies of different sizes. And the company size and the transaction volume are two of the biggest factors that we take in terms of how we price our clients. And so we have clients that pay us as little as $500 a month. We have clients that pay us north of $10,000 a month. They're all very different in size and they have different needs. And I think a lot of people think they're too small for something like this. That's not true. And what they tend to do is they go on Upwork or Fiverr and they hire an offshore bookkeeper that most of the time, unfortunately, doesn't know what they're doing. And I think bookkeepers tend to book whatever they see to whatever account. And that's kind of like in their name of a bookkeeper. They're not accountants. That's what a lot of people don't understand. And accountants, a lot of them are not CFOs, right? And a lot of accountants aren't controllers. But everyone plays a role. Like my packages that I sell to my clients have bookkeepers, have controllers, have CFOs, have an FP&A person. There's multiple people servicing each file. And that's the key to really gain success here and finally solving this financial reporting issue that a lot of companies face. It's not a one-man job. That's what founders need to understand. And it definitely is not a bookkeeper's job to handle all of this.

Megan - 00:28:56: And as you increasingly see companies moving to the cloud, what specific financial and operational efficiencies have you seen that have successful in businesses that have successfully implemented cloud solutions? And can you share any particular stories?

Rich - 00:29:12: I think one great cloud solution is just simply having more of multi-factor access and ability rights. I, previously consulted this payment processing company, and a lot of these operations required huge amount of wires. And obviously very risky to have that given to the wrong person. And if you actually go to, for example, a traditional bank in the U.S., Canada, UK., it is very painful to work with them because you have to maybe call them. You have to maybe visit the branch. It could be at the teller counter for hours. And one of the great solutions we've helped them implement is GoCloud with that transfer wiring. And I think there's a lot of great providers out there. And we could do a reoccurring, we could make it timed, and that just ultimately revolutionized their operations because you don't have to hire people to go to a bank. You don't have to get the CEO involved because that person could have a million other things going on. You can just simply have it actioned with the right authorities to approve it, and it could be done on your phone, through email, and so forth. So the control is also split amongst many people thanks to cloud accounting. And you can give different access rights in the next second, and it's actually going to just go into the settings and apply to every user out there that you change access rights to. So it's very simple on that front. I think another benefit to cloud accounting is just how fast people can have access to data. So many times we've been doing audits. People hate audits, right? No one wants to do a public audit. A lot of people have to do it to sell their business, to go IPO, to get investors. We've had some investors that said, hey, we need a public audit done. We're not touching this without an audit. So one of the great designs of cloud accounting, if you look at QuickBooks with Xero, is that you can just give the auditors access, a view-only access to your ledger. And I've seen that expedite audits five times faster than a traditional company that doesn't have cloud computing ledgers. Yeah, they have something that probably sits on the server. That's very old school. Auditors might have to go to the site. To complete their audit. And it's going to take like six months or eight months to complete.

Megan - 00:31:37: Yeah, it's nice as an auditor when you can kind of just click through something that's all digital and see where it originated.

Rich - 00:31:44: Yeah, that's right.

Megan - 00:31:46: And in your experience, what are the key financial metrics that CFOs should focus on to effectively monitor and control job costs? And how is it that data analytics and cloud-based systems provide, A, more accurate insights and, B, more timely actions?

Rich - 00:32:03: Yeah, I think it's because it's able to refresh that data life. I work in corporations where they were using 20, 30-year-old software that they either made it themselves or they bought it from a company that no longer even exists. Is that to make any changes, you really had to run some overnight batch or something for it to reflect that change. It's absolutely a dinosaur. Cloud computing, if you have the access points, you can make that change, right? And that change will reflect the next second. Which you can immediately see the impact of that. Right? Whether it's financials to make your decision, whether it's giving auditors this very thing they need to complete the audit or check it off their list. You can see that you just basically cut hours in a day. And there's obviously many days to a year. So the overall impact is huge. You also don't need to hire as many people to double check or push that data into a software because it's not able to run it live. And so I think cloud computing really is probably the most convenient thing I've ever seen happen to a lot of these companies on a financial basis, but also operational. It also comes with great updates. And what you see today, well, a year from now, they figured out a lot of their clients have emailed them suggesting they make a certain feature and it would help them greatly. And if they see enough of that same email, they're going to actually make that feature. And whoever is subscribed to that monthly gets that feature update. And then it just revolutionizes further on how any of these tasks are being automated.

Megan - 00:33:40: And last question, but looking ahead, how is it that you foresee the CFO's role evolving with the growing adoption of AI and cloud technologies?

Rich - 00:33:49: Yes, I think cloud computing technology from a software standpoint, there's going to be more and more out there to accelerate the accounting turnaround time. I think that is forever going to be the problem with accounting, is that it takes roughly at least 10 business days of the new month to close the previous month. So right now, let's say we're in January and we want to see December. We're probably not going to get December numbers until January 15th or 20th. Which then, depending on the size of the company, you're going to have to give it to someone to then package it further to send it upstairs through the echelon process. And who knows, maybe management gets to it on January 28th, right? So you're talking about one month time lapse and no one likes that. And the smaller the business, the more time stringent. It is to have these decisions made. Founders are saying yes or no to a partnership or a deal. They need to know those financials, right? Investors, they want to close this deal. They want to know the financials. And so with more software in the next decade or two, you're going to be able to make that turnaround time to maybe as little as one week. And there could be a whole other thing that needs to be done for that to happen. Maybe banks and payment processing providers need to start talking to each other. Maybe we need to also have more of a transparency out there on what is being done. For example, if you look at crypto and the blockchain technology, a lot of people talk about the blockchain technology being great because every transaction is public. And maybe there needs to be some form of that to allow us to gain that data without having to wait for our counterparties, whether it's a bank or Visa and Mastercard, to send us the reports so we can close those month ends. So I think there's going to be more automation, less turnaround time, and the CFOs are going to be using more AI to even analyze those financial data so they don't have to do it themselves. And then that analysis is also going to be able to have a shorter turnaround time as well. And so I look forward to the future because I think companies can move faster. If you've ever worked at a large company, I mean, everything takes a very long time. They move in the speed of glaciers. And then before you know it, the year is done.

Megan - 00:36:26: Yeah. I mean, these days, it's so, so important to just be agile and shift on a basically daily basis.

Rich - 00:36:33: Yeah, yeah, totally. I think everyone wants just-in-time numbers. Maybe one day we get there. But for now, I would say there's a lot of tech that's aiming to solve this problem.

Megan - 00:36:43: Yeah, getting closer. Yeah. Rich, thank you so much for being my guest today.

Rich - 00:36:47: I appreciate it. Thanks for having me.

Megan - 00:36:48: Yeah, I really enjoyed speaking with you. And thanks for finding the time to be here with us today to share your knowledge. And I wish you and Aquifer CFO all the best.

Rich - 00:36:57: Thank you so much, Megan.