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The $100M Revenue Mistake Everyone Missed — Transcript

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0:00This is really exciting. We really want
0:01to move forward with this. Make the
0:03purchase. It sounds really compelling.
0:04We have a limited time window to make
0:06the offer. Can you look really quick at
0:08what's going on here? And can you agree?
0:10You see revenue go up. You see income
0:11up, but cash outflows continue [music]
0:13to get worse. First, let's just look at
0:15the numbers of, hey, what's this the
0:17story the numbers telling me? In this
0:19instance, I come back, you know, over a
0:20weekend and say, "Hey guys, you're
0:21totally missing the story here. There's
0:23something really wrong." If you would
0:24like to earn CPE credit for listening to
0:26the show, visit earmarkcp.com/fpna.
0:32Download the app, take a short quiz, and
0:35get your CPE certificate. And if you
0:38enjoy listening to FPNA today, please
0:40leave a rating and review. And now on to
0:44the show
0:45>> from Data [music] Rails. This is FPNA
0:48Today.
0:49>> $100 million. That was the deal that was
0:52on the table and it was 3 weeks away
0:55from closing. The company had been
0:56audited and the opinion had come back
0:59clean. Then somebody spent a weekend
1:03reading through the contracts and found
1:06that there was no right to any of the
1:10revenue. That someone is Devon Kums, our
1:13guest today. He's a CPA who read
1:16hundreds of thousands of contracts, big
1:19four, then the deal desk at Google
1:21Cloud, now teaching finance at Santa
1:23Clara. He gets called in when someone
1:26needs to know whether their top line is
1:28real. This is FPNA today and I'm your
1:30host Sarah Schlott. On today's show, the
1:33weekend that killed a million dollar
1:35deal, why the same business can report
1:38$100 or three, and both of the answers
1:41are defensible. what consumption pricing
1:44is about to do to your forecast and then
1:48Devon takes a kill shot and buries a
1:51report almost everybody in finance still
1:55produces. All right. Well, Devon,
1:58welcome to FPNA today.
1:59>> Thank you. It's very nice to be here.
2:01Appreciate you having me.
2:02>> Absolutely. So, when we met a few weeks
2:05back or maybe it was a month ago, we got
2:08to talking about revenue and that top
2:10line. And from my experience, that
2:13revenue number is not always say
2:16technically reality, right? There's a
2:18lot of different decisions and um snap
2:22judgments that we make before we book
2:23that number. And it's certainly not your
2:27cash number, but we need that revenue
2:29number to be something that we can um
2:32have confidence in. There's a lot of
2:34decisions that we're making around it.
2:35There's a lot of reporting that we're
2:37putting in front of investors, the board
2:40deck, and sometimes that revenue number
2:43can take a life of its own. So, I wanted
2:46to jump into the story that you told me
2:48about a hund00 million company that kind
2:51of went bust, but only because you saw
2:54what no one else in the room saw when it
2:56came to revenue. Do you remember that
2:57conversation?
2:58>> Yeah. Yeah. I'm happy to jump into it
3:00and I'd argue revenue is the most
3:01important number other than we're
3:03looking at cash flows. you know, cash
3:05flow is king, but um revenue is
3:08definitely what everyone's looking at to
3:09drive uh earnings growth and u being on
3:12the front lines as a 606 expert as 606
3:15is the area of the accounting
3:17codification um that's focused on
3:19revenue. I've been an expert in that
3:20area for 10 plus years now. Um when it
3:24was adopted and uh there's so much risk
3:26in it and happy to share the story of
3:29yeah $100 million company that went bust
3:32just through a diligence process of
3:34reviewing that that those 606 numbers
3:38but also um why this is such a
3:40high-risisk area overall from a
3:42diligence and financial planning
3:43perspective especially in the world of
3:45AI and consumption based repreck it gets
3:47very complicated. Absolutely.
3:49>> Happy to share the story.
3:50>> Great. So that was a Remind me that was
3:53a fintech company.
3:54>> Yep. So this was a fintech company. Um
3:57again going to scrub. We've done a lot
3:58of work, worked a lot of clients over
4:00the last 10 years um and in a variety of
4:03capacities. So going to scrub some of
4:04the details, but it's not as uncommon as
4:07you'd think to see um some confusion
4:09around 606, the application of it for
4:12determining that topline revenue number.
4:14And I'll walk through some of the traps,
4:16but the example of this was the we had a
4:18a big company that was looking at an
4:20acquisition. Um they called me in to
4:23look at the revenue of this company.
4:25This was a finten company that had to do
4:27with um imagining factoring of
4:30receivables. uh was ultimately
4:32collecting I'm trying to keep it a
4:33little high level but they ultimately
4:35>> were um were collecting uh were
4:38collecting based off of um type some
4:41types of loans or some type of loan
4:42transactions and um and they had
4:46multiple partners with within this. So
4:48three-party relationships. You'd have
4:50companies that they partnered with and
4:52then you had end users as well and they
4:54were facing facilitate these different
4:56relationships. And these this was just a
4:58perfect storm of technical revenue
5:00accounting where it can get um
5:02misinterpreted and where the highest
5:03risks are. We call that like principal
5:05versus agent guidance which is are you
5:08should you recognize revenue when you
5:09have three parties on a gross basis or a
5:11net basis um for that top line. That can
5:15widely distort margins if you get that
5:18wrong. Right? If you imagine if I'm
5:20selling you a $100 item and but I have
5:23to pay a $97 fee to party B. Um
5:27>> yes,
5:28>> there's a question. Should I recognize
5:29$100 or should I recognize $3? And
5:33there's a whole variety of technical
5:34considerations.
5:35>> And then if you recognize the $100,
5:37where does the 97 hit? Is it COGS? Is it
5:40opex? XYZ.
5:41>> Exactly. Exactly. So there's that
5:44there's that piece and that's actually
5:45very technical about who controls the
5:47underlying assets and when um or
5:49services and then there's the uh there's
5:52a separate piece of the timing of
5:55revenue recognition when when should we
5:57recognize that 100 or that three is it
5:59upon invoicing is when is the
6:02performance obligation that we have
6:04promised ultimately satisfied and this
6:07can lead to a lot of distortions with
6:09also what we call collectibility
6:11guidance like how collectible is the
6:13underlying cash flows
6:14>> and then what does your balance need to
6:16look like for all loans for doubtful
6:19accounts? It's it's interconnected.
6:22>> Yeah, they're all interconnected. And um
6:24how cash flow and return rights in your
6:27contracts my like refund rights in your
6:29contracts inter intertwine with th those
6:32conclusions. And so in this specific
6:34instance when I get pulled in, one of
6:35the first things I always do is like,
6:37hey, let's look at income and income
6:39growth and trends versus cash flows,
6:42right? And one of the biggest risk
6:43factors you can see is if hey, you see
6:45revenue go up, you see income up go up,
6:47but cash outflows continue to get worse,
6:50right? The company's in a negative cash
6:52flow position as a kind of a high-risisk
6:54flag to me of, okay, maybe something's
6:56wrong with the revenue numbers here. And
6:58what what we saw here
7:00>> because more revenue is being booked
7:02than cash coming in the door. So clearly
7:04something's not footing
7:06>> exactly and the company was arguing well
7:08it's because the company's outgrowing
7:09the cash flows like we're continuing to
7:11invoice more and more and so when we're
7:13investing so that's what's driving the
7:15cash outflows but they were also
7:16negative from a cash operating
7:18perspective. And so gut gut goes to okay
7:21well if your revenue is growing and your
7:24income's growing how can you have
7:26sustained cash outflows that tend uh
7:28operating cash outflows that are
7:29increasing at an increasing rate and you
7:31know their response was hey this is you
7:33know fintech we're eventually going to
7:35collect on it maybe factoring involved
7:37um what may you well I would normally go
7:40then to the contracts at the customer
7:41level like that's what 606 is is you
7:44know revenue ultimately is just a
7:45transaction with a customer which is a
7:47contract with a customer or revenue is
7:49fundamentally contracts and um and you
7:54that's where all the dirty laundry is
7:55where essentially we would we found you
7:57know first well is it 100 or $3 that
8:01we're like are we entitled to all the
8:02revenue or just a portion of the revenue
8:04in this case I would have argued it was
8:06a portion they had third parties that
8:08they were invoicing and then pre
8:09payments for but then had refund rights
8:11associated with some of those
8:12prepayments they also were prep
8:14pre-invoicing like a lot of us in FPNA
8:17world know that we tend to treat
8:19invoicing as revenue. That tends to be
8:21the like the default for most systems
8:23and in the accounting world it isn't.
8:25You can recognize revenue prior to
8:27invoicing or post invoicing depending on
8:29the performance obligation satis
8:30satisfation um or how you satisfy the
8:32performance obligation and in this case
8:35uh they were invoicing and recognizing
8:37all of this revenue but then most of the
8:39revenue itself wasn't collectible and
8:42they weren't recognizing that
8:43collectibility in the allowance for
8:44doubtful accounts. And this was this got
8:46through a clean audit opinion because
8:48it's so technically complex, but you and
8:50you really had to dig through the
8:51contracts to realize that there is
8:52actually no entitlement to these cash
8:55flows that they were recognizing
8:56revenue.
8:56>> So how many audits did they go through
8:58where they got a clean bill of health on
9:00their deferred revenue?
9:02>> Well, and so this
9:03>> or recognized revenue.
9:04>> Good question. Most of the time when
9:06companies are acquiring these smaller
9:08entities and 100 million I'm saying
9:10small,
9:10>> they haven't hit audit yet.
9:12>> Yeah, they haven't hit audit yet. this
9:14one had or they or they hire a mid-tier
9:16or small firm that has gone and done
9:19their audit just for the acquisition or
9:22just for the offering right and um and
9:25I'd say unfortunately much of the time
9:28these small firms don't have the
9:30technical expertise to opine on revenue
9:32recognition at the level needed
9:35especially in complex technology and
9:36fintech environments and so in this case
9:39they rely on management representation
9:41that the numbers are factually correct
9:42that's part of like part of the audit.
9:44It's like materially represents it
9:46accurately and based on management
9:47representation of the numbers and so
9:49management represented the numbers this
9:50way wasn't in my view a factual
9:52representation and once again it's a
9:54small company so management
9:56representation depending on who you've
10:00hired that's that's good or that that
10:02can be the same problem
10:04>> as a smaller audit firm right is you you
10:06you still have skill gaps there
10:09>> exactly you have skill gaps in the audit
10:10firm and not knocking small audit firms
10:12they have their place And you can have
10:13talented people, but technical 606 and
10:15fintech and technology is a very rare
10:18skill set. Um especially with this
10:20background like most people don't go
10:22through big four then go through
10:24national office uh national office where
10:26you're debating very highly technical
10:28one-time transactions and then become
10:32CPA become CPAs and then practice this
10:35and practice and see what it looks like.
10:36There's just not a lot of those people
10:38out there. And so it leads this big risk
10:40for these smaller companies, these
10:41smaller acquisitions where almost all
10:43the time there's a misrepresentation,
10:45maybe not intentional, right? It's
10:47either it's normally management
10:48competency and audit competency that
10:50comes that comes into play or management
10:53>> maybe there's factual misrepresentation,
10:55but it's hard to I'm not the judge
10:57there. You know, you can
10:59determine
10:59>> that would be an unfair judgment, too.
11:01There's not enough information there.
11:03And before we get into the details, cuz
11:05I know you're trying to go there and
11:06that's where I want to go, but I'm
11:07curious, did the buying So on the buy
11:10side, they contacted you to help with
11:12this diligence. Yes,
11:14>> correct.
11:15>> Um, specifically for just the revenue
11:17portion or all of it?
11:18>> Yeah, I I have a team that I work with,
11:20one of the uh one of the companies I
11:22help advise, Principal Consulting Group,
11:24does the financial due diligence um in
11:26these type of transactions. I normally
11:28don't do it through my my company, but
11:30uh but in this in this case, that's
11:31where I've been. like a company like
11:32Principal Consulting Group, I help
11:34represent, they call me in um it wasn't
11:36necessarily Principal Consulting Group,
11:38but they call me in and uh and have me
11:41help me I help look at the overall
11:43transaction and then I also focus I just
11:45have a deep expertise in the revenue
11:47recognition area,
11:47>> right? So, so that's where you just you
11:49default to looking at that in in depth.
11:52Um, I'm sure you look at everything in
11:54depth, but but certainly like I'm always
11:56interested in revenue because I I kind
11:58of got into FPNA through billing and
12:00through revenue recognition, right? So,
12:03um, but
12:03>> that's what most companies are buying,
12:05right? Like at the end of the day,
12:06you're you're buying the revenue and you
12:08want to see the quality of your
12:09earnings. The opex is stuff that you can
12:12opex and cost of sales are largely the
12:15most adjustable aspect of the business.
12:17The revenue is what you're really
12:18purchasing and the customer
12:19relationships.
12:20>> Yep. Exactly. Um, the company though
12:23that called you, did they already have
12:25any concerns about revenue or there were
12:28things that they missed too?
12:29>> No, most of the time what happens is
12:31like they the normally in-house
12:33diligence teams give me a call and say,
12:35"Hey, this is really exciting. We really
12:37want to move forward with this. Um, make
12:39the purchase. It sounds really
12:40compelling. We have a limited time
12:41window to make the offer. Can you look
12:44really quick at what's what's going on
12:45here and can you agree?" And I in this
12:48instance I come back, you know, over a
12:49weekend and say, "Hey guys, you're
12:50totally missing the story here. Is there
12:51something?"
12:52>> Oh, wow. Over a weekend.
12:54>> Yeah. Yeah.
12:54>> Okay. Well, that's that's a really quick
12:56turnaround. So, you're you're spending
12:58that weekend kneedeep in contracts. I
13:00think that's where we left off. You're
13:02kneede in contracts. What is it that you
13:04saw that was was the killer?
13:07>> Yeah. So realizing and mapping out the
13:09transaction flow becomes really
13:11challenging for a lot of a lot of teams.
13:14But realizing that there was these third
13:15party relationships and that there was
13:18an invoice to this third party and they
13:20were recognizing their revenue like
13:22tying that to the system is pretty
13:23challenging, right? reading the contract
13:25realizing that they're recognizing the
13:26revenue based on those specific
13:28invoices. And then uh so the the the
13:32gross invoices, not the net customer
13:34relationship that they were uh relying
13:36on that they didn't have relevant cost
13:38of sales, you know, in this industry. So
13:40it was very distorted like there's not a
13:42not a margin consideration in fintech
13:45necessarily. Um so you just have opex
13:47offsetting it. So revenue looks really
13:48strong. So that was the first piece and
13:50then the second was realizing that in
13:52the contract there was actually no
13:54contractual right to receive payment
13:56when they were doing invoicing. And so
13:58when they were they would were invoicing
14:00ahead of their contractual right to do
14:02so. And so in this instance, let's say
14:06this company was a type of company that
14:09uh let's say I I'm going to try to scrub
14:11it. So don't don't indict anybody. But
14:13the the idea would be like, hey, I tell
14:15you to do something. And then you hire a
14:18third party to go help you do it. And
14:20then once that or I hire a third party
14:22to go help you do the thing that you
14:24want me to go do. You hire me to do
14:25something, I you hire a third party to
14:27go do that thing. I'm invoicing as soon
14:29as you ask me based off that third
14:32party's ask, based on everything the
14:34third party is going to collect, even
14:35though they're doing everything. And
14:36then at the point in time that I send
14:39that invoice, uh, I'm recognizing my
14:42revenue. But my contractual right is I
14:44only am allowed to any payment or to
14:46invoice you at the point in time that
14:49you ultimately have felt that the
14:53service is completed upon acceptance. So
14:55in that case, it wouldn't even be
14:57matching matching to the service period.
14:59You're going one step further and saying
15:01now you as the client, you're satisfied
15:04with what was delivered.
15:06>> Yeah. Exactly. And so I would I I
15:08wouldn't have a contractual right to
15:09invoice you until you're like, hey,
15:10yeah, you did that the third party did
15:12everything. We're good to go. Send me
15:14the invoice. As soon as you asked me for
15:16the work, I was sending out these
15:17invoices
15:18>> and recognizing [clears throat] the
15:19revenue related to it. And that led to
15:21this huge collectibility issue. But then
15:24they were saying it's not a
15:24collectibility issue because if you go
15:26to these people, they're like, "Yeah,
15:27we'll pay them once the service is
15:28completed." You had these huge trailing
15:31invoices for a bunch of work that they
15:33didn't necessarily agree to the scope
15:35on, right? That like if I was to tell,
15:37like you and I were in a room and I was
15:38like, "Hey, I'll do anything you want.
15:39Just tell me and and I'll get it done."
15:41And you're like, "Yeah, as soon as you
15:42get it done, I'm happy with it. I'll pay
15:44you." And then I just start shipping a
15:45bunch of invoices to you for all this
15:47work that I'm doing or like kind of
15:49holding the invoices, billing holds. um
15:52that can be uh you you don't have to
15:54necessarily know about those invoices
15:56and you don't really care about them
15:57because you're not going to pay them
15:58unless I finish the thing anyways,
15:59right? So So it can really boost up in
16:02this case it really boosted up revenue a
16:04ton on their balance.
16:06>> How old is this company?
16:08>> Only a couple years old.
16:09>> Okay. [clears throat] I mean that's long
16:11enough obviously to to compound into 100
16:14million.
16:16>> Um
16:17>> yeah. So
16:18>> did the customer ever see the invoice?
16:20>> Yeah. So that black box for me but
16:22ultimately what I looked at is
16:24contractual right to invoice of like
16:26what was satisfied what was their
16:28contractual rights and and in practice
16:31the contractual right was like hey you
16:32don't really have any right to ask for
16:34payment until you complete the service
16:36and do you have any recordkeeping of
16:37completing these services and they
16:39didn't they didn't have a great record
16:40the cash receipts was kind of the record
16:42of completing those services right and
16:44so yeah it's a lot of detail you have to
16:46go through to really validate that the
16:48revenue number was actually correct I
16:50mean, on the top line, it seemed like,
16:52yeah, this is this seems reasonable, but
16:55um if you dig into it, you could quickly
16:57see that, wait, they they're probably
16:58not going to collect all of this,
17:00>> a substantial amount of this,
17:02>> right? So, what did their actual let's
17:04say collection rate look like? Was that
17:06also very poor? Was that one of the
17:09flags that said, "Hey, let me now like
17:12like what were the steps? Did you just
17:14know enough about this to go straight to
17:16the contract or did you look at it, you
17:19know, look at more of the items on the
17:22balance sheet and say, "Hey, the
17:23collection rate sucks. The the operating
17:26cash sucks or stinks, right?" And then
17:29you went to contracts or was it just
17:31like, "No, I've done enough of these."
17:33Um, we know, I mean, you have big four
17:36experience, so I know enough to go just
17:38straight to the contract because that's
17:40where we're actually going to be able to
17:42tie a legal obligation to that cash
17:46handoff.
17:47>> Yeah. I kind of do it in tandem, right?
17:48And so I almost always first I try to
17:51look at it's one of my philosophies in
17:53business is like I try not to be biased
17:55by management representation. So I like
17:58first let's just look at the numbers
17:59>> of hey what's this the story of the
18:02numbers telling me cash outflows income
18:04the cost related to it and then I go
18:06don't look at footnotes or anything like
18:08that I I try to avoid any bias try to
18:10come to my own conclusion and then go
18:12straight to the contracts and say okay
18:13what what do the revenue contracts
18:15actually state um and then I try to make
18:17my own opinion and then go and see what
18:19they disclose like how did they they
18:21determine that these numbers should be
18:23disclosed and that's where I go oh aha
18:24you know this is very different than
18:26what I'd expect and you know what
18:28happened at the end of it is it turned
18:29out you know the cash outflows operating
18:32cash outflows was more of more correct
18:34the income basis was the gap basis was
18:36not correct in our view and then after
18:38the business went uh after we declined
18:41which I we helped we helped them make a
18:43avoid a $und00 million mistake right
18:46they ultimately that business went under
18:48immediately after it was kind of like
18:49their last leg to try to get some cash
18:51flow and have an exit because the
18:53business was performing so terribly So,
18:56>> so does that does that maybe kind of
18:58point to they knew what was going on or
19:01was it just a competency issue?
19:04>> Yeah, hard to tell. Not the judge there,
19:06but hard hard to,
19:08>> you know, people can convince.
19:09>> Hard pass on that judgment. I hear you.
19:11It's okay. I'd probably do the same
19:13thing.
19:14>> Yeah. [laughter]
19:15Yeah. Yeah. Hard to Yeah. Hard to think
19:16that people weren't like nervous about
19:18the business and Yeah. And they had a
19:20sellside representative, too, right? And
19:22so who knows what they knew and what
19:24management knew and all that. Yeah.
19:26>> Yeah. I mean I think that's the part
19:27that scares me the the most without
19:30making this entire episode about fraud,
19:32but it's but it's a big one, right?
19:34Because it we can't sit here and say it
19:35doesn't happen. But what scares me the
19:38most about that is let's say within your
19:41own company, right, for our listeners,
19:43you're recognizing revenue the way that
19:46you think that you need to and you think
19:47that you're gearing up for a huge
19:49acquisition, right? you've you've gone
19:52through some I wouldn't say due
19:54diligence but you're thinking that your
19:57multiple is 7x 8x because you're SAS or
20:01you're fintech and then you get to what
20:053 weeks away I think was the story where
20:08someone else comes in looks at it and
20:09they're like no everyone else that you
20:12pass this revenue number in front of
20:15missed it. That's what scares me is that
20:17so many people probably looked at this
20:20number, probably reviewed this number,
20:22trusted this number, and yet um it just
20:25wasn't it wasn't able to be supported.
20:28>> Well, I think that comes from the level
20:30of complexity of this accounting
20:32standard and something that was launched
20:34over a decade ago or about a decade ago
20:37and I've been an expert in ever since
20:38the adoptions I've done. I've read
20:40hundreds of thousands of contracts now
20:41over the last 10 years and done
20:43assessments at a bunch of different
20:44IPOs. I was at Google Cloud as a a
20:47contract reviewer lead over there done
20:50this for a long time and it's something
20:52that people don't understand is that
20:54like the technical guidance is very
20:56complex like if I sent you the guidance
20:58on how to recognize revenue it would be
21:01a combination of like a 500page FASBY
21:04document along with like four different
21:08big four interpretations
21:10>> of that guidance
21:11>> and all that's from a technical
21:13accounting world but I'm not just I'm
21:14also
21:15a teaching finance professor at Santa
21:17Clara and I know finance you don't and
21:19I've also done live in the BD and sales
21:21world and there's not a lot of people
21:22who understand all three like what is
21:25the actual underlying substance of this
21:27transaction how do you interpret these
21:29thousands of pages of guidance and
21:31precedence and then how do you bridge
21:32that to the finance and a PNA world
21:35there's almost virtually nobody like you
21:37know probably 10 people I've met that
21:39can actually articulate how those are
21:41all interconnected and then understand
21:43how it impacts businesses This is a real
21:45problem because it's almost like we'll
21:46just look at businesses at a cash flow
21:48basis at that point because most people
21:51aren't going to be interpreting ASC 606
21:53correctly and and that's the required
21:55guidance. And so if you make something
21:57so challenging to operationalize, it's
21:59like maybe we need to refine it in order
22:02to make it more consistently applied
22:04across companies.
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23:03That's a bold claim and a bold point,
23:05but I love bold points that if it's this
23:08complicated
23:09after 10 years of being published, can
23:12we get like a rewrite on this? Right? We
23:15need to review this or provide better
23:17guidance, right? I mean, I've tried to
23:20read through some of that stuff and and
23:21and what it ends up with is just trying
23:24to find other professionals that can
23:27help support or argue my claim, right?
23:30And and I've even seen some CFOs try to
23:33get creative with it or try to say,
23:36"Hey, well, we still need to recognize
23:38the revenue, so let's rewrite the
23:40contract." I don't know if that's always
23:42the answer either. What would you say to
23:45that?
23:46>> Yeah, I think I think there is a middle
23:48ground. Like a lot of the times like
23:49financial due diligence is one of many
23:51things that I've done throughout my
23:53career. What I tend to specialize in is
23:55in transactions themselves. And I think
23:57one of the most advantageous things a
23:59company can do is have an expert who
24:01understands a combination of deal flow
24:05um deal economics, technical accounting,
24:07legal and uh and finance. And it just so
24:12happens CPAs with this kind of
24:13background tend to bridge all those
24:15gaps. It's part of our education. It's
24:17just very rare to find those people.
24:18[snorts]
24:19And like coming from an accounting lens,
24:21the accounting guidance that 500 pages
24:23wasn't written by a bunch of idiots, you
24:24know, in a black box. are extremely
24:26intelligent people have seen a ton of
24:28transactions and there's actually best
24:29practices embedded in them like hey we
24:31should be very clear about what our
24:33promises are in a contract
24:35>> extend that yeah
24:36>> yeah we should be very clear about the
24:38termination rights and the enforceable
24:39rights and obligations in our contract
24:41uh from a pricing perspective we should
24:43have standardized pricing mechanisms and
24:45skew management with from recognizing
24:47revenue we should be clear when we're
24:49delivering our processes at a point in
24:50time and overtime and like if companies
24:52do adopt that in practice they're going
24:54to run a better business like that's a a
24:56lot of companies are really sloppy with
24:58their offerings on what they're actually
25:00trying to sell or they're always
25:01creating new offerings and not having
25:02good skew management. So I I think
25:04having a revenue expert in the room
25:06across those I think the spirit of it
25:07was corrective like there's nothing
25:09wrong with bringing someone in being
25:10like how can we structure this contract
25:11better to get the commercial outcome
25:13that we desire and then that accounting
25:15outcome might also be favorable too
25:17because we're aligning on the commercial
25:19outcome but you don't want the tail to
25:20wag the dog. We shouldn't be like, "We
25:22need to make
25:24>> $10 million in earnings this year. How
25:26can we start screwing with contracts to
25:27make that happen?" That's that's a it's
25:29a
25:31>> slippery slope, my friend. Yes.
25:33>> Slippery slope. Yeah.
25:34>> Yes. Um so then just thinking about
25:37three different stages of companies with
25:40with this problem. Um your your smaller
25:42company, they're going to be kind of
25:44more in that mindset of I just need to
25:46get to that next milestone. I need to
25:48get from 10 to 20, from 20 to 50, right?
25:52And so they they might actually be
25:54chasing chasing that number more than
25:56they're chasing accurate revenue
25:58recognition. Not on purpose, but just
26:02design, right, of
26:03>> Well, if I might pause you, I got a good
26:05story there.
26:06>> Okay, tell me.
26:06>> I have this I've worked with a unicorn
26:08company and scares. That's what worries
26:11me for our listeners at these different
26:13stages is how do we get ahead of it
26:15because it's clearly a problem a hundred
26:17million dollar problem to be
26:19>> yeah know this one was a I'd say a
26:21multi-billion dollar problem that I've
26:22worked on one of the many preipo
26:25companies I worked with earlier on in my
26:26career there was the guidance was new
26:30there's a CFO who realized that this
26:32guidance was intentionally more judgment
26:33based and determined that like some of
26:36their contracts they should be
26:37recognizing they wanted recognized on a
26:40ratable basis so they could recognize
26:41more earnings in the future, but they
26:43wanted to split hairs on certain
26:45contracts and recognize them upfront and
26:47other contracts they wanted to recognize
26:48on a consumption basis because he wanted
26:50to manage his earnings. Um, and this was
26:54completely not okay. And ultimately my
26:58this is my perspect perspective. This
26:59company was very hot unicorn company
27:02getting ready for a billion dollar um
27:04IPO, billion dollar plus IPO and then
27:07they ultimately didn't go public because
27:09the auditors weren't comfortable with
27:11the all these positions the CFO was
27:13taking. And my personal view was that
27:15this company lost all of that money from
27:18the competency and the ethics of that
27:20CFO, right? they from them splitting
27:22hairs like maybe he they were
27:24prioritizing you know they were
27:26ultimately prioritizing how much
27:28earnings they were going to get or the
27:29valuation trying to have dry valuation
27:31but they were like they were splitting
27:33too many hairs there and so it's not
27:35it's not unheard of and I'm sure it
27:37happens more often than we care to admit
27:39in the market
27:40>> just kind of highlights the importance
27:42of if you don't have the cash flow to
27:47hire that higher level CFO that's Okay.
27:51On your day-to-day, but quarterly,
27:54annually, I mean, what's the answer?
27:56Annually, are we bringing Do we need to
27:58start bringing in a revenue expert to
28:00just kind of give a onceover on our
28:03books? Is is that money well spent? If
28:06we are chasing a private equity or a
28:09merger or an IPO, we need to bring
28:11someone else in.
28:12>> Yeah, I think so. I
28:14>> Or do we need to hire differently from
28:15the beginning? Yeah, I think
28:17unfortunately this space I do think
28:19there's been a trend of and I love my
28:20finance people, right? Again, finance
28:22professor here, but I think there's been
28:23a trend of more finance, pure finance
28:26people going into those leadership
28:29positions and less accountants, right?
28:31CPAs tend to go more the CEO controller
28:34route. 30 years ago, it was pretty
28:36common for them then to go to the CFO
28:38path. But now I think we see more of a
28:40path of investment bankers, FPNA going
28:42to the CFO path and don't have the
28:44technical uh the technical accounting
28:46grounding because quite frankly let's be
28:49real companies are trying to look as
28:51good as they can and they feel a lot of
28:52the times that the accountants are
28:53slowing them down. I gotta say like
28:55being in the room, being on duels desks,
28:57you can find people who aren't going to
28:58slow you down, aren't going to help you.
28:59But I know there's that market
29:00perception there that like that branding
29:02from accountants is like or compliance
29:03based function. And so um
29:06>> so CPAs need a rebrand
29:08>> clearly because 1 billion 1 million I'm
29:11sure you have several other stories that
29:14that look very similar and sound very
29:16similar in in in the dollar amount.
29:18>> Yeah. And we can be talking to each
29:20other more like like the FPNA teams like
29:22one of the best partnerships I can have
29:24is strong FPNA teams who are interested
29:25in the accounting and accountants who
29:27can make and educate those teams
29:29effectively and communicate effectively
29:31while holding ethical guard rails
29:33because ultimately the ethics are going
29:34to drive you know the sustainability of
29:36the business. You can't split hairs with
29:38contracts. But um it's tough to hire I
29:40guess. And if my argument there is it's
29:42really tough especially for small
29:44organizations to hire uh for these the
29:46skill set because it's so rare and so
29:50expensive and then FPNA teams don't a
29:52lot of them don't tend to care about the
29:53606 or technical guidance and then the
29:57accounting route there's not really a
29:58path to those leadership roles a lot of
30:00the time and the CFO suite through those
30:02revenues and quite frankly like this
30:04expertise we're talking about ahead of
30:06revenue at a small public company or a
30:09large private company might be making
30:11$700,000 a year, $600,000 a year. So,
30:13it's a very expensive full-time head for
30:15a small company, right? That's not
30:17that's not going to be something most
30:18people can afford. And when you start
30:19dipping below that $300,000 a year line,
30:22you're not going to find the quality or
30:24expertise that you need. So, yeah,
30:25there's a company sitting at 50, let's
30:28just say 50 million to 100 million or 20
30:31million to 200 million, what can they
30:34do? They can't afford a 700k
30:37full-time employee, but what can they
30:39do?
30:40learn about it. Like there's educational
30:42resources. I make some of them as a
30:43professor. I also have done workshops.
30:46Get a workshop for your team. Like if
30:48you can't full afford a full-time
30:49consultant at a $400 an hour rate or
30:51whatever, $500 an hour rate. Get a
30:53workshop like hey tell us what we're
30:55missing here. Do a quick assessment a
30:56onetime flat fee. Or if you can at least
30:59get in a consultant on retainer like a
31:01fractional heads of revenue can be
31:03great. or like, hey, people have hired
31:05me to do that all the time where I go be
31:07a VP of revenue or head of technical for
31:10five hours a week. You pay what 10
31:12$20,000 a month, but at least you have
31:14someone in the room, especially through
31:16prepping for a transaction can be
31:18extremely valuable, at least like to
31:20call a friend.
31:21>> How far out from that transaction should
31:23you really be concerned about your
31:25revenue? I mean, I I'm of the mindset
31:28that you just need to be handling your
31:30revenue correct from the beginning,
31:32right? and and what it takes is is is
31:34what it takes. And and I think if you're
31:36a smaller company that tends to lean
31:38more to educate yourself. Um I lean more
31:42towards in a smaller company, you should
31:43have a controller before you have an
31:45FPNA person.
31:47>> That's that's just me.
31:48>> Um so that your books stay clean while
31:51you're going through that growth phase.
31:52Um and then you can contract the FPNA
31:55out rather than accounting out. my fresh
31:57opinion and I am I'm in finance and I I
32:00will still say that after being in um
32:03you know growthbased company after
32:04growthbased company the controller is
32:06actually the better bet. But my my I I I
32:11guess I guess my question there is
32:12you're you're a smaller company, start
32:14with clean revenue. But if you didn't or
32:18you can't or you're already at the 2 3
32:20year mark and now you're looking for
32:22that next transaction or transition, how
32:26far out should you be calling someone?
32:29Is it 6 months, 12 months? What is it?
32:32>> And I'm totally realistic here. Like I
32:34advise a lot of startups. I'm a serial
32:35entrepreneur myself. I don't think if
32:37you're in year one and two and just
32:38trying to get your business afloat and
32:40generate cash flow that you necessar I
32:42think controller is a good first hire
32:43once you have a certain amount of like
32:45cash flow coming in the door.
32:46>> Yes. Yes. I I I should I should have
32:48said that right. I'm not talking about
32:50oh at 100k you need to go get a
32:52controller. I'm talking at like five
32:54seven million. Let's let's not make sure
32:57we have controller in the seat.
32:58>> Yeah. But at least have a bookkeeper
32:59beforehand or something like a team an
33:01outsourced team beforehand. But as soon
33:03as you're I I think as soon as you have
33:06a controller, that's probably the next
33:07right person to have. Like that would be
33:09my next in the sequence is having
33:12someone who understands revenue and not
33:13looking at it just from a I need a
33:15compliance person to make sure I'm set
33:18for my transaction, but more as like a
33:20strategic partner. Here's someone who's
33:23looked at there is the right person with
33:25this level of expertise. someone who's
33:27looked at hundreds of different
33:29businesses and tens of thousands to
33:30hundreds of thousands of different
33:31revenue types of contracts and
33:33understands legal finance, accounting uh
33:37and uh sales and deals desk positioning
33:40and sales ops. Yeah, that that's a huge
33:42but that's a huge asset. So, it's like,
33:44hey, that's not just someone who's going
33:45to come in here and can help you
33:47>> like, oh, what's your technical
33:49conclusions for this and how can we make
33:50sure we line it up? I think of it more
33:52as like revenue architecture of hey
33:54here's somebody who can come in and tell
33:55you how if your pricing makes sense do
33:57you need to fix any of these processes
33:59how can you scale to get to the next
34:01step it's like a strategic it's a
34:03strategic partner in your business and
34:05we're seeing this more and more like if
34:06you look at the trends of revenue
34:07accountants over the last 10 years
34:10there's a huge increase in like heads of
34:12revenue position or VPs of revenue this
34:15wasn't really like a thing 10 years ago
34:17like 10 years ago VP of revenue or head
34:19of revenue and most organizations
34:21That's someone who helped you like
34:22manage orders and occasionally looked at
34:24a complex contract. But now it's like a
34:27real strategic thought partner in a
34:28business partially because businesses
34:30have become sophist like exponentially
34:33more sophisticated with AI. Like what 10
34:36years ago a good business had a website
34:38up and sold one product. Today it's
34:41probably a combination of implementation
34:43services
34:44uh a softwarebased product that has AI
34:46consumption under it probably a part
34:49data partnering and exercises and
34:51connections attached to it along with a
34:54variet and we're probably doing new
34:55launches every single month not every
34:57single Yeah. So it's like a completely
34:59different business market with a
35:01completely layer of different expertise.
35:03If I want to be clear. If you're in a
35:04market where you're just you're like
35:06you're just we're just selling shoes, I
35:09don't think I'd be worried here. I'm
35:11talking to all everyone here who manages
35:13the new AI businesses, new consumption
35:15based pricing software businesses for
35:18new like
35:19>> you have subscription. You have um resid
35:23residuals third parties that that's
35:25doing some of the work.
35:27>> Yeah. And partnership ecosystem, right?
35:29The partnership ecosystem has
35:30drastically changed like almost it's
35:33like table stakes now when you're doing
35:35business to have strategic partners and
35:37to have a referral relationships and
35:39revenue shares and go to mark joint go
35:42to market strategies and to invest
35:44equity in one each other and to like all
35:46of that's kind of table stakes for the
35:48modern business just because there's so
35:50many new businesses coming out and the
35:52competition has increased so much. So of
35:54course the technical expertise needs to
35:56increase to match that. And so having
35:58someone in the room who's seen best
35:59practices is actually extremely
36:00valuable. So I I kind of go away from I
36:03wish from a from a CPA lens of like you
36:06need a technical accountant like you
36:07need a revenue expert strategic partner.
36:10You need a
36:11>> someone who kind of lives in the the the
36:15cross-section of of all of those.
36:17>> Yeah. And we need more people in that
36:18field. We need more people to take that
36:20up. Yeah.
36:20>> Yeah. So I mean so because I was going
36:22to ask it that sounds like to me someone
36:24who has big four experience and then
36:27lived in a a decade or two really in the
36:32business that has those complex
36:34arrangements, right? Not someone who
36:36just knows it in theory but then saw it
36:39in practice I think is important. But my
36:42question to you would be then I'm I'm
36:44reading there's not a lot of accountants
36:47period in school. there's not a lot of
36:50accountants that want to then get their
36:52CPA like where there's there's like a
36:55black black hole that's happening right
36:58now with accounting.
36:59>> Yeah, it's very unfortunate and there's
37:01always these challenges like even being
37:02in accounting organizations like at
37:04Google uh I knew accountants made 10%
37:07less than their FPNA counterparts,
37:09right? Just being just being framed as
37:11that. But then the expertise and
37:13requirements were so heavy on some of
37:14those and that's pretty standard across
37:16organizations. And so those incentives,
37:18if they're not lined up, then of course
37:20you're not going to have as many people
37:21want to go into the accounting
37:22profession, right? Like why why go in
37:24the accounting profession and have to be
37:25held to the CPA and regulations
37:27according to it when you could not go
37:30the CPA and potentially get paid more.
37:32So I think there's an incentive
37:33structure like supply demand. And I
37:34think we're starting to see that change
37:36a little bit. Like I said, like I think
37:38uh heads of revenue and very technical
37:40roles there, the total compensation
37:43packages have increased drastically over
37:44the last year. While like the job market
37:46has otherwise been relatively stagnant
37:48or declining, some of these very
37:50technical roles have been very strong.
37:52Um
37:52>> I mean it's a technical role, but it
37:54also needs to be a a a business partner
37:57role.
37:58>> Exactly.
37:59>> So
37:59>> exactly. If you look at any, you can
38:00look up one of these job wrecks, any of
38:02them will be like no technical
38:03accounting, work with sales, be able to
38:05work in deal flow, be able to understand
38:07the systems underlying it, understand
38:09our business model, understand our
38:10pricing. It's like, man, that's a like a
38:12seuite level ask essentially of like the
38:15level of requirements that this or
38:17expertise that this person needs to
38:19have. But but to your point, if if that
38:22role is growing, then at least for
38:26>> the CPAs currently, there's a route to
38:30that. And if you're a strong FPNA leader
38:32who already has everything else on that
38:35uh ask right for that role, then maybe
38:38investing some time in learning at least
38:43revenue recognition rules, right?
38:45because that is where the company from
38:48what you've seen lives or dies in a
38:51transaction.
38:52>> Well, I would say I I've worked with
38:53great FPNA people who like it doesn't
38:55need to just be an accountant. It's just
38:56a skill, right? Like you just got to
38:58learn the technical jargon and I've seen
39:00great companies like Google Cloud. We
39:02rotated I had good friends in FPNA who
39:04rotated into the technical deals desk
39:06area and picked up those skills. And I
39:08think that's a very good and dangerous
39:10person to be. It's like you have the
39:12finance skills and now you learn the
39:13technical accounting. It doesn't need to
39:14be one path fits all, but it's it's
39:16their own unique skill that needs people
39:18need to be picking up on because there's
39:20not enough expertise in the market. And
39:22there's honestly, it's like a lot of
39:23people aren't even aware of how
39:25important it is, right? Like like like
39:28there's so many unknown unknowns of
39:30people who don't even realize that
39:31revenue can be skewed the wrong way or
39:33that or that there's these type of
39:35experts out there. So, I appreciate you
39:37making a platform for it. Yeah, I mean I
39:39I learned that revenue could be skewed
39:41different ways because I just naturally
39:44watched, you know, in some of these SAS
39:46companies um contracts being adjusted or
39:50whenever there was a question about
39:53booking revenue,
39:55uh my CFO was a actually came through
39:58the big four and so we always made sure
40:00that the contract matched what we were
40:03um booking and revenue actually lived
40:06under finance. instead of the controller
40:09at the time. And my natural inclination
40:13was, well, if we're making sure the
40:16contract is matching the revenue, the
40:18reverse can be true where there's a
40:20company that doesn't realize that
40:22they're misaligned and there's there's
40:25errors, right? It's it's like the ying
40:26and the yang. If I'm learning the good
40:28way of doing it, someone's someone's
40:31doing it the misaligned way. I'm not
40:32going to say wrong because you don't
40:34know what you don't know, but you don't
40:35know what you don't know. So here we
40:37are.
40:37>> Exactly.
40:38>> Here we are. And and you know we talked
40:40about um the consumption based billing
40:44model which is fascinating to me because
40:46it is happening in SAS in tech and
40:49fintech. When I first started 18 years
40:52ago, we were actually getting a like we
40:55were careful in um the SAS um with our
41:00software to not do consumptionbased
41:02because the consumer the customer felt
41:05that it was nickel and dimming them. Now
41:0718 years later, they're getting tired of
41:10subscription and we're moving to
41:11consumption or is that just hey Claude
41:14and chat GBT with their consumptionbased
41:17billing kind of opened up the gates for
41:19that and now it's standard where where
41:22did this where did the shift happen?
41:24>> Yeah, I think there's a few key shifts
41:26and I'd say I don't think the jury's out
41:28on what people actually want, right? Um
41:32and so I've done a lot of research on
41:33this. I had some writeups as well. But
41:35one shift is let's look at costs. Well,
41:38if Anthropic and OpenAI are going to
41:41charge on a usage based pricing for you
41:43to control your margins on software that
41:45now has all these like all these LLMs
41:47embedded in it to control the margins,
41:49they have to have some kind of tie all
41:52like profit share relationship. So usage
41:54based cost helps with that. like well if
41:56I know chatb is going to charge me per
41:58token I better charge a little bit per
42:00token too so my customers don't take
42:02advantage of my pricing structure my
42:04routable pricing structure right so
42:06there's one thing of just cost behavior
42:08with big companies driving all these
42:10changes to protect margin the second
42:13>> but you can still just bundle that in
42:16>> yeah yeah so I think yeah again and I've
42:18worked with companies like yeah even
42:20though that's a case I think ratible is
42:22what customers tend to prefer especially
42:23if you're B toC and um or beta like
42:26light B um and so it makes it a lot
42:29easier
42:29>> itemized view.
42:31>> Yeah.
42:31>> They don't want to trust that your
42:33number is all-encompassing. They they
42:35they want the itemized view now.
42:37>> Yeah. Exactly. And then uh and there's
42:39ways to get around it like hey you could
42:40have minimum commitments
42:41>> that have a certain dollar value
42:43threshold and then you can say hey we're
42:45going to charge you ratibly across this
42:47but we're going to meter it by
42:48consumption based and if you go over
42:50we'll have anti-abuse provisions.
42:52there's like there's ways to get around
42:53that cost cost question. So I don't
42:56think that's the main driver. The second
42:57driver is earnings and valuations. Like
43:01we have to be real the SAS apocalypse
43:03has happened and there's been huge
43:04compression on SAS multiples because
43:06reality is you can use AI to code and
43:09generate and create SAS that's
43:11comparable. And now there's the world of
43:13what I call customized SAS, right? where
43:15you can have specific engineers build
43:17specific platforms to solve unique
43:18problems rather than going out of the
43:20box and have to and have to have
43:22customization which cost a bunch. So um
43:24so SAS multiples gone down well how do
43:26you chase the AI trend and actually say
43:27you're AI based well if you told the
43:30consumption based revreck if you look at
43:31valuation trends when companies switch
43:33to consumption based pricing not
43:35necessarily revreck and those can differ
43:37which is important right like the
43:38revreck can be different than the
43:39pricing which also is a confusing area
43:41we could always talk about but um when
43:44they switch valuations tend to increase
43:46because they're saying we're pivoting
43:47more to this AI and customization world
43:49so there's part of that like c companies
43:51chasing that valuation trend
43:53And then third, I think software and
43:56subscription companies kind of got
43:59greedy. I'd say that's the third thing
44:01is like originally it was, hey, we don't
44:02want you to feel like you're nickel and
44:04dimed. We want to feel like you're
44:05getting access to these platforms. Well,
44:07what happened over those 18 years? Well,
44:09we got harder cancellation rights over
44:12like how do we cancel our contracts if
44:13we don't feel like we're getting value?
44:15Maybe the companies didn't keep up or
44:17service their company customers
44:18correctly or outsource their customer
44:21relation relationship departments. So
44:23it's hard to get contact. You don't have
44:25sophisticated people there anymore. They
44:27raise their prices and so now you have
44:29this world agency price without raising
44:31the value or without innovating
44:33something new that you can use. It's the
44:35same product for a higher price.
44:38>> Exactly. So now customers are like it's
44:39the exact same problem that we're trying
44:41to pay for first. Like I don't want to
44:42be nickeled and dimed. Now you're on the
44:44flip side is like I don't want you to be
44:45charging me a bunch of money for things
44:47I'm not using, right? And so I think
44:48that customer perception has swinged
44:50that other direction. And I I personally
44:53believe we'll land somewhere in the next
44:55few years with the AI trend of new
44:57engineers coming in building new
44:59customized products specific to
45:00industries or companies because they're
45:02able to do it faster and then them right
45:04sizing the spend like coming in and
45:06undercutting these SAS companies who
45:08can't keep up. Um, so there'll just be
45:10new entrance that probably go more back
45:12to a SAS model because a lot of
45:13companies once they go the consumption
45:14base are also unhappy. It's like it's
45:17not the great greatest place to be in a
45:18forecasting perspective swing. It's it's
45:20been this way for so long. We're going
45:22to come all the way over to the opposite
45:23side. Realize that that's not exactly it
45:27either. So the the teams that win will
45:30be somewhere back in the middle.
45:32>> Exactly.
45:32>> And maybe that answer is is the
45:34minimums, right? I I don't know. Yeah,
45:37that's my recommendation to companies
45:39right now is and you have to structure
45:41it the right way because then you can
45:42also get ratable rev even if you have
45:44consumption pricing but it's like
45:46establish a minimum commitment that gets
45:49you comfortable margins doesn't screw
45:50over your customer and has an underlying
45:54promise of capacity and then you can
45:56either bill you can invoice ratibly or
45:58you can invoice based on their capacity
45:59and send them a bill at the end of the
46:01commitment period if they're under. Um,
46:03but the idea would be to kind of
46:04rightsize that where, hey, you're never
46:06going to really hit this minimum
46:07commitment threshold and it's more of an
46:08anti-abuse provision of you're not going
46:11to come and screw us over by using a
46:12bunch of this underlying product without
46:14paying the price.
46:15>> Is there a different revenue recognition
46:17rule for that though? Like if if they're
46:19under that minimum, do you ever have to
46:22true that up or is it just based on how
46:24you wrote the contract?
46:26>> Well, so there you go. So that goes ties
46:28us back to the earlier conversation,
46:29right? How complex is that business
46:31model from an invoice revenue?
46:33>> Sounds very and this is becoming the
46:35standard now, right? Like this is kind
46:36of
46:37>> we're not going to get that right if we
46:38didn't get subscription right over the
46:40past 10 years. How are we going to get
46:41this right?
46:41>> Exactly. And so we're seeing all these
46:43businesses move into these consumption
46:44based minimum commitment models. And the
46:47ultimate technical accounting conclusion
46:49on how when revenue should be recognized
46:51and how much ultimately depends on well
46:54how high are your like thresholds for
46:56your minimum commitment values. Do you
46:59intend to charge customers if they
47:00exceed those minimum commitment values
47:02like overages, rights? What happens to
47:04their functionality? Are you going to
47:05still let them have functionality
47:07afterwards? Are you going to use it to
47:08as a negotiation strategy to rightsize
47:10the commitment or upsell them in the
47:12future? U what happens if they're under?
47:14Are you going to how are you going to
47:15invoice them? How frequently are you
47:16going to invoice them? What's the
47:17invoicing cadence? It's a judgment based
47:20conclusion. And based on the judgment
47:21based conclusion, you can land in a
47:23world where you're either rattible you
47:25you're consump purely consumption based
47:27based off of uh that's similar to
47:29invoicing if you're invoicing based on
47:31consumption but there's going to be
47:32allocation differences based on how your
47:34pricing is and what your standalone and
47:35selling prices are. Or there can even be
47:37a third model. It's a hybrid model where
47:39you have a breakage associated and have
47:40to recognize a portion on each quarter
47:42and estimate the future consumption. And
47:44then based on that estimated
47:45consumption, you you true up a little
47:47bit each time to make sure you're
47:48getting like an accurate representation
47:49through the periods. So that's insane.
47:53>> That's insane because I think what's
47:54going to happen is half of the organ
47:57like half of your people are going to
47:58fall to where they really over complic
48:02complicate this and half of your people
48:04are going to fall to where they're not
48:06they're oversimplifying it. Right? And
48:10so I'm I'm just thinking here without
48:12making this a master class and because
48:14we are we are approaching our our hour
48:17in the next like 10 to 15 minutes but
48:19without making it a master class I need
48:21some takeaways. If I'm a company and I'm
48:23listening to this I'm like oh kind of
48:25like so um what do I do now? What are
48:28the three to five things between
48:31contract and my rev my rev practices
48:34that need to align to get me into at
48:37least hey I'm comfortable I'm
48:39comfortable until we're 6 months out
48:41from a transaction
48:43what needs to align here.
48:44>> Yeah. So I I'd say first off make sure
48:47you standardize your offering to the
48:48best of your ability. And
48:51>> that helps with operations by the way
48:52too.
48:53>> Yeah. Which helps with your operations a
48:54ton and your also your customer. Let
48:57customers appreciate it as well to
48:58understand what you're offering and your
49:00pricing structures. And so, hey, what
49:02are we offering? What's going to be the
49:04standard list price and how much are we
49:06going to discount it by? And come up
49:08with some best practices initially on
49:10what's the goal for this offering. Are
49:12we trying to create a great customer
49:14experience where they get access to a
49:15platform? Are we really charging like to
49:18buy each shoe, each each unit of this
49:20product? Where's the customer really
49:21driving the value? and build a contract
49:23around that and be very clear on that.
49:26Um, and also make a clear second make a
49:29clear commercial objective of what you
49:30want for uh your revenue recognition
49:34policy. I would say like if if you don't
49:37want to go into this complex consumption
49:38based world and you want ratible revenue
49:41recognition because you view your
49:43company as more of a SAS type like
49:45product even in the AI world it's
49:47probably worthwhile even early on
49:48getting an expert at least for 10 or 20
49:51hours to give you some advice or do a
49:53workshop with you on how you could
49:54structure your business to accomplish
49:57that in a way that auditors would be
49:59comfortable with if you were to have an
50:00offering so at least you don't go too
50:01>> I think that's probably the best I think
50:03that's probably the best suggest gestion
50:05there.
50:06>> Yeah. Yeah. And then third would be then
50:09deal uh playbooks and deals desk deals
50:11desk procedures of once you are aligned
50:13on your ultimate vision of what
50:15customers want and what you're trying to
50:16provide. Is it a platform? Are you
50:17selling each unit or is it somewhere in
50:19between you've determined your ideal
50:22accounting outcome based off of that.
50:24And I'm not saying you can mess with the
50:26accounting outcome, but you've at least
50:27like try to align the accounting with
50:29the underlying business and make sure
50:31that bridges correctly because you have
50:33influence there. Um, then develop
50:36playbooks so that as your business
50:38grows, they kind of know the guard rails
50:40on if a salesperson like I I'm not
50:42trying to be unrealistic here. You're a
50:44lot of don'ts don't have leverage early
50:46on in your business. Even when you're
50:47like a small mediumsized business,
50:49>> you're just like,
50:51>> yeah, just get it signed. Well, the
50:52saleserson needs alternatives and talk
50:54tracks and a good leader in this space
50:56with a like like myself or anyone name
50:58my colleagues I could refer to um will
51:01at least give you those talk tracks of
51:02like hey the customer doesn't want this
51:04discount. Well, can I offer credits? Can
51:06I offer cash rebates? Should I invest in
51:08the customer? Can we do co-arketing? Can
51:11we can I take away the minimum
51:13commitment? The sales team should like
51:14know what will be acceptable so you can
51:17still hold your accounting conclusion
51:18correctly and hold that underlying
51:20commercial business objective. So that
51:22can be really advantageous like bridge
51:24the gap between legal sales and finance
51:26and accounting. Have that have that
51:28documented and memorialized as you scale
51:31and grow.
51:32>> I know we're going to I know we're going
51:33to have a lot of listeners because I've
51:34definitely been in this space and and
51:36and in this situation before it's like
51:39okay I I don't have the time for that.
51:41>> Um and that's a whole another
51:43conversation for another day. But at
51:44least we've kind of brought awareness to
51:47the fact that this is a real this can be
51:50a real problem, right? It can run away
51:52from you without you noticing. So, um,
51:56thank you so much for your time today. I
51:58think we're going to have to cut it
51:59short, though. I feel like we could talk
52:01about this for probably another hour to
52:04to get it right. But but if we start
52:06with those takeaways, um we can at least
52:09get directionally there and then start
52:11improving as as the cash opens up and
52:15and and allows. So before we close out,
52:17I do have our standard rapid fire for
52:20you, something a little bit more light
52:22than our hundred million and billion
52:25dollar problems. Um first question,
52:28what's your favorite Excel function and
52:30why or formula?
52:32>> Oh man. Um, I'll
52:34>> be a goody.
52:36>> Yeah, index match has got to be
52:38>> Yeah. goated, but
52:40>> so far everyone I've asked it's Xookup
52:43or index match.
52:45>> Yeah, I know. Index match dates me a bit
52:47because Xookup is supposed to be the
52:49newer, but who even needs it anymore now
52:51with AI? AI will write all your formulas
52:52for you. Yeah,
52:53>> I know. My my next question was actually
52:55going to be for you um and maybe maybe
52:58we'll have to connect again was how much
53:00can Claude help with creating these
53:03playbooks, but another question another
53:05time. Don't answer it now. We'll leave
53:07it on a cliffhanger.
53:08>> Um number two, I usually ask our guest
53:13um to tell me something uh that people
53:16don't know about you or something that
53:17they can't find on LinkedIn. But in this
53:19case, I am going to ask you to tell us
53:21about something I found on LinkedIn
53:23about you, which is that your book just
53:27launched yesterday or Monday, was it?
53:31>> Yeah. Yeah, that's right. Yep.
53:32>> So, tell us just a quick 15-second clip.
53:36What's your book about and um why should
53:39we all rush for it?
53:40>> Yeah. So, this is a interesting book.
53:42It's a hybrid story about myself. I was
53:44homeless uh and unhoused when I was 18.
53:47My mom passed away when I was 15, never
53:49met my father and eventually am doing
53:52all these technical transactions. I've
53:53worked on deals over $10 billion. And so
53:56I found and I've lectured at finance uh
53:58uh and taught at finance in
53:59universities. And so I try to build a
54:01book that tries to teach personal and
54:02practical finance for businesses and
54:04people that bridges that story of how I
54:06got from homelessness to um working at
54:08Google and doing these crazy
54:09transactions. Uh along with basic
54:11financial principles that everyone can
54:13use and how they mattered to my personal
54:14life throughout my businesses that I
54:16built throughout and how they helped me
54:18get out of homelessness and then how
54:19they ultimately helped me and are
54:21applicable to everything that I do in my
54:23career today. And so I try to
54:24memorialize that in the 10 laws of
54:26finance of 10 things that I think an uh
54:28any person should know about finance,
54:30any educated adult and I've lectured and
54:32taught it at San Jose State and it's
54:34gotten great reviews from my students
54:35over there. So um not a textbook. It's
54:37more of a fun book to read, but you're
54:38going to love it.
54:39>> I love that. I love that. It's like a
54:41it's like a Cinderella story, but it has
54:43practical applications for both personal
54:46finance and companies. And so it's it's
54:49a good it's a good book maybe for your
54:52team or even for your senior who is
54:55going off to college next year, which is
54:57where I'm at. So,
54:59>> exactly. Yeah, a lot of people are
55:00buying it for their kids. A lot of
55:01people are buying it for their kids and
55:02I always have
55:03>> Please learn these finance like rules.
55:06Please. Um, okay. So, next question.
55:09What was your last AI prompt?
55:12>> Polish this email.
55:13>> Okay. Yep.
55:14>> Okay.
55:16>> I like I like a lot of speech to text
55:18and then make making it into emails is
55:20very helpful.
55:21>> Okay. All right. I like that one. Our
55:23next one would be what's one report or
55:27KPI that continues to show up in the
55:29world of finance that we could really
55:31just do without?
55:32>> Oh my gosh. Well, I I think I'll say we
55:34maybe we don't need quarterly financials
55:36anymore. Um maybe we're going to go to
55:38semiannual and it seems like the market
55:41>> I've seen a lot of companies do that.
55:43Yeah. Well, that's
55:44>> that's a whole another conversation. I
55:47>> could have a whole another conversation
55:48on that. I'm very interested in that.
55:51All right. And then our last one. What
55:54is one thing that our listeners can do
55:57tomorrow morning or one question that
56:00they can take to their team that will
56:01significantly improve their finance
56:04function?
56:05>> Yeah. Do we what's our strategy around
56:06revenue architecture for organization in
56:08the age of AI and consumption based
56:10products? I think would be the way to do
56:12it.
56:12>> I love the full circle we keep doing.
56:14It's important. It's very important.
56:16>> Yeah. And I would say I have playbooks
56:19and all that stuff. So people just got
56:20to Google my name and you can find all
56:22my deals playbooks and all things free
56:24for everybody. I have YouTube and all
56:25that on it too. So more than welcome.
56:27Please watch.
56:28>> Awesome. I might be pointing some people
56:29to the um you know technical accounting
56:31stuff because that's definitely
56:33necessary. Um, but we'll also, if you're
56:35listening, um, on Apple or Spotify,
56:38we'll make sure that in the show notes,
56:41we post those links to your book and to
56:44your LinkedIn page where they can find
56:45everything else. And then on YouTube, if
56:47you're watching on YouTube, we'll also
56:49drop that down in the notes as well. So,
56:52well, thank you Devon for coming on
56:54today. I really appreciate you taking
56:56the time to kind of uncover what secrets
56:59can lie beneath. So, thank you. And um I
57:04hope to maybe in the future we can have
57:06you back on.
57:07>> Yeah, anytime. Reach out anytime. It was
57:08such a pleasure. I really appreciate
57:09your time today. Thank you.
57:10>> Perfect. Thank you. So, this one got me
57:14thinking because those two numbers that
57:17we talked about passed everybody.
57:19Management signed it. An audit firm
57:21blessed it. A sellside banker marketed
57:24it. A diligence team read it and got
57:27excited. Every gate built work exactly
57:30as designed. And yet the number was
57:33still wrong. And it took one person one
57:36weekend reading through the contracts to
57:38find it. Devon says that maybe
57:4310 people he's ever met could hold the
57:46contract, the accounting, and the
57:48finance in their head at the same time.
57:50And that that person costs 6 to700,000 a
57:54year, which means almost nobody
57:57listening to this can hire one. That's
58:00the scary part. He also mentioned a very
58:03interesting fact in passing that the
58:07accountants he worked alongside were
58:08paid about 10% less than their FPNA or
58:12finance counterparts. And those two are
58:15actually the same fact. We price the
58:18only skill that catches this below the
58:21skill that consumes it. And then we act
58:24surprised when there's no one in the
58:25building that can step into that role.
58:27So, here's my thought of what we can do
58:29now. If we're not going to talk about
58:31compensation and getting people into
58:34that role, let's at least do this. Let's
58:37pull one customer contract tomorrow,
58:39this week, your largest customer, your
58:43largest product, and I mean, maybe not
58:47one, maybe 10, and read it next to how
58:51the revenue is being recognized or
58:53booked. not the invoice, but what's
58:57actually making it onto the P&L, the
59:00contract, the P&L, face, you know, face
59:02to face, side by side. If you can't
59:05explain in one sentence what you've
59:07promised, what you've delivered, and who
59:10decided those two things were the same,
59:13if there's a misalignment, then you've
59:15just identified the riskiest number in
59:18your model. And so, I'll leave you today
59:22with that. Thank you for joining FPNA
59:25today. I'm your host Sarah Schlott. I'm
59:27always open to feedback, topic ideas,
59:30your own war stories, or even guest
59:34mentions, so please drop them in the
59:36comments or email me at podcast
59:38atthelotco.com.
59:40I'm your host Sarah Schlott. Thanks for
59:42joining.

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