In the office of the Chief Financial Officer (CFO), determining what metrics matter—and how often to track them—is one of the most critical and challenging tasks of the job. “It’s really about finding the right balance between signal and overhead that lays the foundation of an effective finance function,” says Alex Wu, founder and managing partner of CFO Advisors and member of Bessemer’s CFO Council.
So, what are the recommended best practices for identifying needle-moving key performance indicators (KPIs) and leveraging them effectively in board relationships?
As part of Bessemer’s SaaS Finance series, we’re sharing an essential CFO playbook for startup founders on company metrics and board management. Alex joined Bessemer Operating Partner Jeff Epstein for a discussion on navigating the complex world of finance leadership and board governance.
Key Areas of Focus
This playbook is structured into four key areas:
- Identifying and Evolving Key Metrics
- Building a Financial Hypothesis
- Presenting Metrics Effectively to Boards
- Managing Board Relationships and Meetings
- Leveraging the CFO Role for Strategic Impact
Each section provides actionable advice, best practices, and strategies that CFOs can implement to excel in their roles and drive their companies forward.
1. Identifying and Evolving Key Metrics
One of the CFO’s primary responsibilities is to identify, track, and interpret the metrics that truly matter for the business. The true test of whether your startup has the right mix, altitude, and number of key performance indicators (KPIs) lies not in their complexity or quantity, but in their ability to drive meaningful action.
If management meetings consist of reviewing KPI beats and misses without corresponding changes in tactics, strategy, prioritization, or resource allocation, this can be an early warning sign. The entire purpose of KPIs is to serve as a compass, guiding your business towards success by prompting decisive action.
Best Practices for Metric Selection and Management
Focus on a Core Set of KPIs: “It’s really critical that you understand where your company is at and what are the one or two things that they’re trying to prove out,” Alex emphasized. Limit your core KPIs to five to six max to ensure management and the board can easily focus on the most important aspects of the business.
Evolve Metrics with Company Growth: Adjust your metrics as your company progresses through different stages:
- Early Stage: Focus on proving willingness to pay and solution viability. Key metrics might include customer acquisition cost (CAC), conversion rates, and initial customer feedback.
- Series A/B: Demonstrate a repeatable sales cycle. Consider metrics like customer lifetime value (LTV), sales cycle length, and net revenue retention.
- Series B/C: Show the ability to serve customers profitably and potential for significant market size. Important metrics at this stage might include gross margins, customer cohort analysis, and total addressable market (TAM) penetration.
Finance Should Own the Source of Truth: Establish finance as the central authority for all key metrics and data. Alex noted, “We’re seeing more and more in our industry where business intelligence and finance have a strong partnership.”
Think and Talk in Ranges: Acknowledge the inherent uncertainty in forecasting by presenting ranges rather than exact figures.
Standardize Non-GAAP Definitions: Create clear, consistent definitions for any non-GAAP metrics you use. This ensures everyone in your company and on your board is speaking the same language when discussing these metrics.
Use Benchmarks Wisely: Be cautious about benchmark sources and relevance.
2. Build a Financial Hypothesis
The ability to cut through the noise and focus on what truly matters is often one of the most critical roles a CFO can play in an organization. Enter the concept of the “financial hypothesis”—a powerful tool that startup CFOs can use to align their board, management, and the organization.
At its core, a financial hypothesis answers the critical question: “What do we have to believe to achieve our goals?”
Case Study: The Power of Focused Metrics at Startup Z
Jeff shared a compelling case study about a consumer internet search company, referred to as Startup Z. The founder’s initial assumptions led to a projection of $3 million in annual lead revenue. However, actual results differed significantly, emphasizing the importance of focusing on a few key metrics and validating assumptions early.
Key Takeaway for CFOs
Focusing on a few critical metrics and validating your assumptions early can save significant time and resources. Usage metrics, especially for B2B companies, should not be overlooked, as they provide valuable insights into product performance and customer satisfaction.
3. Presenting Metrics Effectively to Boards
CFOs must communicate complex financial data clearly and persuasively to their boards.
Jeff Epstein’s Favorite Board Slides
Jeff recommends starting your board deck with these two slides:
- Top three to five priorities since the last board meeting, with a grading system indicating progress.
- Priorities for the next board meeting, outlining continuing priorities and new initiatives.
Best Practices for Metric Presentation
Use a Simple Red/Yellow/Green System: This visual approach communicates the status of key initiatives quickly.
- Focus on the Future: Discuss future strategies rather than just past performance.
- Provide Takeaways Upfront: State the narrative around the numbers to guide stakeholders to salient insights.
- Highlight Key Decisions Under Consideration: Allow the board to provide input before decisions are finalized.
4. Managing Board Relationships and Meetings
Effective board management is a critical skill for CFOs.
Structuring Effective Board Meetings
- Balance Strategic and Operational Discussions: Spend a majority of the meeting on forward-looking discussions.
- Set a Clear Agenda: Cover updates on top priorities, key decisions, financial performance, and strategic discussions.
- Encourage Active Participation: Foster connections and contributions from board members.
Navigating Board Dynamics
- Conduct Annual Board Evaluations: Regular assessments can help identify and address issues proactively.
- Build Trust through Transparency: Finance teams can build influence by reporting on key metrics.
5. Leveraging the CFO Role for Strategic Impact
Modern CFOs are key strategic partners in shaping company direction.
The Evolving Role of the CFO
- Be a Strategic Advisor: Position yourself as a key partner in shaping company strategy.
- Drive Data-Informed Decision Making: Leverage financial expertise to enhance decision-making processes.
Conclusion
The CFO’s role extends far beyond traditional financial management. By mastering key metrics, building strong relationships with the board, and strategically leveraging data, CFOs can significantly impact their organizations’ success.
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