Introducing CX Cash
Budgeting for your start-up
Apr 15, 2023
Achieving start-up financial success requires modern, data-driven practices. Cash Contextualization (CX Cash) allows founders and investors to base decisions on data.
Preparing your business for Cash Observability
Cartographying your business operations.
Secondary growth drivers (Product & Services development, Customer support)
Profitability (Net profit margin & Gross profit margin)
Customer Lifetime value & Retention rate
One of the most important milestones in the early stage of any business is launch day. It's defining because a failed launch often means the business and its stakeholders will not (and should not) go forward with the development of an idea they hoped would change their life and in some cases, the world. But it also marks a shift in the way the company is thought about and managed.
Before launch, there is no market feedback, for the product or services to be sold are just not public to the world yet. This means it's practically impossible to evaluate and validate decisions with data (even more so if the product is innovative). During this "Phase 0", the founders' experience and talent are the primary drivers of decision. The team is invited to have faith in the founders' intuition and even though some tasks can be prioritized, most of them are crucial to the successful kick-off of the company's offering. This all changes the day the product is launched and this historic day marks the start of a nascent product-to-market feedback loop which should inform most of the founders' decisions for the years to come. Crucially, it empowers top management to base business decisions on solid foundations: the analysis of cold, hard data. Business Research has consistently proven that data-based decisions are more likely to result in business success and all medium to large businesses base most of their key strategic decisions on thorough data analyses and scenarios.
This article will outline the different steps start-ups can take to make the most out of their post-revenue data and inform their strategic decisions going forward. Together, they form a cash contextualization framework ("CX Cash") which will help shed a new light on your business operations and pave the way to sustainable growth.
Preparing your business for Cash Observability
The first step start-ups need to make once the magical first sale hits the end of their conversion funnel is to implement cash observability. Decisions are harder to make in the dark and lighting up business operations at every level should be an ongoing concern. Cash observability happens in three steps.
1. First a business operations map is drafted to conceptually outline the way resources flow within your business entity. 2. Then cash flows are categorized in a tree-like structure which should reflect your company's activities 3. And finally the cash categories defined in step 2 are attributed to parts of your operations map yielding a dynamic picture of the way your business is doing.
We cover these three steps in more details in this section.
Cartographying your business operations.
Your Chief Operations Officer or Chief Financial Officer should draft an operations map outlining how leads are converted to recurring customers (that is, your funnel: direct sales and marketing initiatives) and which other business processes are required for the funnel to run smoothly (product development of course, but also other indirect business operations like brand awareness marketing, customer support, etc.)
This map typically includes your marketing funnel (how to bring potential customers from the awareness stage to the 'recurring customer' stage), your product/service development business operations (Production, R&D, Sourcing, etc.), your customer support operations as well as all functions which are necessary for the company to operate (HR, Legal, Accounting, Finance, Office management, Top management)
The acquisition funnel
The acquisition funnel is the main growth driver of your company. It can be defined as the process your company leads your prospects through when purchasing your products or services. It typically includes different phases:
The awareness phase in which your leads become aware of your product or services.
The interest phase in which they demonstrate interest in what you have to offer
The evaluation or pre-purchase phase which is characterized by the fact your prospects invest some time and effort into evaluating the costs and benefits of your offering
The Decision or negociation phase in which your prospects decide to buy and potentially negociate the terms of the sales contract.
The Purchase phase during which the prospect purchases your goods or services and officially becomes a customer.
Additionnaly, a few other phases can be appended to this basic conversion funnel:
The Activation phase during which your customers fully understand the value your products or services are bringing to the table and become potential long-term customers
The Reevaluation phase, which is concomittant to the activation phase and in which your customers reevaluate the need for your offering
The Repurchase phase in which customers re-purchase your product and potentially sign up for a longer term contract, thus becoming recurring customers
This mental model helps you picture the acquisition process within your company and optimize it each step of the way. Your brand and product awareness efforts should reach as many targeted prospects as possible in order to grow as fast as possible. Your marketing team should focus on enticing interest among your "aware" customer cohort so as to bring as many of them as possible of them to the interest phase. The interest->evaluation phase transition can be increased by setting up a Sales team within your business or by demoing the product in the most effective way possible. Finally, the purchase phase happens when your leads decide to try out your product. Having sales representative talk to them on the phone is paramount to close as many deals as possible and your online funnel should also be reviewed by Conversion Rate Optimization (CRO) specialists in order to make sure you're not leaving money on the table just because transitions to each subsequent phases are not straighforward enough.
This customer acquisition funnel is one of the most important business operation to track and monitor. Most modern CRM should be able to help you structure your efforts using the phases above and let you know in real time the conversion rate you have from one stage to the next. Identifiying your bottlenecks in terms of conversion will unlock untapped growth which is the #1 success driver of any young business.
Now to cartography this, you need to step back and think about all the initiatives your company is taking to drive leads from the start of the funnel to the end. Do you have a sales representative talking to potential buyers on the phone? Do you have a newsletter? Do you have a strong and clearly defined brand identity? Do you have a blog? Do you spend money on paid or organic marketing initiatives? Find all operations within your business which lead to revenue creation, either directly (paid ads) or indirectly (brand design, sponsorships), and try to associate them to the corresponding step of the funnel they're most relevant to.
Search engine optimization (SEO) for example is relevant to the first step (from unaware to aware). A sales team corresponds to the interest -> evaluation & purchase phases. Try to find the right step for each of your growth-related business units. These are your primary growth drivers.
Secondary growth drivers (Product & Services development, Customer support)
Secondary growth drivers are growth drivers which are not directly aimed at converting prospects to paying customers. They contribute to increased revenue through word-of-mouth which can add virality to your growth. The objective here is to focus on the post-purchase journey of your users. Users who are delighted by your products, services or customer support will be more likely to spread the word and bring you more business over time. While primary growth drivers (marketing) is the most effective way to kick-start the growth of your company, secondary ones are key to achieve fast and long-term growth. Practically none of the most used products and services on the planet would have achieved massive adoption without word-of-mouth and virality should be embedded within your offering as early as possible. Only then can sustainable growth be attained.
The two main secondary growth drivers are product/service and customer support and the business operations underlying them should be cartographied right after the funnel. List all initiatives within your company which contribute to a better product or service offering, and more efficient customer support. Do you have a customer support team? Do they use specific tools to do their job (ticket management software, phone support platform, etc.)? Do you have a product development team? Do you do Research & Development? Do you have a technical infrastructure? Each of these business units has costs associated to them. Try to be exhaustive and map all business units which are not directly related to customer acquisition and contribute to growth indirectly. Ideally, you want to associate each of these business units to a step of your post-acquisition funnel (customer activation, customer retention, or customer advocay - driving growth organically).
Tertiary business units - company support functions (HR, Accounting, Legal, Finance, Office, Internal IT)
Tertiary business units do not have a direct impact on your growth funnel. Your company would not operate the same without them but your customers never deal with them directly and are not aware they exist. During the early stages of your company's growth, it's likely you will not have a dedicated employee or team in charge of these functions but they exist nonetheless. Maybe you are doing the recruiting on your own, maybe you are using an internal chat system like Slack or Microsoft teams, maybe you're using GSuite. All these tools and initiatives are company support functions and should be mapped as such. It's important to keep track of them because they can prove to be costly and reduce the amount of cash you will have available to invest in primary and secondary growth initiatives.
Your strategy should be to reduce these costs as much as possible in order to invest in business units which will have a direct positive impact on your growth.
Try to list each of the company support functions within your business and group them in independant units. Typically, most post-revenue start-ups have HR, Accounting, Office management and Internal IT and some have Legal & Finance departments. Based on your business' specificities, you might have additional units - list them all and add them to your business operations map.
Once you have a map encompassing all your business operations, review it and make sure all the initiatives your company takes on any given day can be attributed to one of the functions on the map. If you find anything that's not on the map, it indicates uncharted territory! Complete your business map by adding the missing business unit in the primary, secondary or tertiary category based on if it drives lead -> customer conversion, product virality, or company support. Once your map is ready, it's time to categorize your business activities.
Cash categorization
As businesses operate, they generate revenue and incur costs. Before the operations of the company can be optimized, you need to track and monitor them.
Categorizing revenues
The revenue side is most often the easiest to categorize. Each transaction contributing to your revenue can typically be mapped to a product or service you are selling. These products and services naturally define the shape of your company's revenue. For businesses selling a limited range of products or services, it is often enough to just list all these products and services and their corresponding sales. Some companies, however, tailor their pricing to their prospects based on their purchasing power, geography or other attributes (yield management). If these pricing delimitations do not have a strong impact on the cost or complexity to provide the corresponding products, it's best to stick with a product-based categorization and accept the same product will have different prices depending on who is buying.
If each sale is different and the products or services given vastly differ, you will need to aggregate these sales in easy-to-reason-about categories grouping revenue events which are most similar. This grouping will underly the way you look at your business so it should be carefully approached. There is no single rule which will tell you which categories are right but some principles can guide you while classifying your sales.
The first and most important principle is internal: if the same business units are involved in the sale and marketing of similar products, there is a good chance they should be categorized together. The second principle is external: think about the way your prospects and customers think about your products. If two customers think they're purchasing the same thing, there is a good chance these two items should be categorized together, even if they were priced differently or do not have the exact same characteristics. The third principle is geographical: if grouping your products with the two aforementioned principles yields only a few revenue streams, you might want to add the geographical dimension to the mix to add some depth to your analysis. Most of the time, this is overkill and we do not recommend geographic segmentation unless you sell a large amount of physical products within multiple locations.
Using the three principles above, you will be able to categorize all the things you sell in a tree-like structure. The root of your tree will be the overall revenue of your company and its first branches the key products and services categories you're selling. Sub-branches should represent individual products and the leaves of your revenue tree the most detailed revenue segmentation that's easy to reason about. You do not want more than 10-20 leaves in your revenue tree or the resulting complexity will negatively impact the clarity of the analysis it will yield.
If we take Apple's example, the first branches of the tree will be the different product lines: Mac, iPad, iPhone, Watch, TV, Music. Notice how they reflect Apple's website categories - that's the sign of a sharp categorization. These first branches will be subdivided in sub-branches: Macbook Air, Macbook Pro, iMac, Mac Pro, Mac Mini. Doing so for each of Apple's products already yields more than 30 branches so the segmentation should stop there. Each branch could be subdivided in more categories (Screen size, Processor frequency, Continent, Country, even region) but that would yield hundreds or thousands of branches and would induce so much complexity one would need tens of full-time employees working on analysing and reporting the data. In most cases, less is more so try to come up with at most 5-15 revenue streams unless your company is already very large.
You can have multiple categorizations of your revenue streams but we recommend starting with just one to keep things simple. As your company grows and you want to contemplate its operations under a new prism, you can add more. These new perspectives will unlock smarter, more refined decisions.
A good rule of thumb is to start with only a few categories. Your product or service offering should be focused and the categorization you go for should reflect that, hopefully mimicing the way products & services are sold on your website.
Categorizing costs
If revenue categorization is often straightforward, costs categorization requires more thought. The good news is that this complex thought process already happened when you charted your business operations map! The business units you defined naturally shape the cost centers of your company. When looking at your business operations map though, you might need to refine the categorization surfacing from it. Some cost centers should be subdivided in smaller sub-units. "Paid marketing" for example should be subdivided in "Google Ads", "Facebook Ads", "Instagram Ads", etc. depending on where your marketing money is going. For costs categorization, you want to be as precise as possible and subdivide each cost centers into atomic units that make sense conceptually. This requires some more thought but will also yield the most precise analysis of your costs and allow you to manage them better.
Here again, you will need to structure your costs in a tree-like structure. The root of your costs tree will be the overall costs your company is incurring and its first three branches will be the primary, secondary and tertiary categories defined in the "Cartographying your business" section above. Each of these three branches will have sub-branches corresponding to the cost centers you defined while cartographying your business operations. Each of these sub-branches will have sub-sub-branches: Paid Online Ads will be subdivided in Facebook Ads + Google Ads + Instagram Ads + Capterra Ads, etc.
The costs tree needs to be more detailed than the revenue tree and can include 100-200 atomic costs centers. Here, precision is key because that's the only way you will be able to understand which business units yield the most return on investment. If all paid ads are grouped together, you will not be able to make a decision on which kind of paid ads are the most effective. You want to be as precise as the decisions you want to make so make sure to put a lot of thought in this process and come up with the list of all atomic cost centers your company is dealing with.
Cash attribution
If you followed the first two steps above, you should now have a comprehensive framework which will enable you to categorize each of the cash flows coming in or out of your company. Now this detailed structure is in place, the last step before analysing your data and deriving the key insights which will inform your decisions going forward is to attribute each of the transactions hitting your bank accounts to the relevant revenue or cost center. To do so, you'll need to integrate specialized software with your bank. Ideally, you want all these transactions to be automatically categorized for you, or at least manually categorizable by your team as soon as they're reconciled by your bank.
Doing it manually is possible if you design a business process to this end. To do so, you will need someone to tally new transactions on a daily or weekly basis and categorize them manually in one of the leaves of your revenue or expenses trees. In order to look at past data and measure the evolution of your performance indicators, you will also need to carry out a ad-hoc project in order to collect all historic data and categorizing each of them
Specialized software can help you in this endeavor by defining custom rules which will govern the categorization of both historic and incoming transactions. There are two significant advantages to using a software designed for this: first, it will greatly improve the time your team has to dedicate to this task, and two, it will result in a lower categorization error rate which will ultimately give you more accurate data on which to base your decisions on.
Analyzing the data.
After following all the steps outlined precedently, you should now be armed with a solid cash contextualization framework tailored to your business structure and updating in real time. Although setting up your business to enable data-driven decision is paramount to fast growth, it's only half of the story. Now the data is collected and structured, you need to analyse it every time you make a strategic decision. There is a large number of performance indicators you want to track and review on a weekly basis and even though a lot will be business-specific, some are shared by most companies operating post-revenue. We will cover the most important ones in this section and conclude by giving you some guidance and examples on how to design and compute indicators specific to your business.
Revenue growth
Revenue growth is by far the most important Key performance indicator of any start-up business. Everything else is secondary, including profitability. Research has consistently found that long-term success and market value of small to large businesses is correlated most strongly with their revenue growth (citation). If there is one objective you must have as a founder to secure your company's future, it's to increase its revenue as quickly as possible. There are countless reasons to this. The most obvious one is that revenue is something external, whereas costs are internal. That means costs can be managed directly because you have control over them. Revenue represents the external validation of your business model. If people are buying your products or services, it means you're solving a problem for them, or adding value to them. The higher the potential of your business is, the faster it will grow (all other things being equal). High revenue growth does not only validate your business, it also gives you the resources you will need to keep growing both directly (re-investing revenues) and indirectly (high growth companies will raise or borrow money more easily).
Revenue growth is one of the most straightforward KPI's to track and if you're reading this, you are probably tracking it already. The growth potential of your company depends on its business model, target market and overall economic landscape. Anything higher than a few percentage points a month is a very strong success indicator for your business. Sustaining a double digits monthly growth rate over multiple months or years is the sign of massive business success and potentially mean the business will be worth tens or hundreds of millions in the years to come.
Profitability (Net profit margin & Gross profit margin)
Profitability is probably the second most important metric for any business, and probably the most important metric for mature, large-scale companies. It directly represents the efficiency of your operations. Highly profitable businesses are less reliant on external cash inflows (raising or borrowing) and can invest more in growth initiatives which, in the long run, will result in an increased market share. It is very important to keep an eye on profitability and make sure it remains stable or increases. Profitability going down is often a warning sign suggesting your business is losing its edge and is slowly becoming less relevant. Profitability indictors are sometimes lagging behind the actual reality of your business operations so if you see it decrease, it may mean something is wrong right now.
Customer Lifetime value & Retention rate
Customer Lifetime value complements the Revenue Growth KPI and is correlated with the long-term value your solution provides to your market. It is possible to have a high revenue growth for many months because of past successful growth initiatives but have the product lag behind your audience's expectations. Revenue growth will look good but users will progressively quit using your product and your retention rate and Customer Lifetime Value (CLV) will diminish over time.
Benchmarking CLV with your competition is also a very good way to find out if you could drive revenue by upselling or cross-selling to your current customers. If your CLV is low, it may mean there are auxilliary services you could be selling alongside your primary product or service - like premium customer support, bespoke onboarding or product customizations.
Business-Specific KPI's
If you're selling an innovative product or service and if you aimed to differenciate your services from the competition, chances are your business model is unique or at least very specific. This means some of the KPI's you should use will not be found in a generic list. Based on the industry you're in, you might look at original ones. If you manage a hospital you might want to look at the bed utilization rate whereas if you're in the business of growing strawberries, you might want to track how many strawberries you can grow per unit of land - or their subjective tastiness score as rated by a sample of a hundred subjects representative of your market. Business specific KPI's are sometimes the most important indicators of success within a company and coming up with one or two simple, measurable metrics to track over time will ensure you don't have any blind spots when monitoring your operations.
The methodology outlined above is only a primer on cash contextualization and we are working on a specialized software which will allow you to track all your revenues and expenses automatically and perform more sophisticated analysis. We will update the guide above when we are ready to take the analysis to the next level. If you'd like to be informed about the launch of CX Cash - please add your email in the box below. We will contact you as soon as we are ready and would love to have your feedback on the Beta version of our solution (free of charge).
Good luck with your business enterprise!