Mastering Profitability & Cash Burn for Second Stage Companies

Meet Host, Stacy Taubman

Welcome to Revenue Radio, the podcast that helps CEOs of second stage businesses tackle their most difficult revenue challenges. Our host, Stacy Taubman, a 3x Founder/CEO and Fractional CRO at House of Revenue, interviews CEOs, COOs, and CFOs with experience taking private companies public, conducting mergers and acquisitions, and scaling beyond startup.

With Stacy's vast experience in education, healthcare, real estate, hospitality, and professional services, she brings a unique perspective to the table. Her guests share their insights, wisdom, and lessons learned from a multitude of industries, providing valuable information that CEOs can use to grow their businesses.

Whether your business is struggling with sales, marketing, or financial challenges, Revenue Radio has you covered. Stacy and her guests will provide you with the support and information you need to grow your business and take it to the next level.

Don't miss an episode of Revenue Radio! Subscribe now to stay up-to-date with the latest insights and strategies for driving revenue growth.

Don't Have Time to Listen, Read The Full Transcription.

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Stacy Taubman: Welcome to Revenue Radio®. I'm Stacy Taubman. I’m your host and am so excited for our guests today. 

I met David about a month ago. When he started sharing his path and the companies he worked for, I was blown away and knew I had to have him on Revenue Radio® because, as second-stage business owners, it is so helpful to learn from people who have done it done it big. 
Thank you for being here, David.

David Diekmann: Thanks for having me and welcoming me to your cool studio here. This is awesome.

Stacy Taubman: Right. I'm impressed. Our CMO, Sabrina, built it out and did a fabulous job. It's an honor to be the host here at Revenue Radio®. Well, I know you've had quite the career. I'd love to hear a little bit about that and your experience.

David Diekmann: Sure. I'm 22 years into a finance career. I've worked for a variety of companies, interesting ones, public companies, private companies, large family-owned businesses, and private equity backed. 

I've done a little bit of everything for the last ten years. I've been in three CFO roles in the consumer packaged goods business, so manufacturing. Then, I was the leader of a CFO of a veterinary platform, a very large business, and most recently, human health care in the behavioral health care side. So, a variety of experiences.

My domain expertise, if you will, is multi-unit consumer slash healthcare businesses. It tends to have an affinity for growth, so I've had a lot of experience scaling revenue and profitability in large organizations.

Stacy Taubman: Yeah. I'm glad we're going to talk about that today. It's interesting because CROs and CFOs sometimes get CFOs, and sometimes get a bad rap, right?

David Diekmann: And with a bad guy. 

Stacy Taubman: I was trying to say that nicely. As a fractional CRO, when we go into companies, it is important that we pair up and work well with the CFOs because the company will scale and grow so much better. That's one of the reasons I wanted to have you on today.

We put on an event called Growth Amid Uncertainty earlier this week. You raised your hand and asked a wonderful question about profitability. Second-stage CEOs often try to grow their company and get advice to grow at all costs. Or they’ll start trying to do things like I’ll have a bunch of money into marketing without looking at the global picture.

I'd love for you to talk about profitability and maybe even the question that you asked. Let’s go on that path.

David Diekmann: Our economy goes through cycles. We're in the midst of a cycle change now. But the reality is we've been living in a boom period. For many entrepreneurs and businesses, the focus has been 3 priorities - grow, grow, and grow. The economic environment has changed.

Stacy Taubman: It has.

David Diekmann: It shifted. We've been living in a zero-interest rate environment for a while. Those days are over. Maybe they'll come back, I don't know, but they're over. Things are changing. Companies and CEOs need to revisit their priorities. Yeah, it's still about growth. That won't change. But you need to be equally focused on cash burn. Yes, particularly for a stage two company as well as profitability and margin. So, it's growth, cash burn, and margin versus grow, grow, grow.

Stacy Taubman: When we as CROs and CMOs go into companies and build out the go-to-market, what kind of things can we be thinking about to ensure that we're setting our CEOs up for success?

David Diekmann: Yeah. So, if you're not growing, you're dying.

Stacy Taubman: That's true.

David Diekmann: Again, I want to reiterate. I know this is Revenue Radio®, right?

Stacy Taubman: We’re not saying no revenue.

David Diekmann: So growth is important, but the revenue quality needs to be laser-focused on right now. There are really important things that CFOs should be partnering with their CEO and the entire leadership team. Frankly, maybe were not priorities or focus areas in the past. For your audience, understand the lifetime value of your customer. Yes. What is that customer generating? What is the duration? What is the lifetime value of that revenue stream? They're not all equal.

Stacy Taubman: They're not. In the second stage, sometimes we've seen when we go into companies is they're not collecting the data or having a tech stack that enables them to capture that. With that information, it's easier to make really smart decisions. I'm glad that you're talking about lifetime value.

David Diekmann: So, LTV is essential, but in conjunction with looking at LTV, you must understand your CAC rate. That's the customer acquisition cost. In these uncertain times, we need to peel back the onion. And because we in finance call this fun with numbers.

Stacy Taubman: It sounds like an oxymoron. Some people are cringing right now.

David Diekmann: The idea here is how you define some of these things matter because they will give you different answers. If you think of your CAC or your cost of acquisition or cost of acquiring that customer, that incremental revenue. Is it simply the marketing campaign you drove? Is it the investment in SEO or more of the marketing part? Or have you actually, or is it, that incremental salesperson?

Sometimes we define it. We stop there. But really, we need to understand what else we are spending money in the organization on to support that account. Yeah, right.

Stacy Taubman: In this phase, what we heard you heard Mary at the event say, you know, opinions are valuable, but data is priceless. Many CEOs in that second stage experience aren't able to answer those questions yet, and making that a priority is really important. It's where I'm going with.

David Diekmann: If you know your LTV and you know your tech, and what is your payback, you need to understand what is the break-even point. How long does this revenue need to be generated consistently to pay back the investment to get that incremental customer, that incremental project? That will give you a better idea of the profitability of that revenue because, again, not all revenue is created equal.

Stacy Taubman: When you're early days, revenue is such a vanity metric that there's so much like, I want to be a $5 million company. I want to be a $10 million company. But if you're losing money, that's not a win.

David Diekmann: Yeah, so that's a good segue way. Cash burn is super important to be focused on. 

Stacy Taubman: Say more.

David Diekmann: How much cash are you burning for the incremental revenue you're generating? So, look at your cash burn ratios. If you're burning 100 dollars of cash, to use simple numbers, if you're burning $100 of cash to generate $100 of revenue, that ratio is one. If you're burning 100 dollars of cash to generate 200 dollars of revenue, that ratio is point five. The smaller the number, the better. The bigger the number, the more scary and troubling your business can become. 

So, again, the quality of revenue and earnings are super focused, not just the P&L but the Balance Sheet. Then things like working capital. We talked about this. It’s time to be looking at your receivable balances. Are they aging as you would expect? Are they aging in line with your contractual terms?

Stacy Taubman: Right.

David Diekmann: Revenue is worthless if it doesn't convert into cash.

Stacy Taubman: It's true.

David Diekmann: It's cash in the bank that matters. Cash is king is one of my fundamental beliefs.

Stacy Taubman: When all this is a big shift in the boom days, as you mentioned, it was just growing, burn money as much as you can, but make sure you're growing. We look at people like we work. They grew at all costs, and we saw how that played out.

What's so great about being a fractional CRO, a fractional CFO, or a full-on CFO is supporting the CEOs in this process. I think CEOs who are listening may even be glazing over at this point because not all CEOs think this is their strength. Having that support and having people come in to get through all the things we're talking about and be intentional instead of reactive. I think that's something that's so important and what we do a lot at House of Revenue® with companies.

David Diekmann: Yeah. I'm sure all those CEOs out there are laser-focused on their business and live and breathe that 24 hours a day. But are you truly understanding the real economic performance? Are you pressure-testing your assumptions?

Stacy Taubman: Say more about that.

David Diekmann: So, pressure testing. Is this the right revenue stream? Have you segmented your revenue? Have you understood and prioritized the kind of customers that are the ones you want long-term? Are you looking at some of the metrics I'm talking about, like LTV, CAC, and CAC payback? Are you looking at working capital? Are you creating reserves in a war chest for strategic investments or maybe just to weather this economic storm? That I don't know, I don't have a crystal ball. It could be 12 to 24 months, maybe longer. 

So, are you laser-focused on generating cash? I used receivables as an example. Another one would be your payables. I've been in businesses large, successful businesses. You go and look at the data, and you're surprised. You are paying your vendors sometimes faster than necessary. So, look at that. 

It could be just the payment mechanism, schedule, or how your AP department works. You may be paying sooner than you certainly want to pay later than you should. That's not good business. Right. But is this the time to be looking at your suppliers or vendors and renegotiate getting payment terms?

Stacy Taubman: That fits, you know. I've talked before, and I've been on the show about the Entrepreneur Catch-22. But I'm hearing you say that second stage, to get further, you have to slow down to speed up. The things that made us successful in getting to that second stage are not the things that helped us beyond and move fast and just quickly. Being reactive has helped people to get to where they are. That's why we take a month to audit, research, and create a 12-month go-to-market plan. We want people to be able to do what you're saying because reactive stuff doesn't work anymore.

David Diekmann: Right. So, the partnership with your Accounting and Finance team is super important. Get to know those folks.

Stacy Taubman: Instead of having that ughh relationship.

David Diekmann: The best finance teams are those that add value and then are welcome to have a seat at the table because, you know, I believe good CFOs are as much as we're copilots, and we look for where things can go right, and we encourage the CEO to pursue those things. We’re all custodians. We look for when things can go wrong, and our job is to help mitigate the risk. It is our job to be the end to the anchor. However, that works with the CEO. Just make sure that we're being very diligent thoughtful, and looking at the data, and using, again, peeling back the onion. Dig deeper. 

Don't you know, when we think about return on investment, people generally understand that concept? But it gets more complicated when you ask to define return and define investment. Is return incremental revenue? Is it incremental gross profit? Or is it incremental gross EBITDA margin? Those are three very different things. They will give you three very different answers. Likewise, on the investment side. 

To reiterate, I mentioned the incremental investment, the ad campaign. Is it the salesperson you added? Well, maybe. But how about the operations support you had to add to manage that customer? Yeah. So, there are a lot of burden costs out there that you want to make sure you're making decisions with eyes wide open and fully understanding the true cost of your business.

Stacy Taubman: Well, if I was a second-stage CEO and listening to you, I could see myself saying, Yeah, I get it. He's right. He's right. I can't afford a CFO like him. The fractional models have become so popular because people are starting to recognize and understand I need people like you. But taking on a full-time CFO is above me. Same with bringing on a fractional CRO CMO. That model has boomed because of that. Have you seen that as well? 

David Diekmann: Yeah, everyone needs help. Everyone's looking for good, good finance professionals today. And because they can pay for themselves rather quickly. But maybe you can't. Look at your point. Let's say you can't afford it because of resources. We want to make sure that we're covering our bases. Yeah. So my provocation to those who maybe are at a stage where they don't have this kind of support is to ask better questions. 

Stacy Taubman: Oh, give us some examples. 

David Diekmann: I'm a big fan or believer that the quality of your business will have much to do with the quality of questions you ask. So, go to that five why. Don't stop too early in understanding. Don't say, Why did this happen? Say, why did the why happen? So, dig deeper.

Stacy Taubman: Right. Oh, so ask the question why five times. Wherever is that, five years? What is he saying? Ask why five times when you're facing something.

David Diekmann: Yeah. Just so that even if even maybe if the only outcome is better self-awareness

Stacy Taubman: Yeah.

David Diekmann: around what you don't know.

Stacy Taubman: Again, that's about slowing down and being intentional, is what I'm hearing, and having to ask yourself why five times, right? Yeah. Wow. We could talk all day about finance and making smart decisions. Is there any point we still need to cover that you want to hit on before we call it a day?

David Diekmann: Again, if you're not growing, you are dying. I get it. Revenue and growing your revenue is how businesses maintain sustainability. But cash is king. If in any market it's this market, that focus needs to be there. So, work on the quality of your revenue to ensure that you can weather a storm that may be here for a couple of years.

Stacy Taubman: Yeah. Well, thank you so much, David. It's been a pleasure speaking with you. Our CEOs learn so much from you, and I look forward to having you back.

David Diekmann: I appreciate it. Thank you.

Stacy Taubman: Thank you.

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