SaaS CFO Tips: Preparing for Board Approval of the Budget

November 30, 2018

Savvy SaaS CFOs know that the best way to prepare for board approval of the next year’s budget and plan is to set the stage before the meeting.   This is the time of year when most SaaS companies are compiling and finalizing budget numbers. The hard work of getting Executive team agreement on the final resource allocations among the operating departments is being done.  Revenue forecasts versus expense and cost numbers have been massaged too many times to count.  Once the budget is agreed upon internally, the next step is to get board approval.

The board’s job is to advise on strategy and issues, and to approve the annual budget, among other things. When the budget goes to the board, the board is approving that the spending matches the company priorities or strategic directives.  The board also has to approve the cash flow and feel confident the company can meet its contractual obligations.  Most boards also want to make sure that the company’s human assets are well managed and planned for – especially in tech companies where human assets are the primary asset. And finally, the board needs to accept the risk in the revenue forecast for the upcoming year and usually wants to see  scenario planning in case of better or worse performance.

Most companies follow a tops down/bottoms up budgeting process.  The board sets strategic directives to guide the planning process at the beginning, but it is up to the management team to build out the detailed operating budget that supports the strategic targets.  Typically, the Finance organization works with each part of the organization to pull together and align every operational number into one package that meets the top level targets for growth, profitability, customer acquisition and retention.

Here’s 5 SaaS CFO tips we’ve learned from our SaaS Benchmarking CFO community as best practices to ensure the board approval process is smooth and productive.

SaaS CFO Tip One:  No Surprises Doesn’t Mean No Discussion

Experienced board advisors always recommend that the first rule of board management is “no surprises.” Boards want regular meetings with clear communications about the agenda and issues before the meeting.  Most companies circulate the budget to board members before the meeting so the meeting is focused on reviewing and approving the budget.

CEO/CFOs should remember, though, that no surprises doesn’t mean that board discussion and disagreement   is to be avoided at all costs.  A diverse board represents different experiences and perspectives which should help management chart the best course among many choices.  The annual planning process can bring up new strategic issues which may not have been considered at the beginning of the planning process.  A good board can provide outside perspective on these issues.

SaaS CFO Tip Two:  Align on Business Assumptions

Rather than wasting a lot of time during the board meeting discussing the details of the budget numbers below the KPIs, review the business assumptions underlying the budget with the board.  Make sure that management and the board are aligned on any changes in the assumptions in the budget.  If there are differences of opinion, that fact should have been discussed before the budget approval meeting (see Tip One).

“The biggest mistake to getting board approval for the annual budget, in my experience, is when board members and management don’t have a common understanding of the basic business assumptions that drive the budget.  That’s a nightmare.  It is the CEO/CFO’s job to explain and validate why they are using the assumptions they are using.  Once that's done, the board's approval of the numbers is relatively easy.” 3 time SaaS CFO

For SaaS companies, it is critical to make sure the management team and board are aligned on the assumptions behind key SaaS metrics, like Retention Rates, Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV).  These assumptions can change with new initiatives and also need to be validated throughout the year.  If the new budget year is focused on investments in new strategic markets, will retention rates, or customer acquisition costs be the same or different?  Will CLV increase in the next 2-3 years if the company continues to invest in improved retention and adds product features?  The list of assumptions underlying any company budget is extensive and should be spelled out. This clarity helps ensure that the Board and management are on the same page.

SaaS CFO Tip Three:  Use Peer Benchmarks to Provide Context for Your KPIs AND Resource Allocations

Benchmarks help boards understand the context for the company’s performance targets, and its choices in resource allocations across Sales, Marketing, R&D, Customer Success and other key departments.   They will feel more confidence in a company’s budget if it is presented in the context of benchmarks from peers and market leaders.  High performance companies always give the Board comparisons to peer and leadership company benchmarks in advance of the budget approval meeting to help set the stage.

“We moved through a systematic process to get budget approval from our board by giving them supporting data (benchmarking data) for our plans in advance of the board meeting.”  Jim LeJeal, CFO Rally Software

SaaS CFO Tip Four:  Worst Case and Best-Case Scenarios

We live in disruptive times.  Business assumptions can be wrong.  Next year’s sales may slow, or heat up.  No forecast is perfect.  Boards want to see some scenario planning if revenues slow, or if revenues grow faster than planned.  Again, benchmarks provide guidelines for faster or slower growth models and should be provided to the board, not just around the core plan but also to support worst and best-case scenarios.

SaaS CFO Tip Five:  Consistency

Board members typically work with several if not numerous boards, and like to see reporting in a consistent fashion.  It is more helpful and more efficient for the Board to see the same KPIs regularly.   When comparing KPIs to benchmarks, use them consistently, so the context is clear. The point of using benchmarks in a board report is to provide context for managements’ performance and decisions.  Formatting and order of the metrics against benchmarks for the board report should be consistent.  It sounds silly, but if you always show spending in the order of:  Sales, Marketing, R&D, G&A, don't change the order to:  Marketing, R&D, G&A and Sales.  That kind of disruption tends to be unproductive.