Chief
Financial Officers are often the “gatekeepers” to the company’s cash
coffers. And, as you can imagine, the
have a lot of people tugging on their sleeves looking for investments into
various projects within the company.
But, CFO’s need to prioritize their spend, based on what is in the best
interests of the company. This post will
help you learn to think like a CFO and how best to pitch your business
investment case with the highest odds of success.
First of
all, there are many different scenarios in which the business may require
capital. Perhaps the CEO wants to make a
big strategic acquisition. Or, the CMO
needs to scale up the company’s sales and marketing efforts. Or, the head of product wants to launch a new
business line. Or, the CTO needs to
develop new technologies for the business.
Or, the head of HR needs to make a few new hires. The ways capital can be invested in the
business are limitless, and the asks from the team are endless. So, you better make sure your pitch resonates
to break through the clutter.
Here are
examples of the best ways to pitch for internal funds, for each of the
scenarios above:
Pitching for Strategic Capital
Like in any
investment, your CFO is going to be most focused on the potential return on
investment (ROI). It is no different
than pitching a venture capitalist for outside funds; now you are pitching your
inside team for internal funds with an “ROI First” mindset. Let’s say the CEO wants to invest $5MM into
an acquisition of a competitor. The
business case he would want to make is: (i) it adds $10MM of revenues and $1MM
in annual cash flow to the business; (ii) it removes a big competitor, making
it easy to price our products and grow our margins; (iii) it grows our market
share in the space; (iv) it will help us accelerate revenue growth by
cross-selling our respective products into non-overlapping industries; and (v)
it will help us to achieve a 10x return on the invested capital within the next
five years, based on these reasonable financial assumptions.
Pitching for Marketing Growth Capital
Your CMO may
be looking for capital to spend on $1MM on additional marketing activities or to
expand the sales team. So, she is going
to have to communicate things like: (i) I am expecting a 5x return on my advertising
spend, adding $5MM in revenues; (ii) the investment should realize a return of
funds invested within 6 months of the spend; (iii) my expected cost of customer
acquisition is $250, well below our expected gross profit of $1,000 per
transaction; or (iv) we will be able to sell into twice as many regions or
sectors than we are today, increasing our potential reach and ability to scale
the business.
Pitching for Product R&D Capital
Your head of
product research and development may want to invest $1MM into launching a new
product line. So, she is going to have
emphasize points like: (i) by doubling our product line, we should be able to
double our sales, by increasing our average order size; (ii) the new product
line will be a “first mover” in the space, with limited competition; (iii) it
will make us less dependent on our original product suppliers, better
diversifying our vendor concentration risk; (iv) we have researched our
customers, and 75% of them said they would buy this new product if it was available
for sale; and (v) I expect the investment to allow to build $10MM in additional
revenues, a 10x ROI, within the first three years.
Pitching for Technology Capital
The process
is exactly the same for your CTO, when asking for $1MM to develop and upgrade
the companies systems in the next year.
He is going to have to impress your CFO with information like: (i) our
old technology can crash at any time and is putting our current $10MM in
revenues at risk if the site goes down (saving a -10x loss); (ii) by improving
our user experience on the website, I expect to reduce our abandoned cart
percentage by 25%, theoretically adding $2.5MM in new revenues (a 2.5x ROI); and (iii) if we don’t make this
investment, hackers will be able to get into our systems and get access to all
of our customer data, which we don’t want to happen to our customers or
ourselves for competitive reasons.
Pitching for Human Capital
Adding $1MM
of payroll happens throughout the organization, by department, but adding human
resources to the organization requires the same ROI-driven financial
disciplines: (i) we need that new salesperson because we are under capacity,
with more leads than we can reasonably handle today, and we expect to close
$1MM of new sales from that $250K investment in a new salesperson (4x ROI);
(ii) our employees are on the “hamster wheel”, getting burned out working at
110% capacity; if we don’t add additional staff members, 25% of our current
team is going to quit, taking those relationships and institutional knowledge
with them; and (iii) to improve our recruiting, retention and morale, we are
going to have to upgrade our employee benefits offering, which should improve
our hiring time by 25% (helping us drive efficiencies and revenues faster) and reduce
our employee turnover rate by 30% (which stops the revolving door we have with
talent, and the inefficiencies and lost revenues that come with that—aggregating
around a 5x ROI).
Rinse and Repeat This Process Within
Departments
And, this
logic needs to flow all the way down to the department level, as well. Your CMO needs to have their heads of search
engine marketing, social media marketing and display advertising each make
their ROI case to her, so she can prioritize her overall marketing spend. And,
your CTO needs to prioritize the 100 technology improvement requests from the
technology team, based on the expected ROI of each one, so he knows which
projects to tackle first. You get the
point.
Concluding Thoughts
So, as you
can see, if you know how to ask for capital from your CFO, in the language that
he is used thinking about it (with an ROI mindset), you should materially
improve your odds of securing it. Your
company should develop a template business investment case form that everyone
asking for capital should fill in.
First, that will require everyone to “think” before they ask; and second,
that will help your CFO to better prioritize the investments based on the
expected ROIs from each one.
But, just
because you ask, and have a well-thought plan, does not necessarily mean you
will get the capital. You never know
what other competing forces are out there, tugging on the company’s purse
strings. Your CFO’s job is to keep the
company liquid and out of trouble, and their job is to make sure all investments
are made within the overall budget of the company. You can count on the CFO to prioritize his
spend based on the amount of the ask, the expected timeframe to return the
funds and the expected ROI from that investment.
So, based on
the above examples: (i) the CEO asked for $5MM to return 10x in five years;
(ii) the CMO asked for $1MM to return 5x in six months; (iii) the head of
product asked for $1MM to return 10x in three years; (iv) the CTO asked for
$1MM to protect 10x and add 2.5x in one year; and (v) the head of HR asked for
$1MM to add 4x ROI on the new hire and 5x ROI by making the current hires
happier and more efficient. So, you
decide; put on your CFO hat and tell me how you would prioritize the
spend? I have a hint for you: the CEO’s acquisition would not be my first choice. (Gulp!)
I’ll let you tell him that!
For future posts, please follow me on Twitter at: @georgedeeb.