Growth vs Profitability: Finding a Balance, with Tiny CFO Founder Jana Kovacovska

"I see space for somebody looking to grow in an independent manner, who wants to be profitable, wants to grow organically."

In this episode of CFO Yeah! we spoke with Tiny CFO founder Jana Kovacovska. Tiny CFO provides “bite-sized finance and strategy content for modern entrepreneurs,” and Jana is both founder and chief writer for the site.

Throughout the podcast, Jana discussed the need for better finance content for entrepreneurs, and her work to highlight profitability as more important than pure growth. We also discussed:

- Common financial challenges for founders - The huge value that comes with automating finance processes - Difficulties in automating forecasting (and why most companies shouldn’t even try)

Below is a brief recap of these key points, and you can listen to the full conversation on Apple, Spotify, RSS, and anywhere else you usually find podcasts.

The best practice finance function

I think the best practice finance function of the future is definitely one where all the routine tasks are automated as much as possible. So it does make sense to spend time initially on the sort of first financial setup to make sure that things are not being done manually. Real humans such as the CFO or other senior finance people are only there to put these processes in place, and then crucially to come up with the insights, do the strategic planning, make sure that the insights are presented and understood in the right context and in general focus on value-adding activities rather than the routine.

Next, I think it's very important for any CFO to realize and understand what kind of company they’re dealing with in terms of the growth ambition. If you’re maybe coming from a background where the companies weren’t growing so quickly, and then you are in a startup and the company is trying to triple its size from one year to another, it's very important to be aware of that.

That will present a different set of challenges - a different set of analyses and a different type of financial management - than when you're running a finance function in a company where it's much more business as usual and, and maybe slight growth over time.

Typical financial challenges for startups

Many of the challenges are very similar, especially in the early stages. Just about everyone is worried about running out of cash. Just about everyone is worried about how to grow the company to the next level. So I don't focus on any one sector because I feel quite strongly that many of these things are really transferable from one context to another.

I would say that the most common thing that founders are struggling with is that sort of feeling that things are not quite under control as much as they would like them to be. They need transparency on important KPIs on things like cashflow on the gross margins, or on customer acquisition costs, depending on the business.

As a result, they often need to make decisions while being completely in the dark about how these decisions affect the numbers and vice versa. That's a very difficult spot to be in. And especially if you're growing rapidly, things are becoming more complex very quickly, and you're making big investments - such as hiring lots of people, developing new products, or expanding internationally.

Putting profitability first

I have always believed that being profitable is a good thing. And if you can grow very quickly and be a profitable company, that's great. But if you can only be profitable if you slow the growth just a little bit, then that's still a good place to be. This wasn't always a popular opinion.

The thing that you can rely on is having really good, positive cash flows, having good solid profits so that when things go a little bit weird and the world changes, then you have a buffer and you are not at the mercy of the VCs. You don't want to be in a situation where your only way to save your company is to raise money.

I think I think it's a tough situation to be in, and that's why so many startups fail because they don't manage to get that next raise.

I think there is a big trend amongst VCs today to value profitability a bit more. This is just anecdotal, but I recently read an interview with Kirsten Green from Forerunner Ventures. And she said something along the lines that they're very interested in companies that have the potential to deliver a solid double digit net margin.

Traditionally, I think VCs were quite comfortable to say you won't turn profit for many years, or until the IPO. And I think we see a lot more VCs saying, if you can be profitable without us, that's very attractive. And then we can provide the capital to help you grow.

Profit vs growth

There is a tension between growth and profit. And I think that's very important to my earlier point to realize what kind of company you have. What is your overarching strategy? Is it growth at almost literally all costs, or is it a little bit more mindful, and are you willing and able to slow down?

I think it's important to do it in an appropriate way to kind of meet in the middle. So a small startup that's just starting out is probably not going to need corporate processes. And it would be an overkill to take processes from big corporations and apply them to a smaller company.

But on the other side I think as you grow, you need to kind of pick and choose what is really important to implement already at that stage, and what will make your life easier going forward. Because ultimately good processes make things easier, smoother, and more efficient.

Why manual forecasting is still the norm

It doesn't really matter the size of the company, I find forecasting quite difficult to do it in a way that's not manual in Excel. I have so far seen quite a few finance tools that are great at showing us the analysis of the past and the numbers in the past. Not so much yet tools that would be very good at forecasting.

Usually these tools just extrapolate existing trends. So it says, “if we grew 5% every month last year, let's extrapolate that into the future.” And then all the other trends that are happening in the data are extrapolated. That tells you, for example, when you're running out of cash or what the profit might be like.

But the problem is that especially as a startup or if you're in a small business, things are changing too much for this to work. It's all really dynamic. You can't just take the existing trends into account. You need to incorporate all sorts of strategic initiatives that you may be undertaking; plans for things that you want to do differently.

And I don't think that the tool has any chance of knowing that. So I think there is this quite critical human input that really is necessary to have some accurate understanding of what's going to happen.

A need for more startup finance resources

There’s a great amount of very sophisticated finance content out there. Of course there is a huge amount of academic literature and places like Harvard Business Review that have very thorough coverage of these topics.

But it's very hard to see how it applies to your business when things are presented in a more theoretical way. So that was really the driver. I thought maybe I can make it sound really accessible and something that you want to engage with.

And then in the startup space, a lot of the VCs have great content themselves. And that is very important and it really serves its purpose. But fundamentally it's focused on the founders who want to be on that growth trajectory that the VCs are looking for. Whereas I see space for somebody looking to grow in an independent manner, who wants to be profitable, wants to grow organically. They still need to understand some of these topics to do that successfully. And I don't see as much content tailored to those types of founders.

Tiny CFO is for you if you want to grow a profitable company. And a profitable company can still get VC funding - that's totally doable.