Breaking Down Annual Planning with CJ Gustafson of Mostly Metrics

Joe Michalowski: [00:00:00] Hello and welcome to another episode of the roll forward podcast. My name is Joe Michalowski. And this episode is brought to you by mosaic, a strategic finance platform that transforms the way business gets done today. Very excited. My guest, CJ Gustafson CFO of parts tech, but probably better known as the man behind the mostly metrics newsletter.

And now the run the numbers podcast, which I’ve been very much enjoying. So CJ, thanks so much for joining me.

CJ Gustafson: Joe. You, you told me you were talking about annual planning, so I strategically had four coffees before this to get pumped up, and I mean, this is like, this is like my Super Bowl, man. This is like my Super Bowl.

Joe Michalowski: I, you know what? I’ve, I’ve heard this. This is like a finance person’s favorite thing to say. I’ve heard that board meetings are finances Super Bowl. I’ve heard that planning season is finances. Y’all are like on a four championship per year cycle. And I’m here for it for you guys. That’s

CJ Gustafson: I love it. Thanks for being here for it.

Joe Michalowski: I luckily know nothing.

So I’m glad you are here to inform all of us. But before we get to all the planning seasons up, do you mind giving everyone the quick [00:01:00] background about yourself? I gave a very tiny intro. I’m sure you will do a much better job of explaining who you are what you’re

CJ Gustafson Introduction

CJ Gustafson: It was a very kind intro. Thank you. Uh, so my name is CJ. I’m the CFO at a series C startup. Uh, it’s a marketplace for aftermarket, uh, car parts. And, um, you know, I’m a CFO now, but it’s kind of funny how I got to the position because I started on the other side of the table. So. Uh, out of college, I did M&A consulting where I learned all about business models, how companies, you know, allocate resources to bring a product to market and sell it.

Then I went over to the private equity side for a couple of cups of coffee. And, uh, I learned how to actually buy and sell companies, which was pretty neat and how to, you know, uh, fundraise, which was, uh, you know, formative for me because now I’m on the other side of the table, you know, asking for those dollars.

And so I made the change to the operator. Um, you know, realm, and that’s where I’ve been helping to grow software companies really, um, for the last, you know, seven years or so. And [00:02:00] a lot of that is deciding how many people to hire, you know, what we can buy, what we can’t buy, and then coming up with a long term plan that, that plays all that, you know, backwards.

So excited to be here, but you know, once again, I, I’m not a CPA by trade, so don’t ask me any tricky balance sheet questions, Joe.

Joe Michalowski: I, I think one reason. So I’m very happy that people enjoy coming on the show. And I think one of the reasons that I try to ask, uh, Insightful questions, but I don’t really throw any curveballs because I don’t know what curveballs to ask, so if there’s like some deep seated, uh, balance sheet question out there, I’m probably not the guy that’s gonna find it, so I think you’ll be okay.

But if I stumble across one, don’t get too mad at me because I might just get lucky and comes

CJ Gustafson: let’s do it.

Joe Michalowski: Alright, well, we said that annual planning would be the big topic. We’re recording this, by the way, on Halloween, my least favorite day of the year. I don’t know if you’re a big Halloween guy, but I hate this day.

CJ Gustafson: Why you don’t like candy? What’s the

Joe Michalowski: I love the candy. I never liked dressing up. I was never [00:03:00] like, uh, just not into the Halloween spirit. So, whatever the Scrooge version of Halloween is, like, I’m that guy. Um, so I’m happy to be here recording with you and not talking about Halloween, but we’re like. Late into the planning season process, so a lot of this is going to be like,

CJ Gustafson: Yeah. A couple of people about to have a major panic attack if they haven’t started yet. Joe.

Joe Michalowski: seriously.

So, you know, a lot of this is like, hey, like, maybe we can clean up some of our stuff that we’ve been working on. Insight for the future insight for maybe like, reforecasting sometime at the beginning of the year, but I’m excited to dig into it nonetheless. But before we get going, just to set it up. Like give me an overview of your ideal timeline and like what the basic like stages of the process are and then we’ll kind of dig in after that.

TL;DR of the Planning Timeline

CJ Gustafson: Yeah. I’ll give you the TLDR. So I think it’s usually a three month process from soup to nuts. I hate that saying, I don’t even know why I said it. I don’t know what you totally know. Yeah, me either, but we’ll do another podcast on stupid things. So, so I think it’s usually a three month [00:04:00] process. With the board meeting that you’re presenting it at for approval as the backstop, so you kind of got to put a date on the calendar and work backwards from that.

And I break it into working with three different audiences. So it usually starts out to see EO and the CFO, um, up front, and they’re trying to figure out, like, what, what field are we going to play next year’s game on? And then you’re going to work with the department leaders, For input to validate that what you wanted to wrap your arms around is doable.

And then what yard line you’re going to start on and what yard line you’re going to hopefully end on. And then the board comes in at the end and gives you the check mark to say, Hey, that totally underline that totally aligns with, you know, our investment thesis and what we underwrote.

Joe Michalowski: I love that. Well, we are going to spend the majority of this kind of digging into what. Uh, those individual pieces look like and so I want to start you said up front CEO CFO, kind of like the pre plan. So what does that part look like? What are the guardrails you’re trying to put in place? How do you go about setting the stage for [00:05:00] a successful planning season?

CJ Gustafson: So I think it starts with the relationship really between the CEO and CFO. Sometimes the CEO already has the plan in mind. And other times it’s the CFO, you know. Taking out a piece of paper. And usually you’re not starting completely from scratch. So I say that a bit in jest because you do have a five year plan out there.

That’s probably within 10 to 20 percent of where you’ll land, but, you know, taking out that piece of paper and figuring out the realm of what’s possible. Um, and I call that the tops down budget. So that’s where you’re setting the guardrails really, um, of, of, you know, where you’re going and guardrails in my mind that CEO and CFO have to align on at the start are three.

So you got revenue. Which is how much you make, productivity, the ratio of people to that revenue, and then profitability or burn, um, which is how much you make or lose. And so, the CEO and CFO, I usually draft out some questions just to get us talking about it, because it’s one of those things where it’s like such a big process, you’re like, where do I even start here?

So the [00:06:00] first question I always ask is like, listen. How fast do we want to grow our revenue next year? Like, full stop, like, let’s just align on that first. Um, is it faster than last year? Is it slower? By what rate do we even think the board’s going to accept? Then I usually ask, how much money can we spend to get there?

And this is a bit of a leading question, because I usually know the answer. But I, I need to get the CEO’s reaction. Um, and a lot of it will start with, well, how much money do we have in the bank? And then the next question is, are we planning on raising again next year? And I really do. Stress to people that if during the annual planning process, you should be thinking about the implications of a fundraiser for your startup.

Um, and then the next question is how many people will we hire to get there? So I’ll usually throw a number out there to the CEO. Like, hey, 150 people. You think we can do this? What we’re discussing with revenue with that many people, just like a quick gut check. Not highly scientific, but this is my starting point, right?

Just to anchor to that to work off of. Um, and then, you know, how profitable? Do we want to be? [00:07:00] So, you know, are we under pressure to get to break even? How is that looking? So that’s usually where I start.

Joe Michalowski: I have, uh, my follow up question. I, I just thought about this. So again, we’re like, at the end of October, but when we were talking, like, before we hit record, you said that usually starting this process in August. And so, you know, that’s great. I think it’s a lot of like, really insightful answers about how to, like, sort of set that stage with the CEO, but how, how difficult is it to start?

You know, five months before the end of the year, like you don’t know what the number you’re basically only have numbers for six months, like as far as the books close. So, like, what are you assuming with your numbers? Are you just assuming that, you know, we’ll hit plan for the rest of the year? Are you just kind of like making a base assumption there?

Like, how do you go about

CJ Gustafson: That’s a great question because it’s something that I wrestle with because, you know, you’re in the eighth month of the year. You probably only have six and a half, seven months of hard data, but you got to remember that we’ve been reforecasting and that’s like the beauty of some of the newer tools, like a mosaic where [00:08:00] you’re like refreshing.

At the end of each month, what the plan is going to look like. So people are like, you’re flying blind. I’m like, well, I have some information and I have like a pretty good gut feel of where this quarter will end too. So maybe I’m only slightly blind on three months here. Um, and, and remember that like most boards ask for a long term plan, right?

So annual plan is like one Lego block in that three or five year plan. So I know to a certain extent, like, you know, I’m just making up a number. Maybe they expect you to hit. Between 30 and 35 million next year. Well, I can start the process at least with knowing that range. So I, I also think that like people will wait until they have all the information and guess what, that never shows up, especially in a startup life.

Like, like newsflash, like you got to move with 80 percent of the info. That, you know, you wish you had and you course correct along the way.

Joe Michalowski: it’s such a good point. I was telling you that I remember, you know, hearing horror stories from from our founders about, like, annual planning, basically [00:09:00] going through January. Like, okay, like, we’re still scrambling. Like, we’re already into the new year and we just can’t figure it out. That’s probably what it is.

It’s

CJ Gustafson: It’s like, pick your poison. You start with less info than you wanted, or you have a, you know, a conniption at the end because you haven’t got there yet.

Joe Michalowski: Yeah, exactly. So I, I love that. I think, uh, it’s a really good takeaway is kind of like being able to work in that gray area. I know it’s not a, probably not the best feeling for a finance or accounting person who is really numbers driven, but yeah, startup land got to be able to do it.

CJ Gustafson: Yeah. You gotta get comfortable in that gray area.

Joe Michalowski: Yeah. Uh, all right.

Let’s, uh, let’s move on to that. Like, top line plan, the sales capacity. Uh, I want to hear how you think about like, okay, we’ve set our guardrails up. Like, we’re moving on. We’re talking revenue. Let’s figure out what we’re going to hit and how we’re going to get there on the sales side.

Breaking Down the Planning Phases

CJ Gustafson: We’re talking dollars, baby. All right. Uh, this is like my favorite. Model to build like, uh,

Joe Michalowski: dig 

CJ Gustafson: most people like on weekends, they’ll like tune a car or like, uh, work on their golf game. Like I work on [00:10:00] old, you know, capacity planning models, uh, you know, in my garage.

Joe Michalowski: get you hobby CJ.

CJ Gustafson: Yeah, I’m quite the hobbyist. My wife thinks I’m super interesting.

So Sales capacity model. This is essentially trying to figure out do I have enough feet on the street or butts and seats? They say to hit the targets that we’ve established right so reps don’t just show up on day one now I wish they did I wish they would show up and just start knocking deals out of the park But I mean like hey, let’s be realistic.

They need time to learn about the product They also need to establish a pipeline. So like qualifying companies out there who may buy, and, you know, depending on. What segment they operate in. You can, you can assume differing lead times for ramp. So you may say, you know, a small business rep, they need three months to go from zero to a hundred percent productivity.

Um, you know, a, uh, mid-market rep, six months, enterprise nine months, and you can ramp them in your model in either a linear or a curve slash exponential fashion. [00:11:00] Like if you just picture the line of like the speed at which they, they, they get to a hundred percent. And you then want to add up the capacity or the ramp percentages across all your reps.

So I have every rep and also the placeholders for reps, like, you know, SMB, uh, higher number one in Northeast, like in brackets. And I, I put in a start date for them and I add up all the capacity, you know, through the columns to say, how many dollars can the org have as a, have, have as a possible output.

Joe Michalowski: I have a question about ramp time. So when I, when I started at Mosaic, we were like, I again, had no finance background. I’m learning from our founders, like all this like finance, uh, kind of metric information, packing it all into my brain. And the one use case that our, uh, co founder Joe. Um, who I would bug for content all the time, uh, that he always talked about Mosaic was sales rep ramp.

I guess this is a real pain point for him, uh, at Palantir and he was just very proud of, like, Mosaic’s ability to give, like, real time insight into that. [00:12:00] So, my, my question for you is, like, how big of a difference can it make in your plan if you know, say, You know, a gut assumption of just 3 months, like a rep time or ramp time, but you find out it’s actually, you know, 4 to 5 months.

Like, if you’re planning around 3 and the reality is much longer, much shorter, like, how much of an impact can that have on your plan?

CJ Gustafson: It will totally kill your plan. Um, and this is actually why, you know, the inside baseball is a lot of hedge funds who are trying to look at public companies and if they’ll hit their revenue target, a leading indicator will be how many sales reps they have on board. So they’re actually like creating models in the background to say, like, do I really think work day can.

You know, hit a hundred million in revenue this quarter. Well, you know, according to my back of the envelope math, they don’t have enough people to even sell that many, you know, seats. But, uh, you know, back to the scheduled program, I think like how you fight that is through [00:13:00] over assignment. And so, you know, keep, keep this on the down low.

I hope there aren’t any VCs listening. But, uh, there is this thing called the over assignment where. Companies will take anywhere from 10 to 30 percent, um, uplift from their board plan to the operating plan. And remember, the operating plan is what you’re actually giving out in quotas to the reps. So that’s their target.

So there is a bit of wiggle room in between. And the reasons why you need an uplift is because A, the economy may suck. You didn’t anticipate it for that and deals take longer to close. B, reps just don’t get up to speed as fast as you thought. Or C, it’s harder to hire them. And you said, Hey, I needed, you know, this person in June and they don’t show up till August.

It’s like, damn, well, I’m two months off now on what I needed. So, um, typically the enterprise segment has the most risk. That’s what I always think about and therefore it should receive the most cushions. So it, you may only have like a 20 percent uplift for SMB. So if you had a hundred dollars, you assign 120 to [00:14:00] the field, but it may be 130, 135 for enterprise.

Joe Michalowski: Makes sense. I think, uh, yeah, I think. A hundred percent accuracy, any like forecaster plans, a total myth. And this just sounds like one of those areas where being more conservative or just kind of assuming that it’s, it’s, uh, might be a little worse than it will be is probably better for the planning process than kind of going in rose eyed or what is it?

Rose colored glasses, whatever the optimistic term might be.

CJ Gustafson: things are never going to go exactly how you planned it. So you think about, well, what are the surface areas for risk of where this could arise? And usually those levers, you can toggle them depending on like what your view of the economy is going to be, or like maybe you’re launching a new product and there’s just like a lot of unknowns around that.

I’ve had that happen before, where like I’m saying in my. P& L that 20 percent of the revenue is going to come from a product that hasn’t even launched yet. It’s like, well, maybe I should have a bit of an uplift to safeguard against that. And that’s like something on our side that we can control more of, but then there are always, you know, [00:15:00] exogenous factors that, that you can’t always control for.

So you try to hedge it.

Joe Michalowski: Totally. All right, so we talked about kind of planning out the reps, but we know that reps are not kind of on their own. Uh, I think in, when we talked about this, or when I saw the outline from the webinar, we did together, we called them like pod ratios. So talk a little bit about the, the head count and the resources that come with a sales rep that you need to also plan for in this part of the plan.

CJ Gustafson: Yeah. So the pod, you think about each rep or each like mercenary who’s out there holding the bag. So the term is called, are you holding the bag? That means you have a quota, like you have a number. That’s the atomic unit that you’re doing your. math around. So each one of those reps may have a quota of say, a million bucks, and maybe their on target earnings is 200, 000.

I want to make sure that the on target earnings, you know, maybe you’re starting out and it’s only a three to four X ratio of, of OTE to quota. But usually as you get bigger, it should become five X, seven X to make sure that the rep can not [00:16:00] only pay for themselves with the deals that they have to bring in, but the surrounding pods.

So think about it like you have, a systems engineer who’s going to help with the technical part of the sale and the implementation. You have a BDR who’s passing them leads, and then you have the person’s manager who’s going to help them strategically to close the account. Remember, those people don’t have individual quotas.

They’re what you call overlays. So there are a lot of mouse to feed when you start to look at the surrounding pod. And each segment has a different ratio. So There may not be any BDRs, you know, linked to SMB reps. It’s like, hey, hey, you know, eat what you kill, go out there, good luck, uh, you know, pat on the back, uh, but for commercial, maybe every two reps shares a BDR to pass some leads.

And then for enterprise, the big dogs, every enterprise rep gets one BDR. So different ratio depending on, uh, the different, you know, segments that you’re in.

Joe Michalowski: Makes sense. I want to, so we could probably spend the entire podcast just talking about this part of the plan, especially since everyone loves the money part, uh, but we do need to [00:17:00] keep moving. But before we get there, I want to ask, we focus this whole part on sales capacity planning. And if there’s 1 thing I’ve learned is that that is not the only way to plan out a top line.

So can you give a quick overview of how you might approach. Planning this part of the annual plan without sales reps. So maybe like a PLG model or something, something that isn’t sales capacity related.

CJ Gustafson: Oh yeah, that’s a sexy question. PLG, the soup du jour. So, um, I think that you have to work off some sort of assumption for inbound leads from the ecosystem. Because most PLG models, they have some sort of way to get past leads from… A channel partner or some way they’re embedded within the product. So I think you’re looking at what’s my capacity, not for reps, but for registrations coming in from each of these sources, and then you have to extrapolate that out to say, Hey, I know that, or I have a pretty good grip on it.

How do I. You know, estimate how many people I need to configure on the platform once the [00:18:00] registrations come in. So this is actually the case for the business that I’m at now, where it’s a channel inbound PLG model. It’s a long string of words, but what we need are configuration specialists and we monetize the customers after we get them configured through a usage based motion where their spend ramps up over time.

So what I’m looking at is, uh, Hey, can, can one. Rep configure 100 new shops per month. And how many registrations do I need to get there? Do I need 200? And that’s the math that I’m doing. So it’s a bit different than the dollar perspective, but I’m still working off the rep as the atomic unit. Who’s doing the configurations.

Joe Michalowski: That’s a really, that’s a really interesting point. I don’t think I’ve ever, you know, we, we talk a lot about modeling just because when we came out with top line planner, it was like the big focus. It was like, all right, how many different ways can I think of building this top line model? And it’s a really interesting way to think about it where like the, the logic doesn’t really change.

Like it’s basically the same as a sales capacity plan, but without the rep part, it’s like, you have to put in a new variable [00:19:00] for the rep and like everything else kind of falls into place in a similar fashion. So it’s really interesting. I haven’t heard anyone explain it that way. It’s cool.

CJ Gustafson: Nice.

Joe Michalowski: it. I want to move on.

And we talked about in, you mentioned inbound. And so that like sets my ears off because I am the marketing guy and I want to move on to the marketing side of this. Uh, I know you said sales was your favorite. This will be my favorite. I want to know how you work with marketing to come up with a plan. We talked like we’re thinking a year out.

And so a lot of stuff in marketing just isn’t so cut and dry. So how do you work with your CMO or VP of finance or marketing, whatever it may be to make sure that this part of the plan. Goes smoothly.

CJ Gustafson: And they’re both links. So I’m glad you brought up sales capacity model first, because you kind of need to come up with a draft of that before you get to the marketing portion. And here’s why. And by the way, so the fastest way, if they’re finance people listening, who are building a plan to ingratiate yourself and get free beers from your CMO is to help them build a great marketing pipeline model.

And so. [00:20:00] What’s counterintuitive about this is it corkscrews backwards, right? The sales capacity model. That’s, that’s kind of like forward looking of like what you can achieve in, you know, how much gas is in the tank. This is working backwards to figure out how big the tank needs to be. And you’re basically figuring out what your sales target is and then grossing it up mathematically, step by step to get to a number of registrations or MQL is that you’re going to need to hit that, uh.

that goal based on conversion rates. And then what you’re doing is you’ll assign a cost to each of those registrations after you’ve grossed up to that number based on source and by segment. So don’t forget you have to break it down into those two lanes. Um, and then that’ll get fed to the reps to say, is this enough to feed the reps to hit those goals?

And it’ll also inform your CAC payback period, because you’re going to want to come up with an assumption. For those registrations of, Hey, how many bucks is it going to cost me for each one of these? Um, and you know, at most SaaS companies, it’s probably assumed that you’ll need anywhere [00:21:00] from like 200 percent to 350%.

Of your new ARR target and marketing pipeline. And that’s going to depend on the sales engine and geography. So we talked about like SMB capacity earlier, or we talked about SMB ramp time. Sorry. Um, for pipeline coverage, you may only need two X because those come in quick and they get closed quick, but enterprise, you may need 300 or 350 percent coverage.

Um, and that’s something that you’re going to want to calculate ahead of time and, and space it out based on how long it takes to close a deal.

Joe Michalowski: I love this. So, so I, you know, I, I am not our VP of marketing, but I’m going to put my VP of marketing hat on for a minute. So I, you know, I’m chatting with you. Uh, we kind of come up with this model and I come back to you and I say like, okay. To generate, you know. Whatever leads it, you know, I won’t get into ads because ads, it’s kind of like dollars in dollars out.

Let’s talk about something squishy. Like, like my thing I do organic. And so, you know, I don’t know, like, oh, if I do 6 articles this month, it’ll generate this much traffic for [00:22:00] sure. And so I come up with a budget and I say, like, okay, I need to invest, you know, 30 K in an SEO per month or something. And you say, that’s way too much money.

We can’t afford that. Like, how do you go back and forth on something that is so. Squishy, uh, without a real, like, dollars in, dollars

CJ Gustafson: I think that’s why you got to run. It’s a great question. You got to run experiments throughout the year to kind of figure out, well, what’s my main channel to hit here. And I joke with my CMO, like if we figure out that X works, we’re going to punch that lead source until our hand bleeds. Because if it’s the cheapest, most efficient way to get.

you want to milk that cow and then move on to the next one. And so you should have like in your head, a couple ideas of if I put 25 cents in, I get a dollar out here for this one. And that’s the part that you’re building the foundation of your plan on. But for the squishier parts, like you mentioned. It may be like a more optimistic goal in your parking dollars there as your experiment for next year to see what you can get out.

[00:23:00] So what I always go back to is which lead source is most reliable for me and how many dollars does it cost? And then what I do is for the ones that are less known is I, you know, I assume less of a return on that, or I even almost, you know, chalk that up to like icing on the cake if we get it.

Joe Michalowski: Love it. Uh, and then my other follow up question I want to ask is, planning out a new headcount in marketing. So, like, marketers are always going to say, like, I need, you know, there’s an infinite number of channels and things we can do in marketing, and so it’s like, I need more people to accomplish X, Y, and Z.

And it’s not as simple as like the sales capacity plan where it’s like, Oh, we want to hit this revenue target. We need this rep in seat. So, you know, from the finance side, how do you think about kind of approving marketing headcount versus maybe giving more budget for contractors or like third parties or something like that?

CJ Gustafson: Yeah. So like a marketing team that’s being built from scratch, you’re going to start with more people costs and program costs. And that’s because you actually need somebody to go out and spend the program dollars. [00:24:00] Like you need somebody in the seat to actually make decisions on what you’re going to spend it on.

But in general, like let’s say you’re ramped and up to speed. You’re just adding a few people each year. The split should never really go more than 60, 40 in any direction between, uh, people and programs. And as a rule of thumb, so this is like super high level. We’re going to have a couple of ratios here at SaaS companies that I’ve worked at, we try to make total marketing spend one third of total sales spend.

Which is very heavy on people the sales portion and then within that one third about half to 60 percent will be Programmed so these are things that I look at not like going in but coming out as a sanity check to say how much? are we spending on marketing and the point about Contractors is very astute because a lot of SaaS companies when they’re starting out.

They’re like, I don’t know if I need like a full time Web design person or, you know, uh, HubSpot admin for, I don’t know, [00:25:00] marketing ops, you should definitely put placeholders in the budget. This is what I do. I put a placeholder in the budget for X thousand dollars for these initiatives. And then we say, if it works and we think it’s a full time job and the dollars start to add up to something that looks like a full person, then in the following year, let’s put that in as a full time headcount.

But let’s start with contractors first.

Joe Michalowski: I love this. I I’m, I’m learning a lot. Just learning a lot. Honestly, my, my finance folks might be mad at me at coming out of this. Cause I’ll be

CJ Gustafson: You’re going to secure the bag for

Joe Michalowski: I’m gonna be so much smarter. My marketing team will love me. Uh, side note for everybody. You should just put a Ryan on a Ryan Weinmiller on your, uh, headcount plan.

Because that is our guy who does all the growth and all the somehow has time to do everything and can do all of our like HubSpot ops stuff. So find a Ryan Weinmiller, you can just kind of accomplish a whole bunch of things that you

CJ Gustafson: that guy a

Joe Michalowski: be able to always. We always give Ryan a raise.

I have no decision on that. Uh, shout out to finance people who can. [00:26:00] Uh, all right, you mentioned kind of, uh, wrapping into, uh, the wider P& L, and I want to move into that. And so, uh, when you worked on the webinar for us about planning season, there wasn’t like a dedicated section just for R& D, and so I guess it’ll kind of fall into, into this, so, you know, we’ve got our top line, we’ve got our revenue, we’ve got our marketing engine, how do we go about planning out the rest of the P& L, including kind of that R& D, uh, side of the house?

CJ Gustafson: Yeah. I mean, at a high level, when it comes down to headcount, 70 to 75 percent of costs, the tech companies walk on two feet. So you want to get this right. And if you don’t, your budget’s probably going to be pretty off just with the amount that’s weighted towards it. Um, and it’s not only the. Majority of your costs.

When you look at payroll, it’s also the driver of the indirect costs too. So like the software licenses will be linked on a per head basis, the office expenses, the rent. So it’s less about to me, like matching dollars in the model to [00:27:00] people and more about using the people to come up with the dollars in the model.

If that makes sense, you may have an idea of where you want your cash burn or profitability to shake out, but to validate that. You need to build from the bottoms up, starting with employees. And so what I always do is I work off of what I call max headcount budgets with my leaders, and this actually gives them less ambiguity.

Like they understand how many people they can grow to, and it allows them to make better decisions on their own without coming to me every time saying, Hey, can I hire this person? Like, yeah, I said, max of 12. So just like for Q4, don’t go over 12 or in for Q3, you know, stay below 10. Uh, that’s the backstop that, that we work off of.

Um, So like total team size, I think is really important. You would have asked about R& D in particular, right?

Joe Michalowski: Yes.

CJ Gustafson: This is a spicy one. So what I ask my, uh, R&D leaders to do an R&D for me is a combination of products. So your PMs and your designers and your TPMs, and then your engineers, [00:28:00] which are backend front end APIs.

I asked them to just give me an export of all your people down the left hand side. And then in the columns, put the products that we have, either existing or net new, and do me a favor and just ballpark. It doesn’t have to be exact, but like go through and be like Joe were Joe, the engineer works on product a with 25 percent of his time.

With 25 percent on product B 50 percent on product C, and then what I’m going to do is I’m going to multiply out basically the cost of labor that we have on each of those products. And what that allows me to do is see like, Hey, order of magnitude. Are we like over rotating on how much we’re investing in certain things?

Like, wait, I thought, you know, this product was good to go and it was all done. Why do we still have X amount of dollars dedicated to it? And what I’ll also do. Is I’ll take the amount that we’re spending on those net new products and I’ll compare that to my five year forecast. So like, I’m not saying we have to bring the product to market, you know, next week or anything.

But, like, I gotta have a number for revenue if we’re [00:29:00] investing that much now. And I think a lot of people forget to do that in their budget. Like, they’ll spend all their time in the sales capacity model, the marketing model. That’s great. That, that’s like your revenue for next year, but guys, we’re trying to like incubate an engine here for multiple years.

So if you don’t have like a new product in the hopper, that’s going to feed into that maybe two years out, then you’re really setting yourself up for, for a major slowdown top line.

Joe Michalowski: Do you have a way to like sense checking? So I’m thinking, and maybe it’s because I’m so far removed from anything product development related, but I’m thinking like, like, as a finance leader, you don’t know what. The engineers and what the, the product team need to accomplish X, Y, and Z. And so do you have a way of sense checking?

Like they say, we need, you know, 40 new engineers to get, to get these three new products out the door. How do you sense check, like what to approve and what not to approve when you don’t have really, like, I assume

CJ Gustafson: Yeah, I’m not technical. I can’t code, but I can ask a lot of questions. Like I’m, I’m, I’m number one in the company at that. [00:30:00] And what I’m usually asking around is like, how many people are you dedicating to this product versus that? And then I’m also saying, what year do you expect this to come live?

Because I need to take what I’m learning from the sales team and match that up with them. Hearing from the product team to say like, are we even on the same page here? As a company of what’s coming out down the line. So that’s usually what I do, but a lot of it’s just a conversation and asking them, like, um, and it’s not like I’m trying to hold back budget or anything.

I’m just like brokering budget with them resource wise of what are the bets we’re making? And something that I didn’t say at the beginning is when you start out with talking to the CEO, you should also make a list of what your major initiatives are throughout the company. So we always try to come up with five and those should cascade down to each department lead who can make a goal against each of those five and usually you’ll have a couple in there about new products coming to market.

So if I go through.

And I know that, you know, initiative number two is to get product X, Y, Z to [00:31:00] market, but we’re spending all our money on product one, two, three. It’s like, Hey guys, hold on here. This does not match up. So do I know how to code it? No, but I, I have a pretty good idea of how to put the poker chips on the table in the right spots.

Joe Michalowski: Yeah, I love, I love the breakdown of kind of allocating dollars to different product lines. And, uh, other follow up question I have is like, I guess originally I wanted to ask how to balance growth plans with investments in R&D, but I think you’ve kind of covered that. So the way I’d tweak it is. Do they always move in lockstep?

So, like, we’re, we’re investing in sales. So it’s going up into the right and we’re increasing our product investment at the same sort of clip or there are times where you kind of need to step on the gas on the sales side or step on the gas on the products. Like, how do you think about. The relationship between those 2 sides of the house?

CJ Gustafson: They do not match up in reality. There are some years where you go deep into building like two, maybe three products, but And those are not going to pay off for a while. And that’s why having a good relationship with your board is [00:32:00] key, because you have to explain to them why you’re investing now, why you’re burning cash to develop these, and how you’re going to come out on the other side.

So there’s a major timing aspect to all of this. You wish it was the case where revenue was scaling at the same pace of R& D investment, but that’s just not the reality. And so a lot of that is messaging around why you’re doing things at a certain cadence.

Pitfalls of Budgeting Non-People Costs

Joe Michalowski: Love it. Um, alright, I got one more, sort of like, planning the rest of the P& L question. I want to know, like, what are, what are the, we talked about headcount, and we could probably spend a lot of time talking about headcount, but I want to know, like, what the pitfalls are that people fall into when budgeting for the non people costs.

So, like, where do people go wrong? What are the mistakes everyone needs to avoid? It’s October 31st, crunch time, better go back and fix these things.

CJ Gustafson: I think seven years in a row. I forgot the budget for laptop refreshes. So if I miss

Joe Michalowski: on two, two, 2011, 11 inch MacBook Pros. Like we’re [00:33:00] just,

CJ Gustafson: Believe it or not Those things do break because you you end up coming up with a new higher budget and it’s like hey every person that comes in 1, 500 bucks or 2, 000 bucks for a laptop a monitor blah blah blah But you forget about the existing people in that laptops break me and maybe they last three years.

So hardware refreshes Write that one down, take it from someone who never writes it down. Another pitfall is starting out with bad data around bonus percentages for people. I see this a lot and it starts a crappy data at the start of the planning season, because you don’t take time to validate it on the payroll or with HR.

And you end up putting in too low of assumptions for the accruals each month, and then you discover that it should have been a way bigger hit. Part of the way through the year when one employee says, no, my bonus percentage is 10%, not 5%. And then this is a big one implementation costs. So for any software you’re buying, you got to ask yourself [00:34:00] if there there’s any one time implementation costs that you should also put a budget in there for a lot of people just stop at the, Hey, this software is 10, 000 a year.

But what if it’s a 15, 000 one time hit for implementation costs? Like that’s a, that’s a pretty big mess if you don’t know about it, even though you only pay it once. So, um, keep an eye out for that. And then like, this isn’t a real. dollar cost, but implementation takes a lot of bandwidth from people. So I always caution for companies to only take on one major IT or software implementation per quarter.

So I tried to implement NetSuite and Hyperion and Workday all in the same quarter. This was like four years ago. And

Joe Michalowski: you doing?

CJ Gustafson: no, no work got, no work got done that quarter. So that, that, that’s a lost quarter in time.

Joe Michalowski: Oh my gosh. Uh, I have never done any of those implementations, but it doesn’t matter. That sounds like a [00:35:00] nightmare. Uh, I’m glad you’re through it. You survived. Uh,

CJ Gustafson: It almost killed me, Joe.

Joe Michalowski: I, I bet it did. Honestly, that’s crazy. All right. Uh, I love all those answers. I think, uh, I think everyone should write those down, especially the laptop refresh one.

It sounds like that’s particularly painful for you every year. Uh, so I hope someone’s taking notes somewhere. Uh, all right. We’ve got. I guess in my head, I’m like, all right, so we’ve got like our, our top line sales plan and we’ve got our marketing engine and we’ve built out our people costs and our P&L.

And now we have all of these perfectly built puzzle pieces and they will just seamlessly connect at the end. And you have your plan. I assume that that’s not how it goes. So talk to me about bringing it all together into one unified plan that you can actually present to someone.

Bringing the Pieces of the Plan Together

CJ Gustafson: Yeah, well, you did all this work, but now you gotta check that it actually makes sense. So if you remember at the beginning, we said you gotta do it tops down to see what’s possible. Now what we’re doing is the roll up from the bottoms up using the inputs [00:36:00] from everybody. These could totally be wildly off.

Like I’ve done it sometimes and people are asking for twice as many heads as we thought, you know, we, we could do it with at the start. It’s like, okay, well, we’re going to have to sharpen our pencils here. We’re not really done yet. And so what you need to follow out of this are two P&L’s. That both tie to each other.

So the same amount of revenue and costs they should, they should link up. And so one of these is by department. So you’ll have sales and marketing, R&D, G&A. And then the other one is by expense type. So you’ll have like across all departments, total salary and benefits, total rent, et cetera. And I like to print both out old school.

Yes, I own a printer. Um, and I’ll check the monthly ramp in revenue and expenses by month. So I’ll just eyeball it to see how they’re increasing. And this is where you start to find like alligators in your model. That are that are popping up like why would our sit our marketing budget go down going into Q3 if we thought it was going to raise every period.

And this is where you start to pick out pieces that you have to go back and do better on. Um, and [00:37:00] you also want to calculate your forecasted CAC payback period that’s dropping out of this. A lot of people said it. I’ve done it too. I don’t know why it always happens, but you set a target for CAC payback period.

Hey, we’re gonna stay under nine months next year, but then you forget to check it at the end. And maybe it’s pumping out 11 months. It’s like, well, I know from the start that I’ve messed this up because it’s too heavy in cost or, uh, too light in revenue. So those are some of the other sanity checks I do in the P&L.

And I also look at ARR per head. So that’s my productivity metric. So you remember how we sat down with thethe CEO and we’re going look at revenue growth, productivity, and burn. Those are the three things I’m saying. Does that match up to what I thought I could triangulate at the beginning?

Joe Michalowski: This is, this is all great. First of all, I’ve never heard anyone talk about alligators in the model. I actually, CJ, I don’t know where you’re from. And in my head, I was like, CJ lives in Florida. Immediately. I was

CJ Gustafson: I’m a Florida FPNA, man. Yeah,

Joe Michalowski: Are you really? I, that was a total guess. 

CJ Gustafson: Florida right now.

Joe Michalowski: Oh, my God, I had no idea, but that makes so much sense.

The, the alligators in the model. It’s [00:38:00] like.

CJ Gustafson: They are, they, they hop out of nowhere and just bite you.

Joe Michalowski: I love that. I’ve never heard that and it’s great. I will use it forever and I’ll attribute it to you sure. Um, what so talked about kind of like, uh, finding out that we’re, we’re just way off, whether it’s dealing with those alligators or just kind of like going back to what we set in the beginning for the guardrails.

How many back and forth are you doing? So, like, you’re probably going back and forth in each of the sections we already talked about. Then you bring it together. You find out again, like, you’re just not matching up. So, like, What is the, what is the back and forth process look like? Like how many versions of this are you creating?

I’m sure it’s painful. I’m sorry if it’s a little triggering,

CJ Gustafson: Yeah, when I was using Excel, uh, this was like four years ago. We got up to model, uh, version 112. I

Joe Michalowski: One hundred and twelve.

CJ Gustafson: it was, it was bad in the model was so big that when you opened it, you could go to the other room and make a cup of coffee yet like a granola bar and come back and it would finally open. [00:39:00] It was like a 50 Meg file, but now, now we don’t do it in Excel anymore, which is nice.

But, uh, it, it’s differing levels. Of back and forth because some departments like check, that was easy. Like, and they’re even shocked. They’re like approved. I’m like, yeah, approved other ones. It’s, it’s a much difficult conversation and. Those are the ones that sometimes you need to get more people involved in what I call an interlock and these should happen throughout the process of like, sales is saying they’re bringing this to the table.

Marketing saying they’re bringing this to the table. Does that match up? Okay. The other one is between product and engineering. So what’s the ratio of PMs to engineers? Does that match up? Okay. And it’s usually when those things don’t match up, you have to have. You know, a more nuanced conversation with that leader, but I would say, you know, probably half the departments end up having to have like another back and forth of, Hey, can we, can we like delay this?

Like, I’m not saying I can’t give it to you, but can we push it out a quarter? And then there’s usually probably two or three conversations with your CEO where it’s not like, do you agree [00:40:00] with this or not? It’s presenting the findings and reporting back and then getting comfortable with it, um, to then have the same story.

So you’re talking about it thematically the same when you get to the board.

Joe Michalowski: I heard all of that and I really liked it, but my eyes are still kind of twitching over the version 112 on the spreadsheet, because I don’t work in spreadsheets, luckily, nobody would want me to, it wouldn’t go well, but that, that would kill me, I think that would kill me, I

CJ Gustafson: You guys can use that in a, in a marketing, uh, advertisement. Put it on a banner. You can quote it.

Joe Michalowski: Version one 12. Let’s see, CJ was on version one 12 until he finally got outta spreadsheets. Don’t be CJ or be like

CJ Gustafson: be me.

Key Takeaways and Career Lessons

Joe Michalowski: Uh, all right. cj honestly, a a 40 minute masterclass of, of the annual planning process, and again, I, I’m sure we could spend an entire episode going into any one of these areas, but I really appreciate you just burning through what felt like a very meaty.

Topic, a lot of great takeaways. So I appreciate that. Um,

CJ Gustafson: could [00:41:00] do this again. We left a lot of meat on the bone.

Joe Michalowski: there’s so much, man. It’s just, it’s a huge topic. And so I know, you know, it’s tough to fit it all into one, but I appreciate you going through, but I do have two non planning season related questions for you that I want to get to. And the first is an ode to your own show.

I want to ask you, what does your finance tool stack look like? Because in true run the numbers fashion, we need to know.

CJ Gustafson: I love it. Time for me to rep my stack. I’ve never got to do this before. This is fun. So, uh, you know, FPNA, Mosaic. I don’t know if you’ve heard of them before, but, uh, not once. All right. They’re great. Um, it’s streamlined our processes and got us away from version 112. And if you need to do sales capacity modeling, it’s like, it’s brilliant.

So. Shout out Mosaic. Then for ERP, we’re using NetSuite, which helps us keep the books clean and makes us feel like a big grownup company. And, uh, then in terms of payments, we’re [00:42:00] using Brex, um, helps us. With virtual credit cards too, which are nice. You can slice one for somebody if they’re taking their team out to dinner or something.

Um, what else do we get? We got for headcount and this is somewhat on the HR side, but, um, we use greenhouse for recruiting, which allows me to do the approvals as a finance person. And then we got high Bob hooked up, um, which is great for tracking, you know. how many people we got on board. And then we use Travel Perk for, for the travel portion.

So that’s, that’s the stack I’m wrapping today. Oh, and I forgot one of my favorite tools of all time, Sigma. So that’s where I look at all of our analytics. Um, we have Snowflake as the underlying data warehouse. We use dbt as the infrastructure, and then we get Sigma on top to give me all my spicy reports that I check each day.

Joe Michalowski: I love this. I wanna, so, I’m glad that I got to play along with the Rep Your Stack. Uh, it was [00:43:00] fun. But I also wanna know, like, is there anything on your, like, finance tool? Wishlist, like you already said mosaic. This is not, this was never going to be like a pitch for, you mosaic, but I’m curious, like, this space is just really exploding, like, whether it’s specialized tools or platforms.

And I’m curious, is there anything that you’re like, oh, man, like, that’s, that’s on my list of things to get in place someday.

CJ Gustafson: I’m very intrigued by where the BI space is going, as I think FP& A and BI are merging over time to become one. Um, anything that can give me signals on the business faster than me having to close the books is big. And then on the procurement front, we started, we started using Tropic. And they’ve been great because I don’t have time to negotiate every deal.

And it’s also information. Asymmetry in the sense that the vendor has done way more deals than I have with companies of X, A or R size and who needs Y number of seats. And so I can rely on [00:44:00] their, you know, wealth of knowledge to go out and get me the best deal. So I’m so pumped about that because it’s given me hours in the day back.

So shout out Tropic.

Joe Michalowski: Love it. All right, cool. I will check them out. Uh, all right. C. J. last question. I ask everyone that comes on, um, spoiler alert. I’m, I’m turning this into a little book and I’m going to make it. I think I’m gonna make it a physical book. I’m I’m almost up to 50 episodes here and, uh, ask everyone that comes on.

What is 1 thing, you know, now that you wish you knew at the start of your finance career.

CJ Gustafson: Listen more. I would try to blind people with my science and my numbers, and I would get silence in return. And I would often be like, I just blew their socks off, like I am the man. But it would really be because I just hit them with a barrage of numbers. And they didn’t even know how to like, Interact with me at that point.

I was like a human robot and I thought it was impressive and it wasn’t. I was actually putting friction on the relationship where they felt like it was a one way [00:45:00] conversation. And what I found out is like, it’s about getting into the business and asking questions then listening. Like, step one is to get out into the business.

Get out from behind your spreadsheet. Step two is to ask questions. Step three is to shut up and listen. what people will tell you about the business because you’ll be a lot smarter about how things work and how your company makes money when you get input from people throughout the organization, whether that be marketing or HR and my favorite people to talk to are our product.

So I would talk too much and not listen enough and you need to collect information from people, not just give information to them.

Joe Michalowski: I love it. Look how far you’ve come though, CJ. You’re hosting a podcast. You’re like Mr. Audience over here. You’re one with the people. Like you are, are man of the 

CJ Gustafson: I’m a man of the people.

Joe Michalowski: You really

CJ Gustafson: to, I’m just trying to balance this balance sheet.

Joe Michalowski: I love it, man. Well, thank you so much for indulging. What is my favorite question? Uh, you will get a shout out in the book that I’m very excited to put together. So I can’t [00:46:00] wait. Uh, but I will respect your time. Although I could probably chat with you for a very long time. Um, but it was really great having you on man.

I want to turn the floor over to you. Where can people go to subscribe to all the things you’re doing to follow along, uh, to work with you. However, uh, you would like the floor is yours whenever you’d like to promote.

CJ Gustafson: Thank you, sir. Uh, mostly metrics. com newsletter twice a week, mostly metrics. com. If you like business models and financial metrics, and then run the numbers podcast, I interview world class CFOs and startup operators, and we make finance and business fun, go get it. Thanks for having me on, man. This has been a blast.

Joe Michalowski: It was fun. Uh, CJ, you’re, you’re great at this. I, I highly encourage people to go listen to Run the Numbers. Making finance fun is no easy task and you do it. Uh, all the things really helped me. So, it, man. Uh, great. Well, it was great having you on the roll forward. We’ll do it again sometime. Uh, but for now, enjoy your Halloween, sir.

Thanks, CJ.

CJ Gustafson: Thank you, sir. I appreciate it.[00:47:00]