⚙️ Ops Playbook #54

Hi Operators ⚙️

The way you manage your business’ finances is the difference between a billion-dollar valuation and a cautionary tale.

No pressure! 😬

We’ve got you covered. This week, we've rounded-up some actionable tips and strategies that'll make your CFO swoon and your investors sit up straight.

Here's what we've got going on:

• Burn, Baby, Burn → Strike the balance while you burn 🔥

• Vendor Negotiations 201 → “You don't get what you deserve, you get what you negotiate.”

• LTV, CAC, and the 3X Rule → The metric that puts the 'fun' in 'funding rounds' 💰

Ready? Let’s dive in 👇

P.S. Building a business can be lonely. Let’s connect on Linkedin

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Operator’s Library

• Nobody wants to think about sales tax, but here’s a primer that makes it easy (OnlyCFO).

• A comprehensive blueprint for growing a consumer subscription business (Lenny’s Newsletter)

• A podcast deep-dive into the current state of Stock Based Compensation (Bill Gurley)

• How to understand your SaaS business’ Customer Acquisition Cost (The Saas CFO)

• Your primer to strategic finance from the perspective of a CFO (CFO Secrets)

I. Burn, Baby, Burn

Insight from Toptal

Let's talk burn rate 🔥

Specifically, how do you nail that Goldilocks zone of "just right" spending?

To start, runway is king. Aim for 12-18 months of cash in the tank. 

That means if you've got $600K in the bank, you're looking at a max burn of about $50K per month. We love simple math.

That being said, your burn rate should evolve as your startup grows. Fred Wilson (VC at Union Square Ventures) provided the following benchmarks:

• Building product? Keep it tight at $50K/month.

• Chasing users? You can crank it up to $100K/month.

• Scaling the biz? Now we're talking $250K/month.

Now, don't freak out if you're burning more than these numbers. High burn isn't always bad (especially if you’re fueling rapid growth).

As a matter of fact, for all you SaaS guys and girls, Brad Feld coined a formula called the "40% Rule": your net burn rate plus your growth rate should be around 40%.

As always, it’s important to note that these aren’t hard rules, just benchmarks. 

Your perfect burn rate depends on a cocktail of factors:

How much cash have you raised? What are your chances of raising more? How fast are you growing? What's your stomach for risk?

You want to ride that line between aggressive growth and not setting your cash pile on fire. 

Check your burn monthly, have a plan to slash costs if needed, and always keep at least 6 months of runway in your back pocket.

Cash is oxygen in this game 🌬️

II. Vendor Negotiations 201

Insight from Ramp

Your ability to negotiate with vendors can make or break your runway. 

It's not just about shaving a few bucks off the price tag—it's about crafting deals that give you flexibility, conserve cash, and set you up for long-term success. 

Here are some specific strategies to keep in mind while ironing out your next deal 👇

The Long Game (with an Escape Hatch): Offer a multi-year deal, score a sweet discount, but keep the freedom to bail if things go south. Propose a 3-5 year contract (vendors love that long-term commitment), include an "opt-out" clause with 60-90 days' notice, and sweeten the pot by offering to feature them in case studies. 

Stretch Those Payment Terms: Cash is king, so why not keep it in your pocket longer? Negotiate for extended payment terms – we're talking net 60 (or even 90) days. It's like an interest-free loan from your vendors. Start by asking for twice the current terms. If you're at net 30, shoot for net 60. Remember, the worst they can say is no, and you might just land somewhere in the middle. Pro tip: Offer to set up auto-payments in exchange for longer terms. Vendors love predictable cash flow almost as much as you do.

Factor in Total Cost of Ownership: Time to put on your detective hat and look beyond the sticker price. We're talking implementation costs, training fees, maintenance – the whole shebang. Create a TCO model for each vendor and use it as your negotiation superpower. You might find that the "expensive" option is actually cheaper in the long run 🤷

Your bottom line (and CFO) will thank you. 

III. LTV, CAC, and 3X Rule

Insight from HubSpot

Alright, let’s catch-up on the basics: 

LTV (Lifetime Value) is how much a customer's worth over their entire relationship with you. CAC (Customer Acquisition Cost) is what you spend to get them in the door. 

Divide LTV by CAC, and voila! You've got your ratio.

The generally accepted benchmark for an ideal LTV/CAC ratio is 3:1 or 3.0x. 

For every dollar you spend acquiring a customer, you should expect to get at least three back over their lifetime.

• Below 1:1? Time to sound the alarms and rethink your marketing, your business model, or both 😬

• Between 1:1 and 3:1? You're on shaky ground. You might not quite be at product-market fit.

• 3:1 to 5:1? You're in the sweet spot for scaling SaaS businesses.

• Above 5:1? You might actually be underinvesting in growth. Get spending!

Pro tip: calculate the ratio as an annual rolling average. 

It'll smooth out those seasonal hiccups and give you a clearer picture.

And, as with all benchmarks, 3:1 isn't a one-size-fits-all solution. 

Your perfect ratio depends on your growth stage, industry, and goals.

How am I doing? 👋

I take all feedback I receive to heart. Keep it coming! Just hit reply and let me know – I'd love to hear from you!

Cheers,

Rameel from The Bottleneck

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