E10: Not all cash burn is created equal - with Diya Sagar

Not all cash burn is created equal. A good rule of thumb is to think about good cash burn as being investing for growth.

What's one mistake you see finance teams make over and over again?

I hate to say this, but I see finance teams having numbers across different files relating to the same thing, but not matching up.

And do you think you can, like, tell the good from the bad just by looking at a cash flow statement?

You want to know who is helping to drive revenue. So it's not as black and white as just being able to look at a cash flow statement and understand.

What's one trend in finance and accounting that you believe will shape the next five years?

I think the answer to this is so obvious, which is, of course, AI. But overall, I think AI is going to help us become faster, more efficient in our ability to support the business.

You're listening to the 10x Finance Podcast. Quick, candid conversations with the people shaping modern finance. Hosted by Albert Ghazi.

Hello everyone, and welcome to the 10x Finance Podcast, where we dive into the real challenges and opportunities shaping modern finance teams. I'm Albert Gozi, Co Founder and CEO at Aleph, and today I'm joined by Dia Sager, CFO at AWA Studios.

Dia, it's great to have you here. Are you ready to jump in?

So ready, Albert.

Thanks for coming. So Dia, you know how this works. I would love to hear what is your hot take?

My hot take is not all cash burn is created equal.

All right. Tell me a little bit more. What's the, what are the differences? What are the options?

And what I, I mean by that is cash burn can either be for good or it can be for bad. Good cash burn is, in the world of venture backed startups, it's on it's typically expected that businesses can burn cash for a couple of years or a few years before they become profitable. And the reason for that is what investors expect is that their investment and the amount of cash that that business is burning is at some point going to be surpassed by profitability. And that at some point the business will be valued at ideally many multiples more than the amount of cash that it's burnt. That is good cash burn. Bad cash burn is when a company is essentially moving a step towards bankruptcy.

So what that means is a company is either it's outspending itself. And at some point it's its liabilities are going to surpass its assets. And over time that company is not going to be able to finance itself and it's not going to be able to realize any kind of valuation that can make good on the cash that it's burnt.

Makes a lot of sense. And then my, I think my follow-up question, and if I'm a listener listening to that, I want to be on the good cash burn and I want to avoid the bad cash burn as obviously it sounds. How would you think about, is it obvious identifying which one is which or how would you know in which situation you are? Where are the pointers?

I think a good rule of thumb is to think about good cash burn as being investing for growth.

So any initiatives inside of a company where you could be investing in helping the business make revenue in the future or make enough revenue that it's going to exceed its costs. So for example, that can be investing in building a product that at some point is the company can sell and is going to generate a lot of revenue from it. It could be investing in marketing to build your brand and give your company more clout in the market.

Or it could be hiring people who, you know, together by bringing them together, they're going to help build a valuable company that it's worthwhile hiring them in the first place.

On the flip side, bad cash burn is harder to identify because you could think that you're investing for growth when actually you find, for example, perhaps you're tied into long term contracts with vendors who are charging you way too much. And then over time you find that revenue is not going to be enough to outweigh the costs, or perhaps you are spending on real estate that your company isn't utilizing properly or doesn't really need. And over time you find that actually those weren't good investments and actually you are heading towards a place where liquidity and cash is going to become a problem.

And do you think you can like tell the good from the bad just by looking at a cash flow statement or does it require like a double click? Because I imagine, again, even for the same metric, take headcount, I could probably make the argument for headcount being the good kind and the bad kind, depending on like what it is. And there's a lot of like meaning beyond the numbers. Would you agree with that and how you think the context of a financial statement or how we go about reporting?

Yes, definitely. I think context is extremely important when you're looking at the financial statements. You, like you say, even with headcount, people are doing different functions, different roles. You want to know who is helping to drive revenue. And also there are some, there are always parts, you know, like the finance function that may not be directly related to revenue or operational roles, but you still need them to help the business operate. So it's not as black and white as just being able to look at a cashflow statement and understand That being said, you can look at the cash flow statement along with the other financial statements like the balance sheet and the P and L to see where are you building up assets versus your liabilities. That can immediately tell you you should zoom in on particular parts of the business to understand where you're burning cash and for what reasons.

Do you have an example of course, keeping confidentiality, but do you have an example from companies that you've either been involved in or like you've seen from like our friends in finance that maybe was going down a path that like, you know, wasn't quite the right one? Where did the theory come from in some way? Or are you feeling strongly about this?

I think one bucket in many companies that can be murky is marketing, marketing spend.

So marketing can, we can broadly think about it as two types. One is awareness and reach and the other is gross marketing, which is more closely linked to revenue.

Oftentimes you can burn a lot of cash or you can spend a lot on brand awareness and building your brand. And you're always justifying that because there's no revenue attached to it, but you believe that you are creating awareness in the market about your company or your product. But I've seen companies go down the line of spending almost purely in that bucket and not thinking about growth marketing and growth marketing actually is a big part of it is a mathematical equation where you can be spending on paid ads or social media, and you can track very closely the data to show you how that's converting into sales and therefore revenue. So I've seen companies make that mistake and marketing, it tends to be a very big bucket where things can go wrong.

Do you have a rule of thumb for what you think is like reasonable to spend in brand? I feel like it's of course, you know, thinking of, you know, I am a CEO, I discuss budget with our marketing team and it's like quite a open ended and very subjective discussion. So, you know, I think the answer is always, it depends, but how you think about the brand spend versus the growth spend?

At the early stages of a company, I think you're going to be very heavily weighted towards brand spend. You have to be able to bring out some kind of awareness in the market about your product to drive demand in the first place. And it also goes towards creating credibility. It's hard to just market your product or your company on its features or its cost or its characteristics alone.

So I think in the early stages of a business, you're going to be very heavily weighted towards awareness and reach and brand spend. In the later stages, I think when you actually have a product that you're selling, that's when you can shift more towards growth marketing spend and linking it towards revenue. It's hard to say sort of a rule of thumb or in percentage terms, but every company, when you look at your growth marketing, you should know at what point the sale of that product is profitable. It's usually, you know, it could be, you could have, you'd have the ROI and it would be some kind of multiple, maybe it's three or four X or for some businesses it might be a lot more depending on what you're spending to create that product.

But I say that's broadly how you should look at it.

And when you think about, if I wanna take the side of, I want to justify my spend, whoever made the decision to lock the company into a five year contract for real estate that is not being used, right? Like I do think that like there's a lot of, you can always argument that the ROI will come in some undetermined timeframe or like, yeah, you know, is growth marketing, but like the outcome of this campaign is going to have How do you think about that? Is it like setting boundaries? Like having, is it about like having a framework? How do you think about like how you control that subjectivity that comes with that?

I'd say for me, the framework is it's always a trade off between risk and reward. So the more risk there is or the less visibility there is into the future, let's say something like a long term contract, you don't have a lot of visibility into the future. You shouldn't be entering into those long term contracts and that long term spend. So you would think about, yes, we have to spend on say real estate, but let's get a shorter contract as possible so that we can manage our risk because if the rewards are only come going to come later and you have no certainty behind that, it has to be tied to that level of risk.

Whereas something that say, you can take a risk on spend where the results are almost immediate, you're going to learn about them very quickly. And you don't, you can spend on that thinking it's a relatively, if it's a relatively small investment and a relatively small bet, but the results can be known quickly. You're more willing to take those bets. That's the framework that I would use.

Yeah. So the smaller, the bet is the shorter timeframe to get back the better. And then you take trade offs on things that are probably like high reward potential. You might be willing to take a little bit more risk.

Exactly. And let's say, if you do have long term recurring revenue, that's already contracted gives you more of a, that kind of supports your risk tolerance. You could invest that cash into building that product and growing it over the long term because you know that revenue is already contracted.

This like risk versus reward, like ROI thinking about the impact long term is of course like a very finance view, right? Like finance people tend to think in those terms and that terminology. How do you think like you see this apply to other budget owners that are making decisions that maybe come from different backgrounds? How much do you think it's about educating and helping them frame problems and seeing the right way? Where are the parts where you think like actual controls are pretty helpful and like help organize? How would you use all of these tools available?

I think when explaining it to non finance people, you can almost explain within general day to day terms, which is costs versus benefits. When somebody in the company or a department head wants to spend on their part of the business, you should just think in simple terms of is this benefit for you or for the business worth the cost? Is it worth the budget? People spend in their day to day lives and so people are generally used to thinking about spending in those terms.

And then at that point, that helps them. They should be able to come to finance with the reasons why they want to spend that cash or the reasons why they want to make that investment on behalf of the company and how it's, how the benefit that it's going to deliver to the company is worth much more than that. I think they don't need to use financial terms to describe it, but that rationale and that thinking is one way of building sort of being able to build consensus and building a view before they come to finance looking for approval.

So what you're saying is that, you know, try to work with them on the reasoning, try to help them qualitatively in some way, think through the answers and then finance might help quantify some of that impact and like partner with them on like really understanding and translating into numbers. Is that a bit?

Yeah, exactly. It's almost show us the size of the opportunity, show us how great it's going to be. And we can quantify that in numbers, but there has to be something that is quantifiable.

Perfect. Yeah. I think, know, you know, these episodes are very short, but I appreciate you elaborating on your, on your hot take with me. We'd love to move towards our rapid fire wrap up. Are you ready to end on a, on a punch note?

Yes, let's go.

All right. First question is, what's one mistake you see finance teams make over and over again?

I hate to say this, but I see finance teams oftentimes having numbers across different files relating to the same thing, but not matching up. So mismatching numbers in finance are never a good thing. Use one source file and just make sure everything ties.

The fewer numbers, the better. You know, I agree.

What's one piece of advice you would give other finance leaders scaling their team?

I would say encourage your teams to develop a breadth of skills as opposed to it being narrow. So whether it's FP and A or whether it's accounting or whether it's treasury solutions or corporate development opportunities, avoid becoming extra specialist in one area and try to get your teams and your teams thinking broad and developing a wide range of skills.

Final question is what's one trend in finance and accounting that you believe will shape the next five years?

I think the answer to this is so obvious and probably said by everybody, which is of course AI. But overall, I think AI is going to help us become faster, more efficient, and therefore generally stronger in our ability to support the business.

Elizabeth, I think it's a popular answer for prior guests indeed. Lia, thanks so much for taking time out of your day to chat with me.

Thanks, Albert. Good to see you.

That's it for this episode of the 10x Finance Podcast, bringing you sharp, real world finance conversations powered by Aleph.

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