In a prior client engagement, I served as the founding Finance Partner for a large entertainment studio launching an app as a joint venture with other major entertainment companies. I came on board to no finance infrastructure, and the client was operating against a fixed development timeline and investment commitment. Nonetheless, I developed all of their forecasting, reporting and scenario planning models to manage their operational strategy. Let’s go over best practices in joint venture finance that I gleaned from that experience.
Tip #1: Understand all salient deal points.
When I first came to the client’s office, I quickly discovered they were operating without any financial planning and reporting infrastructure. They had already hired an executive team, droves of software engineers and data engineers, as well as marketing folks. They had leased office space and started to pay third-party vendors.
In other words, they were burning through cash without a plan for how to manage it responsibly within a development budget.
To immediately tackle this problem, my first step was to sit down with the General Counsel and discuss the key deal points. Namely:
- How frequently was the client obligated to report to its investment partners, and at what level of detail?
- On what basis was the required reporting (e.g., cash, accrual, etc.)?
- What was the current investment commitment and timeline, as well as the required product deliverables within that timeline?
I discovered that the joint venture partners had agreed to a monthly reporting structure on a cash basis. There was an established development budget cap, as well as an annual approved budget for its first year of post-launch operations.
Tip #2: Design a Chart of Accounts and necessary reporting attributes in the company’s Enterprise Resource Planning (ERP) system.
Once I had a clear understanding of the deal requirements, the next step was to discern expectations from key team members. I conferred with all executive team leads to understand their respective internal needs for reporting and research. For example, the Head of Product may want to know forecasted data usage from Amazon Web Services, while the VP of Marketing may want to categorize spend by type of campaign (e.g., email/push vs. print).
Taking these perspectives into consideration, I constructed a bottoms-up Chart of Accounts to meet the flexibility in reporting to the organization. The client used SAP for its ERP system, and I leveraged SAP’s “WBS Elements” feature to create additional data attributes within a specific account. This allowed for even more granular reporting where needed.
Tip #3: Establish a comprehensive vendor management process.
As mentioned, the client was burning cash without a plan. They had already contracted with a few essential third-party vendors in order to operate. However, there was no clear-cut process on how to pay these vendors.
I established a central email account for vendors to digitally submit invoices, and I spoke with the legal team to have invoice instructions changed within future vendor agreements. Leveraging the new Chart of Accounts, I created a guide on how to “code” invoices to the proper accounts. Then, I trained the office administrators on invoice coding, and I gave them shared access to the invoice mailbox.
Vendors were finally being paid on time, and invoices were coded to the correct accounts. (What a concept!) But how would future payments be forecasted and managed? A monthly meeting was established with the team leads to stay afloat of the current and future vendor pipeline. I built an Excel tracking tool to monitor by-vendor SLA terms, timelines, and anticipated rate increases.
Tip #4: Build a bottoms-up operational forecast model.
Now that the urgent building blocks were in place, I could finally tackle building a robust financial model. I started by working from a download of monthly actuals from the new Chart of Accounts. I leveraged trends from historical monthly spending and created SG&A account forecasts. Then, I layered on:
- commitment schedule from the third-party vendor tracking,
- by-employee labor tracking, and
- a by-account topside worksheet to enable flexibility in forecasting special circumstances.
Whenever any product is being developed, labor is usually the largest expense line item. Due to this, I ensured the forecast model allowed for any possible changes in headcount and their associated costs. I set up a weekly meeting with Human Resources to stay in close touch with any anticipated staff updates. I also informed HR about the cash available to spend on labor, which influenced some hiring and role re-leveling decisions.
In order to both inform guidance internally and report to investment partners, I amalgamated the granular detail into a high-level reporting summary based on categorized cost drivers. I wanted to clearly speak to the “punch lines” of the forecast model, particularly when the audience included some executives who lacked a Finance background.
Tip #5: Construct a robust reporting suite.
To complete the client’s finance infrastructure, I constructed a monthly reporting template that seamlessly integrated with the forecast model. I additionally ensured the monthly reporting template suite satisfied all of the requisite deal points contemplated in the master agreement. A cadence was established to review the monthly reporting package with the respective investment partners and answer any of their questions.
By thoughtfully approaching how to establish the client’s finance and operations infrastructure, I was able to deliver both the initial development and first year post-launch operating costs within budget. I also had the intel to construct a detailed, bottoms-up budget for their second year of operations, which was approved by all investment partners on the Board of Directors. The client is still operating today and continues to leverage the models and accounts I constructed to help manage their business.
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