Pro Wrestling, Anime, and Financial Modeling with Ariel MencheDownload MP3
Ariel Menche: [00:00:00] Such as financial modeling, because it's strategic finance. That's the way I like to think about it. And maybe I'm just adding fancy words to something that's simple, but I do believe it because it's not just putting numbers on a sheet. Because when you just put numbers on a sheet, you'll do what I did at the beginning of my career, which is hand over the model and they say, "Why am I making $1 billion a month? That makes no sense." And I'm like, "Well, that's the formula." And they're like, "You have to do the sense check. You can't just be a monkey with the numbers. You got to really think about what you're doing."
Blake Oliver: [00:00:30] If you'd like to earn CPE credit for listening to this episode, visit earmarkcpe.com. Download the app, take a short quiz, and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Hey, everyone. Welcome back to the show. I'm Blake Oliver CPE talking today with Ariel Menche. Ariel, welcome to the show.
Ariel Menche: [00:00:58] Yeah, thanks for having me.
Blake Oliver: [00:01:00] Ariel, you are a strategic finance advisor at Raftel Strategy. And the way that we, I guess, got in touch is you were working at Demostack with my buddy, David Wieseneck. Is that right?
Ariel Menche: [00:01:15] Yeah, still in. This is one of my clients. Yeah. So Raftel Strategy is my consulting firm. I do financial advisory for a number of companies, usually focused around transactions, helping companies who want to eventually do a capital raise, whether it's a series A, B, C, whatever it is, debt raise, or eventually exit M&A or IPO. And there's a lot of different people involved with those transactions. So you have your bankers, you have your investors, and no one's really there working for the founder or the founder's team, the CFO, trying to help them, guide them towards that transaction. So that's our focus. And it's not only that, but we also go into companies and help build out financial models and sometimes part-time or outsource finance teams. Not like a CFO that does purely accounting, but think of forward-looking financial models, strategic KPIs, and how to think strategic... Finance today is really a mix between strategy and the numbers. So trying to take all that together. So working with Demostack today also.
Blake Oliver: [00:02:30] Well, yeah, it was great talking with David. If you have not, dear listener, heard that interview, go back to the episode called Scaling Startup Finance with David Wieseneck. And we talk all about his approach as an accountant, a controller who then became head of finance at a startup. And he recommended that we talk to you, Ariel. So I'm eager to hear your insights into FP&A and more on the finance side of things and building models. And you have such a really interesting LinkedIn profile. The one that stuck out to me, the experience that stuck out to me, is your time at WWE, what used to be the World Wrestling Federation when I was growing up, now WWE, doing financial planning and analysis. And I'd love to hear a bit about how you got there. What was your background? Were you an accounting major in school? How did you end up doing FP&A for pro wrestling?
Ariel Menche: [00:03:27] Yeah. First of all, yeah, I'm actually a big fan of WWE, of the show, and then being able to work there was a really amazing experience. I started out in college. I did a double major of business and art history. Actually, the way I usually say it is accounting and art history. And the reason I chose them was the first two on the list. But the truth is I did a master's as an undergrad, so I did my 150 hours during my undergrad, so only had an extra summer and got pretty much all ready for the CPA and also art history degree, which was great for conversation starters. And then moved to KPMG where I did strategy consulting. Did one project with an accounting advisory team so I could get an accounting partner to sign off on the accounting side of things and got the CPA.
Blake Oliver: [00:04:21] So art history, you have like artist favorite period type of... Did you guys do a thesis?
Ariel Menche: [00:04:30] Yeah, actually, it's pretty funny. I came in really liking surrealism, so like Salvador Dali. Ended up focusing on architecture in the Islamic world, looking at just development of art and architecture in the Islamic world, really a focus on buildings everywhere. And I love that. But for my honors thesis, which I ended up not doing because I was doing the master's in accounting, and it just would have been too much. I wanted to do the development of comic book art and how the covers of Batman comics reflected the different esthetics different decades, starting out with the Golden Age, Silver Age, and eventually like the '80s grungy Batman. That was the dream.
Blake Oliver: [00:05:11] Oh, yeah. No, that's fantastic. It's funny, too, Like growing up, I feel like the world has changed a lot because when we were kids, comic books and anime and all that stuff was sort of like a, I don't know, not the mainstream culture. And now here we are in a world in which that's all like totally mainstream now and normal.
Ariel Menche: [00:05:32] So yeah, actually you mentioned anime, and that's part of my journey into WWE.
Blake Oliver: [00:05:39] Really?
Ariel Menche: [00:05:39] Yeah. So I'm an avid anime watcher. And one of the really cool things that anime is unique is that it's long-form storytelling. You're watching these characters develop over a number of years. And so you're really into the characters and their storylines. And there's only one other form of entertainment that really goes into long-form storytelling that's also centered around fights, and that's professional wrestling. And so when you have an audience as professional wrestling, there's usually a big overlap with anime because you're watching these people develop relationships, break off these relationships. And so everything's focused around fights. With professional wrestling, that's unique, though, even more than anime is that it's happening in real time. So when these group of... In this squad of three guys who are fighting together for three years and then they break up, and then five years later, they meet each other in the ring, and are they going to be friends, are they going to be enemies? What happened? Well, you were there eight years ago when they formed and you were there five years ago when they broke up and you were with them and their individual journeys for the last few years. And that's real time in your life that you spent dedicated watching these guys and developing them. It's a very strong parasocial relationship that you have. And the emotional payoff is amazing.
Blake Oliver: [00:07:01] I think that's the thing that people outside of these subcultures don't see is that they just see the fights. But what it's really about is the relationships and the interactions between the different characters.
Ariel Menche: [00:07:13] Yes, exactly.
Blake Oliver: [00:07:14] The long drama that it's very intricate and drawn out. And you have to know the history to really enjoy it.
Ariel Menche: [00:07:21] Exactly. And so when you're a new fan and... When I say new fan, you could be watching it for three, five years and then someone comes on stage and everyone's freaking out, you have to do all these Wikipedia searches to see what the relationships were beforehand.
Blake Oliver: [00:07:36] It's a lot easier these days. You can just go on the Wiki and look it up.
Ariel Menche: [00:07:40] Yes, that's true. You could do that. So definitely helpful. But to how I got to WWE is actually when I was at KPMG, one of the projects I did was actually for the FP&A team at WWE. And I wasn't poached or anything. But there was kind of when I came up as like, oh wait, WWE is a company that people could work for. So it was on the radar. And about a year and a bit after that, I was looking to change direction. So I was doing strategy consulting for a number of years. Most of the time on projects I was put on more of like a financial modeling side of things. I was like an Excel guy, my bread and butter. And I wanted to go into finance. I thought that was an interesting direction to go. And then there happened to be an open role at WWE. It was very fortuitous. And I was able to join the team. And at WWE, I managed Stephanie McMahon's budgets.
Blake Oliver: [00:08:32] So Stephanie McMahon is the what, the head of...
Ariel Menche: [00:08:35] She was the chief brand officer at the time. Actually, she just recently resigned. So that meant everything to do with marketing, brand, also community relations. They do give a lot back to the community, which was really cool for me to experience that side of the business as well. They also had like a network... I'm sorry. Yeah.
Blake Oliver: [00:08:58] I was going to say, I mean, I don't mean to derail you, but I'm really curious about like, what are you modeling out for WWE? What do those financial models look like? What's important? What's everybody...
Ariel Menche: [00:09:13] Yeah. So it's a number of things. So interesting to think about like the CFOs role and how their different responsibilities look and then how that's actually changed over time. So I'd say like the traditional CFO has like three hats. You have the treasury, you have accounting and finance. So treasury is taking care of everything to do with cash, accounting is making sure everything is reconciled. And then finance was really what do we expect to spend? It's all forward-looking. But as I think data has become more accessible and we're able to manage more and more of it, the finance role has expanded to become more strategic. And it's not just about forecasting the expenses, but also thinking strategically about what KPIs to be measuring, how to think about where to invest in the company. And so finance kind of grew to be this almost like a nucleus of the company where we're working with all the different operators. And it's almost like a service. You have clients within the company. So working with the accountants, working with the marketing team, working with data analytics, making sure they all have the support they need to... the KPIs to measure that they're succeeding and what they want to do, make sure that they understand how much funds they need to succeed or how much funds they have left. And what I found was in the old legacy practices, a lot of times what you're doing was acting like almost a broker, not a broker. I think the term would be like a-
Blake Oliver: [00:10:50] Middlemen.
Ariel Menche: [00:10:51] Middlemen, I guess. Living in Israel now. So I can't speak Hebrew, but then I can't speak English either. So you lose all the [crosstalk].
Blake Oliver: [00:11:00] What's the word in Hebrew?
Ariel Menche: [00:11:01] It's actually my last name. In Hebrew, my last name is Menche or Menche. And it's the same word, but it's like a moderator.
Blake Oliver: [00:11:11] Same word. A moderator There we go. Yeah.
Ariel Menche: [00:11:12] Yeah. So marketing would say, I'd say, "Okay, here are your actuals that came in." And they were like, "I didn't spend that. That travel and expense thing, that's way too high. I didn't spend anything near that." When I first joined the company, it was like 20 days of the month was trying to reconcile all the actuals from the previous month. There was a limited accounting team and then every single team in the company had a different data set. So just for one example, HR had one set saying who is belonging to what department? Accounting had a different set. The travel team had five different sets depending on whether or not they were using an Uber or a plane. And so I realized this and I was like, "I don't want to be spending my time doing non-value add activities. Let's get to the bottom of this problem." And what we did was we created single sources of truth. We gave more responsibility and put the onus on the operators to say, here, I know what I spent, so I'm showing you what I spent. So when they have a report now that feeds into accounting. And so what does the modeling look like? I created a report that a marketing team could use. Use some dropdowns to say, "Oh, it's this type of expense, this type of that," that automatically filled out the accrual sheet for accounting. So everything just looked very pretty for all the different teams. So it's looking at who are your stakeholders. So marketing was one of my stakeholders. Accounting was one of my stakeholders. I want both of them to be happy to be able to do their job as quickly and efficiently as possible. So modeling out tools. And in this case, everything was in Excel, but the tools were the different sheets that we created that they could all use. And we got a 20-day process down to a four-day or even, I think some business units down to two days. And then you have the rest of the month doing value add activities.
Blake Oliver: [00:13:04] Okay. So 20 day, something close, down to a few days. I got to dig into this more with you. Tell me more about these sheets you created. So if I understand correctly, you need to get the accruals from each of these teams on what we spent in the previous month that hasn't yet hit the books. Is that what we're talking about?
Ariel Menche: [00:13:27] Exactly.
Blake Oliver: [00:13:27] Okay. So you created a way for them to report to you on that through these Excel sheets for each department.
Ariel Menche: [00:13:33] Correct. So there is a lot of coordination that had to go into it. But what the sheets did essentially is that I had a sheet for every month and a dropdown of the different expense types. Now, there may be five different accounts that they had to deal with in the chart of accounts, but for the operator, they're a marketing team, they're seeing 20 different types of expenses. They're paying for advertisements, they're paying for conferences, but there's booth expenses versus partners versus PR or travel. They track the difference between their flights and their limos and all the different pieces. And that's important to them because that's how they see their budget. Now, accounting, they don't really care about all the different nuances, they want to care about the accounts, which accounts are getting hit. So when they originally were being told, okay, they're spending on this and all these different pieces, things get lumped together. So what I did was now we would use XLOOKUP. I was using INDEX/MATCH. By the way, for anyone using Excel, don't use VLOOKUP, it's very information-heavy, data-heavy. So it will slow down models and also it's not dynamic at all. So I use INDEX/MATCH for most of those things, but XLOOKUP is really fast and great.
Blake Oliver: [00:14:52] So I finally took the time to learn how to use INDEX/MATCH, and now you're telling me there's a better way, XLOOKUP? We're going to go back to that. Okay.
Ariel Menche: [00:15:01] Yeah. So essentially, it was an XLOOKUP. I had like these are the different activities that the marketing team does and they map to different accounts. And so the front end, the marketing team is filling out all their expenses and they're tracking it by vendor, they're tracking it by those activities and when they expect to get paid, by the way. Because they know the relationships with the vendors. You're dealing with people in the end of the day. Sometimes we forget that getting paid by vendors is like, oh, I have a relationship with this person. I know they're not going to pay for 50 days or I know they're going to pay tomorrow. So put the onus on them. It's like, okay, so just let us know. Put in when you think we're going to get paid.
Blake Oliver: [00:15:42] Okay. So the difference now is in the old process, I was waiting as the marketing director to get the report from accounting and then we'd have to go and sort through all this stuff. You're saying-.
Ariel Menche: [00:15:51] So accounting closed, by the way. I should say the accounting did close, but we spent the rest of the month to do fixes on the back. We had to get rid of accruals or add accruals. And so we spent a lot of the month for fixing for the next month. And then by the time the next month came in, there were more problems.
Blake Oliver: [00:16:10] You're having me, the operator, the marketing person, be proactive and put in all that stuff as I'm spending it.
Ariel Menche: [00:16:17] Right. And depending on the size of the company or the team, each of these business units had a director of operations or someone who managed the budget and the spending. So we worked very closely with that person. And they tracked all their expenses and what it did on the back end of the sheet. So I had a tab at the end of the sheet that said for accounting or whatever I called it. And they would email it. At the month. I would say, okay, please send in your tracker, your expense tracker. That's how we called them and seaside accounting on it. And accounting had the accrual sheet already filled.
Blake Oliver: [00:16:54] That's great. So they could go then match up what had already come through, like compare it to what was on this expense report essentially and then make the appropriate adjusting journal entries.
Ariel Menche: [00:17:06] Yeah, exactly. And they were able to mark things as paid or unpaid and change it retroactively, which would then flow through. And when I say retroactively, I mean like let's say it's March now and then their January thing just got paid. So they'll flip it and that'll adjust the accrual. Because every month, there was a real accrual of everything. All the accruals had dropped and then we had the recrew. So it made it for easy process. It was just as fast as sending an email at that point.
Blake Oliver: [00:17:37] What gave you the idea to do this?
Ariel Menche: [00:17:42] I was losing my mind spending all this time doing these non-value add activities. When I first joined the company, I did FP&A and I was like, okay, I don't understand the value I'm bringing. I feel like I'm just a custodian. I went to the director of the group, the VP of the group, and I said, "What value add are we doing here?" And he was telling me about all this value add that we're giving. And I'm like, "I don't see my job that way because I'm just looking through travel receipts and making sure that people are coded to the right department. This is not what our job really should be. So I try to automate it as much as possible.
Blake Oliver: [00:18:17] Well, and I imagine that the operators appreciated once... I mean, they probably didn't like having to do a little more work at first, though, right?
Ariel Menche: [00:18:26] It was less work.
Blake Oliver: [00:18:28] It was less work for them. Okay. How so?
Ariel Menche: [00:18:29] Yeah, because in the end of the day, they're spending half the month looking at their numbers that were wrong and trying to help me figure out what's going on. And they don't want to be spending their time doing that. And so they're tracking their expenses anyway. They just weren't tracking it in the same place that the accounting was getting it or in a way that accounting made sense.
Blake Oliver: [00:18:49] Well, because they had to track it to make sure that they were staying on budget. They were doing it anyway.
Ariel Menche: [00:18:52] Exactly. Everyone was doing the job, but it was just inefficient. All the information was... Nothing was coordinated.
Blake Oliver: [00:18:59] So you connected what they were already doing to what accounting needed so that they could close the books faster. I get it.
Ariel Menche: [00:19:05] Yeah. I mean, and this is already many years ago, so I feel like it's okay to say it, but we found we saved, within the first month of doing this, almost $1 million of things that were over accrued. They cleaned up the balance sheet.
Blake Oliver: [00:19:20] Yeah. That's amazing.
Ariel Menche: [00:19:22] Yeah. It was really like you could point to the value right away of the job. And besides the amount of time that was saved, there was real costs that were saved.
Blake Oliver: [00:19:34] Well, so you automated weeks of your job then. So yeah, what do you do with the free time now?
Ariel Menche: [00:19:40] That was the fun part. So now, I talk to the sales team, and they're trying to... Sales at WWE is media placements and talent placements, commercials sponsorships for big events. So for example, Snickers, I think, sponsored WrestleMania for the past, I don't know how many years. So they have different salespeople and they have quotas and they want to know what their commission is going to be. It was a very complex commission structure depending on new business, international business, going over the quota amount. And so it created these pretty intense trackers that was able to read previous sales and know whether or not a business or a partner was new or somewhat renewed, all these different iterations of it. Also created these pretty dynamic dashboards with Excel so different teams could track their spend in different areas. Yeah, that was a lot of different cool projects like that, getting those KPIs set up.
Blake Oliver: [00:20:33] Yeah. So KPIs, meaning key performance indicators. What were the most memorable KPIs at WWE? Number of tables and chairs broken in an event. Number of body slams. I'm guessing it's not quite like that.
Ariel Menche: [00:20:53] No. Unfortunately, I wasn't so into the business side of things. I wasn't really tied to the talent, as we call it, the wrestlers or the events themselves. That was someone else's position. I like the community team because they were doing a lot of really interesting activities. So community engagement was a really interesting KPI to try to figure out how to measure.
Blake Oliver: [00:21:19] Community engagement. So what does that mean?
Ariel Menche: [00:21:22] So the brand team has... There's a community relations team, so it's essentially donations. And so you're engaging with community, you're having these events that bring awareness to certain brands. And so there's brand awareness and how many eyes are seeing something. And sometimes there are sales associated where you're raising money.
Blake Oliver: [00:21:42] So raising money for the charitable.
Ariel Menche: [00:21:45] For the charities.
Blake Oliver: [00:21:46] For charities. Okay. Got it. And so then you track like how many people saw that campaign or how many-
Ariel Menche: [00:21:53] So help setting up dashboards for that. Exactly.
Blake Oliver: [00:21:57] Got it. Got it. What other kinds of KPIs do you remember being important?
Ariel Menche: [00:22:03] At WWE. Well, data analytics. A lot of it was spend related. So tracking different vendors, how often they're being used. I remember there was looking at the cloud spend and trying to get an understanding of cloud spend. So there were a few months where the cloud spend sort of ballooning and so I dug into it and try to understand what's going on there. And looking at Amazon Web Services and understanding the different products they have and how those different products price. You're learning about like E2 instance, I think they call it-
Blake Oliver: [00:22:36] Are you talking for the streaming, like streaming the shows and all the web stuff that's going on?
Ariel Menche: [00:22:41] Yeah. So they had a network at the time which I think was subsequently sold to Peacock. But WWE Network was another streaming service or app you could get. And so there was a lot of cloud spend. And so E2, I believe it's called. Probably someone would correct me on that. But the server instances that you have on Amazon Web Services? And I looked up best practices. And so you can actually turn them off and only run them like one hour a day instead of having them on 24/7. So being able to get into those types of weeds and say, okay, let's help get more efficient spend. When you're dealing with the non-business side of things, you have to be a little more creative on what KPIs to measure to really understand the value of investments. Because it's efficiency, it's time spent on activities, and it's more subjective.
Blake Oliver: [00:23:33] Yeah. And you're trying to minimize spend, control spend, or help people control spend. Yeah. How do we not use a ridiculous amount of cloud compute so that we don't pay out the nose for Amazon or all that. I suppose it's more it's more behind the scenes. Like all that stuff that needs to happen to make sure there is a profit at the end of the day.
Ariel Menche: [00:24:00] Exactly. And there's so many moving parts, especially when you have larger organizations. And that's why you have the finance team, it's not one person. I think we had over ten people at the time. It's a pretty large organization. And people dealing with the business. And then you had a bunch of people who just dealt with consolidation full time.
Blake Oliver: [00:24:19] So that's where you really, it sounds like, honed your skills as an FP&A manager. And then you spent a couple of years, it looks like a few years, at WWE and then you went off on your own. So now you're running FP&A for startups for your clients. What's the difference for you in those roles where you were at WWE and now managing FP&A or running FP&A?
Ariel Menche: [00:24:49] Oh, that's a great question. So I would say that I have two different types of projects that I engage in now. So either running FP&A or helping people set up their team. So having that experience, that corporate experience, really gave me the nuance of what does it mean to be on a team? And someone says, "Oh, I'll get back to that in a week." Working at KPMG, it's like, okay, someone gives you an ask, they're expecting it back that day. It doesn't matter if they asked you at 8:00 PM. And so the corporate lifestyle of a strategy consultant versus going into corporate where people are, it's like a 9 to 5 job and it's like, "Oh, well, I'm leaving in a half hour, so maybe we'll talk next week." I'm like, "What's going on? What do you mean next week?" It's a bit of a culture shock, but that perspective is really important because I think that's how most companies work. And I think for good reason, I mean, it's not healthy to do the Big Four lifestyle and a long term... There's a lot of benefit. I mean, I learned a lot. And I'm not disparaging it, but I think it's not for everyone.
Blake Oliver: [00:25:56] And that's why only 1% of the people who go in stay for life.
Ariel Menche: [00:26:01] Exactly. Yeah. Sometimes you think about how many years of life kind of scraped off by doing it. But i don't like to think about that too much.
Blake Oliver: [00:26:12] Well, the best argument I've heard for going the Big Four path and just working your butt off is that you get double the experience in terms of years. So if you're there for 2 or 3 years, you're really there for like 5 to 10.
Ariel Menche: [00:26:25] Yeah. It's not double, it's more. The amount of experience I got, I could jump into any industry now, whether energy, finance, life sciences, health, tech, media, SaaS companies. And I know the business models because I've worked with big players in each of those fields and could talk to the detail of it and understand the business models, which is how I'm able to do my job today. Today I'm talking to a company that is setting up electric charging stations across Europe or another is a SaaS company or a recruitment agency. And each has a different business model, but I feel comfortable in each one because of the experience I had at KPMG.
Blake Oliver: [00:27:09] Wide exposure to a lot of different types of businesses, industries. Yeah. Hard to get anywhere else, right? Yeah. So so back to the question, how is being head of FP&A different for you?
Ariel Menche: [00:27:22] So first of all, it's the scale of the companies I tend to be working right now with earlier stage startups. So there is not much of infrastructure that's there. Or if there is infrastructure, it was sometimes just put together pretty quickly. So what we could talk about is usually goals. I can't go into a company and say, here is your function. It's like standard product, take it. It doesn't work like that. Every company has a different goal. Someone wants to IPO, someone wants to have an exit, someone wants to get acquired by a specific company, or maybe it's just a next capital raise. And so that's why have that transaction focus because we have that conversation and say, okay, what is your goal with this? What are you trying to get at? And you have different approaches for each of these companies. Now, the basics of it will have to have clear insight into what you're spending and where your spend is going to go. But the KPIs that you set up after that will differ. So first have those conversations. And it's very high-level strategic and then go into the model building and setting up the processes. Whenever you build a model, the first question I ask is what is the output? And people say, "Well, I want to look at this KPI, this KPI, this KPI." And I'm like, "No, no. Who's looking at those KPIs? Is it for you? Is it for an operator in the company? Is it for the board? Is it for potential investors?" Because each one needs something else and is going to define the KPI differently? One of the biggest things today, especially in the SaaS world, is ARR. Everyone's talking to ARR. They want a recurring revenue model. I forgot which company put this out, but there was a document with a thousand different definitions and literally a thousand different definitions for ARR. I mean, there's a general what's going on, recurring revenue, but how you're defining it is so vastly different.
Blake Oliver: [00:29:09] It's crazy to me that FASB, we don't have accounting standards for SaaS metrics that... It blew my mind when I discovered this, that the only ratio that the Financial Accounting Standards Board has ever defined in the United States is EPS. Did you know that? It's the only one?
Ariel Menche: [00:29:32] I did not know that.
Blake Oliver: [00:29:32] Yeah. Everything else is up to the discretion of the business as to how they define it. And so we have widely different non-GAAP metrics and calculations for them. And the margin calculations are even weirder. Where if you're calculating LTV, lifetime value of a customer, some just take the ARR and multiply it by the average number of years that a customer stays. And they call that their LTV. But some deduct their COGS from LTV. They only consider the contribution margin. Sorry, go ahead.
Ariel Menche: [00:30:09] Actually, one of the idea, I think I heard it on your podcast, on the Cloud Accounting podcast, talking about... I mean, the P&L structure is really antiquated to deal with the modern business. COGS, you don't really have COGS in SaaS companies. It's essentially 100% margin business. So what's the point of having a gross margin line. At least you should have gross margin line because that's how we think about it. But all the terms are upside down. We're dealing with recurring revenue, customer acquisition costs. I think you guys mentioned these things are really assets. Like a cohort of customers, it's really an asset that you're realizing its value over time. Especially the mature SaaS companies, they know exactly how much money they're getting from these cohorts over time and exactly how long they're getting it.
Blake Oliver: [00:30:57] For me, the big example that shows just how wrong accounting standards are when it comes to subscription businesses was Netflix. Because when Netflix dropped, it plummeted. I can't remember, was it a year or two years ago at this point? All their financials looked great. All the reported earnings, numbers, and everything looked great. The only thing that changed was their subscriber number plummeted. And then everybody sold. And I thought that's so crazy that why don't we have mandated reporting on numbers of subscribers for subscription businesses and LTV? Because that's what investors really care about. hat's what I care about as a Netflix investor is how many customers do they have and what's their churn and what's their ARR or their average ticket or that sort of thing. That's how you can see... That's the asset. But it's not on the balance sheet. The biggest asset of Netflix and every other subscription business is not on the balance sheet.
Ariel Menche: [00:31:56] I agree. The whole business model... What are you going to do with COGS. So you're talking about they should deduct COGS from ARR. What is COGS? Is it their hosting cost? I think cents, compared to-
Blake Oliver: [00:32:08] I think normally, it's the hosting. Like if you do AWS, then it can be-
Ariel Menche: [00:32:12] That's the only thing that's really traditionally COGS. But some people will put customer support because you'll have to increase your customer support the more customers you have.
Blake Oliver: [00:32:23] But there's no standard, I think, is the thing. Yeah.
Ariel Menche: [00:32:26] Exactly. There's no standard. But also it makes less sense to define gross margin when you have no standard. So that's why SaaS metrics is its own category of metrics and of KPIs.
Blake Oliver: [00:32:39] So everybody wants to create forecasts and budgets and financial models, but it's really hard. I had a job, my last gig, my last full-time employment was as the marketing director for an FP&A platform. And I attempted to learn how to do it in Excel and in the software. And even with software, putting rails on it, it was hard. It's really hard. How did you learn how to build financial models? Do you have advice for folks who want to get into it as to how to start? Because we all have Excel on our computers. But it's this blank slate. It's like having this totally blank canvas and now I want to learn how to make an oil painting. How do I get there?
Ariel Menche: [00:33:27] So many answers to that question. So first of all, we're entering the stage where there are these tools like Jirav and others. I worked with a company called COSOL, and I still do a lot of client work on COSOL, which is another platform. It's really a financial modeling platform that can be used by any team. I like to think of it as Excel, like you just said, is a clean slate. And you could do anything on Excel. You could do project management on it. You could build your financial models on it. You could do your shopping list on it. But it's not really optimized for any specific thing. It's very good for a lot of these things. And I use it still for most of my projects. But it's not optimized for it. People now use like a Monday.com for project management. Everything in Monday.com can be done in Excel, it's just way more optimized. Same thing with like building models. I would use COSOL because it's optimized for building financial models. So someone's serious about financial modeling, look at the different tools that are available, see what's out there, and that could also help. But as far as the practical steps, most of us are going to be using Excel. We'll be honest for now. Start with your outputs. What are you trying to get at? Then once you have that defined, go back to your inputs. What information do you have to feed this? One of the biggest problems you have when it come to financial modeling is either thinking too granular or too abstract. Someone will have a revenue forecast that's growing 2%. Actually, funny, one of my company I worked with a few years ago was a crypto company. It was one of these exchanges. And their entire model was a 2% growth. When I say their entire model is 2% growth, it was revenue was 2% growth, all the operating expenses were 2% growth. Even the Bitcoin to USD exchange rate was a 2% growth. [crosstalk].
Blake Oliver: [00:35:25] Yeah, we're just going to get... I mean, that's the laziest form of modeling, is just a static growth rate.
Ariel Menche: [00:35:34] Right. And the problem with it, sometimes 2% growth is the way to do it. But when you have a revenue model and the forecast model and you're doing a 2% growth on your revenue and then you put your actuals into it, let's say, and you fill the actuals, now you hit your target or you missed your target, you overshot, you undershot, why? You have no idea. You just know that 2% wasn't hit. And that doesn't help you because your output really should be is show your full sales motion. So let's say a very typical out of the box SaaS company, you start with marketing spend. Marketing spend generates leads. Leads then convert to qualified leads, then that convert into customers. And customers have an ARR, let's say ACV, which is an average contract value. And that will give you your ARR, and then you divide that by 12, and that's your MRR, which is your revenue in that month, monthly recurring revenue. Now, if I build a model like that, I build not only how much marketing spend I have, I have a cost per lead. So everything is converting. I spend $100 per every lead that I get. And then those leads then eventually convert into a qualified lead. But there's actually a time component. So I might delay it for a month or two depending on the size of the company. If you're doing B2B, it could be a six month sales cycle. And so now you have this thing starting with an activity which is your marketing spend and which we know then converts. So the conversion into leads has to do with marketing and the quality of your marketing. Leads converting to qualified leads, that's your SDR team. Then the qualified leads, converting it to customers, that's your sales team. And then the sales turning into customers and their ACV, that's all part of your sales team. So now when I hit my revenue, I also have the KPIs pulling in. Hopefully, I'm measuring from like my CRM, whether it's HubSpot or whatever it is, I know how many leads came in, I know when I spent that marketing spend, I know when they converted in my funnel. And if I have my whole funnel defined, now I could say, okay, we have fewer customers this month, which is a miss, but actually our revenue is higher than expected because our ACVs were higher than expected. Or the marketing spend was more efficient than we thought. But someone in SDR really dropped the ball. And now you can make business decisions based off of these actuals that are coming in. And that's the point of the model. The point of the model is to have the level of granularity to make business decisions that drive value for your company. Go in the opposite direction, you're too detailed, then you can't... You're not measuring things that are too detailed. You're not measuring the age of your customers. Let's say you're, oh, I sell to someone on the sales team who was 24 years old versus a 50-year-old versus a 40-year-old. You're probably not capturing that information. And what value does that give you? And I don't know why you want that. So there's a fine balance between overly granular and overly abstract.
Blake Oliver: [00:38:32] But the key is that you've connected something that's happening in the business, something controllable, which is how much money did we spend on marketing, how many leads did we get, how many calls did we make, all that stuff. And you're connecting it to that output, which is the financial information. And so then you can actually see what led to that as opposed to just saying we missed this arbitrary goal.
Ariel Menche: [00:39:00] So I had a customer, a client who wanted to build a platform and they had no marketing spend. And I was like, "So how are you going to get leads?" And he's like, "Oh, it's all referrals. And I was like, "Okay, so let's say the referrals don't come in. What can you do? Can you do anything or any levers for you to pull to increase the number of customers or number of people in the platform?" He's like, "No, it's not going to be a problem because they'll come in." I'm like, "Okay, let's say it's not." Or the opposite, like let's say one month, there's a lot of referrals. What did you do to get all those referrals in? He's like, "We didn't do anything." There is this conversation. It's like, "Well, maybe we had an event." And I was like, "Oh, an event. Okay, that's marketing spend. You generated leads?" That's something you can measure. And if you don't-.
Blake Oliver: [00:39:46] Yeah. Even just asking for referrals, that's an activity.
Ariel Menche: [00:39:50] Right. And it's hours that you're spending. Maybe you're not capturing that, so you shouldn't be modeling, but maybe that's not the best business approach. It's actually interesting for accounting firms. You don't want to do marketing spend a lot of time if you have a good accounting firm, it's all referrals. It's like the opposite of SEO. I think you maybe you guys mentioned this once where your site is to show that you're legitimate but you're not trying to generate new leads. So what's the business model to get higher ACV? So that's an interesting question.
Blake Oliver: [00:40:24] Yeah. And that's where I think most accounting firms don't do this kind of modeling. And so they really don't know and therefore their ACV is lower than it should be a lot of the time because they're not going out and asking their existing customers, hey, do you need help with this? We offer this as well. And most of the time, the customers have no clue that the firm does that kind of stuff. And that's where a model that... Even if your only source of new business is referrals or expanding existing customers, you could build that out really well in a model and understand it better. So that's what I loved about learning about financial modeling, is that, to me, it really connects what I learned how to do as an accountant, which is actuals to what we want to achieve as a business, which is that forecast or that that goal at the end of the day. And unfortunately, I feel like it's been... I mean, this is what my hope with this software now is that it's bringing down the cost of modeling and especially the whole updating of the model. Because that's always been the part that's really challenging, is once you build the model, actually updating it and keeping it valid and then comparing it to your actuals is a lot of times really hard.
Ariel Menche: [00:41:42] Right. That's where I think these new tools really Excel is... I think you still usually need help building the models because... Again, I think hopefully the point came across that these things really shouldn't be out of the box, they should be really your strategic approach or business approach to the market quantified. And every company is a little different. You'll have templates, like a SaaS business model is going to be generally the same thing. But timing is going to be different. The definitions of the sales funnel, the sales motion is going to be different. There's different stops along the way. So once you have your model defined and making sure that you actually are capturing the actuals to feed into the model, those non-financial and financial KPIs. And the financial KPIs usually are coming from the accounting system. So I never go more granular than the chart of accounts. If a customer says, "Oh, I really want to capture the level of detail," it's like, well, does your chart of accounts go to that level of detail? It's like, no. It's like, well, maybe we should start building that out in your chart of accounts, and that's how you start capturing it. Once you connect that, then the new tools, really, if they're integrated well, feed into the model and then you'll have those actuals versus your forecast or budget done right away. And there's no guesswork. I'm trying to get that set up. Always need some checks because even with the new stuff, if you have a new chart, if you have a new account that comes in, it's probably not linked up to your model yet. So that's a big pitfall why things won't reconcile. But yeah, it really helps with the process.
Blake Oliver: [00:43:20] What are the biggest mistakes you see in financial models?
Ariel Menche: [00:43:25] With Excel? I mean, wrong cell references. It's really that simple. Sometimes you'll have math mistakes. People grossing up ratios the wrong way. So like someone saying, well, I want my gross margin to be 25%. And so they'll divide the cost by one plus the gross margin or that they want. And I was like, that's not exactly how you do that. That doesn't really work. Or, oh, another big one that really bothers me, this is a pet peeve, is taking averages of percents of different bases when people do math on percentages. So percentages are ratios themselves. And if they have different bases, you can't average them out. It doesn't work. Or you can't add them together. You have to make sure you're dealing with the same base. So that's where the weighted average really comes in handy.
Blake Oliver: [00:44:20] Interesting. Yeah. The stuff that we kind of don't think about too deeply and then we build an entire model based on it and it turns out that the math wrong.
Ariel Menche: [00:44:30] Yeah. Like gross margin. You can't average out your gross margin percent over the last three months to find out your average gross margin of the quarter. Don't do that because each month has a different base, different revenue. So what you need to do is add up all the revenue and then add up all the expenses and do the ratio just to be clear.
Blake Oliver: [00:44:46] And then calculate it. Yeah. That's great. That's like something I probably wouldn't have thought of and I'd be making that mistake myself. What's your favorite type of business to model out? Do you have a favorite financial model you've built? You don't have to name the company. But what kind of businesses? Because there's so many different. Businesses, right? I mean, the common one that we see is a lot of SaaS. There's a lot of SaaS out there.
Ariel Menche: [00:45:16] Yeah. So, I mean, I like SaaS because I do a lot of it. And so I feel very... There's a certain level of confidence that comes to it. I always like the challenge of a new company. Energy models are really interesting because the business is very different. It has to do with proving to regulators you could charge more. It's a very different type of business.
Blake Oliver: [00:45:38] Really?
Ariel Menche: [00:45:38] I wouldn't say it's my favorite type of... Yeah. A lot of like what an electric company can charge more for is if they prove like, oh, I'm going to invest in renewable energies. So actually years ago, I worked for... One of my clients was a large electric company in the US. And the Clean Power Plan came out, they had to deploy gigawatts of renewable energy. And so I was trying to figure out which sites to deploy the renewable energy, which was most efficient, and then also what could be the best argument towards the regulators to be able to charge more for it. [crosstalk].
Blake Oliver: [00:46:12] Because the regulators set the price. So if you're making that CapEx investment, you have to make the investment and then tell them like, we think that you should let us increase the price this much to pay for it. That's so backwards to how businesses normally operate.
Ariel Menche: [00:46:27] Yeah, it's a wacky model. So when you go into specific industries like healthcare and energy where government is involved, the incentives change. And what you're trying to maximize is different. And so you always want to try to make sure it works out well. But yeah, I don't know if I have a favorite type of model. It's a great question. I like models where I did something cool, like a formula that works out really well that I wasn't sure how it would work out.
Blake Oliver: [00:47:00] Do you have an example you could share with us?
Ariel Menche: [00:47:01] Yeah. So actually, just with Demostack, I was building out a deferred revenue schedule based off of transaction data. And I was trying to figure out how to do it. And what I did was I created a formula that took a ratio of how many months? So first of all, you have billing cycles. So some companies are on an annual billing cycle, some are semiannual, some are quarterly. So that's a variable. So I had to take the contract value, let's say, once the contract ending and then figure out based off the variable of what their billing cycle is, a ratio that would divide up how many months are left until the next billing cycle to come up with a deferred revenue piece. I had to figure out these fractions that based off of an end date to say, okay, well, if this is a March and the end date is in a December, then it only has to be 9/12. But it's not really 9/12, it's really exactly... It depends on if it's a sixth or a third or 12. Yeah. So it worked out. It was pretty cool.
Blake Oliver: [00:48:06] That's cool. That sounds a lot better than the way I did it, which was line by line, manually.
Ariel Menche: [00:48:11] Yeah, but I don't know how long that will take.
Blake Oliver: [00:48:14] Yeah. I mean, for the client, I was doing it for, they didn't have that many customers at the time, but then it quickly started to get out of control so I could see automating it like you're talking about would be extremely valuable.
Ariel Menche: [00:48:25] Yeah. And now to update this, all you need to do is copy and paste the transaction data into the file and then have a check that says, Do you have enough rows? There was a way to do dynamic rows, but it would take up too much data and slow down the model. So I did manual add rows. So I had to check said, "Please add two more rows." And I wrote the words, "please add two more rows" in the model. Because it's I think esthetics in a model is also important because if you're looking at the stuff all day, you don't want your eyes to glaze over with numbers. So add colors, add borders so you could visually see things without having to read it.
Blake Oliver: [00:49:01] That's really important because it may make sense to you as somebody who built the model. But the question is, can somebody come in and understand it who didn't build it? And normally, that's not possible. And that's one of the big limitations of Excel for modeling is like, nobody can figure out how to use it except the person who built it.
Ariel Menche: [00:49:17] Right. So I built my models in a specific way, especially in Excel. So any input tab, I have an I in front of it. Any calculation tab, I put a C in front of it, any output tab, I put an O. My mentor, George Allen, who's I think now a partner in KPMG, taught me how to do these models like this. And there's also an assumptions tab and a dashboard. So I put all my inputs. I never like to hard code any numbers into a formula. I always do everything variable-based or input-based. And so you have a dashboard with all your inputs and I color code it so you know what's an input versus a calculation. And then you have your charts next to those inputs. So you can just change everything on a dashboard. Why go into the... Look under the hood and see what's going on. If you're just using it to stress test multiple scenarios, everything's in the front.
Blake Oliver: [00:50:07] Do you have any advice for listeners who love what they're hearing and want to do what you do?
Ariel Menche: [00:50:15] Oh, man. I really just had a conversation about this over coffee right before the recording. I think there are a number of resources out there. Hopefully maybe I can follow up with you and so we could provide it. I think finding a mentor for me was the biggest thing. YouTube is really great. I got to say.
Blake Oliver: [00:50:38] Really? Huh.
Ariel Menche: [00:50:39] Yeah.
Blake Oliver: [00:50:39] Any favorite channels?
Ariel Menche: [00:50:41] YouTube, it just has on Excel. Not specifically offhand. Yeah. I use, there's a website called exceljet.net. That's whenever I have those formula questions, I go there and they usually have very good descriptions and videos on that. But it's a quick question. I always wanted to put out like an Excel training course and actually even a causal training course because I think it's such an important thing for at least even the next generation of college kids or people who are just starting out their careers to really understand it's not just financial modeling because it's strategic finance. That's the way I like to think about it. And maybe I'm just adding fancy words to something that's simple. But I really think I do believe it because it's not just putting numbers on a sheet. Because when you just put numbers on a sheet, you'll do what I did in the beginning of my career, which is hand over the model, and they say, "Why am I making $1 billion a month? That makes no sense." And I'm like, "Well, that's the formula." And they're like, "You have to do the sense check. You can't just like be a monkey with the numbers. You got to really think about what you're doing." So the advice I have really is start with your outputs, then look at your inputs and then you can connect the dots between the two. And everything that you build out should be able to be actionable. You're not building out the model just to have numbers on a sheet. Some people love data. Too much data is a type of bias. And then also take that step back. Always look at the big picture. What is the goal here? What are the numbers? Do these numbers really make sense? Am I really spending that much on this item? Does it make sense that if I'm investing this amount, that I'm only getting that amount of revenue? Those are the the moments where I think really differentiates someone who's good and great at this. Not saying that I'm one or the other.
Blake Oliver: [00:52:39] Right. It seems like you've done pretty well and you've got a great career ahead of you. And so I'm sure I appreciate that advice. I have a fantasy of like, if I wasn't doing podcasting and interviews, I'd be learning this kind of stuff because I've always loved systems, and that's why I got into accounting systems and cloud-based systems and APIs and connecting them and automating the flow of data. And to me, this is that same thing. It's the same feeling. But on the strategic forecasting future-looking side of things. And so I can nerd out with you all day long. I feel like on Excel formulas and how do you tackle that challenge of importing a bunch of transactional data and just automating a schedule, that's the sort of thing where you might puzzle it out for hours and hours or days even, and then you've saved yourself hours and hours or days over and over again. That's a good feeling, I imagine, when it works.
Ariel Menche: [00:53:41] Yeah. One of my people asked me like, "What's your favorite moment in college?" I remember had a professor who said, "Your favorite moment in college will be when you get your balance sheet to balance and your forecast." You hear that at the beginning of the semester, you have no idea what you're talking about. And after pouring all those hours and sweat and tears into the financial model. And then you have to... Nothing's balancing and all you have to do is press F9 and it refreshes. And then all of a sudden, oh my gosh, my balance sheet balanced in the forecast. And then we're jumping up. And I was like, "Yeah, actually it became one of those highlight moments of my college." I also had fun in college. Don't worry.
Blake Oliver: [00:54:19] You know what? Just like anime has become part of our pop culture, maybe someday financial modeling will become part of the mainstream culture. I think it's just a few years away at this point. Maybe another generation, we'll get there.
Ariel Menche: [00:54:35] Yeah. I think I agreed with you most of everything we just spoke about. I don't think that's going to happen.
Blake Oliver: [00:54:42] Well, Ariel, it has been so wonderful speaking with you and learning from you. I mean, you're consulting now, so what sort of clients are you taking on, customers, clients? Are you looking to work with certain types of businesses or accounting firms?
Ariel Menche: [00:55:01] Yeah. First of all, anyone very junior in their career looking to hire people to train, thinking about also doing some training content around that which we could talk about at some point. The clients that I'm looking for are people who are looking to do some sort of transaction in the near not so distant future. So it could be 1 or 2 years away, but don't really know how to position themselves financially to do that. So if you're looking to do a capital raise coming up in a few years or in the next few months, or you're looking to do an exit of some sort, whether it's by acquisition or IPO, maybe my partners have the experience to help position you and get you confident to get to that point.
Blake Oliver: [00:55:57] What's the best way for our listeners to get in touch with you and learn more?
Ariel Menche: [00:56:01] So my website hopefully is going live soon, either this week or next. It's at raftelstrategy.com. And you can reach me at my email, which is Ariel A-R-I-E-L@raftelstrategy, which is R-A-F-T-E-Lstrategy.com.
Blake Oliver: [00:56:19] Ariel, thanks so much for your time today. Great having you on the podcast and hope to talk to you again soon.
Ariel Menche: [00:56:26] Yeah, looking forward to it. It's been really great.
Blake Oliver: [00:56:33] Thanks for listening. I hope you enjoyed this episode and that you learned something new. And if you did, wouldn't it be nice to get some CPE credit for it? Well, I've got great news. My new app, Earmark CPE offers free NASBA-approved CPE credits for listening to podcasts, including this one. Visit earmarkcpe.com to download the app, take a short quiz, and get your CPE certificate. That's earmarkcpe.com.