Leveling Financial Brevity with Dan Shapiro

Episode Summary

For various reasons folks tend to associate companies with one personality, but as we all know there are a plethora of folks behind the curtain who make everything tick. This week Duckbill Group’s very own CFO, Dan Shapiro, and unofficial “adult supervisor” joins us to talk about what exactly needs to happen behind said curtain to make a company work. Dan talks about when he landed at Duckbill and the finance brevity he was able to level. Dan talks about what exactly a CFO does, and couples that with his definitions of finance and accounting. Dan offers ways to improve our own literacy with business finance alongside other valuable takes. Tune for some financial savvy!

Episode Show Notes & Transcript

About Dan

After earning his CPA in New York, Dan dedicated his early career to education, helping to build eight schools across two continents. Three of those schools make up the charter school network Coney Island Prep, a 160-person, $20mm+ organization where Dan served as both CFO and COO.  

He has served as CFO of many fast-growth start-ups, is a recurring guest lecturer at Harvard Graduate School of Education, and is an avid adventurer and musician.  But most importantly, he's a dedicated husband and an enamored father who, at this point, knows the lyrics to each and every Raffi song ever created.


Announcer: Hello, and welcome to Screaming in the Cloud with your host, Chief Cloud Economist at The Duckbill Group, Corey Quinn. This weekly show features conversations with people doing interesting work in the world of cloud, thoughtful commentary on the state of the technical world, and ridiculous titles for which Corey refuses to apologize. This is Screaming in the Cloud.

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Corey: Welcome to Screaming in the Cloud, I’m Corey Quinn. A common myth that has sort of permeated the entire ecosystem is, when you associate a single person with a company, they’re the only person is really there. It turns out that with AWS, Jeff Barr is writing an awful lot of blog posts, but I have it on good authority that there are at least three services he didn’t personally create himself. Similarly here at The Duckbill Group, there are a lot of folks who aren’t necessarily in the public eye as much as I am because they don’t have the overriding personality flaws that I do. One of those people is my guest today. Dan Shapiro is our CFO, and I guess the closest thing you could consider to us having adult supervision. Dan, thanks for joining me.

Dan: Thanks for having me, and I appreciate you considering me an adult, even though I don’t always feel that way.

Corey: I always assume there’s someone else out there who knows what’s going on and how life works, and one day they’re going to bother to explain it to me because the alternative is that none of us know and we’re making it up as we go along, and I’m not sure I can wrap my head around that fear.

Dan: Yeah, my job is to allow you guys to have the vision, some wild ideas, try to put data to ideas, tell you if I think it’s a good idea. I think, you know, I’m the balloon string to your guys’ balloon is the way I think about it.

Corey: It’s funny, given that we fix the AWS bill and deal with customers, who are in many cases themselves working in finance, that for the first year or so that we were doing this as The Duckbill Group, and never back when I was independent did we really have anyone in a CFO position. What we were doing made sense to me from a very simplistic naive point of view. Okay, well, how is the company doing? Well, I have an app that tells me that. No, it’s not QuickBooks, it’s I’m going to pull up the banking app and see how much money is currently sitting in the company accounts.

And that would inform things like can we hire new people, can we afford this piece of equipment, or embark on this project? And it was sort of Fisher-Price finance, from our perspective. And when you came in, you were very good at this in that you did not make us feel like the naive hayseeds we very clearly were. You were excellent at hiding your contempt, which is great. But before we dive into the specifics, let’s ask the big question that I didn’t know the answer to back when we first started working with you, which is, what does a CFO do?

Dan: CFO does a lot of tactical things, but ultimately, I think that they have two main 30,000-foot view functions. One is to safeguard the assets of the company, and two is to ensure that those assets are employed in the best way possible for the best outcomes that the company is after. And that doesn’t always necessarily have to be financial; it could be operational successes. But whatever the goals of the company are, the CFO’s role is to utilize the assets to help approximate those goals as best as you can, get the most out of your resources. So, I think that, you know, you play a little bit of defense in trying to make sure that you’re protected and you play a little bit of offense in trying to make sure that when you put your chips on the table, that they’re in the right place.

Corey: So, please take this in the spirit of which it’s intended, but if I’m starting out my career today, I can attend a boot camp, learn how the ins-and-outs of software programming work, get a job somewhere, and if I manage my career right, in two or three years I’ll get a job somewhere as a senior engineer. So, from that perspective, are you more or less an accountant with title inflation? What’s going on? What is the difference between finance and accounting?

Dan: Yeah, so to define those two words, I think of the delineator being time, right? So, today backwards is accounting. It’s a historical record of everything that has happened, well categorized. And I think of finance as today forward. It is the strategy and planning and potentially analysis of what you think is going to happen in the future.

So, those two buckets are delineated by time in my mind. Am I an accountant? Yes. Do I think that the best financial people have an accounting background? I do. I think accounting is the alphabet of finance and I think it’s hard to really fully understand or be effective without, you know, at least some baseline accounting information. So yeah, I think accounting is super important. It’s a codebase to an engineer, except there’s really only one code.

Corey: I will say that once you started working with us, it enabled me to understand things in a way that I hadn’t before. And on some level, I feel… a little embarrassed, I’m in my mid 30s, here—which annoys the hell out of my wife because I’m 39—but I’ve gotten this far in my career without understanding a lot of the basic literacy of corporate finance. Now, let’s be clear, I’m very good at handling personal finance aspects to my life. I can quote chapter and verse in some cases, from ERISA requirements around 401(k)s and how much I’m allowed to put in in a given year. And that’s great, but business finance looks very different than personal finance in a few key ways. And I’m curious as to what your impression is of those key differences because I have thoughts, but I don’t generally invite experts in areas onto this show and then explain their field to them.

Dan: [laugh]. I will go into that but I am curious what you think. You know, or what you perceive in your experience in working with me, what you’ve seen—maybe one or two differences that you’ve seen between personal finance and corporate finance. I certainly feel like there’s differences, but I actually don’t feel like there’s a tremendous differences, I just think it’s much greater scale with a lot more people involved. But I’m curious what your experience has been, and then I can kind of jump off of that.

Corey: Sure. From my perspective, it is—and this is probably heresy, but I tend to view finance in many ways as being more psychological than it is mathematical. And if I were to pick a random person off the street, and give them a choice of you need to come up with a thousand bucks: you can either make another $1,000 or you can save another $1,000—and let’s be clear, I’m talking about someone who is in a technical-style career track; I understand the margins, this becomes a very different thing in either direction and I want to be sensitive to that—but if I ask most people, their answer is almost universally going to be to save the money because if you look at folks who are in a salary job, if they want to make more money, they need to either come up with a side project and start moonlighting, they need to petition their boss for a raise, they need to do a few other things here and there and okay, it becomes a pain. And well, I haven’t updated my resume in years, I’m not great at interviewing for jobs, I don’t really want to leave and upset the applecart. Whereas saving a thousand bucks when you’re making six figures a year is not necessarily that hard. Eat out less, cancel Netflix, et cetera, et cetera, and you can get there by saving.

Companies philosophically are the exact opposite. Because there’s a theoretical upper bound of one hundred percent of a company’s AWS bill that I can cut, either by moving them to another provider—which is cheating—or flying to Seattle and taking hostages—which is not particularly something we’d like to do, and it doesn’t generally work more than once. And that’s fine, but they can earn a multiple of that by launching the right feature or product to the right market at the right time, faster. That’s always going to be more compelling for a company because they’re after growth, not protecting the baseline that they have, in most cases. When that shifts, they tend to be companies in decline.

Dan: Yeah, that’s a great point. And I think to add onto that, when you’re running a company, almost every company is going to have something like 60 to 70% of their expenses tied up in their people. So, cutting discretionary spending at a corporate level is not always going to yield the impact that you might need it to. And if you actually need to cut expenses, you’re talking about very serious decisions about reducing your workforce, which happens in big steps, right? You can’t just find, you know, 5k here, 10k there; you’re talking about, you know, reducing your org chart, which is a very serious decision that a lot of companies take very seriously, which is great.

Versus there’s a lot of avenues to increasing revenue, you know, new product streams, growing your team, investing in your team, raising prices, follow-on sales with these existing customers. You know, there’s just a lot more opportunity to generate revenue because companies, by definition, have a lot more opportunities to create revenue than just, you know, like you said, somebody who has a salary job.

Corey: One of the things that really woke me up to what our customers are going through is I take a look at the finances of The Duckbill Group—as pointed out and categorized and [aligned 00:09:09] by you, which first, thank you, it’s extremely helpful, and two, it helps me contextualize things. You raised a flag on things being out of bounds, where they had been historically. At one point, our AWS bill was a little over $2,000 a month, and your question was, “What’s up with this?” It is not the sort of thing that was going to make or break the company; our payroll is six figures a month and compared to that the AWS bill is irrelevant.

But given what we do, and given that it’s always a good idea to be good financial stewards of the money that has been entrusted to us, “Great, let’s take a look at that.” And it was dropped down to 700, 800 bucks. I think it [crested 00:09:47] at $950 last month, as of the time of this recording because I was doing some fun experiments. And sure it’s annoying in that I want to keep it as low as possible just given the nature of what we do, but from a business perspective, it does not fundamentally matter. Now, that is not the case for most of our clients, it matters; it’s a large expense, but payroll is still bigger.

In many cases, depending on the company, real estate is bigger. And Netflix, one of the larger AWS customers, has publicly stated that their biggest expense is content. Yeah, they’ve built a bunch of studios, they have to get rights to all the content that they stream, they pay people through the nose, and their AWS bill is reportedly massive—it would have to be given what they do—but it’s never the number one driving focus. And, on some level, it feels like a company deals with two classes of problem. There’s the side that we’re on of cost control, risk mitigation, et cetera—insurance hangs out here, too—and the other is speeding up time to market or growth and expansion. Our class of problem is a good diligence thing, but it isn’t usually ‘summon the board in the middle of the night because of an opportunity’ territory. If I look 
at those as the two great problems, it is more lucrative as a business to be targeting the former.

Dan: Yeah. I mean, so just to go back to that AWS example for a second, right, it’s contradictory, right, because on the one hand, are you really going to win the day by shaving, you know, $500 off your AWS bill a month if you’re a $3 million company? You know, is that going to move the needle? Not necessarily.

But I believe in hygiene and habits, and I believe as you’re a growing company, that it’s a lot harder to put in good financial process and good financial hygiene, the bigger you get. And so if you start doing these things early, you know, if you have a quarterly review of your subscriptions, your SaaS products, you have some kind of budget versus actual process in place where you have—even if it’s wrong, right? I mean, you just take a stab at what you think, you track your actuals, and at least now you have some data to rally around from a financial perspective, as opposed to saying, “Oh, look, we spent X on Y. That’s interesting.” Or, “Does that feel right? Or”—

And so you have a baseline and you have a measuring stick, and then you have a process in place for figuring out what happened, and then how to better guess in the future. And so yeah, I think that hygiene is important and I think the hard part—and I think it was exhibited by you guys early on—is when you’re starting a company, this is the last thing that you want to focus on, or even think you need to focus on because it’s not on fire, right? Finance is never on fire until it’s absolutely on fire, and it’s going to kill you. And I think a lot of founders sweep finance and accounting to the back of the closet because a client is upset, or an employee quit, or their code broke, and those things are on fire today, and if they don’t get fixed, the company can’t move forward.

And so finance, it doesn’t matter, doesn’t matter, doesn’t matter, doesn’t matter; it kills your company. So, I think it’s not that the founders don’t know about it, aren’t smart enough for it, don’t care about it. It’s just that it’s not on fire, and when you’re starting a company, all you can do is pay attention to the things that are.

Corey: It’s easy to look back and beat myself up for my lack of understanding or lack of focus on things. The similarly I talked to technical people all the time where the first DevOps hire into an environment. It’s been application engineers or developers building the environment so far, and it’s easy to look at it in a condescending way of, “Oh, our entire field knows not to build things this way. What’s wrong with you fools?” Well, it worked well enough to get to a point where they could afford to hire you, so perhaps show some respect when you’re in an environment like that.

This is something that most business folk, like I don’t know, a CFO intrinsically understands, but many engineers still don’t seem to have fully wrap their heads around just because it’s easy to over-index on the area that you’re focusing in. You almost certainly view companies, start to finish, through a lens of finance. A lot of engineering folks I spend time with—and used to be one of, myself—view it through a lens of well, what’s their stack look like? What’s their technical debt? How are they actually architected?

Which is interesting, but usually not the indicator of whether a company will succeed or fail. There are other broader focuses that are important to look at, and being able to view our own company through a lens of something other than dealing with just the technology or just the sales aspect of it, or, “All right, time for me to go shitposting again because that’s our substitute for marketing.” Instead, we’re focusing on what the larger picture is through a finance lens. It introduces a level of rigor that I hadn’t expected, though, clearly, we do still put our own stamp on it. I suspect we are probably the only company you have ever worked with that has an explicit line item in the budget labeled ‘Spite’ for example, from which we make our ridiculous parody videos and other assorted nonsense, for those who are unfamiliar with the Spite Budget.

Dan: That was a new one for me. I’ve seen, I think, every other chart of account line item before and Duckbill Group was the first one that I had to type in ‘Spite Budget’ for. I didn’t even really understand what it meant, and then as I, you know, got to know you a little bit better, I knew exactly what it meant. And it is—

Corey: Yeah, this is what passes humor with his set.

Dan: [laugh].

Corey: Got it. Okay, I’ll smile, nod, and continue to keep the finances in order.

Dan: Yeah. So, when you leave, I just cross it out and I write marketing. But [laugh] it is what makes you you and what makes this company successful. But in all seriousness, it’s an outstanding financial investment because our business is—like every business—is driven by eyeballs. And whether you’re a media company or you’re any other company, you need people to know about you.

You need people to want to believe that your services are valuable, and want to engage in your services. And the Spite Budget brings eyeballs. And the other thing is, I think it’s always wrapped up in farce, but there’s always an underlying truth to it which is why people find it compelling. I think if you were out there actually, slinging shit to us, you know, [laugh] you’re parlance, I think you wouldn’t get 100 Twitter followers. But I think because the undercurrent is truth, you don’t give yourself credit for this but there’s an immense amount of knowledge behind the truth that people find it compelling. So yeah, from a serious financial perspective, I think it’s one of the best investments that we make. [laugh].

Corey: It’s definitely a lot of fun. And it always bothered me when I would walk around re:Invent or travel for client trips and whatnot to see billboard ads in airports because I’ve priced out what those things cost, and for those who are wondering, it’s not a small number. And okay, so you’re going to go to all of the expense of buying out ads in multiple airports doing a country wide brand saturation campaign, and with all of that space, and all of those millions of dollars you’re spending on this to get your message in front of folks, you fill it with something that is so anodyne, something that is so… I guess, droll, that no one notices or cares. You wind up getting all of these eyeballs and then have nothing interesting to say. And to me, that’s the cardinal sin.

I can build an audience, and the way I built it is by having something interesting to say. But take a look at any brand awareness billboard for a large consultancy. I mean, Accenture had one years ago in airports that I still haven’t stopped making fun of them for, even more so since they blocked me on Twitter. And it said, “The new isn’t on its way. It’s here now. New, applied now.” So yeah, I guess they’re bringing the new and it’s… okay, they spent how many millions of dollars on that campaign and then wound up effectively building the tagline and the phrasing just by, I don’t know, having some analyst in some junior role bang their head off a keyboard a few times? I don’t get it. I just don’t get it.

Dan: Yeah, without being a marketing expert, I think that’s the product of risk tolerance being a directly inverse relationship to the height of an org chart. I think the higher you grow in your decision-making capability and potency, the more responsibility you have on your shoulders, the less willing you are to do anything that’s interesting, fun, risky, and that’s why we have a lot of the marketing that we have today. We’re lucky to be a small company, we’re lucky to be a small company that has creative founders. I think a lot of founders for their marketing go, they use a lot of external folks, and you know, they—sometimes it works, but a lot of times they lose the actual, like, heart and soul of the company because they just aren’t in it, they don’t understand it. And I think it’s fun, a lot of the stuff that, you know, we get to do.

But I think we’re fortunate that we are in a unique spot in the sense that—you know, we talk about this a lot—we’re a company that has a services arm and we’re a company that has a media arm. And where many companies in services have to think about marketing and sales in a very straight up and down way, we get to play in our media space, which is a revenue-generating arm of our business, in a lot of experimental ways that other companies are spending thousands, millions of dollars on marketing expenses, we get to do it and make money doing it, via media. And it’s really this incredible, bifurcated business where one serves the other and vice versa. And, you know, it’s fascinating.

Corey: I still don’t pretend to understand how we got to the place that we did. When you look back, it’s easy to see a sense of plodding inevitability, where, “Oh, yeah. You did this, that led to that, and it led to this, and here you are now.” But at the time you’re making the decisions, you are throwing darts blindfolded. Professional advice for those in bars, don’t do that. They do not find it nearly as amusing as it sounds.

Dan: I think that’s how it feels, but I don’t actually believe that story that you like to tell. You and Mike are—[laugh] you enjoy the self-deprecation but you’re very bright guys and I think you are always fiscally responsible. You just didn’t have the language that I have to show how you’re fiscally responsible. And I think you really were conservative founders in the fact that you made very short-term decisions and always made conservative short-term decisions, and that puts you in a good place. I think what I have brought to the table is an ability to look a little bit further out and think about, you know, okay, it’s not just next month, right? It’s not just two months from now. What are we building here? What are the long-term goals, and what are the intermediary goals that will be true if we’re on the right path?

And that’s some planning, that’s using historicals, that’s using some good analysis tools to try and get there, but it’s also a matter of time. When you’re a founder of a company, you can’t spend all of your time on finance and accounting. It’s just the reality. You have 8 million things to do, and so you do exactly what you guys did, which is you look at your bank account, you try and make a decision in a vacuum. But you don’t have time to really grind over the details, or the strategy of the next 6, 12, 18 months because you’ve got people to hire, and you’ve got clients to appease, and you’ve got work to do that will generate the revenue.

And so there’s a whole world of fractional CFOs, some who are good, some are not good. There’s a world of bookkeepers out there that are competent. And I think, even though it’s not a great use of cash, or revenue-generating use of cash, which I think a lot of startups, you know, are reticent to go down that path, I think having good hygiene and good strategy on your financial front early on is necessary for the future planning of a lot of these startups. And also probably peace of mind, right? I mean, I’m not sure—

Corey: Oh, I sleep way better now than I did before.

Dan: [laugh]. Yeah, I hope so. I mean, I think just the not knowing creates such an undertone of stress that, you know, may or may not be recognized by founders. And I think being able to look at a document and say, “Okay, this makes sense to me, I know what the future probably holds.” And I hope it allows you to think about other things than money.

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Corey: One challenge we had was that a lot of the advice for first-time founders—since there’s a lot of those in our space—is not applicable to 
us. The way that Mike and I built this place, we provided the initial investment personally; we’re the only investors in this place, we don’t have outside funding, we don’t have investors, and we’ve given no equity away, so it is all us. And the way that most companies in tech tend to work is I would go and debase myself in front of a bunch of investors, and some VC would absolutely bite on my Twitter for Pets idea and give me $50 million to go and build the prototype.

And at that point, I’m not making money. I have $50 million in the bank that I am burning through every month as I hire, as I build the MVP, et cetera, et cetera, and there’s a ticking clock–it’s called a runway in our space—and if we don’t wind up hitting a certain milestone of being able to raise more money by the time that we’ve crossed a certain point, it’s time to begin an orderly shutdown of the company. And that’s a ticking clock hanging over the head of many founders. In our case, I was looking at it like that originally, but we are profitable, we are actively closing deals, and one of the things you taught me, for example, was when we have accounts receivable, money that is owed to us that has not yet been paid, we can count that and use that as in many ways an asset because it is. It also helps the fact that we are in a market where businesses do not generally decline to pay us money that they owe us.

This is very much an understood thing in business, but my question was always, “Well, yeah, but what if they don’t pay? What does that mean for us?” And that’s really been a non-issue, which at first I was really grateful for and thought, “Wow, we have great customers.” It turns out that this is expected. This is like running a store and being super ecstatic because most of the people in your store aren’t shoplifting.

It’s, yes, that is the baseline expectation for people doing business in the modern era. That was an eye opener. But it also kept me up at night because it was, “Oh, if suddenly this money in the bank is all that we’re going to get in, then we only have enough runway to go two, three, four months and then we have to shut the company down.” Yeah, but we’re profitable every month, so what’s the concern here? It doesn’t work that way.

Dan: Right. We look at two key metrics as a company every single week, right? We look at a metric called months of cash.

Corey: Which is pretty self-descriptive. It’s in the title.

Dan: Yeah, [laugh] just, you take your bank balance and you divide it by your, you know, average monthly burn, you know, total expenses out each month. And that will give you some number. You know, we really like that number to be at least two, closer to three, but I think something like having, like, six months of cash—now this is for a company that has not raised a bunch of money, right? So, if you’ve raised $5 million, your months of cash is going to be well more than that because you’re investing in your—

Corey: And the goal should be to lower that months of cash because it’s designed to be used to hire and grow, not sit there, and you should not be turning a profit on that interest; you should be spending through it at a reasonable clip.

Dan: Right. And for companies who have not raised money, right, even if you have a month’s of cash, you know, five, six, that’s probably not right either, right? I mean, there’s probably opportunities for investment where you want to get your chips on the table for growth, right? Because you don’t always have to be after hypergrowth. But typically, if a company’s not growing, it’s declining, and that’s not a great thing, right? So, some amount of growth is always important for a healthy company.

So, months of cash is one metric that we look at every week. And the other is what I call an adjusted quick ratio. But essentially, it’s taking current assets over your current liabilities. Now, many startups are going to be debt free, short-term debt free, and so what we do is we try and talk about cash plus accounts receivable—so invoices that are out that have not been paid—and that gives you your numerator, over any outflows that you should experience over the next 30 or so days, right, we think about that as, like, our current liabilities. Because there’s no real debt.

In larger corporate finance, you have big, big balance sheets, quick ratios are more formulaic corporate formula, but in this case, we look at cash plus accounts receivable, over 30 days of liabilities. And that gives us a number that we’re tracking constantly. And we have our own benchmarks for internally for what that number is, but that’s a really great tracking of liquidity; that’s more than just what’s the cash in the bank, right? You’re looking at your cash, you’re looking at your receivables, and you’re looking at your upcoming payments, you know, whether that’s payroll or big vendor payments or any other, you know, non-recurring expenses that you know are coming down the pike.

Corey: Yeah, a lot of things can impact that number. And that means, oh, that number is out of kilter. It’s time to dig a little bit into why, but it’s not itself a diagnostic, it’s just an indicator that gives a snapshot of overall financial health.

Dan: That’s right. There are also ratios that you can track on a weekly basis and not just wait month-over-month because you can actually start to see trend lines up and down and start to ask questions about, “Hey, what happened this week?” “Oh, we sent out a big invoice, you know, we just haven’t been paid on it. That’s why we saw our AQR go up.” Or, “Hey, we just took in a big invoice for redoing the website. We owe $50,000 to x vendor and that’s why the denominator of that equation went up. And so our AQR went down a little bit this week, but we expect it to climb back up in the coming weeks.”

And so it’s a really good way to track liquidity. On a longer-term, we’re talking about things like margin analysis, right? Gross margins is an important thing we talk about. You know, revenue, minus the cost of goods to deliver that revenue, want to make sure that we’re delivering products with efficiency. And, you know, we talk about net margin or EBITDA, or, you know, however, you want to describe the bottom line, and that’s obviously your profitability.

So, those are sort of the things we rally around internally. We try and look at them at least weekly, or monthly, depending on the metric. And this just goes back to hygiene and habits. You don’t have to do a tremendous amount of work here. And you also—I think, people can get wrapped up in esoteric formulas that they’ve read in books, right, but I think if you’re looking at cash, you’re looking at cash and receivables over expenses, you’re looking at your margins, and you’re looking at your bottom line, those four metrics tracked well, you know, weekly or monthly over time, should really protect you, and should also give you great insights about your business.

Corey: This is another example of viewing personal and company finances through a different lens. If I were to come home and tell my spouse that I had just dropped $50,000 on a website for example, the conversation would not be pleasant immediately afterwards. But it’s not personal money. Conversely, an awful lot of business owners that I’ve heard stories about get into trouble by treating the company as their personal piggy bank, which Mike and I are very clear never to do. If you’re listening to this from tax authority, I want to emphasize, we keep our noses remarkably clean.

And again, it comes down to one of those, I don’t want to lose sleep at night over things. That’s why you’re here, Dan. I don’t want to lose sleep over the idea that we’re going to run out of money, or that I’m going to get audited and my great fraud will be discovered. It’s no, I don’t want to get audited because it’s a pain in the neck, and I have to wind up providing a whole bunch of receipts and whatnot, but everything’s legitimate. That’s the type of fear and paperwork thing that I just want to be able to avoid, by and large.

Dan: Yeah, we do keep clean books, and there’s probably things that we could be expensing that we’re not, right? More than the tax gray area that exists there is the difficulty with partners and equity—and I don’t mean equity on the balance sheet; I mean, like, fairness amongst partners, right? So, if one partner is going out more often than the other for dinners, is that really fair for that person to get their meals paid for more than the partner? Vice versa, if one person lives in a city and the other person doesn’t and their car runs through the business. You know, how do you deal with those differences with multiple owners of a business? And I think those complexities are sometimes more difficult to deal with in the tax gray area of what is deductible and what is not?

Corey: Oh, yeah. That’s why I’ve always been such a big fan of making sure that when you have a business partner that your values are aligned. Mike and I are incredibly dissimilar in a bunch of different ways. He loves spreadsheets, I love shitposting on Twitter. But when it comes to values in how we approach these things that was laid out at the very beginning in our partnership agreement.

And it’s never been something that we’ve had cause to even visit, like, “Well, let’s see what the partnership agreement says.” Just because it makes sense. It’s, yeah, Mike doesn’t spend tens of thousands of dollars a year on travel—in non-pandemic years—just because he’s not constantly out there doing the things that I have been doing, historically. Now, post-pandemic that might change it, if he winds up traveling a lot and I’m sitting at home, I’m not sitting there upset because he gets to expense dinners out. It doesn’t work that way. Whenever you start seeing that type of breakdown that feels like it’s a proxy for something that’s deeper.

Dan: Yeah, I would agree with that. I think also just not like a marriage, you know, it comes down to communication and expectations. I mean, like any management in company, right? I mean, you have to be clear about what is expected of your partner. Ideally, you’re measuring those things, and you’re making sure that everybody’s in line with those expectations, but yeah, I would say you and Mike have always been aligned in that sense, and I think you’re right, the instance—or examples where it goes south, it’s not because someone spent $600 more than the other, it’s because there’s a lot more going on there.

Corey: Yeah, it’s the proxy for things. So, at some point it’s, “Okay, why do you have a $4 million yacht that just parked in your driveway? And yeah, what’s the deal here?” One last area I want to cover because this is probably relevant to folks who I imagine most of our listeners are, who are employees elsewhere. I always was extremely bothered by the fact that I had remarkably little financial wiggle room when it came to expensing things.

Like, “Let me get this straight. I have root in production, but you’re going to question me over a $15 expense?” That always sat very strangely. And I carry that with me to the point where even now at the time of this recording, we’re going through one of our periodic exercises that you put us through of, yeah, here’s a list of all the recurring expenses on your credit card. Is this something that we still need? And how do I 
categorize it if so? If not, let’s cancel it.

And it’s weird because instinctively, I hear that, even now, as you saying, what’s up with this $9.99 a month thing? And I’m sitting here going, 
“Wait a minute.” Like, I’m trying to justify, like, “Is that really worth $10 a month to me? Should I—wait a minute, I don’t work for you.”

Dan: Right. [laugh].

Corey: It was a bit of a different moment here. Like, I felt like I’m being called to the carpet by my boss, but that is absolutely not what’s going on. So, my question for you, as someone who has a storied career in finance, is that what’s being asked in most companies by management when they question expenses? Is that about, “Help me understand what this is,” or is it in fact what I’m hearing, a, “Justify why you think a $10 monthly expense is worthwhile?”

Dan: I think it really depends. I mean, in my case, in our case, I am genuinely trying to understand how to categorize most things so that when I do my reporting, I can tell you where we spent our money. So, you know, if I see a charge that I don’t know what it is and I ask you for clarity on it, it is a hundred percent so that I understand is this COGS? Was this part of delivering our revenue? Is this, you know, a sales and marketing expense that at the end of the year, I could say, “Hey, we spent x percent on sales and marketing for y revenue,” and I want that to be an accurate number.

If you’re talking about big corporate bureaucracy and they have expense policies and a lot of rigorous rules that were derived from the head of HR who doesn’t know the 500 people that this rule is going to impact, I think there’s probably a different motivation for those questions. And I think it’s tough; it’s not to say that you shouldn’t have policies, you need to have policies, but you know, the bigger you get, the harder it is to have the right policies for the right people and you end up making blanket decisions to try and get to an average lau that nobody’s probably happy with, instead of empowering your people and trusting your people, that they’re going to spend their money on things that are good for the company. At Duckbill, I know, it’s not even a question. Everybody here has a corporate card, and I don’t think I’ve once seen you question somebody about an expense that they had. The only questions they get are from me in terms of how to use it for accounting purpose, but the underlying current there is we hired these people; we trust these people; they’re our employees and we’re all swimming in the same direction, so if they spent money on something, I would assume it’s because it’s good for the company.

And I think that goes a long way. I would always prefer to have better tracking and reporting metrics to spot the bad apples than to have a 
policy that turns the good apples, the 95% of good apples into sour apples. Not to have a terrible analogy on this recording. But I [laugh] would much rather convey to my employees that I trust them and then do a little bit of extra work on the back end to ask questions about, you know, the expenses I think are a little funny, versus writing a policy that says, “Here’s x. Here’s what you can spend on y.” And now everyone is dissatisfied. Someone was telling me just because someone wore shorts to the office, don’t write a policy, “No shorts in the office.” Just talk to that person and say, “Hey, pants might be a better choice.”

Corey: Right. You should not need a list of policies that are organically built every time someone does something they shouldn’t. And at some level, it’s one of those ideas where collective punishment never works. I wound up getting an email from my boss once to the entire team of, “We have to start at nine or there’s going to be problems.” And I’m sweating bullets because I came in at 9:03, a couple of days this week.

Meanwhile, the person next to me has slowly started drifting from coming in at 10:45 to 11:30. And it’s one of those I think I’m going to get fired. No, no, no, it’s really you have one particular person and you’re just being chickenshit as far as approaching them and telling them that there’s an issue.

Dan: That’s right. Yep. Totally agree.

Corey: Dan, thank you so much for taking the time to speak with me today. If people want to learn more, where can they find you?

Dan: I don’t have a huge footprint on the interwebs, but I’m always here at Duckbill, you know, serving the company, and if anybody has specific Duckbill questions, they can always reach out and I’m happy to converse. But I really appreciate you having me, and happy to talk Duckbill anytime.

Corey: No, it’s appreciated. Dan Shapiro, CFO at The Duckbill Group. I’m Cloud Economist Corey Quinn, and this is Screaming in the Cloud. If you’ve enjoyed this podcast, please leave a five-star review on your podcast platform of choice, whereas if you’ve hated this podcast, please leave a five-star review on your podcast platform of choice along with an angry comment talking about how as an accountant, you are annoyed by this episode because you will never be depreciated in your own lifetime.

Corey: If your AWS bill keeps rising and your blood pressure is doing the same, then you need The Duckbill Group. We help companies fix their AWS bill by making it smaller and less horrifying. The Duckbill Group works for you, not AWS. We tailor recommendations to your business and we get to the point. Visit duckbillgroup.com to get started.

Announcer: This has been a HumblePod production. Stay humble.
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