The Finance Tech Stack: Opportunities for Innovation (Part II)
We believe there is an opportunity to optimize every layer of the CFO tech stack in response to the pain points we covered in our initial post. As we alluded to there, some of this optimization is already underway: The space has seen a lot of innovation in the past few years, mostly driven by finance practitioners and operators who are frustrated by the status quo.
Below we have created a map of both established and emerging companies looking to innovate various aspects of the tech stack. Note that some of the companies highlighted play in multiple lanes, but we have categorized them according to their core products.
Based on our conversations with CFOs, we have broken down the finance tech stack to align with how finance teams tend to think about the workflows and systems:
- ERP/Accounting: The ERP/general ledger is the backbone of the CFO’s tech stack, connecting financial information across business processes and accounting sub ledgers.
- Payroll: Software used to manage employee information, payroll and benefits. This may be integrated with the HRIS, or separate. The system may be owned by HR, but Finance will interact heavily with it as personnel expenses are a large part of a company’s overall spend.
- FP&A: Software used to track business KPIs, and make decisions around budgeting and forecasting.
- Spend management: Software used to manage vendor spend and employee expenses.
- AP/AR reconciliation: Software to manage complex AP/AR workflows and reconcile large volumes of invoices.
- Bookkeeping/Financial Close: Software that helps companies close the books every month. Includes workflow/task management tools, reconciliation and reporting.
- Equity management: Software that helps companies manage their cap table and investor relations.
Despite feeling like there is a better way to do things (and often being inundated with outreach from companies developing solutions), most of the CFOs we spoke to were wary of experimenting with new tools without good references from peers. The unfortunate reality is that finance teams tend to have very little time to implement new tools because they are always chasing a deadline — whether it is the next close cycle or assisting leadership on key business decisions. Understandably, they tend to be risk averse and reluctant to spend on anything that is a “nice to have.” So as we alluded to in our previous post, finding the right wedge is key for startups hoping to break into this space. Below are some examples of areas where we think the need is pressing enough to break through the noise.
- Better financial planning & analysis: The majority of planning and analysis takes place in Excel and Google Sheets today. Even companies using advanced tools like Anaplan or Adaptive Insights will default to Excel for certain parts of the process. While Excel is beloved by finance teams for its flexibility, it has significant shortcomings around collaboration, real-time updates, and versioning. We see an opportunity for companies to build automated workflows on top of Excel or create end-to-end solutions that obviate (or drastically reduce) the need for Excel altogether. We also believe data analytics using advanced tools like SQL and Python will become an increasingly core skillset for FP&A teams. The worlds of FP&A, BI, and data science are colliding — especially in consumer businesses. We are bullish on software that anticipates this shift and helps non-data oriented FP&A folks make the transition more easily.
- Expediting the close process: Today, a company often does not have a clear picture of its P&L for the quarter until halfway through the following one. This makes it very difficult to be agile and react to the changing realities of a dynamic business. The reality is that preparing monthly financial statements is still a time-consuming and manual process. For most companies, the default way to get to a quicker close is putting more resources on the problem, but this introduces its own set of issues. Manual steps like downloading transactions and reconciling paper invoices make the process error-prone. Tools like Blackline help expedite this for large companies, but they tend to be expensive, clunky, and require heavy implementations. We believe there is an opportunity to develop lightweight workflow tools that streamline the most painful aspects of close: invoice and spend reconciliation.
- Enabling real time spend management: Related to the previous point, a major point of frustration for finance teams is around spend management. Tools like Divvy have been successful because they do a great job of helping finance teams set centralized spend limits and track expenses against budget in real time. However, other parts of the process like data entry and classifying transactions require significant manual effort, creating lags in visibility into critical COGS items. We believe there is an opportunity to leverage ML/AI to create tools that can ingest data from various sources, identify anomalies, and automatically pull in the appropriate entries into Netsuite or other systems.
- Sales and cash flow forecasting: Sales forecasts influence critical downstream decisions. However, accurately forecasting sales (and therefore cash flow) is tough, especially for businesses without subscription revenue. One CFO of a transactional consumer software business shared with us that 70% of the company’s revenue for the year is done in a span of three weeks. In order to accurately forecast, such companies have to develop manual workarounds which involve downloading data 2–3x a day from billing systems and running static Excel analyses on them. It’s critical for early stage companies, too, to know when they are about to run out of cash. We believe there is an opportunity to build tools for the finance team that can take predictive modeling to the next level.
- Additional fintech products: More and more, we see an opportunity for companies in the space to not only offer SaaS tools but also to insert themselves into the flow of funds. The most obvious example here is in spend management — companies like Divvy and Brex make the majority of their revenue through interchange. In addition, once a company has visibility into the cash inflows and outflows of its clients, it is in a good position to offer financial products like working capital, lending and insurance. For instance, a tool that does cash flow forecasting may be able to proactively recommend working capital solutions or even offer those solutions themselves based on access to a company’s past financials. Brightflow.ai is one example of a company that aspires to make this shift, and we see many more going in this direction.
The above is a small sample of areas where we see opportunity to reimagine the CFO tech stack. For more thoughts on what we believe are requirements for success, check out our previous post where we share learnings from our conversations with CFOs. If you are working on a company to solve an issue faced by the CFO’s office and our perspective resonates with you, we’d love to hear from you!