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The XBRL provider's CFO tells how to make decisions that are perhaps not perfect, but good enough to survive a business boom.
David Rosenbaum, CFO.com | US
February 7, 2012
Eighteen months ago, XBRL provider EDGAR Online had 90 full-time employees (FTEs) and a little over $19 million in annual revenue. By the end of 2011, it had about 400 FTEs and revenues around $30 million, says EDGAR Online CFO and COO David Price, who presented at last month'sCFO Corporate Performance Management Conference in New York and is expecting revenues to increase another 25% overall this year.
Based on the 2009 Securities and Exchange Commission mandate that XBRL tagging be used in financial filings, EDGAR Online, which turns HTML into XBRL, invested heavily in becoming an XBRL leader, and, according to Price, the company could grow even faster than it already has.
This is good for EDGAR Online and its investors. It also presents challenges for Price. The biggest challenge, he says, is managing the company's cash flow.
In fast-growing organizations, says Price, "the biggest risk is going out of business because of the speed of growth." EDGAR Online's heavy investment in its XBRL capabilities drained its cash balance. "Many successful companies go out of business because their accounts receivable (AR) grows and you can't get the dollars in so you go out of business because you can't watch the cash flow," he says.
EDGAR Online was operating at a loss, and in order to turn positive revenue, it needed to improve receivables or extend payables. And the latter was not an option.
"My risk-management profile around cash is more acute than others," says Price. "Eighty percent of my cost base, the checks I write, are for people or they're occupancy-related. You can't say to either, 'Please wait a couple of weeks because customer A hasn't paid us.' If I were Ford, I could call my suppliers and say, 'I'll have your check for you in 10 days.' I can't do that." In other words, for Price, extending payables is not realistic. He has to meet his payroll and pay his landlord on time. Consequently, "one way to mitigate the risk of growth is to spend on AR and collections - having people chasing payments - to make sure I have the cash to fund that growth."
Managing Growth on the Ground
A large number of EDGAR Online's customers subscribe annually (a subscription for data and analytics platforms such as EDGAR Pro and I-Metrix begins around $600 and can rise to seven figures) and renew automatically on credit cards. When those credit cards expire, Price notes, EDGAR Online can't charge them. "In the past," he says, "we waited until the card didn't go through and then we called the customer and said we needed a new card and we're going to cancel you until you get a new one. That wasn't good for us, not good for cash flow." It also didn't make the company's customers feel all warm and fuzzy about EDGAR Online.
Price had his team begin produce a list of credit cards due to expire and call those clients proactively. He invested about $50,000 in an employee to "harass them," and estimates that that enhanced revenue by about $200,000 a year.
"You don't need Excel for that," Price says again. "You don't even need a calculator. You do the math in your head."
Making the Best of IT
"The fastest-growing part of our business is translating HTML filings into XBRL," says Price. "It's very labor intensive, and the way to reduce that cost is to make better use of the software available to us today." Price's IT group identified 10 changes to its software that it believed would have a positive impact on efficiency, and therefore cost. IT, however, said there was no way it could do all 10. So Price and the executive team came up with three enhancements they believed would enhance gross margin by 5%.
The changes, Price says, "took six weeks to develop and test. We fast-tracked development and quality control to get [them] into production because 5% on $20 million in gross revenue is a million bucks. So every month we didn't implement we were throwing away $80,000 a month." Again, he says, "You don't need Excel for this."
Price emphasizes that the decision to assume the risks of a faster-than-normal development and implementation process (a change in software as the company conducted business could affect operations and therefore profitability) was made by the executive team; "it wasn't just me saying, 'let's do it and do it quickly.'"
Perfection Is the Enemy
Eighteen months ago, says Price, it took EDGAR Online five weeks to do a four-week close. The business risk, he says simply, was that "we had no information to run the business. By the time we got the close information, it was so out-of-date it was useless. I'd rather have 90% information in three days than 100% in five weeks."
For Price, as Voltaire famously wrote, the best can be the enemy of the good. "If you need to know your cash balance, you go to the ATM," he says. "But if you've got someone spending days doing bank reconciliation in order to find a hundred bucks, that's a complete waste of time. If we're $10,000 off, I care, but it's just not that important to our ability to make plans. Which is the greater risk: that the company goes bust or we have a rounding error?"
Now, EDGAR Online does a monthly "soft close" in three days because, says Price, "we know what matters and doesn't matter. It comes down to understanding the risks. I tell my finance team, 'Don't be afraid to make a decision.' Making no decision is actually a decision. If you make 100 decisions and get 51 right, you're two up."
The Next Risk
"EDGAR Online's business model will change," Price told the CPM conference attendees last month. He foresees software becoming increasingly capable of allowing companies to produce their own filings in XBRL rather than sending their data to EDGAR Online (or a competitor) and waiting two days to get it back. Today most companies handle financial filing as a species of business-process outsourcing, but Price sees finance taking it back in-house to mitigate compliance risk, as well as driving efficiencies. The future for EDGAR Online, Price believes, will be as a software-as-a-service provider (its platform for managing and consolidating filings is called Xcalibur) giving companies the ability to optimize XBRL's capability as a collaborative reporting tool as well as a platform for performing financial analysis.
And when it comes time to mitigate the risks of that business-model change, EDGAR Online will look at it collectively and do the best it can.
"We build a team and a structure and a process to run issues through," says Price. "We're not brain surgeons. Nobody's going to die if we make a wrong call here. Making decisions based on incomplete information is a must these days."