The step-by-step playbook to budget the core

🛠 THE CFO EFFECT PLAYBOOK (Part III)

Step 0: Prep the data (the 90-minute clean-up that saves you 90 hours later)

Before you model anything:

• Lock a clean baseline: last 24–36 months of monthly actuals (P&L, balance sheet, cash flow).

• Map your chart of accounts to a budget schema (e.g., Revenue → COGS → Gross Profit → OpEx by function → EBITDA).

• Reclass “miscellaneous” out of “other.” Put card fees into COGS (SaaS/eCom), freight-in into COGS, shipping-out into COGS or fulfillment (be consistent).

• Tag costs by behavior: Variable, Fixed, Step-fixed (important!). Step-fixed = costs that jump when volume crosses a threshold (e.g., add a second shift at 1,200 orders/day).

Sanity checks:

• Does GP% last 12 months vs prior 12 months trend stable?

• Do OpEx per order (eCom) or per active customer (SaaS) trend rationally?

• Do inventory turns and DSO/DPO show any weird spikes to explain?

Step 1: Build the revenue driver tree

Do not start with “+10% over last year.” Start with drivers.

Here are two canonical versions you can adapt.

A) E-commerce / Product business

Revenue = Sessions × Conversion Rate × AOV × (1 − Returns%)

Then break it down:

• Sessions by channel (Paid, Organic, Email, Referral, Retail POS).

• CVR by device/landing page / returning vs new.

• AOV mix: promos, bundling, price changes.

• Returns rate by category (apparel vs hard goods differ wildly).

• Seasonality index (normalize last 2–3 years to a 12-month index; apply to sessions and/or conversion).

Mini-example:
Last year:

• Sessions 12.0M, CVR 2.5%, AOV $120, Returns 6% → Revenue ≈ 12,000,000 × 0.025 × $120 × 0.94 = $33.84M

Plan drivers:

• Sessions up 8% (12.96M), CVR up to 2.7% via CRO, AOV to $124 (pricing/mix), Returns steady at 6%

• Planned revenue ≈ 12.96M × 0.027 × $124 × 0.94 = $40.9M

Guardrails:

• If AOV up +3% and promos also up, your margin must reflect it.

• Conversion jumps >20% need a reason (site speed, new PDP, email list growth).

• Don’t forget stock-outs: cap revenue by fulfillment capacity (units available × ship throughput). Model a hard ceiling per month.

B) SaaS / Recurring revenue

ARRt = ARRt-1 + New ARR + Expansion − Contraction − Churn

Break down New ARR and churn with drivers:

• Pipeline = MQLs × SQL% × Win% × ASP

• Sales Capacity = # reps × ramped productivity × quota attainment

• Churn = starting ARR × Gross churn% (logo or $), model by cohort if possible

• Expansion = upsell % × install base

Mini-example:
Starting ARR $24.0M

• New ARR: 14 AEs × $1.2M quota × 70% attainment = $11.76M

• Gross churn: 8% → −$1.92M

• Expansion: 4% → +$0.96M

• Planned ARR = 24.0 + 11.76 − 1.92 + 0.96 = $34.8M (45% growth)

Guardrails:

• If you add reps, add ramp curves (0%, 50%, 80%, 100%) by month.

• Win rates don’t jump 10 pts because “we feel good.” Tie to enablement/product changes.

• Expansion without roadmap alignment is fantasy. Link to actual features/packaging.

Seasonality:

• E-com: apply monthly seasonality index to sessions and CVR.

• SaaS: seasonality often hits sales start dates, enterprise deals closing Q4, churn Q1 (budget resets). Reflect it in monthly cadence, not just annual totals.

Step 2: Gross margin: from unit economics up (not averages)

A) E-commerce COGS & fulfillment

COGS per unit:

• BOM / product cost (landed)

• Freight-in + duty + brokerage

• Packaging

• Returns write-off (if not resellable)

• Fulfillment per unit:

  • Pick/pack/ship

  • Merchant fees (payment processing %) – I like to keep these fees in the OpEx on my end to track performance

  • 3PL fees (storage, inbound, returns processing)

  • Customer service cost per order (tickets per order × cost per ticket)

Mini-example per order (hard goods):

• Product landed: $48.00

• Freight-in/duty: $3.20

• Packaging: $1.10

• Payment fee (2.9% + $0.30) on AOV $124 → $3.90

• 3PL pick/pack/ship: $4.00

• CS cost: $0.50

• Total COGS + fulfillment ≈ $60.70

• Gross profit per order = AOV $124 − $60.70 = $63.30 → GP% ≈ 51.0%

Scale effects to model:

• Volume tiers on freight-in and 3PL

• Mix shifts (bundles often raise AOV but also picking fees)

• Returns (% and severity) by category

B) SaaS COGS

Common buckets:

• Hosting/infra (per MAU, per GB, per query)

• Third-party APIs (priced per call)

• Payment fees (if in COGS)

• Support (headcount in COGS or OpEx, choose and be consistent)

• Customer success (often OpEx, but many put in COGS for gross margin optics; again, be consistent)

Mini-example per $ revenue:

• Hosting 7%

• Third-party APIs 3%

• Payment fees 2%

• Support 5%

• Gross margin ≈ 83%

Guardrails:

• Tie hosting to usage drivers (MAU, queries, storage).

• If price increases are planned, model downgrade/discount pressure (GP% rarely rises in a straight line).

• In eCom, if promos lift conversion, gross margin drops unless vendor funding offsets it (model vendor credits explicitly).

Step 3: Operating expenses: capacity-aware, not “last year + 10%”

Headcount plan (the heart of OpEx)

Build a hiring table with:

• Role, level, department

• Start month

• Base salary, bonus, benefits %

• Fully-loaded cost (base + bonus accrual + benefits + payroll taxes)

• Ramp (for revenue roles): productivity over time

• Backfills (attrition assumptions)

Mini-example:

• 2 CS agents start March @ $55k base; benefits 18%; taxes 7% → fully-loaded ≈ $69k each; add seat/licenses $2k each

• 1 FP&A analyst starts July @ $90k; fully-loaded ≈ $113k; tools $3k

Capacity checks:

• E-com CS: target tickets per agent per day (e.g., 40 at SLA), forecast tickets = orders × contact rate; add agents when SLA breaks.

• Warehouse: units per hour per picker; add shift when forecast crosses 85% capacity.

• SaaS Support: cases per agent; backlog threshold triggers hire.

Step-fixed non-headcount

• Warehouse lease: jumps at 80% utilization

• SaaS observability tools: pricing tiers by volume

• ERP/BI licenses: per-seat escalators
  Don’t smear these as “linear.” Add threshold logic.

Sales & Marketing (in the core)

Even in the core, you’ll spend to sustain growth.

Tie spend to outcomes:

• Paid media: spend → clicks → conversions → CAC

• Guardrail: CAC payback (gross margin basis) ≤ X months for core

• Brand: if you fund brand, cap as % of revenue and don’t credit it with short-term CAC; measure via aided awareness or direct traffic trend, not last-click gymnastics.

Formula (eCom CAC payback):
Payback months ≈ (CAC) / (Order GP × Repeat order factor per month)

Formula (SaaS CAC payback):
Payback months ≈ CAC / (ARPA × Gross Margin%)

If payback exceeds your threshold (e.g., 9 months for SMB SaaS, 18 months for enterprise), you’re over-fueling relative to engine efficiency: either fix conversion/pricing or pull back.

Step 4: Working capital & cash: profit ≠ cash

You can “hit plan” on EBITDA and still run out of money. Model the core’s cash loop.

E-commerce working capital

• Inventory purchases = COGS + ΔInventory (by month)

• Build a buys plan:

  • Sales units by SKU family

  • Target days of supply (DOS) and safety stock

  • Lead time (supplier + ocean + receiving)

  • Reorder points = daily demand × lead time + safety stock

• AP terms with suppliers (e.g., 30% deposit, 70% at ship/landed)

• AR if you have wholesale/B2B; else mostly card (cash next day)

Mini-example:

• COGS next quarter projected $8.1M; inventory to rise by $0.9M to hit DOS targets → Buys ≈ $9.0M

• Terms 30/70 with 45-day transit → cash needs spike before revenue. Plan the cash bridge and revolver draws.

SaaS working capital

• AR: DSO 35 → AR month-end ≈ (Revenue/30) × 35

• Deferred revenue: if you invoice annual upfront, cash leads revenue (good!); model billings and deferrals explicitly

• AP: cloud bills on 30; not huge but predictable

Cash conversion cycle (CCC)

• E-com: CCC = DIO + DSO − DPO (aim to shrink CCC; negotiate DPO, improve turns)

• SaaS: often negative cash conversion cycle if annual prepay. Your core funds itself; don’t squander that advantage.

Guardrails:

• If your plan increases DIO from 85 to 120 days because of range expansion, that’s a cash tax; finance it consciously (revolver, supplier terms) or rethink the expansion pace.

• Tie inventory targets to service level goals (e.g., 95% in-stock on top 50 SKUs). No vague “more safety stock.”

Step 5: Maintenance CapEx & depreciation (core only)

List the keep-the-lights-on CapEx:

• Replacement equipment, warehouse racking, laptops for planned hires, minor automation modules

• Capitalize only what meets policy (useful life > 1 year, above threshold)

Set useful life and depreciation method; build the monthly schedule.
Guardrail: maintenance CapEx roughly tracks depreciation for steady-state ops (not a law, but a smell test).

Step 6: Build the model in a way anyone can follow

Workbook structure (tabs):

1. Assumptions Pack (one pager: drivers, sources, rationale)

2. Seasonality & Indices (12-month factors, device/channel splits)

3. Revenue Drivers (eCom driver tree or SaaS ARR waterfall)

4. COGS & Fulfillment (unit costs, tier tables, returns)

5. Headcount Plan (hire table with costs/ramp)

6. Non-HC OpEx (step-fixed logic)

7. Working Capital (AR, AP, Inventory turns/DOS, buys)

8. CapEx & Depreciation

9. Financials (P&L, BS, CF by month)

10. Scenarios (Base/Downside/Upside switches)

11. Bridge & KPIs (LYA → Plan bridge, key ratios)

 Rules:

• No hard-typed results; every number traces to a driver.

• Keep a Data Validation tab for lists and thresholds.

• Color code inputs (blue), calcs (black), checks (green), outputs (bold).

• Add a Check cell: Balance Sheet balances? Cash never negative without financing? Sum of parts = total?

Step 7: Turn assumptions into numbers (worked examples)

Example 1: eCom Q1 revenue & margin

Inputs (Jan–Mar average):

• Sessions: 1.0M / 1.1M / 1.3M

• CVR: 2.4% / 2.5% / 2.6%

• AOV: $122 / $122 / $125

• Returns: 6%

• Units available: 24k / 26k / 28k (cap throughput 900/day)

Compute:

• Orders = Sessions × CVR → 24k / 27.5k / 33.8k

• Apply capacity cap: Jan 24k ok; Feb limited to 26k; Mar limited to 28k (backlog if you queue)

• Net revenue = Orders × AOV × (1 − Returns)

• Unit COGS/fulfillment from Step 2 (say $60.70, rising $0.30 with fuel surcharge in Mar)

Outcome:

• Q1 Revenue ≈ $8.2M; Gross Profit ≈ $4.15M; GP% ≈ 50.6%

• Note the Feb/Mar cap: if marketing plans assume higher orders, either increase throughput (temp labor, overtime) or your revenue is fiction.

Example 2: SaaS Q2 ARR and CAC payback

Inputs:

• Start ARR $28.0M

• AEs: 16 (12 fully ramped, 4 ramping)

• Quota $1.3M; Attainment 68% full, 30/60/80% ramp months

• ASP $40k; Gross margin 82%

• CAC per new logo $12k; Expansion +3% of starting ARR; Churn 7% annualized

Compute:

• New ARR ≈ sum of rep-month productivity → $9.9M annualized (call it $2.5M for the quarter)

• Expansion ≈ $0.21M

• Churn ≈ −$0.49M

• End ARR ≈ $30.22M

• CAC payback (months) ≈ CAC / (ARPA × GM%) → with ARPA $10k, GM 82% → payback ≈ 17.5 months
  Guardrail: If your threshold is 15 months for SMB motion, either cut CAC or raise price/expand.

Step 8: Scenarios, triggers, and guardrails

Build three cases with switches (don’t copy three models):

• Base: conservative-realistic drivers (attainment, CAC, turns).

• Downside: −10–20% on top-line drivers, margin pressure, inventory overhang or churn spike.

• Upside: improvements you can defend (new CRO program, win-rate lift with new demo, freight contract renegotiated).

Define triggers that flip resource decisions:

• If weekly conversion < plan by 15% for 4 weeks → reduce paid by X% and pull 3PL overtime.

• If DSO > 45 → stop annual prepay discounting until AR normalizes.

• If inventory DOS for top 20 SKUs < target → freeze long-tail buys, reallocate cash.

Guardrails to bake in:

• Gross margin floor (e.g., never below 48% eCom or 80% SaaS unless CEO/CFO signoff).

• CAC payback ceiling per motion.

• OpEx per order/customer cannot exceed last year unless tied to explicit capacity build.

• Cash minimum (e.g., 2.5 months OpEx) below this, automatic hiring freeze.

Step 9: Tie to cash and financing before you celebrate

After the P&L looks pretty, finish the cash bridge.

If any month dips below your minimum cash, the plan is not fundable.
Solutions (ranked):

1. Change timing (stage inventory buys; stagger hiring; shift promo calendar).

2. Negotiate terms (supplier deposits, DPO; customer prepay discounts).

3. Increase revolver availability (and cost it).

4. Cut spend (nice-to-have initiatives).

Write the financing narrative now, not when you’re tight: your banker will ask how the budget converts to cash. Have the slide ready for discussion.

Step 10: Quality checks & common pitfalls

Smell tests:

• GP% moves less than 100 bps while you change price, mix, freight, and returns? Unlikely, re-check.

• Headcount up 20% but OpEx per order flat? Where did productivity come from? Document it.

• Inventory DOS goes up and cash still looks fine? Did you fund buys?

• SaaS ARR up 45% with same AEs? Show the math on productivity and pipeline.

 Pitfalls I see over and over:

• Average thinking: using last year’s blended COGS when mix/tiers change.

• Ignoring step-fixed: leases, support tiers, 3PL jumps (these are cliffs).

• Linear revenue: smooth monthly revenue is comforting but wrong; add seasonality/cadence.

• Capacity blind spots: sales hires without SEs; orders without 3PL throughput; features without support headcount.

• Cash lag denial: inventory and AR suck cash earlier than revenue arrives; plan it.

Putting it together: a one-page Core Budget Bridge

When you brief the CEO/board, show this bridge from Last Year Actuals → This Year Plan.

This tells a coherent story in five minutes.

The rest of the model is backup.

A few “friend-level” pro tips (the small things that save you later)

• Document every assumption in plain English (“CVR +10% due to new checkout + PDP A/B results; see test #47”). Future-you will thank you.

• Name owners for each driver (Marketing owns sessions; Product owns CVR; Ops owns pick rate; Finance owns the math).

• Build a “kill list” inside the core: 2-3 recurring costs we will eliminate in Q1 to free oxygen.

• Create early-warning dashboards: a tiny set of weekly metrics tied to triggers (CVR, AOV, cancel rate, tickets per order, DSO, DOS).

• Practice the “capacity rehearsal”: run through a big month (e.g., November) and ask each team to show how they’ll handle that volume with current resources.

What this looks like in real life (condensed case)

Company: $40M DTC hard-goods brand

• Last year GP% 49.8%. Freight contracts improved, product mix shifts toward bundles.

• Core plan: sessions +9%, CVR +0.2 pts via PDP revamp, AOV +$4 via bundles, returns steady.

• Throughput: 1,000 orders/day capacity; November demand model suggests 1,300/day → plan overtime + temp labor for 4 weeks (costed in).

• COGS: landed cost +$1.10/unit from supplier; 3PL pick-pack +$0.30 from wage hike; payment fees flat.

• Net effect on GP% = +60 bps (bundles) − 40 bps (COGS/3PL) = +20 bps overall (to 50.0%).

• OpEx: add 3 CS, 1 Demand Planner, 1 FP&A; cut legacy SaaS $12k/mo; add QA contractor in Oct/Nov.

• Working capital: raise DOS on top 30 SKUs from 38 to 52 days ahead of Q4; finance via extended terms on two key suppliers to DPO 45 → CCC rises +6 days but stays within revolver.

• Cash: maintain $3.0M minimum; worst month low $3.2M → no covenant risk.

That’s a real core plan: realistic drivers, explicit capacity, funded in cash, minimal drama.

Quick checklist you can copy into your doc today

• 36 months monthly actuals cleaned and mapped

• Revenue driver tree built (with seasonality)

• Unit-level COGS and fulfillment modeled (tiers/returns)

• Headcount plan with start dates, loads, and capacity constraints

• Step-fixed costs flagged with thresholds

• Working capital model (AR, Inventory DOS/turns, AP terms)

• Maintenance CapEx & depreciation schedule

• Base/Downside/Upside switches and triggers

• Cash bridge with minimum cushion and financing narrative

• One-page bridge (LYA → Plan) for the CEO/board

If you hit every box, you’re building a core operating system that funds everything else.

Next Week’s Episode:

🔜 Budgeting for innovation

Most CFOs think a budget is done once the core is locked.
The revenue engine. The cost base. The predictable drivers.

But here’s the truth: if you stop there, you’ve only built half a budget.
And half a budget won’t win the game.

The missing piece in your budget are the bets.
The initiatives that aren’t in your P&L yet: new products, new markets, automation, bold shifts.

This is what will define whether your company stalls or scales.

Next Sunday, we’re going deep into the part of budgeting nobody teaches you:

✅ How to budget bets when there are no historical records to lean on
✅ The playbook for deciding which bets get fuel, and which get killed
✅ The portfolio mix that transforms budgeting from a cost exercise into a growth weapon

Because finance teams that master this, turn budget into the engine of the company.

If you’ve ever felt your budget was complete but not powerful, this is probably the missing piece you’ve been waiting for.

Disclaimer:
This content is for informational and educational purposes only and should not be construed as financial, legal, or professional advice. Always consult with a qualified advisor before making any business or financial decisions. The author and publisher disclaim any liability for actions taken based on this content.

Talk soon,