5 Finance Questions for Marketplace CEOs
Are you the founder or operator of marketplace model business? Here are 5 critical questions to ask your finance and accounting team.
TLDR: Marketplace businesses have unique challenges that require a clear understanding of financial performance and direction. The questions below highlight the importance of the following:
Marketplaces usually have a series of disparate systems for tracking data that need to communicate well with each other to clarify performance.
You need a clear view of your marketplace’s KPIs (namely GMV/GSV and take rate) – your systems need to give you this information with ease.
Working capital can make or break the growth of a marketplace. Proper accrual accounting is critical to understanding your historical and future working capital needs.
Building and maintaining a financial model that gives you a clear view into future growth, profitability and cash flow is essential. It must be built off a foundation of your historical financial data.
Marketplace models have unique tax considerations. Your accounting data needs to be organized in a manner that gives your tax team the ability to keep you compliant.
How well are your systems communicating with each other?
Marketplace businesses often present a complex systems integration challenge because of the patchwork of ‘data-flow’. For revenue and payment recognition, many marketplaces will typically have a minimum of 3 different systems: 1) a back-end system (typically SQL with a visualization application like Lookr, Tableau, Power BI etc.) for collecting user information, 2) a payment processing system (Stripe has become the dominant player in this space for its customizability), and 3) an accounting system (QBO, NetSuite, etc.). Getting the information to flow properly from these systems to recognize revenue on an accrual basis can be a difficult challenge that requires an understanding of all three of those systems. A common mistake we see is the processing of ‘net stripe deposits’ as monthly revenue, a deeper topic for another post.
Your systems for collecting user and transaction data must be integrated.
What is our GMV and Take Rate?
The health and profitability of marketplace models are dependent primarily on Gross Merchandise Value (‘GMV’)/Gross Services Value (‘GSV’)) and Take Rate (sometimes referred to as ‘rake’ or ‘spread’). GMV/GSV is the gross value of the merchandise or service sold in the marketplace, and the take-rate is the amount that the marketplace collects from that sale, represented as a % of GMV/GSV. Typical take-rates range from 10-30%, with lower take-rates more common among earlier-stage, higher-growth marketplace businesses. Related to the topic above, it is very important that your business is recording revenue and costs on accrual basis (matching the GMV/GSV inflows to the payment outflows within the same month), so that you have an accurate reflection of GMV/GSV growth and take-rate %. Additionally, you should be able to segment GMV/GSV growth and take-rate by market segments and user cohorts. Setting up your accounting system to accurately collect this data is challenging but it can be hugely beneficial to your sales and operations teams in making decisions.
Does my market model generate a working capital surplus or deficit?
This is an incredibly important question to ask if you are a fast-growing marketplace. Do you collect from your customers faster or slower than you pay out the cost of the services/products to your suppliers/vendors? If you currently pay your vendors before you collect from your customers, your growth will be significantly hampered by funding needs. For most businesses, there is a straightforward answer to this question; for others it may not be so simple. This is where accrual accounting is critical for a marketplace business. Recognizing and measuring the balances of amounts due from customers versus amounts due to vendors, and differentiating those amounts from revenues earned and expenses incurred will give your marketplace business clarity around earnings and cash flow.
Does my financial model give me a clear understanding of future growth, profitability, and cash flow?
If you do not currently have a financial model built, consider building one ASAP. Click here to learn more about how we build our models. In addition to understanding your current and future GMV/GSV, take rate and working capital situation, you should have a clear view of future growth, profitability and cash flow. Your model should answer the following questions (these questions are specific to venture-backed, cash-burning marketplaces, which are most common at the early-stage lifecycle):
What key metrics must I grow to bring GMV/GSV to the necessary milestone for my next capital raise? How much do I need to invest in sales & marketing efforts to achieve that growth?
How much cash am I burning per month in the future, and how many more months of runway do I have until I need to raise again?
At what GMV/GSV and take rate am I breaking-even? At what point do I start generating positive cash flow?
Build your financial model to give you the ability to answer these questions, and to be able to constantly inform your forecast with actual financial data from your accounting system.
Do we understand the tax consequences of our marketplace business?
Taxes can be messy for marketplace models. Marketplaces need to deal with unique consequences of income nexus, gross vs. net revenue for gross receipts taxes and 1099 requirements for suppliers, to name a few. Having clean accounting data and a tax-accounting team that has a clear understanding of your marketplace model is important to reduce the risk of future unintended tax-related risks.
A common thread among these questions is that their answers require a solid foundation of accounting systems, structure and process. At Ballast we have extensive experience owning the finance and accounting function of marketplace models; our clients sleep sound knowing that they can rely upon us to supply the answers to these questions and more to help them make decisions for their business. If you need help with the accounting and finance function within your marketplace business, contact us!
