6 Key Tips to Best Leverage Your Numbers
One area where many startups could use a little help is that of financial planning and analysis (FP&A), which involves thinking very critically about an organization's numbers and what they truly mean. For startups who don't already have a CFO or Head of Finance in place, this is yet another valuable function that a finance consultant can support. Either way, there are some basic financial planning and analysis guidelines that all founders should be aware of as they begin setting the framework for long-term success.
1. Look Both Short- and Long-Term
Perhaps one of the biggest mistakes startups tend to make is that of focusing too much on their short-term needs, whether that’s the next fire to put out, new role to fill, or client request. And this is an easy mistake to make for startups because you are moving so quick and constantly seeking more ways to grow the top line. But the most urgent thing is not always the most important, meaning your priorities are not aligned. Sometimes it’s OK to just let a fire burn. Or taking on a client for revenue, even if it requires a deviation from the product plan, might not support your ultimate goal to raise capital. Ultimately, a lack of prioritization will never end well.
2. See Beyond Vanity Metrics
Certain metrics, from dollars raised to the square foot of the new office space, are essentially "vanity metrics." They make you feel great to share with the press or other founders, or look good on paper, but they don’t drive the business. By looking beyond vanity metrics, focusing on the real drivers of the business, and making decisions that will result in better long-term success, founders can set their businesses up for the future.
For example, it's not enough to just say that you’ve been able to generate $1M in new sales, but it costs you $1.00 for every $0.50 in sales generated, then that growth in revenue is not very meaningful. Or your site has been able to attract 5MM new users (amazing!), but you spend $250k on digital marketing, their engagement metrics are low, and you have no path to monetizing them..
By looking beyond vanity metrics and truly analyzing every influencing factor, you'll be able to paint a more accurate image of your organization. And having a seasoned finance person is great here because he or she will analyze the entire business critically.
3. Structuring Your Financials Correctly
In addition to looking beyond vanity metrics, startups should also focus a lot of their time and effort on getting their financials structured in a way that is accurately reflecting the underlying business. This means making sure your reporting isn't only done correctly and consistently, but that it actually tells you something meaningful about your business. Otherwise, you just have useless numbers that aren't helping to inform any of the decisions you're making or trusting others to make.
4. Roadmaps Make for Better Decisions
No one likes driving blind and the same is equally true when you are running a business. Knowing how your business is currently operating is important, but having an idea of how your financial operations look 6mos, 12mos and 18mos out allows you to make better decisions and make adjustments if need be. A finance person can help you build forecasts for future periods to give you more clarity for what to come and better budget your money. After all, cash is king and having an idea of how that cash is to be allocated is key to ensuring your business is still around in one year’s time.
5. Love the Business, Not the Idea
As many founders move through the process of taking an idea, finding a team, and building the product, their attachment to the idea can make it difficult to be as analytical and decisive as the role requires. But by simply making an effort to ask "what is this going to do for the business?" before making a decision, you'll be in better shape. After all, a "cool idea" is nothing more than a cool idea until you can actually deliver growth, profits, and the ROI your investors demand.
By identifying and understanding the unit economics of different decisions, you can say you have thought about and considered something analytically. Of course, this can be a challenge for many founders to do because founders inherently tend to be more emotional and passionate about their companies and their ideas. They're more likely to overlook the logic of a decision and go with their gut, even when their gut instinct could be a bad decision for the company. This is why learning to think analytically and critically is so important. And if you can't do that, then you may be better off consulting with a CFO.
6. Not a Cost Center
Often times, startups fail to see a finance hire as a possible revenue driver because they're incredibly focused on burn, treat it purely as a back office role, or simply don’t prioritize the value the person can bring. In this sense, they're thinking too closely at a cost standpoint and failing to see a finance team as an investment. This is understandable, but it's a mistake that should be avoided in situations where you have need to understand the company-wide impact of different business decisions. Specifically, finance experts focus on supporting your business and its long-term revenue by thinking critically and helping founders make the right decisions based on the numbers. They have the bird eye’s view of the entire business so they can help you think through the economic impacts of current and future decisions, and most importantly, ensure you’re allocating cash and resources most effectively.
Analytic thinking and financial acumen is key to any startup's short- and long-term success. By learning to think analytically or work with a finance expert who can do this on your behalf, founders can set their businesses up for a better future and well-informed decisions.