Building for Scale: The No-Fail Financial FoundationMay 24, 2016
Anyone who has gone through a process to build a home from the ground up knows that extensive manpower and material are required to establish a solid foundation. We don’t question the process because we know that in the absence of a solid foundation, nothing else matters. In the same way, and no less important, your business requires a certain financial foundation that is built for scale.
Whether you realize or not, you are writing an investable story about your business with each passing day. You are making decisions that will ultimately impact your ability to attract investors, raise capital, scale your business and grow. And every day, your financial foundation is playing into that story, either hindering or equipping you to move your company in the right direction. Just as shortcuts to the home building process can result in a structural nightmare and unnecessary spend, your financial foundation requires time, intentionality and a consistent approach with all components working in sync.
Where does this approach begin? The good news is that regardless of business model, regardless of business structure (e.g. for profit, not-for-profit), regardless of targeted consumers across varying end markets, a solid financial foundation shares a common denominator and is reflective of three primary components.
The Quantitative Roadmap to Support Your Qualitative Vision
Most of us are pretty good at laying out the qualitative vision for our company – knowing where we want to go 12, 36, even 60 months from now and identifying the key milestones of achievement along the way. What we aren’t quite as good at, however, is putting together the quantitative roadmap that supports that qualitative vision. What does my revenue model look like over time? What are the additional costs I need to incur to drive sales to that optimal state? Will I need to seek outside capital to invest in these growth expenses, or is my business going to be providing the free cash flow I need?
Any solid financial foundation that is built for scale must have a meaningful financial model in place as a starting point. This financial model serves not only as your gameplan for the year, but also provides a tool to operate against with its alignment to the current reality of your business. Not sure where to start in building that financial plan for the year? No worries, start with the basics.
Data – Timely, Accurate & Relevant
Now that you’ve got your model in place, it is time to make sure you’ve got the data you need that supports your inherent assumptions. Where does this data come from? Think back to your Accounting 101 days.
A solid accounting function is defined as having the people, systems, and processes in place to deliver data that is timely, accurate and relevant. Data needs to be timely in order to be relevant, and data that is not 100% accurate is 100% inaccurate. That desired output of data can only be achieved by making sure your people, systems, and processes are in place and working in efficient alignment.
Entrepreneurs are ever eager to think through the next strategic phase of business and implement the right strategic finance initiatives to drive business forward. While that drive is vitally important, know that flaws in your accounting foundation will prevent you from making effective progress on the strategic finance front.
With your financial model in working order, and the people, systems, and processes in place giving you data that is timely, accurate and relevant, you are farther along than you realize in building for scale. Pat yourself on the back! What’s left? Reporting; or in our words, making meaningful usage of that data.
It is great to have financial data about your business – lots of it. But what good is it if we’re not making meaningful usage of it? The key conduit that provides the proper link between data of the past and decisions for the tomorrow is the reporting of that data.
Each month you should have a thorough understanding of the results of your business accompanied with the reasons driving those results. Why was revenue off 10% against the budget? What is my cash position today and what is expected to be 30 days from now? Are my profit margins in line with expectations? How does the model I prepared need to be updated, if at all, based on this month’s results?
Meaningful financial reporting should encompass the above thought and then some, ensuring you are making meaning usage of the data you have, and shaping your financial model and investable story along the way.
Take a quick gut check and ask yourself: are you confident that your financial foundation is built to scale? If after an honest look, your business is lacking in any of these areas, let’s just say you might want to rethink that upcoming vacation. (We kid – you deserve it!).
Seriously though, more than 90% of all startups ultimately fail, and of the ones that survive few ever achieve significant scale. Perhaps it’s time we re-define what a solid financial foundation built for scale looks like, and carry the conviction that your financial foundation is as pivotal – if not more – to the success of your business as any product differentiator or prospect list.
Inflammo partners with growing enterprises looking to scale through a smarter back office platform approach combined with wraparound financial consulting solutions.