According to Andrew Stern, the host of the “1 Question” podcast, most founders and entrepreneurs know that the strategic finance function is important, and “they’re willing to change how they operate, but a lot of them just don’t know what to do, they don’t know how to work with bringing more insights into their business.”
Andrew recently interviewed our CEO and Founder, Ariel Menche, to discuss how other founders and CEOs can better understand finance in business operations.
“I like to say we help founders or CEOs become capable drivers in the car. They not only have a destination that they're driving to, but they have the maps and the skills to be able to drive that car in that way.
“FP&A – or getting a good strategic finance function – is giving you that map so you can make the decision – Do I go down the highway or do I take that first exit and go by the streets? Without the data, without that information available for the CEO, it's very difficult to make those decisions without kind of sticking your finger in the wind and just hoping for the best... The board doesn’t want them driving blind…So we like to say our dream outcome for this CEO is to lead confidently with available, accurate and actionable information.”
You Can’t Just Build a Financial Model for a Company
Ariel explains that you can’t just build a financial model for a company. You have to understand the business strategy. Based off what that strategy is, you’re going to understand what KPIs you need to see to grow your company. Not every company is the same. A transaction-based e-commerce company should not necessarily be measuring churn or ARR because they don’t have recurring revenue, they have transactional revenue.
Building a model isn’t a one-size-fits-all process. Different companies need different kinds of models at different stages of their evolution. And sometimes, companies invest in models at the wrong time for the wrong reasons. They ask for information that isn’t really relevant to what the company is doing. Some companies even use models to justify procrastination by the founder, to put off making important decisions.
“Investing in a model that is going to map out your go-to-market motion based off of how you’re feeling today – and if you’re a founder you understand what I’m saying – you shouldn’t be investing your money into that…That should be a maybe back-of-the-napkin calculation that you do just to understand what it is and just test the waters and see if that go to market works. There is a valley between when you get that original seed funding or Series A funding, before your product market fit, where investing in a true model is really not the best use of your time or funds…Don’t overcomplicate what you’re doing.”
The Importance of Available, Accurate and Actionable Information
Andrew asked Ariel to give an example of a client that found incredible results through a better understanding of their data.
“There was a company that we were working with… they were making some assumptions around gross margins. They didn’t want to have finance as a function. They were like, ‘Listen, I have an accounting person, I have a data team, we understand our data, and we’ll trust our data team for all this information.’
The problem was that they didn’t have anyone with a strategic mindset looking at any of the financials or managing what their reports looked like. They were looking at their gross margin and concluding that they were killing it!”
The way this client was defining their gross margins excluded a lot of cost of delivery for their implementations. Raftel Strategy went in and looked at their chart of accounts, and redefined how they were looking at their costs around the delivery of their products.
As a result, the client realized that they were actually losing money every time they sold their service to specific client types. They thought they were being very profitable with these services, but they were basically burning up cash with every sale to these clients.
In the light of this new understanding, they stopped selling to these client types and prioritized other segments, and from that point on,” they really were killing it.”
It all came down to understanding strategy, applying it to accounting and the chart of accounts, getting their data team to understand it, getting the right players into the room to understand what the goals were, and then being able to use that data to make decisions. (We talk about this in our “Data Piping” blog post.)
There’s plenty more to listen to in the “1 Question” podcast. You can hear the whole episode here.
If you’re interested in seeing what a good Working Capital Model looks like, you can download a template for free here.
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