Somewhere in the universe, there is a field. In the middle of the field, there are three houses.
These houses have been, uncharacteristically, built by pigs with variable levels of long-term strategic planning. While the pigs are hard-working, having each built their houses all on their own, not all of them have optimized for one key factor: next to their houses there is a forest, and in this forest resides a hungry wolf.
You know how the rest of the story goes.
The Big, Bad Wolf comes out and blows down the houses of the pigs who optimized for the short-term, building their houses quickly out of straw and sticks. The one pig who survived was able to do so because he built his house of bricks. It was harder to do, and it required more thinking and resources—but it paid off.
When it comes to finance, most founders have a lot in common with the two pigs that meet an untimely end at the fate of the wolf.
Often, when I meet founders, they say things like:
I’m not sure what our gross margin is
I have no idea how much we’re spending on payroll next month, or quarter
I don’t know how many new people we could hire if we made $1M more this year
And so on.
While some founders have better insight into their company’s finances than others, I find it’s exceedingly rare that—without some additional help—you already have all of the leverage you could have to make decisions about your business. And that’s because this stuff is complicated. It’s hard to understand your company’s finances.
In the beginning, it’s just you. Then you hire a couple of people. And a few more. All of this can be run out of a simple Excel spreadsheet—you can open that sheet and understand within 30 minutes how your finances are looking.
But, as you scale, it’s not so easy anymore.
There are more people, more expenses, more departments. Soon, each department has their own spreadsheet, and it gets harder to keep track of everything. You hire a CFO at some point to help you out, but even if they’re competent, they still have a lot to keep track of—and are often in a reactive, rather than a proactive, state.
All of a sudden you’re being asked to make a lot of decisions about the company and its direction. And the consequences get higher for making the wrong decision. Now, in a perfect world, you’d be able to understand the financial impact of every decision you make.
Why aren’t you getting all the information you need?
Why can’t you see what would happen:
If you moved a marketing campaign 3 months back
If you hired a couple new engineers
If introducing a new pricing tier or product line would significantly impact revenue
You should have these answers. Instead, your finance team is busy chasing down receipts and filling invoices. The good news is, there’s a way to fix that.
The 5 phases of strategic finance
A useful note: I’m the guy people call to help them figure out their mess of Excel spreadsheets and implement strategic finance.
I started by working at consultancy firms, where I realized most teams move way too slow and don’t get much done. Then I worked in-house at a number of companies, where I realized most founders want strategic finance—but have a hard time getting out of a short-sighted, reactive state. Now, I help companies save millions of dollars by getting clear insight into their finances and thinking for the long-term.
When people come to me, they want to be strategic with their finance. They want to make data-driven decisions. But they don’t really have a clear path to getting there. Fortunately, there is a path (that anyone can achieve).
Unlocking strategic finance happens in 5 phases:
Good data
Good models
Strategy-based budgeting
Good reporting
Data-focused culture
Here’s why each one is important.
(Caveat: This essay is the ‘Why’ for strategic finance. If you want to learn how to do the things I’m talking about, I just launched a free email course that dives into specific stories and tactics for each of these things. You can sign up for it here, or keep reading this essay and decide later if you’re interested.)
1. Good data
A couple years back, I worked with a Fortune 500 company. The goal? Give leaders at the company the ability to make pricing decisions backed by data that aligned with their strategy—as opposed to taking shots in the dark.
There was just one problem: the company didn’t know which of their products were profitable.
You won’t get anywhere with strategic finance if you don’t start with good data. And if it’s hard to tell which of your products are profitable, you won’t be able to make it any further—it’s a house with a weak foundation.
2. Good models
So you’ve got your data in order. Great. Now, if you can get your modeling right, you’re 95% of the way to unlocking strategic finance. Naturally, that’s not as easy as it sounds.
Bad modeling (which is what ~90% of businesses do) is one or more of the following:
Overly abstract
Overly detailed
Disconnected from the reality of your business
Good modeling finds the right level of abstraction—it shows you the data you need to make good decisions. It’s also dynamic and flexible: if things change in your business (or you want to see how certain decisions would impact outcomes), good models are adaptable.
3. Strategy-based budgeting
Budgeting, and the approach CFOs take to it, often comes in a couple of buckets: either 1) you deeply micromanage expenses and are ruthlessly frugal, 2) you give employees autonomy to make their own decisions, or 3) you implement strategy-based budgeting.
Whereas the two former options—which are what most CFOs do—are based on intuition and general philosophy, strategy-based budgeting means making decisions about expenses based on the goals and constraints of your business.
Strategy-based budgeting means setting clear goals and limitations, like:
We want to get to X% gross margin this year on Y product.
We can’t spend more than $X this year because Y.
We’re launching a new product this year—so we should anticipate $X expenses.
Then, you figure out how to budget in a way that helps you achieve your goals.
Too often, budgeting happens in a world totally disconnected from the financial state and goals of the business—caring about these details has enabled me to find millions in unnecessary spend with clients over the years.
4. Good reporting & communication
Imagine the Biblical story of the Tower of Babel: a large group of people, all trying to build the same thing, suddenly start speaking different languages—and they lose their capacity to communicate with each other. The project fails.
It’s the same in business. As your company grows, things get messy. Different departments have different ways of calculating things, numbers get jumbled, and nobody’s clearly communicating what is actually going on. People are using the same words to refer to different things—and different words to refer to the same thing. This makes it very hard to get a clear picture of your business’ finances.
Worse yet, finance-oriented people often use jargon that ‘normal people’ don’t understand—which makes it hard to communicate across departments. (Your own CFO has probably said things to you that are hard to make sense of.)
Good strategic finance means setting company-wide standards for reporting and communication, so everyone (not just you) knows what’s going on—and can make decisions accordingly.
5. Data-focused culture
Succeeding with strategic finance in the long-run means you need a culture that cares about good, clean, organized data. It’s not enough for you (as a founder or CEO) to care about it—every single person on the team needs to care about it, from your CFO to your finance team to every other department that records data in any way.
Once you have clean and organized information, the next step is to make sure your culture is one where decisions are made based on data (and not intuitions or whims). This is roughly as hard as it is to get good data in the first place—people sometimes have an aversion to relying on the data over their own opinions. Implement this well, though, and you’ll be making smarter, more consistent decisions across your entire organization.
Good data culture doesn’t happen immediately. It’s a muscle that gets strengthened over time. And it’ll likely require some instruction, and reinforcement, from you. Nail it, and you’re putting your company in a good place for the long run.
How do you implement strategic finance?
This essay covered the Why, and gave you a quick outline for what you need to do if you want to implement strategic finance. It sounds pretty, of course, but implementing strategic finance is a lot harder said than done—you need specific tactics and frameworks to make it work.
I’ve spent decades of my life doing this stuff, helping clients like the WWE and the Elton John AIDS Foundation save millions by getting a clearer view of their finances. If you want to learn more boots-on-the-ground tactics on how I actually think about implementing all of this, sign up for my free email course. It’s just five emails, and it’ll give you a foundation to start taking control of finance at your company.
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