Everyone wants their company to be wildly successful. When most businesses go through very rapid growth, they often find that the founder’s inspiration was mostly “being in the right place at the right time with the right stuff”. A few companies, like Apple under Steve Jobs, were visionaries, creating products and telling the marketplace, “You might not have seen this before, but trust me, you are going to love it,” and the market did.
Creating a successful business has many challenges, but successful businesses have a lot in common. From start-ups to large corporations, all businesses benefit from some level of proactive fiscal management.
Startups have great challenges. These include building prototypes, proof of concept, trial marketing, and beta testing. But of course, the real challenge is funding.
Very few startups can self-fund. Unless they have a network of qualified investors willing to put up millions, most will need seed money. Today this can come in many versions, including grants, venture capitalists, and internet based crowd funding. A few find fee-based projects after proof of concept, but these companies are the exception, not the rule.
Many companies try to reduce overhead by having a “bare-bones” team. However, these teams are quickly overwhelmed when they start adding marketing, sales, production, inventory, labor, accounting, and logistics. Beyond this, the company itself must have a vision of its future, for, as Proverbs so clearly states, “without a vision, the people perish”. The company’s vision is truly a double-edged sword, with several implications and consequences.
Few companies will flourish if everyone on the teams does not have a passion for the vision. Without passion and vision, quality of work, client experience, and company culture will suffer. The company’s clients and customers can easily sense these strains, even if only subliminally. Likewise, funding becomes a challenge, as the money sources must also “buy into” the vision and its timeliness to the market.
Once the funding is at hand (and few startups actually receive funding), a new challenge emerges. This challenge has a name, and the name is Exit Strategy. Most investors are looking to see a significant rate of return over a few years; generally, three to five of them. Significant typically means something between 3X and 10X of their initial investment. There are limited ways to get that kind of return in that short a period of time. Either the company does an IPO, or the company is acquired by a larger organization. Think of LinkedIn being acquired by Microsoft for $26 billion.
Some business founders believe that the company can succeed sufficiently to create those rates of returns through dividends to the shareholders. It is a noble thought, but the reality is that if the dividends can create 3X in three years, the IPO or Merger/Acquisition would yield 10X. This is where the fundamental conflict on the company’s vision takes place.
The business owner believes in the vision, enough to stake their life, hope, and future on it. The investors believe in the vision enough to stake their money, patience, and control of the company on the rate of return. Based on the investor, and business savvy and legal representation of the business founder, most investments result in the investors having final control of the future.
Few investors put all of the funding in at the beginning; they are looking for benchmarks of performance for continued financial support. If benchmarks are not met in reasonable periods of time for the various types of venture capital organizations, the plug is pulled. The business founder find themselves without a company.
Companies That Have Made It Past Survival:
Few businesses have the explosive growth that allow them to go public or become acquired. Whether they are privately held mega-corporations such as Cargill, or the family owned farm, plumbers shop, hardware store, or general contractor, the largest percentage of companies are owned by a limited number of individuals. At some point, all were “startups”, but by the time they have made through the first five to seven years, some reasonable level of revenue has been reached to support and sustain their efforts.
By this time the “vision” of the company is deeply engrained; so much so that it has become a part of the culture rather than a tag line on the website. Challenges are still faced, whether they come from regulatory law, a shift the market demand, new competition, or the need to move to higher levels of technology. Regardless, the desire to become “wildly successful” has not departed. For most it may be reflected in defining a succession plan, or selling the company and retiring. The impact of money on the company has never gone away as the company got more mature. The level of sophistication to improve financial stability, increasing profitability, and raising the value of the company has grown. In fact, it has grown significantly.
The unifying key to reaching “the dream” of any business, be it a fast growth tech startup or a more mature, established company, is fiscal management. Everyone believes in fiscal management. The question is, how well do business owners, their management team, and other strategic partners such as their accountants and their bank, truly understand fiscal management, and how to bring about a prosperous future.
If you ask anyone in the private sector to give you the definition of fiscal management, you will get a range of answers. These might include:
- Keep revenues higher than expenses
- Reduce costs and expenses to improve profitability
- Have liquidity in capital reserves
- Monitor performance, especially budgets
- Maintain good Key Performance Indicators (KPIs, name your top five favorites)
- Be smart in your leveraging of debt
- Be free of debt
- Watch every penny
- Invest in the future (along with, “whatever that means…”)
- And many more…
All of these contain elements of the truth, and most of them can increase profitability, but simply increasing profits alone does not always significantly raise valuation. A division president of Texas Instruments told me the truth about raising valuation in 1983 when the company was featured in both Good to Great and Built to Last, the top selling business non-fiction books of the decade.
“I can tell you the fastest way to increase profitability. Reduce fixed costs. Your largest fixed costs are employees. Shrink the size of your staff and you will boost profits, but only for the short term. In a little while, the relationships with the rest of your trading partners, such as distributors, suppliers, customers, and the marketplace at large, will deteriorate. I suppose if you are a senior executive in a publicly traded company and your employment incentives are tied to raise share value quarter to quarter, you might do that, but at Texas Instruments, we believe in lifetime relationships. If we do a great job in creating value for what we trade, the share values will take care of themselves.”
How true was his statement? Over the next ten years that division in Texas Instruments primary competitors at the time were:
- Wang Corporation: out of business
- Hewlett Packard: left that segment of the market
- Digital Equipment Corporation: out of business
- Control Data Corporation: out of business
- IBM: completely out of those segments of the market
How true was the concept of Good to Great? Texas Instrument’s top management understood fiscal management in a way far beyond “conventional wisdom”.
Company founders are entrepreneurs. Few of them started their companies after graduating with an MBA in Finance, and even those that did hardly understood real fiscal management. Ratios, arbitrage, leveraging debt, KPIs, perhaps; but true fiscal management?
Owners of companies are in a challenging position. They understand what has brought their businesses to their current performance. They are constantly worrying about the future. They know this is tied to money. They have almost no one they can talk to about the company’s finances…
Business owners cannot talk to employees about the company’s financial performance. If times are good, employees will wonder why their wages are so “low”. The best may start looking for other jobs. If times are bad, the best and the worst will start looking for other jobs. Most will not talk to their significant others; “Why am I driving a Mini instead of a Jaguar?” They will not talk to other business owners; egos can be such fragile things.
Whom can they trust to talk to about their money and the company’s financial performance? Certainly not their attorney or solicitor. Traditionally the bank has not been a friendly place; they keep turning down loan requests. At last, the light dawns on them: “I can talk to my accountant! They see my money every year!”
Certainly I do not want to appear disrespectful, but, most accountants specialize in Tax, Audit, and Compliance. Tax, Audit, and Compliance are very important, but they are NOT fiscal management. Unfortunately, it is the equivalent of the deaf and the dumb asking the blind to lead them. Why would I be so harsh on accountancy?
Though good Chartered Accountants are quite talented in assessing Key Performance Indicators, evaluating the Profit and Loss Statement, and reading the Balance Sheet, all of these reports are only telling what is today’s current state of the business. Essentially, it is looking at the past to see where we are today. This is NOT fiscal management.
What do I believe fiscal management truly is?
Fiscal Management is the ability to know where a company is today, and from relevant data and information. From this build a prosperous and profitable future through effective investment into tomorrow’s activities. Do this within reasonable risk limits.
True fiscal management is about building forecasts, scenarios, and business strategies that create the future, and from this, managing the company towards them.
This is more challenging than it appears at first look. Consider the following:
- The Profit and Loss Report does NOT tell whether a company is making or losing money
- The Balance Sheet has cash expenditures that are neither obvious or instinctive to find
- Most forecasts do not show true liquidity, as they must account for future budgets, seasonality, aging receivables, aging payables, the cash disbursements hidden in the Balance Sheet, while removing unique items such as depreciation and certain types of write-offs.
How many business owners understand this, and how many accountants or bankers take the time to explain the peculiar vocabulary that makes up accountancy? The glazed look in a business owner’s eyes is why, when asked, “How is the company doing” they reply, “There’s money in the checkbook”.
What are the keys to helping business owners, particularly SME business owners, to become effective in fiscal management? How can we help them become proactive, (not reactive) in managing their companies?
Training a Business Owner on Fiscal Management:
There are 10 key steps to helping business owners systematically master the art of proactively managing the assets and resources of their companies.
- Teach them the vocabulary.
What does the P&L really show? How do you read a balance sheet? What are the top five KPIs that have relevance to their company? How should they interpret them? What do the Accounts Receivable and Accounts Payable shape up?
- Provide them their reports monthly.
Talk with them on what the reports are showing, and review the trends month-to-month.
- Help them build a budget.
Use smart tools such as ProfitSee CFO or MBA to account for seasonality, trending, and historical analytics to create budgets that can monitor performance in real time. Help them discover the monthly anomalies that show up in the reports, and talk about what caused them, and how to fix them.
- Run a Three-way Cash Flow Forecast to discuss liquidity.
From this you can establish cash reserves that can be used to level out cash flow, invest in growth, and a bit of money for innovation.
- Create strategic business strategies.
Build scenarios for new opportunity that can show the cash flow and rates of return as they modify known values, assumptions of performance, and time lines.
- Forecast your scenarios.
Integrate the strategic business scenarios into the three-way cash flow forecast to evaluate capital needs and the impact on KPIs.
- Compare internal performances.
Benchmark the company’s profit centers against one another. Assess the weaker to determine how to improve performance.
- Review financing options.
Review with the company’s bank how fiscal management takes place. Determine if bank financing can improve the financial performance of the business.
- Industry benchmarking.
Benchmark the company against other companies in its market sector. Run a competitive analysis/competitive advantage assessment. Determine future changes that improve the financial strength of the business.
- Build a future-driven business plan.
Build a business plan that incorporates all the previous steps to create the next fiscal year’s strategy. Determine the top three or four metrics for each quarter. Track the company’s performance against these metrics.
Whether the company is a startup or an established organization, these are the components to creating a thriving, prosperous business that will exceed everyone’s expectations!