BENEFIT 1 – MINIMIZE ANXIETY

Anxiety in a business is usually associated with fear, worry, and uneasiness about potentially undesirable outcomes. For example, a business that is nine months behind with its financial statements may generate some anxiety in those who are running that business. They might know what the balance in their bank account is today, but they have no idea if they are actually profitable and if they can sustain the business in the future.

I was recently introduced to a business experiencing financial difficulties. It did not surprise me to learn that they had not received accurate or timely financial statements in years. They lacked any way to measure their performance historically other than the cash in their bank account, which is often a false indicator of how the business is doing. They lacked a way to measure their current productivity and success, and they had no clarity on where they were going and how they intended to get there. Anxiety in this business was high. It was not until they gained clarity in their past, present, and future that they could create a plan to turn their business around and return to profitability. Not coincidentally, this clarity, even though it painted a very grim picture, reduced everyone’s anxiety and reinvigorated the entire company as they worked together to save the business.

BENEFIT 2 – IMPROVE TACTICAL DECISION-MAKING

We obtain clarity in the past with timely and accurate monthly financial/managerial reporting. We obtain clarity in the present with weekly dashboard reports and other productivity and cash management tools. Our clarity in the future comes from a combination of short-term cash flow projections, an annual budget, a 5-year plan, and an up-to-date financial model. Knowing that tactical decisions involve the day-to-day functions in a business, here is an example from one of my clients on how we improved our ability to make tactical decisions with clarity.

In our monthly executive team meeting in which we discuss the past, present, and future of the firm, the President shared that one of our largest customers was requesting a new Request for Proposal (RFP) from all of its vendors for some of the services we provide. Included in this request was an entirely new tier of services for which we had never had to provide unbundled pricing. Within 30 minutes we constructed an entire financial model to determine the lowest possible prices we could offer without damaging our margins. This information was powerful, especially when the President realized that her competitors would likely have much higher prices than our minimums. The result – we won the business with prices that increased our margins but still came in at or below our competitors.

BENEFIT 3 – IMPROVE STRATEGIC DECISION-MAKING

In addition to improving tactical decision-making, financial clarity may bring its greatest benefit in terms of driving the strategic direction of a business. Here is just one example:

Another growing company for who uses our CFO services became dissatisfied with the performance of its distribution strategy. Sales growth had been less than stellar, to put it nicely. We began to explore different distribution strategies, desiring to be open to all options and suggestions. Because of our already-existing financial clarity, the process was quite simple – evaluate all of our options and find the distribution strategy that would add the most value to the shareholders. We modeled each option and eventually chose the one with the most promise. Although we are still in the development and implementation phases of this strategic change, we have already received several points of validation that we are moving in the best direction.

Many businesses are founded “on a shoestring”. They grow by reinvesting the earnings of the business. If the owner(s) withdraw the earnings to support a lavish lifestyle, they have put the cart before the horse. Most businesses experience cycles of good times and bad times, growth and retraction. Without accumulating a “war chest,” thebusiness will be unable to survive a downturn. Further, without reinvesting earnings, the company usually will be unable to exploit the opportunities of the good times by financing expansion.

Many of the founders of companies that are now prominent lived modestly, even after their companies became successful. Some examples are Sam Walton, David Packard and Bill Hewlett. These people habitually avoided extravagance because they were focused on building something significant. The financial systems of their organizations are exemplary. They recognized that managing the finances of their organizations was fundamental for survival and growth.

It’s good to enjoy the fruits of your labors – after the harvest. But don’t consume the seeds for next year’s crop.