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Founders, This is How Your Finance Team Increases Your Valuation
A close friend reached out to me after the company she founded failed its second due diligence. The buyer’s reasoning was harsh. “We don’t understand your numbers. And we think you don’t understand them either.”
Ouch.
Frustrated and anxious, she asked me: what does it take?
Only four things, I told her. Do this and I guarantee it won’t happen next time.
Finance was always something that she just got around to. After hearing what I had to say, she started making changes immediately. That led to spectacular results, which I’ll share with you later.
I told her about the four things every great financial department does. I gave her the Key Three objectives that matter to every founder.
This is what I said.
The Four Pillars of Every Great Financial Department
There are four things great financial departments do well.
- Accounting
Maintain timely, accurate financial data that would pass an audit
- Reporting
Easy to find insights and knowledge from your data
- Planning & Analysis
A roadmap to higher valuation, tracking and measuring improvement along the way
- Advice
Practical advice that interprets the above to execute brilliantly and win in the marketplace
Accounting:
Founders struggle with accounting because it is unceasing. There’s always cash to collect, invoices to cut, payroll to make. It’s easy to fall behind and get lost in all of it.
The trick is plugging yourself into that data flow and making it work for you.
This requires people who know what they’re doing to set up the right processes, install technology and improve controls to make sure this data is timely and accurate. You need all three: people, processes and technology. It requires an investment, but one that has a huge payoff. Without good data everything else is useless.
Reporting:
Once you have good data you can do something with it. Reporting is more than just Excel financial statements emailed to you when someone remembers to do it. It is an interactive system providing you insights that are easy to understand, relevant and available when you want them. These systems exist today, in the cloud, at reasonable cost.
Better insights lead to better decisions. Comprehensive financial reports should be available mid-month and reviewed with your team. Every month. There is a rhythm to finance. Attending standing meetings helps you recognize patterns. It sends a message to your team that you are holding them accountable. It provides an opportunity to communicate how the team’s activities drive financial performance.
Planning & Analysis:
If you want your business to have a higher valuation you need a plan to get you there. It won’t happen without it. Would you travel to a new destination without a GPS? Same concept applies here.
Start with a monthly plan and lay out everything: sales forecast, hiring plans, marketing spend, etc. A good financial person will be able to model it for you (there are some great apps to automate this). Develop, track and measure only those things that drive valuation. Discuss this plan in your monthly meeting. Reforecast at least quarterly. Maintain a rolling 12-month forward view.
Advice:
Find a skilled financial resource to help you interpret all the new data, reporting and analytics you are getting. This doesn’t have to be a full-time CFO. A partner, advisor, board member or anyone with financial acumen can help you out. You could also go the fractional route. The point is that this person is there to interpret the other three pillars. They guide you on how to deploy your new financial regime to maximize valuation.
Exceptional advisors present founders with various tradeoffs, providing the pros and cons of recommendations they make. They implement risk management so if a big decision goes sideways, it doesn’t sink the company. Your advisor should make you confident in your decisions, even those that don’t work out. Failure is instructive and a great advisor helps you learn from it.
The Key Three Objectives:
There are only three things that matter to a founder:
- More sales
- More cash
- More profit
Key Three objectives tie directly to increased valuation. They will be tracked and measured rigorously in your new financial system. Any activity not directly contributing to one of these objectives should be discarded. You don’t have the time.
The Outcome:
About three years after our fateful conversation, my friend took me out for a celebratory dinner. She had just closed the sale of her business… at 3X her original valuation and on outstanding terms.
Her financial system equipped her with the knowledge she needed to smartly grow her business. This “finance-avoidant” person was now talking like a CFO. She must have said “EBITDA” about a dozen times that night.
She was as relaxed and happy as I had ever seen her. I asked her a simple question. What’s next?
She paused. She smiled. She gave me a simple answer.
“Whatever I feel like doing next.”