Finance

Without good financial results as measured by free cash flow, a company is by definition unsuccessful. But short-term results are not the only measure of success or failure. Well-run companies plan for the future, choosing specific investments to execute their chosen strategy while rejecting non-core expenses. And detailed financial oversight is important to ensure that a company can afford to grow, that it has sufficient cash to fund growth under its financial model.

Performance Management

The board has responsibility for the whole company, not just for revenue, or the balance sheet, or the dividend, or the burn rate, or any other item whether big or small.

To give the CEO useful guidance, the board has to have a handle on how the entire business functions — every step on the path from taking capital from investors to the CEO’s allocations of capital to the eventual production of free cash flow. I call this enterprise performance management because it goes deeper than just the financial statements; it involves not only how the business actually runs, but also how it is managed and how it is measured. Consistently taking the enterprise-wide picture is the only way to avoid making the kinds of errors they use in business school case studies, like losing money in unit economics and trying to make it up in volume. Less flippantly, it’s certainly possible to chase revenue at the expense of profitability or days of AR outstanding. There’s no trade-off that is per se wrong other than one that is unintended.

Enterprise performance management isn’t just about making plans: it starts with understanding how the business actually works – which elements drive others in what relationship – and requires building the oversight tools to actively surveil each part of the business as your plans are set in motion so that the team can affirmatively intervene to manage the overall performance in pursuit of the strategic plan. As time passes and plans are turned into budgets to keep the company on plan, you would prefer that your team not have to guess about what to fix. They might not know exactly *how* they’re going to get from A to B, but there’s no reason they can’t start with a roadmap the company has built reflecting how the business runs.

Planning for Growth

Growth. Almost everyone wants to grow bigger, with more sales, more turns of inventory or units, more market share, more profits. But getting from here to there is always more complicated than it looks. For one, many smaller companies operate almost without being conscious of a specific competitor – they see results from the market but don’t ascribe them to a known actor moving against them. Most bigger companies have learned, through painful experience, that the market is a dynamic place.

Growth tactics will be met with responses by competitors – whether they know what you are doing or not. They will see changes in the market and respond, no matter whether that is part of your plan or not.

Strategy, however, is how you plan for growth while taking the competition into consideration. Choosing a strategy implies that you’ve evaluated the SWOT not just of your own company but also of primary competitors (they’re the “T,” but they have a different SWOT than you do). To plan for growth, you have to understand how your company generates free cash flow (see performance management above and financial analysis below). You use that information and an understanding of your competitors to search for a strategy that plays to your strengths and into their weaknesses. The best growth plans are those where you could tell your competitors exactly what you are doing and they would be either unable or unwilling to copy you. That’s the road to a sustainable competitive advantage.

Financial Analysis

Financial analysis is another board function that often begins and ends with financial statements. But looking backwards 30 or worse 90 days is a poor representation of the present, let alone the future.

Cutting-edge financial analysis is properly tied to enterprise performance management, where the entire business is the subject of the analysis, from the nature and amount of capacity provided by investments of capital to the productivity of management in using that capacity to generate revenue and gross income to the efficiency of management in operating the business to yield free cash flow.

Comprehensive financial analysis uses a detailed view of the present to prepare for the future. Understanding how the business actually reacts when different pressures, forces, and changes affect it is the starting point for planning for the future that will happen instead of just the future that’s predicted.

Different businesses use this information differently based on their goals; it’s not a single path to greatness for many reasons. Most traditional small or medium businesses will be looking for growth while ensuing that they don’t put themselves out of business by foolhardy actions. Others will be more mature and looking for GDP-sized improvements in the single digit range. And typical venture-backed businesses, or those that follow a classic model, will be aiming to maximize certain factors based on their strategic plan. It might be revenue, it might be users, it might be market share; the point is to connect the inputs, the operations, and the outputs so that the business is managed rather than just having managers.