Beyond the Balance Sheet: How Finance Fuels Business Growth

May 2, 2024

For some business leaders, finance is seen as purely functional, even a necessary but perhaps boring and tedious necessity. When you dig a little deeper, you find finance is more than numbers and spreadsheets. Finance is the fuel that powers business growth. From managing cash flow to understanding the broader economic landscape, finance touches every aspect of a business and directly impacts its ability to thrive. Like any part of your business, the better you understand some of the nuances of finance, the better you can integrate financial literacy into your organization.

Cash Is King

One of the fundamental tenets of business finance is that cash is king. Managing cash effectively is essential for paying bills, growing the business, and ensuring long-term prosperity. This means minimizing debt, generating consistent revenue, and making sure that every dollar spent contributes to future growth. It’s a simple concept, but it’s often neglected in favor of chasing short-term profits or focusing solely on sales numbers.

• Establish a Cash Flow Forecast: Regularly monitor and project your cash inflows and outflows over the coming months. This will help you anticipate potential shortfalls and plan accordingly, ensuring you maintain sufficient liquidity to cover operational expenses.
• Optimize Receivables and Payables: To speed up the collection of accounts receivable, consider offering discounts for early payments or using digital invoicing to speed up processing times. On the payables side, negotiate longer payment terms with vendors to retain cash longer and avoid early payment penalties.
• Prioritize Expenses and Investments: Review your expenses regularly to identify unnecessary or non-essential costs that can be cut without impacting core operations. Prioritize investments that generate a high return and support your business’s growth strategy. If you don’t have a growth strategy – well, that’s job one.

Aligning Finance with Performance

Aligning financial performance with overall business goals requires looking beyond top-line revenue or margin figures. To truly understand how finance impacts the business, you have to dig into the details and hold teams accountable for their contributions to the bottom line. Incentives should be structured around generating revenue, profitability, and the ability to generate cash.

For instance, instead of rewarding sales teams solely on the number of deals closed, they should be incentivized based on how much revenue those deals contributed to the company’s EBITDA. This creates a culture of financial accountability that encourages teams to focus on profitable sales rather than just selling for the sake of selling.

For most businesses, this is a fundamental shift. Sales reps are used to a quota of activities—calls made, pitches or meetings held, deals closed. This leads to an end-of-month frenzy to just make another sale. Those sales won’t help you if they lose money.

Incorporating Cash Flow into the Organization’s DNA

To embed a focus on cash flow into the organization’s DNA, it needs to be integrated into everyday decision-making. This can be challenging, particularly in startups where founders are often more excited about the idea or the market opportunity than the financial details. However, by simplifying the approach to finance and making cash flow a key metric for all teams, businesses can ensure that every decision contributes positively to the company’s growth.

Break down complex financial concepts into basic, digestible metrics aligning with your business’s goals. Implement straightforward financial dashboards that provide a real-time snapshot of key metrics like cash flow, revenue, and expenses. Regularly share these dashboards with your team to encourage transparency and understanding. Non-finance staff – including executives! – can be educated through workshops or training sessions on the fundamentals of cash flow management, emphasizing how their roles directly impact the company’s financial health. Finally, establish simple, consistent budgeting and financial reporting processes so every team member knows what to expect and how they can contribute to the company’s financial success.

If you’re thinking, “Wow, my organization doesn’t really function like that,” you’re not alone. Ideas like transparency, understanding, and shared responsibility are largely cultural. Like we said, finance is more than numbers.

Forecasting and Planning for the Future

Financial modeling is critical for understanding the drivers that impact your business, and building those into your financial model allows for more accurate forecasting. This includes macroeconomic factors like inflation and interest rates and internal drivers like sales performance and production efficiency. Generally, macroeconomic factors are things you have no or little control over but that can impact your financial health. Internal drivers are those you can leverage. Both are important to understand.

By developing a forward-looking cash flow model, you can anticipate cash flow over a 15 to 20-week horizon. This enables you to make more informed decisions and measure performance against key drivers. Regularly reviewing these forecasts helps you stay aligned and agile against changing market conditions.

Again, we’re talking about your goals, so it’s important that you have some and know them. Many businesses—even enterprise organizations—are surprisingly seat-of-their-pants about their direction. Having structured goals broken down into yearly, quarterly, monthly, and weekly milestones helps you manage every facet of your business. It makes your financial forecasting much more tangible and meaningful.

Accountability and Team Alignment

Financial accountability extends beyond the finance team to every level of the organization. Regular performance meetings where each team reviews their results against financial targets create a sense of ownership and encourage everyone to work toward the same goals. Individual and team goals should be aligned with your financial objectives, ensuring that every decision is made with the bottom line in mind.

Accountability meetings also help create that transparent culture where successes are celebrated and challenges are discussed openly. This keeps everyone focused on achieving the company’s financial goals and reinforces the importance of financial literacy.

Better With A CFO

Your CFO or fractional CFO helps put all this together, translating financial data into actionable insights and making them instrumental for strategic decision-making. Being more financially literate doesn’t just mean knowing how the money works – it means knowing who can make the money work. The CFO can help make comprehensive financial models and cash flow forecasts that align with your long-term vision – and they are instrumental in helping to create that vision. Whether a startup or an established corporation, a fractional CFO can tailor financial strategies prioritizing cash flow and profitability, identify and manage risks, optimize resource allocation, and help create a culture of financial accountability that empowers the entire organization to operate efficiently and effectively.

Finance is far more than a collection of numbers on a balance sheet. It drives business growth to manage resources effectively, make informed decisions, and navigate economic and business realities. By integrating finance into every aspect of the business, you can create a culture of financial accountability and ensure long-term success. Look to the CFO to help drive this vision and the actions needed to achieve it.