We live in a capitalist society. We build businesses. For all the adjacent reasons to build a business – inventing the next new thing, changing the world, advancing humankind – a business must make money, create profit, and keep growing (or at least bettering) itself.
For this you must understand the numbers, even if you can’t create or manipulate them.
Get help
The first item on my checklist of a potential client is “What is his background? Is he a techie, a sales guy, an attorney?” I rarely see a financial specialist start a technology company as its CEO. This could be the technology niche I occupy, or it could be that financial folks like their supporting roles and don’t want to be the head honcho.
One lucky fact is that there are a great number of trained Certified Public Accountants (CPAs) in the world, as well as Controllers and Chief Financial Officers (CFOs). And bookkeepers. So it is possible for you, as a CEO, to have excellent support in this area.
If you are an early stage start-up CEO, hire a CPA or CFO with start-up experience, as well as a deep background in your industry. Keep reaching into your network until you find this person. Experience in large corporate accounting work does not prepare anyone for the roller coaster cash management required for a start up.
One client’s CFO was visited by one of the company’s Advisors, a senior executive with more than 30 years’ experience building divisions within a Fortune 50 financial services company. He was visiting to help, as the company was struggling. The Advisor asked, “Show me your cash planning analysis.” The CFO laughed. “That’s easy. When the cash comes in, I look at what is most urgent to pay, and the cash goes out.” Both were right – cash planning is important, and startups often don’t have enough cash to plan around.
The struggles faced by startups – from capital raising, to matching growth with available resources, to controlling margins and more – can demand an even tighter control and deeper comprehension of how to handle cash, capital and credit than more established companies .
Many years ago, during the “honeymoon period” I establish with each new client (30-60 days under contract to get to know one another), I discovered how badly my new client understood cash management. When she didn’t know the scheduled date that her bank loan would demand a partial repayment – some months away – and had not considered planning for this event, I knew the company was doomed, as her only financial support was her bookkeeper. Since then I have always reviewed the books of a prospective client before signing on to consult.
Other financial savvy requires understanding how much capital is required to begin a new venture. Once I talked a client out of his first idea, showing him that he would spend all his startup capital to launch a venture which would never create wealth, even if it succeeded for the first four years (as it would perish in year 5 from time-to-market strategic issues). His next idea was so large, I had to tell him, “This idea is 10 years ahead of its time, will require $50M to launch, and $30M more to sustain until you know if it can succeed. And by then the way business is done in this industry will have morphed due to new technology, and you may have spent that capital for nothing.” He came back with a much smaller, more immediately deployable idea that we started with the capital he had available.
Get honest with yourself
It is said that the numbers do not lie. Now, we all know the “interpretation” of the numbers can lie. But internally, your numbers should show you the stark reality of what is needed (and when) in cash, credit and capital to move you to each next strategic step. The secret is to work with a CFO you can trust, and to tell yourself the truth. New companies are often killed by the CEO’s denial and optimism around the basic financial truths of his own company.
Get educated
So, if you have a head for numbers, you will know how to find the best finance person to meet your needs. If you understand your product, industry and market, but not how to read your balance sheet and income statement, get educated. There are many tools for this – books, seminars, training. Our own guest blogger, Gene Siciliano, has written such a book for you (McGraw-Hill), and an e-book primer for your administrative assistant http://bit.ly/cxPnkR .
Get a handle on your profit margins
Do not get distracted from your strategic goals of making a profit. Top line revenue is important, but profit (as my father used to say) covers a multitude of sins. Profit gives you flexibility and more options. It allows you to defend and sustain your strategic direction. Many times I have seen a new CEO distract himself from his own declared goals to pursue some intriguing opportunity that is adjacent or afar from his path to profitability.
In this alternative pursuit, the company’s attention and resources are pulled away from its path. This lack of discipline is more dangerous in an early stage company that needs traction in its own field, and revenue and profit to establish itself. A CEO needs to focus on the goal and drive the company to profitability, changing direction only for real issues of new threats or changing market trends.
Education, expert support, honesty and discipline: it’s all about the numbers.