What 2020 has taught us all is that the new normal for business is a constantly changing landscape. Even more than in the past, Founders have an endless list of demands on their time and it can be hard to know where to focus first, especially when it comes to finances.
We’ve developed our list of the ‘five things that matter’ when managing your finances. We believe that all Founders should focus on these first in order to make sound strategic decisions and drive business growth in this constantly changing world.
1. Focus on the future
We don’t drive looking in the rear view mirror, we make a plan and use a guide (a sat nav) to help us get to where we want to be. In business terms this means that we need to develop a financial forecast that aligns to our strategic goals so that we have a plan and we know what finances we will need to realise it.
2. Understand the key drivers in the business
You need a keen understanding of what drives your business forward so you focus on the right things. What has the biggest impact on profit and cash? What drives increased sales and how do you monitor / influence this? Every outcome can be measured and changed if you understand what has led up to that outcome in the first place.
Define these key business drivers and then set targets and metrics against these so you can track how you are performing. This will refine your understanding of which changes have a positive outcome and which have a negative outcome and so refine your focus.
For example, a SAAS company would want to track Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR), the costs of acquiring a new client and the direct costs of servicing the client over the contract term. By understanding these drivers, Founders can make decisions which have a positive impact on their bottom line.
3. Understand the impact of discounting and do it at your peril!
Now, more than ever, businesses are resorting to discounting to drive sales. However, do you know the impact this will have on your business both now and in the future? You need to calculate the lifetime customer value so you can measure the impact on your business and whether the proposed discount will achieve the desired results. If you do decide to discount, make sure you know your floor price.
4. Manage the downside - the number one risk being cash flow
More than 90% of start-ups fail and one of the main causes is a lack of cash. As the old adage goes, sales is vanity, profit is sanity, cash is reality. You need to monitor the risks to your business, consider the impact on your cash flows and plan ahead to ensure you have sufficient cash to meet your short-term and medium-term needs.
5. Calculate long term customer value and monitor customer retention
If you know your customer acquisition rate, retention rate and the average lifetime value of each customer then you will understand the best way to increase revenue over the long-term. You need to monitor the value in your current customer base and the risk of customer churn. It is far harder (and more expensive) to win a new customer than to keep your existing customer and perhaps sell more to them. Focus on improving client retention first then look to increase the lifetime value of each customer.
At GrowthBuilders, our role as your Finance Business Partner is to ensure you are focused on these five fundamental pillars for growth. Get in touch now to see how we can support you.