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  • Jeff Bruno

How Financial Clarity Improves Business Performance

You have probably realized that having clarity on your financials and metrics for growth is paramount. Business strategy is dependent on effective and rapid decision making. Without having a clear understanding of your monthly and yearly financials, you will not be able to make short- and long-term strategic growth decisions.

What if your target was to hit $10M in sales as part of a broader reach to expand market reach for your product or service?

Is this an arbitrary number or does this have some significance on your larger goal or BHAG (Big, Hairy, Audacious, Goal)?

Did you ask yourself if you have enough capital to get there in the time frame you planned?

All of these questions should and can be looked at both from a realistic level from team capability and bandwidth all the way to demand for your product or service. At Your Outsourced CFO (YOCFO) we recommend looking at your Trickle-Down Metrics© plan.

Start tracking your company’s performance with Trickle-Down Metrics©

Possibly the most important factor in determining your strategic initiatives is your “why”, or the intentions you had when deciding to start your business. This 7-step process allows YOCFO to get into the owner’s head, and immediately enact positive change in the business by feeding the strategies down the ladder into the day-to-day structure of the business. The process is as follows:

1. Target the Trickle-Down Metrics derived from the ‘why’ 2. Identify Supporting Downstream Metrics 3. Collect a Variety of Data 4. Monitor Outcomes 5. Take Action 6. Repeat 7. Grow

1. Target metrics that are derived from the ‘why’

The team members at YOCFO recognize the owner’s “why” as being the key driver for your business’ strategic initiatives. Often, the owner’s ‘why’ is very broad and doesn’t immediately provide clarity as to what the next steps are. For example, “I want to pass the business down to my children in 20 years” or “I want to build this business up and sell it in 30 years for a nice retirement”, or “I am closing in on 70 and want to sell this for the best price I can in a couple years” are all long term goals that are essential to communicate and unpack. While not offering much information as to the steps involved, these statements provide a basis for us to begin determining what changes should be made within the business in order to achieve these goals.

2. Identify supporting downstream metrics

The next step to realizing strategic initiatives is to identify the downstream metrics, or the metrics that will inform your strategy coming from all sides of your business. Whether basing it off of numerical Key Performance Indicators (KPIs) or human resources, it is important to plan out action items to facilitate the completion of your objectives.

Let us explain some common examples:

Owner’s Why/Goal: An owner of a manufacturing business wants to sell his company in 2-3 years because the owner is older and the kids do not want to take over management of the business. Here are metrics within 3 years that we should track:

1. EBITDA targets — to produce most value from a financial buyer 2. Replacement of owner — for clients relationships is most likely an Executive level change 3. Inventory management — turning more to bring in better cash to support growth 4. Modernizing things — for better efficiency and cost cutting

These 4 critical goals that support the “why” are all very different when it comes to structuring the capital plan including hiring, inventory purchasing and equipment modernization. Planning for this business owner’s 3-year goal starts now. To understand why, check out this simple illustration: If it costs you $500K to improve these things in the first years, but you show a $300K improvement in EBITDA by the end of year 3, you might get $1-1.5M more at a sale effectively adding $500K-$1M to your retirement if run correctly.

Owner Why/Goal: An owner of a technology based e-commerce B2B business wants to be a triple bottom line B-Corp focusing on social & environmental issues as much as they do on profit, but at the same time they want to make their product ubiquitous throughout the US market. What metrics are relevant here:

1. R&D and development budget — will most likely need to be financed from investors only who share the same goals and returns. So the search could take years rather than months. 2. Equity compensation — as a tool rather than competitive pay could be more heavily considered. 3. Strategic partners — in logistics and other areas that share the vision and support the approach with lower cost structures. 4. Branding & differentiation — will need heavy initial emphasis. As you might imagine, the financial budgets, strategies, metrics and planning are massively different between these two examples over the next 3 years. This is not simply about gathering financial reporting together on a normal basis to assess cash or profit.

3. Collect a variety of data

The collection of data is the most critical next step in the waterfall from the owners “why” to the execution. For company A, there could be valuation analysis and review of what consolidation is occurring in their space for a manufacturing company selling in 3 years. You might need to hire a consulting or investment banking firm in your space to bring in some specific strategies for your market. This will help focus more on the key levels of the 4 metrics above that need to be mapped to consistently.

In contrast, a B-Corp Ecommerce business might need to review loads of consumer sentiment and buying pattern data using many focus groups over several years to gather the right approach to continue expanding their market. This could help delineate which of the 4 above need more $ and more time.

4. Monitor Outcomes

Just as important as collecting your data, monitoring the outcomes is the crucial step that will allow you to glean insight from your data. As you are tracking your business’ growth, keep alignment with your employees in mind; they help to determine the success of the business. Ensuring the team has a baseline understanding of the current financial state of the company will provide valuable insight in understanding the strategic goals and acting upon them. Monitoring of outcomes becomes a full-team responsibility that is shared.

Aside from setting goals within the realm of your current business model and processes, you may also find your team brainstorming strategies that could mean new revenue streams for your business, improved efficiency or general societal benefits consistently leading to more profits or simply feeling better every day about where the business is headed.

With proper planning and monitoring, your company can also prepare for future unforeseen events during precarious and uncertain times. If you’d like to learn more about navigating a crisis, download our free economic disruption guide here.

5. Take Action

This next step is the most important. You can have the best goals, the most engaged team and a receptive marketplace, but if you don’t consistently and quickly take action you will not get closer to realizing your “why”. Your employees, stakeholders, and strategic partners or critical partners like YOCFO must understand what you are trying to do and help you get there.

6. Repeat

Every business book on the market has some theme about making sure you don’t fall off the tracks: get behind the market, become inefficient, hire the right people in the wrong roles. This is why repeating and evaluating to ensure that the WHY is still intact and the metrics are still aligned quarterly, or minimally once a year, is part of this process.

7. Grow

Assuming things are clear, the team is engaged, and the engine is gassed up, the final step is to fulfill the BHAG and grow your business.

Work with Your Outsourced CFO

When considering the benefits of a properly strategized goal for your business, you might find difficulty determining how to go about it or even where to start. The team at Your Outsourced CFO is dedicated to ensuring our clients are effectively strategizing and managing for business growth. We work alongside you as a strategic partner, helping to financially stay on track, while assisting in executing your growth objectives. Through accurate data collection and metric tracking, YOCFO’s team provides the financial clarity for our clients to plan for the future. If you are ready to take your business to the next level and would like to hear more about the value of a strategic partner like YOCFO, connect with us to identify the Trickle-Down Metrics© for your business.

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