4 pillars of great finance

Tell me if you can relate to this conversation:

• Me: I work in finance

• Them: Cool, can you do my taxes?

• Me: Not that kind of finance...

• Them: Oh, so you do investing stuff?

• Me: Nope. It's actually business finance.

• Them: Got it. So accounting?

• Me: Still no. More in the planning and forecasting space. I help business leaders know what happened, why it happened, and what's going to happen.

• Them: Cool. So is that the same as investing?

• Me: sure...

Finance is such a broad term that I honestly don’t blame people for not understanding.

But after being in finance for over a decade for some of the largest and fastest growing companies in the world, 1 thing is clear to me:

Good finance is all about the fundamentals.

There is no real difference between big company and small company finance.

Sure, there are details and nuances - but you could say the same thing about different industries and business models.

And since I’ve helped a few friends and family members with their small business finances, I’ve found that there are largely 4 pillars that are critical to running a healthy business.

Here’s a breakdown of the 4:

Pillar 1: Financial Review (cashflow audit)

Every month, business leaders/owners need to be reviewing their financial performance.

I’m not talking about some magical blend of KPIs and metrics that are more advanced than rocket science…

I’m talking about printing out your financials, comparing results to the budget, putting an action plan in place for things you want to change.

And repeat that monthly.

In a large company, we call it a financial review.

In a small company, I call it a cashflow audit.

At its core, you’re simply studying the cash inflows and outflows of the business and looking for patterns or trends (both favorable and unfavorable)

Regardless what you call it, spending 1 hour per month reviewing your financial statements is the foundation of financial maturity in a business.

It helps you understand what trends are occurring in the business and leads you to the next pillar…

Pillar 2: Cashflow Forecast

This is the most underrated of the 4 pillars.

Mature companies live and die by their financial forecasts.

Hardly any of them would be able to function without it.

But small businesses largely don’t know this tool exists.

And every time I’ve built a cashflow forecast for a small business owner, their eyes light up.

It’s one of those things they didn’t know they needed. But once they have it, they can’t go back.

The power of a cashflow forecast is that it clearly shows exactly how much cash is coming in and out of the business at any moment in time.

This becomes critical to running a business when you consider:

• large purchases in equipment

• hiring staff to fuel growth

• investing in marketing

Layering all of these scenarios into your business is not easy, so having a single place to do this and evaluate the output is where the magic happens.

It’s usually the difference between a business owner who is stuck and one who confidently makes decisions.

Pillar 3: Growth Analysis

At the end of the day, a healthy business is all about growth.

Sure, you need to be profitable and control your costs.

But if you aren’t growing, you’re dying.

So a great financial infrastructure will spend far more time on growth than it will on profit management.

And one of the best investments of time is to break down your sales funnel into measurable KPIs:

• Leads

• Appointments

• Presentations

• Sales

• Revenue

Then you can set goals for each piece of the funnel and feed that back into your cashflow forecast.

Every month you’ll review your growth KPIs and determine which is the constraint of the business. Then you can work to solve it.

Pillar 4: Expense Efficiency

The purpose of cutting expenses is to reinvest in growth.

Gone are the days of finance teams running around and telling business leaders to cut expenses for the sake of stashing away more cash.

You need to spend money to make money.

Think of every dollar saved as a free dollar to invest in growth.

And the best companies will review every dollar that they spend 1 to 3 times per year.

Every single dollar. Line by line through your P&L.

In summary:

By focusing your finance efforts on the 4 core pillars of financial management, you’ll run your business like some of the largest and fastest growing companies in the world.

Sure there is a more advanced layer to financial management (working capital management, treasury, investments, etc.)… but this is the biggest 80%.

Start here, do the boring/effective things every month, watch your business thrive.

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