It was so obvious

For more than a decade I’ve been a part of something and didn’t even know it…

Every month I was contributing to something bigger than I realized…

It’s the way successful companies drive value with finance…

And I’ve recently awoken to it…

What is it?

I’m calling it Finance-Led Growth.

Let’s get to it!

What is finance-led growth

I’ve never heard anybody explain it before, so that means I get to name it 🙂 

If The FP&A OS tells us what to do…

And the FP&A Flywheel tells us when and how to do it…

Then Finance-Led Growth tells us why we’re doing it.

To be clear, this is nothing new - it’s still reporting, analysis, forecasting, and consulting best practices done on repeat to drive value.

But, when you see how it all comes together you’ll see why it’s valuable to study it as a system.

In short, finance-led growth is the act of finance (or FP&A) leveraging our tools and resources to create income surplus to reinvest - which in turn creates more income surplus to reinvest…

(you have to spend money to make money)

A quick example of finance-led growth

Let’s say you just wrapped up the annual budgeting process.

And you are 2 months into the year.

Results look like this:

• Expenses are coming in below budget for OpEx by $1M

• Revenue is dragging below budget by $500k

• GM % is holding at budget levels

Which means you probably have ~$750k of surplus income that wasn’t accounted for in the budget.

But before we go spend that, we need to re-forecast the financials through year end to confirm this surplus will hold.

Let’s say that no other financials change (for simplicity) and that you roughly have $1M in surplus income above the annual budget once you finalize your reforecast.

What do you do with that $1M? Spend it? Save it? Reinvest in growth??

Finance-led growth would suggest you should reinvest it in the highest returning yield in the business.

Often, that’s simply dropping more in marketing or sales (depending on your current bottleneck).

In this example, we’ll spend $500k in marketing and return an additional $2M in surplus income (because our LTV:CAC is 4:1, for example).

Now we wait… next quarter when we update our forecast we’ll take a fresh look at the annual projection for income with a sharp eye on how that marketing spend is performing.

Then this cycle repeats itself.

Pretty cool, huh?

What if you need to generate surplus first?

That example was pretty simple - the underlying business didn’t change much at reforecast #1, we already knew our LTV:CAC, and (most important) we started off with surplus!

What if your first reforecast shows that you’re behind budget? (this is much more common)

What do you do?

You have a few options…

First, you can cut or delay OpEx spend. This is maybe the fastest and simplest way to generate surplus to reinvest.

Second, you can advocate for pricing or payment term changes. This is a bit slower, but can yield a significant boost in income (or cashflow) without adding operational complexity to the core business.

Third, you can reallocate resources within the business. Rather than cutting expenses, this means we’re shifting expenses away from lower-performing segments (products, services, acquisition channels, etc.) and reallocating that investment back into our highest performing segments (see this video on how to do it, step-by-step).

Each one of these will generate surplus for you to reinvest.

And a great finance team will continually be evaluating each of them.

In summary:

‘Basic finance’ reports the numbers.

‘Good finance’ looks for isolated improvements.

‘Great finance’ builds a finance-led growth system that automatically extracts profit to reinvest in more profitable growth.

Expect more on this topic over the next few months!

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