A Japanese proverb reads, “Vision without action is a daydream. Action without vision is a nightmare.” This proverb holds true, many times, for the entrepreneur as they strive toward success. Either there is too much vision and too little action, or vice versa. In either case, the entrepreneur is destined to either live the daydream or nightmare.
What causes the daydream or nightmare scenario for the entrepreneur? In most situations, it is trying to become the expert across too many diverse areas. The majority of entrepreneurs have a brilliant service or product idea based on a prior expertise, passion or interest. However, when they launch their startup business they now need to be an expert on marketing, sales, finance and accounting, human resources, manufacturing, research and development, and information technology – and chief executive of the business. These new areas are not where they have expertise, passion or interest; they are forced into it by necessity.
The SynFiny Advisors’ Definition of FP&A
- Critical value creation processes, which require a deep understanding of finance, modeling, data systems and processes, and accounting, all married to deep business knowledge.
- Typically combines financial and non-financial data as required to create strategic and operational financial plans.
- When done well, these processes are a clear competitive advantage and thus are viewed as critical by a firm’s owners and senior leaders.
The entrepreneur is thrown into the “deep end of the pool” to gain experience. There is a 50/50 chance the entrepreneur sinks or swims, but even if they swim it may be too late to deliver a successful startup as they focused on income statement preparation, pro forma financials, or book vs. tax depreciation schedules. (Yes, yucky finance and accounting!) Instead, the entrepreneur should be focused on consumer or customer-centric activities like marketing development, fast cycle product development and testing, or design execution to delight the consumer or customer.
The purpose of this article is to explain how a Finance leader helps the Entrepreneur through each phase of the startup.
Critical Development Phases of Financial Leadership
The chart below shows where Finance plays a role for each of the critical developmental phases of a new business.
“Finance is the key owner of critical business processes.”
-Jeffrey S. Wuest, SynFiny Advisors
Seed or Idea Phase
In the initial ideation phase of a new company, it is necessary to penetrate and understand the financial and funding strategies of the company. This includes an assessment of the competitive environment and market understanding to determine the size of the market, pricing and ease of entry. The funding at this phase may come from friends and family or small “angel” investors. To note, even at this phase the investors MUST be accredited to avoid issues later.
Startup or Start of Sales Phase
As the idea is validated further, it is necessary to start better understanding the exact funding needs. This is confirmed as part of the pro-forma financials development required by investors (balance sheet, income statement, cash flows). These are going to be more detailed from the initial seed phase of analysis since at this point it will be necessary to price and cost the product or services. A large part of the investor deck will be coordinated or owned by the Finance leader. At this point in time you will start asking for funding from investors (accredited angel investors or private equity mostly).
Growth or Rapid Sales Phase
The product or service is now out in the marketplace. The sales have taken off and now there is greater need for deeper knowledge and understanding of the financial structure of the business, which will also be needed as there will be further investments from investors (private equity or venture capital). The investor deck will now be supported by the detailed actuals and financial projections.
Maturing or Stable Sales Phase
The business has experienced rapid growth and is now beginning to slow down, from a fairly large base of revenue and profit standpoint. The management requires fully developed financials, capital/cash plans, and reporting or analysis to sustain the business. In addition, there is no need to find new investors but simply keep the existing ones updated on financial progress.
In all of these phases, Finance plays a key leadership role in ensuring the financials are accurate and well communicated to both the entrepreneur and the investors.
Turning Startup Financial Vision and Strategy to Action
We are now to the detailed action steps required to turn the initial financial vision and strategies into reality. This is the point where the “dollars meet the cents.”
This is also the step in the visioning process where Finance insists the entrepreneur check and confirm sufficiency of competitive understanding, availability of funding, cost assumptions, and realism of the startup plans.
This happens at each phase of the new business financial flow. The Finance leader and Entrepreneur will want to confirm the key financial assumptions at each phase of development. When there is a major change, they will want to go back and request more funding, resources, or time from the investors. A good Finance leader and Entrepreneur will never surprise the investor with sudden bad news; they are continually reviewing, reassessing the plans, and communicating the current reality.
A few examples of where the Finance leader helps the Entrepreneur:
- Financial strategy exists, which supports the growth of the company
- Competitive analysis and market understanding (includes market size)
- Create the initial investors deck, working with the entrepreneur and other experts
- Attend investor meetings and explain the financial aspects of the business
- Pricing (based on competition/consumer) levels to support profitable growth
- Budgets exist for both overheads and marketing spending
- Identifying ways to keep the organization lean and the burn rate slower
- Challenge (based on external understanding) all plans for spending
- Create Finance training materials to build capabilities for new staff
The Path Forward… Find Your Financial Sage
There are a few critical questions the Entrepreneur should ask when assessing and selecting a Finance leader:
- What experiences have they had in the industry or other businesses?
- Do they feel comfortable talking to the investors, sharing the financials?
- Do they challenge the Entrepreneur? (i.e., on assumptions of the business plans, financial plans, investment or spending choices)
- Did they have experiences with all aspects of Finance and Accounting?
- Did they have a Finance leadership position in the past?
- Do they have local or global contacts that can help?
- Are they providing pro-bono, low cost fees, or reasonable salary for the work?
And of course, the Entrepreneur needs to make sure they both trust and respect the Finance leader. This person will be one of the key leaders of your business.
F. Scott Fitzgerald wrote in The Crack Up, “In a real dark night of the soul it is always three o’clock in the morning.” The Entrepreneur should see be able to see themselves picking up the phone, even in the middle of the night, to ask their Finance leader just about anything. There will inevitably be many down moments in the startup journey and the Finance leader needs to be a trusted advisor to listen and help guide the Entrepreneur through it.
This article hopefully provided a useful reminder about how obtaining funding and keeping the organization lean and focused on the biggest opportunities are key for a startup to survive. A strong Finance leader should be one of your key partners who can take on those responsibilities, letting the Entrepreneur focus on what they do best.