It’s time for startup leaders to get serious – charisma must make way for surgical precision
DESPITE investment activity in sectors like artificial intelligence and ESG, capital markets are undergoing a reckoning driven by a continuation of elevated interest rates, global conflicts, and diminishing manufacturing, especially in China.
Consequently, these persistent negative adjustments are culminating in the weakest global growth forecast seen since 2001, with the exceptions of the periods following the 2008 Global Financial Crisis and the Covid pandemic.
Though the valuation bubble for public equities and startups has burst, there is still an opportunity for steadfast companies to bolster their basics, and become more resilient to current and future economic fluctuations. This need not involve new resources – in fact, most leaders already have all the tools they need in their general ledgers: the bedrock of a company’s accounting.
Instead of focusing on a headline-grabbing vision, it is time to focus instead on developing systems to succeed.
Startup goals shouldn’t be at odds with financial foundations
Going back to basics, businesses’ financial goals are straightforward: to drive profit and cash flow. Profit means more revenue and fewer expenses. Cash flow means collecting cash faster, and paying cash out slower. However, setting goals around profitability and cash flow does not make these goals inherently more achievable.
In his New York Times bestseller Atomic Habits, James Clear emphasises that results have little to do with goals, and instead are a direct outcome of the systems developed to pursue those goals.
Sometimes strategic tradeoffs need to be made: for example, utilising penetrative pricing for growth, taking a longer time to collect cash from strategically important customers, or investing in product research and development or Capex (capital expenses) to establish competitive advantages.
Like aeroplane pilots, most CFOS are used to “setting course” or budgeting only twice a year, and then bridging from one budgeting season to the next with minimal inputs (effectively on autopilot) with respect to capital allocation unless there’s a significant event. However, turbulence now is the norm, not an exception. Fortunately, the CFO’S cockpit has evolved significantly, allowing for more consistent ROI (return on investment) optimisation. But it all starts with visibility.
Visibility leading to executive decision-making traditionally involves permutations of operational and financial metrics across lines of business, products, departments and geographies. However, this visibility rarely extends to the depth of the general ledger.
This shallow view results not only in superficial financial reporting that obscures the detailed cash flow drives and levers underpinning an organisation’s profitability and cash flow drivers and levers – but also a lack of understanding around the lag and elasticity associated with manipulating those levers.
The general ledger is a recordkeeping system used by accountants to track and categorise financial transactions. Transactional data is input into accounting or enterprise resource planning software, then automatically mapped via the chart of accounts to generate the profit and loss (P&L) and balance sheet – two of the three financial statements. The third financial statement is the statement of cash flow derived from the balance sheet and P&L.
For a CFO looking to develop a systems-driven approach to grow sustainably and drive profitability, general ledger-level visibility is critical.
An early to mid-stage startup might have thousands of rows of data in its general ledger each month; larger companies may have millions. Critical information such as vendor concentrations, accounting hygiene, anomalous transactions, and the long tail of smaller spending that can be overlooked and thus metastasise are housed in the general ledger but constantly overlooked. The chart of account-mapping hygiene itself tends to go stale regularly as a business evolves, and without consistent general ledger visibility, a CFO’S visibility will be further obscured.
While data analytics and visualisation software like Mixpanel and Tableau have grown in popularity within operations and product teams, most finance teams still rely on laborious and error-prone Excel-based workflows to provide executives with financial visibility.
This visibility is the tip of the iceberg – the data in the general ledger goes unseen. The general ledger is not only perceived to be excessively large and detailed, but it also represents an intensely complex data engineering challenge.
This is compounded by the nearly prohibitive challenge for an accountant to explain the nuances of debits, credits, accruals, reversals, bills, payments, invoices, and more – to data engineers, financial analysts, and anyone else who could help bring general ledger visibility or insights to management teams.
Could companies be more on top of their finances?
As multiple CFOS have shared with us, underinvestment in their functions prolongs by weeks the postbooks-close FP&A (financial planning and analysis) process, which involves auditing, analysing, and generating deep insights from a standard monthly financial reporting pack – at just a superficial level.
This leaves no time to develop actionable insights from the general ledger on how to surgically course correct, drive revenue, reduce expenses, collect cash faster, and pay it out slower. Underinvestment in finance and accounting tools and talent usually stems from a belief that it is not a revenue-generating function – however, the visibility and systems around these functions are the key prerequisites for profitability, cash flow, and sustainable growth.
Here are a few examples of how general ledger visibility drives more rigour into the FP&A system that can lead to the accomplishment of profitability and cash-flow goals:
■ Bridges the gap between “real business spend” versus timing journal entry nuances such as material accruals and reversals;
■ Overhauls data entry and month-end standard operating procedures to improve and maintain accounting hygiene;
■ Management would not have to wait for the accounting or finance teams to perform painful and slow exports from accounting systems to provide the details “underneath” the financial statements – thereby reducing the time needed to operationalise insights following each month’s end;
■ Maintains a constant ROI optimisation framework via dynamic intra-budgeting period capital reallocation;
■ Understanding of the Pareto curve distribution of expenses for sharper budgeting in a “zerobased” fashion; and
■ Vendor-focused concentration and leverage awareness, to drive negotiation around payment and pricing terms.
When operating department heads are armed with granular visibility of their own functions, those section heads begin to proactively supplement the monthly FP&A process by suggesting budget adjustments, providing critical commentary, and instituting a costsensitive culture in their direct reports in a way that empowers their teams by allowing them to see how their functions and decisions are helping to drive the company towards its goal of profitability.
Creating an enabling environment where the broader team collaborates on FP&A helps boost engagement positively while making finances more transparent. Teammates are able to share when they have managed to save money, and their colleagues commend the win, reinforcing a sustainable growth mindset. This provides a critical boost to morale at a time of layoffs and financial uncertainty.