Get granular financial data

1. The constraint and what graduates it

Item	At this stage
The constraint	You are spending money to grow, but you are not growing, so money seems to be missing: you made bets and investments, and you cannot see where the money is going or where the return is
To graduate	Get more granular financial data
What goes with it, in the order first given	Data by product, such as gross margin and lifetime value per product; a balance sheet for what you own; quarterly tax payments; receivables and payables scaled up

This way of working is called financial operations: finance blended with operations, so that you can see the business in much finer detail.

2. Break the numbers down by product

Get granular by product. Ask what the gross margin is on each product, what the lifetime value is on each product, and questions like those. The aim is far more detailed information on the business you already have.

3. Start a balance sheet

As you keep spending, you start buying things: equipment, and hardware for your team. All of a sudden you have assets. You might have a building, or several buildings; many lawn mowers; studio equipment; cameras. Each becomes an asset because the business owns it, so start accounting for it now.

The reason offered is value. When a company is valued, in this view, you count the cash in it, you value the company on its ability to generate cash flow, and then you add in the cost of its assets. If a business owns five buildings, the cost of those five buildings should add to the overall enterprise value of the business.

What to look for. The kinds named are furniture, equipment, technology, intellectual property, trademarks and domain names. The example given is a domain name: the domain itself has value. There are probably some things in your business with real value that could trade on the open market, and you want them on the balance sheet as assets.

Accounting standards and business valuation are not covered on this page; the statement about value is carried as it was made.

4. Pay tax quarterly, and save for it

Paying tax quarterly starts at an earlier stage (SOP 150 section 4). At this stage you absolutely have to do it. In one practice here it was forgotten at this point, and this is when quarterly payments first started there.

If you know tax is due quarterly, do not spend the money. Save it, and be able to pay your taxes when they fall due. Believe it, in this view, and you sleep well at night.

Tax law is not covered on this page.

5. Scale receivables and payables

It is pretty common at this point to have more accounts receivable, more vendors and more bills to pay. The systems that handle what comes in and what goes out have to grow with them.

Receivables. Not collecting is now unacceptable. Every person on collections, it is said, will pay for themselves. If you have only one, and that person is barely getting through what is overdue, staff up: uncollected money is a huge missed revenue opportunity. The earlier stage made the same point about a collector paying for themselves (SOP 150 section 5).

Payables. On the other side, you cannot fall behind on payments to core vendors or partners. In e-commerce, for example, you cannot fall behind with your third-party logistics provider (the 3PL), or on buying more ingredients or more inventory for later. Suppliers like these are partners more than they are vendors: they are core to your business.

Be every vendor's best customer. That is the habit described: pay on time, and do what you said you would do. It is striking how quickly you can lose leverage in a relationship through a money slip. Pay late, and the expectation given is that you lose priority service at once and the vendor likes you less; the reason offered is that this is sometimes how it feels on the other side, with customers who pay late. Sometimes you did not mean it, but it still affected their business.

So, by all means, staff those roles up. They are very important, and to your reputation as well.

6. Decide where collections sit

Receivables do not have to sit in finance; they can be a function of customer service. They sit kind of between the two. Wherever they sit, when someone reaches out to collect, it should not feel gross, as if they are shaking people down. It should feel like a conversation.

• Always ask before you assume. Did you know you missed a payment? Did you switch your credit card?
• Always give them the benefit of the doubt.

The observation given, from the practice described: where receivables sit under finance, collecting tends to be more aggressive and less empathetic; where they sit under customer service, it tends to be more empathetic and less like a shakedown. The view offered is that you want customers not only to pay you but to remain customers, so it works best as a collaboration between finance and customer service.

7. Build the financial dashboard

Of the finer-grained data, this is called probably the biggest item operationally: the one that shows what will actually make the business more money.

What it shows. Finances across every department. The first dashboard in one practice here came after a controller was brought in, and it answered questions like these: how much does customer service cost each month? How much does customer service affect churn? Has it reduced refunds? How much has it added to your ability to collect?

Why it answers the constraint. You were spending money and asking where the return was. Broken down, you can see that one department costs this much and returns this much, and another costs that much and returns that.

Why it matters more as you grow. The higher up you go, the more you become an allocator of resources, an investor. You shift where you put money, time, energy and people in the business to get the best returns, and you cannot do that without data.

Who runs it. You need a more operational finance person, one who understands how money flows down through the business and comes back. Without an operational CFO, it is said, the link will not get made. You should know it yourself as the entrepreneur. The challenge put to you: can you clearly define how every department makes the business money? If you cannot define it, they certainly will not be able to. Make that connection, so you can see the true return on each investment in the business.

Some of what the first dashboard held, in one example:

• Gross profit by product line. Gross profit is sometimes cross-departmental: a product line carries some customer service, some of the customer experience, some technology. You want a blended view of what each line really earns. The insight can be sharp: one line turns out to be hugely profitable, so you sell more of it, reinvest, and put more resources there.
• Lifetime value against acquisition cost, by product line. The example given: a line that not only makes more money but also costs little to win customers for.

Then keep going, from the top down: by traffic source, by product line, by customer set. Each cut gives you a much better basis for good investments in the business.

The shift. The theme is moving from decisions made by intuition to decisions made by information. The same shift is a theme across the departments at this stage: the business is too big for you to make all those calls by gut, so you move to data.

8. Insurance for the risks that could end the business

The finance step at this stage closes by asking you to consider some of the higher-level insurance where you think you have more exposure: what could kill the business, and how do you prevent it? That is on SOP 156 — Insure against what could kill the business.

9. The bottom line for finance at this stage

You are spending money to grow, but you are not making money or growing, so money seems to be missing and you ask where the return is. The answer: scale up receivables and payables, and get far more granular in your financial data. Start keeping a balance sheet, because you spent money on things that matter and have value, and some of what you put in now sits there as assets. Save for tax and pay it quarterly, and consider some of the higher-level insurance where you think you have more exposure.

10. What this page does not decide for you

• What the dashboard holds beyond the examples. Not established on this page.

11. What this page does not cover

Accounting standards, business valuation and tax law are not covered on this page.