So you are all brushed up on your finance and you are ready to take on the CFO for your next project. WAIT! You are not quite ready yet!
As I have been working on this series of posts, I’ve tried to avoid being a consultant. You know, that guy who tells you ALL OF THE THINGS, but never tell you how to practically do it! After writing the last post, I realized I did just that. There is one more piece that you need to know in order to apply your new finance knowledge.
Every CFO works under a set of assumptions when he builds the financial models for the next period. She knows that she has $X amount of capital and is expected to deploy it in a way to receive $Y amount of profit. There is an assumption on headcount, there are estimates built in for cash flows, and she will identify any shortfalls and augment cash through various financing activities (or alternatively, cut from the plan to avoid financing). This is really the missing link. You must understand the assumptions of the business before you can fully build out your case to take to the CFO.
For example, a former employer required that divisions deliver 20% back to the business. Essentially, for every 80¢ the parent would give us to spend in our operations, they would expect us to return $1 in revenue. Not every team or group under the division did 20%, but that was what our CFO had to deliver back to the parent company. For my team, we could run at a lower gross margin because the CFO saw our business as an investment for longer-term gains, and used profits generated from other areas (that ran at 30-40% profit) to make up for the smaller margins we generated. One of the first assumptions you may want to know is what profitability the business is expected to generate. If you can’t at least get your business case to hit that target in the first year, you will have to borrow from elsewhere which may not be possible.
Margin is a key metric, but other businesses (retail comes to mind) may care less about margin and more about revenues and cash flow. Getting to know the key figures that go into the business will help you with your pitch and make sure that you are positioning things appropriately. Keep in mind, just because you may not be able to meet the assumptions (for example, you can’t generate revenue fast enough) doesn’t mean that you won’t get the green light to move forward on your project. It just means that you and the CFO may have some work to do to get it approved.
Up next, my favorite topic, writing!