Evaluating Your Company’s Financial Confidence

An axiom in business is that CEOs and founders must “know what they don’t know.” It’s rare that a CEO or founder has expertise in all arms of the business. Instead, they must rely on identifying their weaknesses and make strategic adjustments—usually by hiring someone with particular expertise—to support that area of the business.

While there’s nothing that says finance professionals don’t start businesses, it’s certainly less common than individuals with creative/development-oriented, sales, or leadership-focused backgrounds.

Because of this, many CEOs find that they lack financial confidence.

What is Financial Confidence?

Financial confidence is having trust in your financials and having clear and accurate financial data to make confident strategic business decisions.

More commonly, executives will have a “gut feeling” about whether a strategic finance decision will pan out successfully, but may not have the facts or data-backed judgment to back it up. This increases the company’s risk when making important business decisions that can make or break their company’s success.

Why is Financial Confidence Important in Business?

Financial confidence in business is the difference between “hoping for the best” and confidently making a decision because reliable data backs it up. When you have financial confidence in business, you can improve your likelihood of success while reducing wasted time and money.

Financial confidence in business decreases risk. Having financial confidence means you have the tools and expertise in place to be able to analyze and model potential decision outcomes and alternatives. It means you don’t make strategic decisions without confidently being able to predict what the outcome is going to be for that decision—or alternate decisions.

“Having financial confidence means you have the tools and expertise in place to be able to analyze and model potential decision outcomes.”

Because of this, financial confidence also improves time efficiency and preserves valuable resources.

A company’s “toolkit” for financial confidence typically includes business tools such as short- and long-term financial forecasts, budgeting, and cash flow. It also includes having a strong, competent financial team.

These tools allow a CEO or founder to more confidently plan their path to get from where they are now to where they want to go. Having a more detailed and confident plan means the business will spend less time on ideas that don’t work, are more likely to have the resources they need (not too few, not too many), and can better circumvent potential challenges.

5 Questions to Evaluate Your Financial Confidence

While there is no official scale for financial confidence, there are some “checkboxes” you should be able to mark to determine your level of financial confidence in your business.

1. Do You Have a Handle on Historical Numbers?

There are two types of financial vantage points in business: historical and future. Future financials help CFOs plan and model strategic paths to goal achievement, while historical financials record and account for the transactions and activities that make up your business operations on a monthly basis.

Both of these vantage points are essential for business and for financial confidence. They also work together. You cannot have a strong future finance vantage point without having strong historical financials.

Your historical financials make up the data that your finance experts use for modeling and forecasting. A strong financial team will analyze these historical financials to determine patterns, trends, strengths, and areas for improvement. It is not only the baseline for your success, but also your biggest pool of information from which to draw assumptions, predictions, and conclusions.

As part of evaluating your company’s financial confidence, take a look at your historical financials. Do you have clear, detailed, and accurate records? Do you have a strong team in place that is able to provide reports and analysis in a timely manner? Is your financial team able to drill-down into the historical numbers to identify inefficiencies, opportunities for improvement, and/or missteps? If not, you may consider improving your existing bookkeeping process.

2. Do You Have a Clear Understanding of Your Short- and Long-Term Financial Goals and How to Get There?

Any experienced CEO knows that business success isn’t about luck—it’s about formulas. A large and profitable market combined with a good product formula, a great sales formula, and a solid marketing formula means a higher probability of business success. However, often overlooked but equally important is a formula for good finance strategy

Your financial strategy should be as well-planned as your sales or marketing strategy. This means knowing what expenses to expect and when, knowing when to expect revenue, understanding your COGS and profit margin for each product and service, knowing when you will raise capital and how much you need, and more. All of these culminate in a financial forecast, which is a financial blueprint that helps companies plan how to get from where they are now to where they want to go.

The benefit of this level of financial strategy is that it minimizes waste while increasing your potential for success. Just like having a blueprint before building a home, a detailed plan makes it easier to achieve a successful outcome with fewer false starts, wasted resources, and mistakes.

3. Do You Have the Proper “Mirrors” and Tools in Place to Safely Make Lane Changes?

Having a short- and long-term financial forecast in place can help predict and prepare for much of your company’s road ahead–however, it cannot always account for every opportunity, challenge, or roadblock you may face. It is important to have the proper “mirrors” and tools in place to make lane changes in your business.

Lane changes may occur for various reasons, including unforeseen market or economic challenges, new high-potential opportunities, or unanticipated growth. It may even be something as small as determining whether to take advantage of a bulk discount from one of your suppliers.

Having financial confidence when challenges or opportunities arise means you won’t have to scramble to make a decision. Instead, you will have the reports, tools, and expertise to analyze your next move so you can safely and confidently move forward.

In the above example, with the proper mirrors and tools in place, you would be able to analyze how much bulk inventory you can afford and whether it is financially prudent to make the purchase. For instance:

• How long will capital be tied up in surplus inventory before you can turn it around?
• Does the financial benefit of the bulk discount exceed the financial cost of storing and maintaining the inventory?
• Is there a reliable formula for using and profiting from this inventory in a predictable timeframe?
• Is this the best place to use this capital right now?

4. Do You Know How Many Months’ Cash You Have On Hand?

How aware are you of your current cash situation? Every business owner should know how much of a “runway” their business has at any given time. This includes knowing how long your business could survive if revenues suddenly came to a halt—as happened with many companies during the onset of the COVID-19 pandemic.

Financial strategy for businesses is complex. It takes money to make money. It also sometimes takes spending money to save money. This means most businesses don’t tuck a surplus of money away for a rainy day. However, these rainy days do come—often suddenly—and without strategic preparation, they can be devastating to businesses.

Know your current cash situation—and take steps to improve it. There’s a balance between growing your business and risking it all.

5. Do You Have a Complete and Properly Positioned Financial Team?

Finally, do you know the capabilities of your existing financial team, and are you confident in each individual’s expertise?

When we engage with companies, we usually find one of two things: either the company has skilled people in the wrong positions, or they have underskilled people on their finance team that need to be properly trained and replaced.

Every company needs the services of a bookkeeper, controller, and CFO. The problem is that many companies cannot afford a full-time, top-level CFO, so they typically promote a controller to this position–or, worse, use an outsourced CPA firm to act as their CFO. Unfortunately, as controllers and CPAs have much different experience and expertise compared to CFOs, this can slow progress and hinder success and opportunities in the long run.

It’s important to understand the differences between the main types of financial professionals and to know which your company needs depending on your size and growth.

Next Steps

Know what you don’t know. After you’ve evaluated your company’s financial confidence and financial capabilities, you’re better empowered to fill in the gaps for a stronger, more reliable financial strategy.

About the Author

Tom Barrett is a skilled CFO with extensive experience. His financial expertise is key to helping companies with strategic financial planning, data analysis, risk assessment, budgeting, forecasting, cash flow management, and much more.

You may also be interested in...