Most corporations split financial management, corporate strategy, and risk analysis into three different departments, each with a separate head. The finance department "closes the books", the strategy department "sets the direction", and the risk department prepares a risk register that is hardly ever read and is only referenced during the audit. This is most likely the cause for the majority of mid-sized corporations stagnating at the $5M - $50M revenue mark, not the weakness of any of the functions, but the lack of interaction amongst all of them.

Having worked with many finance teams and founders across multiple verticals, there is always the same pattern: the companies that grow the most and the healthiest are the companies that have the CFO, CEO, and Risk team all in the same room, aligned and focused on the same topic.

Real-Time Financial Reporting Benchmarks for Scaling

The most common mistake is to consider financial management to be a function that looks in the past. This is a grave misunderstanding. Functions such as closing the books, finalizing the reconciliations, and preparing the reports for the board should be seen as the basic hygiene practices but are not financial management. A properly functioning system of financial management is the opposite.

Three things distinguish functional financial management from performative financial management.

1. The first is cash forecast management. For this dimension, it's important to understand the timing of cash collections and perhaps the structural forecast of cash outflows, as well as known and measured seasonal variations of cash. Some companies operate within very tight liquidity conditions even when they have a very healthy P&L. If you look only at bank balances, this is also the case.

2. The second dimension is the understanding of unit economics in the context of the underlying business model. Comparing the unit economics of a SaaS business to that of a service-based business is largely an apples-to-oranges comparison.

3. The third dimension is the owner understanding unit economics to the extent that they have pressured their controller or CFO to explain the numbers to them in a way that puts the owner on the same plane as the CFO.

The goal of financial management is an accurate, truthful, real-time understanding of the organization's cash position, along with an understanding of the headroom the organization has. Everything else (growth, risk, and strategy) stems from this understanding.

Corporate Strategic Goals Have No Meaningful Value Without Financials

Most corporate strategy documents paint detailed pictures of the market opportunity, competitive advantage, and projected growth. However, they usually fail to answer the financial question: what do the executives intend to do, and in what order, given the financial constraints.

This is where finance and strategy must work as one. For example, a strategy to pursue a 40 percent increase in revenue over a 12-month period at the cost of a 7 percent increase in operating profit must be reconciled with the financial understanding of available resources.

Good strategic planning starts with analyzing financials.

1. How much does it cost to acquire a new customer segment? How much time does it take for the segment to pay back the cost?

1. Which strategic initiatives fund themselves and which ones need external funding or will use up current cash reserves?

1. If the anticipated growth does not occur, which initiatives would be the first to get cut? Do you know the order in advance, or will you decide it on the spot?

Companies that plan for this order will cut initiatives before the plan is disrupted. Companies that do not plan for this order treat the finance team as the group that approves or denies initiatives. Those companies do not make decisions quickly and rationally, because situations do not remain constant.

Every strategic initiative should include a financial model before approval. Most initiatives have financial projections after approval to justify the decisions. Those projections should be built to support the financial model.

Risk Analysis Is Underutilized Because It’s Treated as a Checklist

Most companies treat risk analysis as a checklist to renew their insurance or complete a compliance audit. It is not integrated with the decisions that drive the company and it is a waste of this discipline.

Risk analysis should look at the past and think, what are the 2-3 things that will actually cause our company to go bankrupt? What will we see coming before that? This is a much sharper focus than the audit of risk categories.

Most growing companies will identify the same categories of risk.

Concentration risk

Many companies identify a small number of customers or suppliers whose business activities represent a large concentration of the company’s business. Customer concentration is a blind spot for most founders. Most understand the risk of customer concentration. However, they often do not internalize the risk until they lose a significant customer.

Working capital risk

This risk is the gap between when cash is paid out for expenses, inventory, and employees and when cash is received from customer sales. This risk increases during periods of growth as working capital needs increase for growing companies.

Key person and key process risk

This risk assesses the knowledge and information concentration of a company as a result of one or more people leaving the company. This risk is assessed when one of the key persons leaves and the knowledge and information is assessed for the first time.

In the best risk assessment frameworks, the goal is not to eliminate risk or the assessment of risk. The goal is to encourage the assessment of risk, quantify the potential impact and develop a mitigation plan.

Where they Actually Intersect

The businesses that are the most successful during periods of growth are not the businesses that have the most sophisticated financial models or the most sophisticated strategy or the most detailed risk registers, but the businesses that force these three assessments to be conducted frequently, at least monthly or quarterly as opposed to once a year.