Episode 86 – Finance Your Strategy, Not the Other Way Around

JANUARY 15, 2023

I recently had a breakthrough with a client. He is a finance guy by training. He loves P&L forecasting. Loves it. He has his finance team do it four times a year. You’d think it was a public company. It’s not. It may never be.

“We can see problems 30 days in advance,” he claimed, which is true.

But here’s the problem:

Your P&L is a lagging indicator of business health if your objective is exponential growth or even mid-double-digit growth. It alerts you to topline problems way, way too late. That’s because this is not how you see topline problems heading your way. Not at all.

And it’s deceleration in topline growth that will turn your P&L blood red, especially in Phases 1-3. And especially, if you invest millions in fixed costs to support growth. You can only cut so much before you hit bone and then you won’t have the assets to reignite growth.

If your P&L is the lagging indicator of health, your cash register/website sales are the leading indicator.

If you want to grow fast, you only strategize for the leading indicator. Your whole organization needs to be dialed in to growth objectives suited to your competitive situation and your Phase of development.

Running a fast-growing business is about following demand, following the market, and ‘letting go’ of the need for total administrative control. This is a risky business sector.

None of this is not an excuse for financial mismanagement. It just means that your financial checks and balances should be the last objector (if we pay for that, we need to cut something else) to a topline tactic, not the first objector (hey, that costs money!)

I’m urging you to set the strategy and then figure out how to finance the playbook necessary to pursue it in the market.

Finance is a critical skill in a low-net margin industry like early-stage consumer brands, where your initial COGS are penalized by your tiny scale. This is why, in Phase 1 and Phase 2, you have to err on spending your personal time to drive results (e.g. field and event marketing, not paid ads). Big topline investments should favor things like equipment or staff (i.e. fungible labor).

Despite the terror of your P&L, finance must follow the strategy, not the other way around. This is why fundraising is a common tool among Skate Ramp brands whose gross (or product) margins are below 50%. It takes until the eight figures for most of these businesses’ P&Ls to become break-even or at least cash flow stable.

It’s scary, but this is why you’re a challenger brand, not a market-leading incumbent. Isn’t it?

Look, I would love to believe there is a way to find a great competitive strategy for an emerging CPG brand with pre-defined financial constraints. You know, like setting your marketing budget as an abstract % of sales. I meet folks all the time who think like this.

But this is not what you want to do at all in a fast-growing business.

Instead you need to find a competitive strategy whose playbook favors your team’s labor initially. This is really the best way to build financial discipline into your plan for growth. Every expense must be justified strategically with known ways to measure its topline outcome (short term or long term).

If working capital doesn’t permit an ideal playbook to pursue your strategy, then you now have a more rational reason to raise funds OR go back to the playbook and replace expenses with your own labor. 

You never iterate your competitive strategy due to financial problems. You iterate your executional playbook to force items off of your expense ledger and make room for the optimal tactics. 

This is, in part,  why my newest online course on effective consumer marketing  preaches spending your time, not money, early on in this crucial business function. Early on, money should be spent on distribution, inventory, equipment and operational staff. 

Set your competitive strategy for optimal growth. Then figure out how to finance it. 

Don’t set artificial financial limits on your strategic thinking or you will drive your business into a myopic, tarpit of stagnancy. Specialty foods companies do this all the time, because they won’t do something as simple as lower their ridiculous pricing to unlock demand for everyday use.

Thanks for listening, folks, and be safe out there.