As an investor and strategic advisor, as well as an entrepreneur, one of the things that I have to do as a part of my role is financial modeling [or at the very minimum, reviewing the modeling that the business owners have done].
In my previous role as strategic consultant, one of the first things that I take a business through to understand their capabilities and get them aligned is an exercise called:
It goes like this. Normally, we are in a big room and we use a big roll of butcher block paper and put it on the wall. Then I draw out this diagram with a big, thick black permanent marker. I also hand out green and red stickers.
Then everyone gets a pack of sticky notes that are pre-filled with a list of key tasks that the team has to complete to achieve their goals. Those tasks include research, creating Powerpoints, giving presentations, social media, making sales calls, closing deals, hiring, firing, financial modeling, etc. etc. The list of tasks varies, depending on the type of group that I’m working with.
Each person has their initials on their pack of sticky notes.
Then they go through and put each sticky note in one of the quadrants – LOVE/DO WELL, HATE/DO WELL, LOVE/DO BADLY (or haven’t tried) and HATE/DO BADLY [it is total mischief to have anything on your list of responsibilities that goes in this quadrant].
Lastly they go through and put either a red or green sticker on the sticky note, indicating whether the task energizes them and gets them engaged, or whether it drains them and causes them to disengage.
As I am explaining how to do the exercise, I always use financial modeling as the example for my HATE, DO WELL quadrant and I put both a red and a green sticker on the sticky note.
Admittedly, I am quite good at modeling, but truly, I’d rather get a root canal than have this as a part of my regular responsibilities.
Yet, I must admit that I am energized when I finish an amazing model. But conversely, I am totally drained by the task and many times during the process, because I hate it so much, I disengage and have to struggle to get re-engaged.
But I will tell you that if you are building a company, or investing in or advising one or more companies, even if you are not a financial wizard, you must to learn how to at least read a financial model and not just the resulting P&L.
Reason being, is that if you can walk line by line through a spreadsheet and understand the formulas (or worse, when there is an assumption that is listed, but not even used in a formula), you will really know your business.
If you rely on a financial analyst and take their work at face value, it will be very difficult for you to spot problems. I highly recommend that you sit down with that analyst and review all of your key performance indicators (KPIs) and ensure that there are proof points in the model that track those.
Just a few examples of KPIs are:
- Unique Visitors
- Calls per Unique Visitor
- Gross Revenue per Customer
- Marketing Spending per Unique Visitor
- Expenses per Employee
Also, before you have them go through the model with you, make sure that every summary total column of the spreadsheet (e.g. the total by year or by quarter) has % of Total so you can understand your business/revenue and expense mix and how it changes by year. Also make sure that they incorporate % Growth figures for every major total for categories such as Revenue, Cost of Sales, Expenses, Capital.
Lastly, one of the best ways to know your business model inside and out is to write up a narrative version of the assumptions. If you still consider yourself allergic to the financial model itself, you will need to sit with the author of the model to get the answers that you need. The narrative should mirror the left hand column of the various tabs of the model.
It is complete and total mischief to not know your numbers, because if you can’t articulate the key things that you need to track in your business and ensure that your financial projections reflect those assumptions, then you don’t know your business.
And you only need to watch one episode of ABC’s Shark Tank or CSNBC’s The Profit to know that if you don’t know your business, you won’t win and you definitely won’t be a game changer.
Stay tuned for more business planning mischief (the good kind) tomorrow. Later this week we will revisit the LOVE/HATE/DO WELL/DO BADLY exercise and I’ll give you some more tips for maximizing the capabilities of your team.
Chief Game Changer,