Curt Mastio
By Curt Mastio on May 28, 2024

How an Optimized Financial System Leads to Startup Growth

Many founders, thinking of startup growth, have the wrong idea about finance.

Some hear the word finance and narrow it down to basic accounting and bookkeeping. They hear finance and think of reactive reporting. They hear finance and think of a dry, boring, necessary evil to stay compliant.

Mainly, non-finance people tend to view financial systems as necessary for fulfilling reporting requirements or securing outside investment, but not much else.

Do you happen to be one of those people?

What you may not realize is that a robust financial system is actually a great way to measure how the company is doing and if it’s on track to meet its goals. In short, an optimized financial system can play a major role in enhancing your startup’s growth.

Finance isn’t simply a measure of the money in your company’s bank account. The cash in your account is actually one of the outputs of accounting information. There are many measurable events that occur before the company receives those dollars. The actual figures are merely the result of previous business decisions and events and understanding these activities can help you be more strategic with your business.

Drive Startup Growth With an Optimized Financial System

An optimized financial system can do a lot to help company management to steer growth and manage profitability. But what is an optimized financial system and what can you do with it?

An optimized financial system is a comprehensive system containing financial and non-financial information about the company and its business.

It’s a way for company management to:

  • Define long-term financial and operational targets
  • Plan an annual budget based on those long-term targets
  • Create forecasts based on operational drivers
  • Compare actual figures against budget and forecast
  • Visualize key metrics including operational drivers and financial results

A robust financial system is a valuable steering tool for any startup. With it, you can model future operations and create dashboards showing metrics and KPIs from all aspects of the business. Starting from the number of leads generated (and other sales metrics) all the way to actual profitability.

Your financial system is a framework used to organize your business’ financial information that makes it easier for you to draw insights from the structured data..

With a financial system in place, you can more confidently make fast and informed decisions based on all available financial and operational data.

Key Metrics That Drive Startup Growth

Since growth is a function of a growing customer base and increased sales, there are a few key drivers that can be used to steer and predict growth. In a driver-based forecasting system, changes to non-operational drivers (like total leads) can be used to predict future growth.

Some frequently used drivers of revenue are:

  • Total leads – the number of prospective buyers in the sales pipeline
  • Close rate – the percentage of leads your sales team is able to close
  • Churn rate – the number of customers canceling their subscription each month (mainly for SaaS businesses)
  • Customer Lifetime Value (CLTV) – a projection of the total revenue a typical customer will generate over the lifetime of them being a customer
  • Customer Acquisition Cost (CAC) – how much it costs to bring in a new customer

How can you use these drivers to fuel growth?

Knowing the inputs necessary to achieve the desired output, i.e. a certain level of growth, will help you make sure that the company is on track to achieve its goals.

Example: If your goal is 100 new customers per month, you (or your financial system) can work backward to determine the level of activity necessary for each step of the sales process in order to achieve that goal.

Imagine your sales team is really good, and they close 25% of all sales calls. To close 100 new customers, they need 400 new leads each month.

To take that one step further. If you know that a customer has a lifetime value of $1,000, keeping your CAC below (at a minimum) the profit generated by those $1,000 in revenue is paramount.

An optimized financial system will help in several ways. Once your targets and their drivers are clearly defined, you can closely track your progress with dashboards or reporting tools. Should it become evident that you’re not hitting your targets, you can drive actions to get back on track.

Financial Figures Result From Operational Drivers

Revenue, growth, and profitability are all functions of your key drivers on both the revenue and the operational sides of the business.

On the revenue side, the key metrics driving growth will be the same metrics driving your financial figures. Adjusting any of the factors – both in your forecast and in real life – will result in changes to your revenue.

In terms of profitability, your business will be affected by many internal and external factors. Keeping your cost of goods sold (COGS) under control and not overstaffing are two metrics to keep a close eye on because of their effect on profitability.

Ready to Optimize Your Financial System?

Finance doesn’t have to be a dry topic that should be avoided. Often, it can be quite the opposite, especially in a fast-growing startup. Quick, meaningful financials can actually fuel your business’s growth, by giving you a way to clearly define where you want to go, and what it will take to get there.

With the right tools and the right information, you can confidently make fast, informed decisions for your business. Simply put: you can focus on doing the right things, better.If we’ve sparked your curiosity and this all sounds intriguing, take a look at how Founder’s CPA can help you build an ideal financial system. We’d love to talk about setting up a financial system that’s right for you and your business.

Published by Curt Mastio May 28, 2024
Curt Mastio