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5 Key Strategies in Financial Modeling for Growth: A CEO's Guide with Daniel Kim

Guest: Daniel Kim, VP, Financial Services and CFO Coach at CEO Coaching International, where he oversees the creation of Making BIG Happen tools, methodologies, and skills. Daniel also serves as a resource to coaches and clients for challenges related to finance, banking, M&A, PE/VC/IPO, industry benchmarks, and reporting issues. Previously, Daniel was VP of Corporate Development at several firms and a head of research and technology analyst in the investment banking industry for 25 years.

Quick Background: Entrepreneurs and CEOs rarely love managing their business’ finances as much as they love running their businesses. But leaders need to have comprehensive data at their fingertips and a team that can use that data to enhance the company’s strategic planning and execution.

On today’s show, Daniel Kim discusses the critical role of accurate financial data in Making BIG Happen, including real-world examples of how money management can either drive growth or unravel your company’s culture.

Keys to Leveraging Financial Models from Daniel Kim

1. Ground your company in reality.

“The very first thing that I learned to turn to as an analyst when I’m looking at a company are the numbers,” Daniel Kim says. “The numbers never lie and people do. We need to take company statements with a grain of salt. Intentional or not, statements may be misleading or unrealistic and it’s our job to analyze the numbers to determine reality. So the first thing I do whenever I look at a company is review their financial statements, historical, and forecasts, to get a really good sense of where they are, where they’re going, the type of margin profiles, etc. It is always the financial numbers that really provide the foundation for any type of analysis for a company.”

Of course, from the Great Recession through the back end of COVID, many companies tried to build their foundations on less-solid numbers: potential subscribers, rosy profit projections, limitless growth targets. Those numbers might have attracted investors, customers, and talent when money was cheap. But now that we’ve exited the ZIRP era, potential just isn’t good enough. Whether they’re planning to grow by introducing new products or services, widening their customer bases, or pursuing M&A, CEOs have to be crystal clear about how much cash they have, how much they need to execute growth strategies, and how much they’re going to earn. Without those numbers, your BIG vision for 2024 might turn out to be a pipedream.

2. Capture your most important numbers.

Every company needs an income statement, balance sheet, and cash flow statement. Integrating those statements into your annual planning will be more unique to each company, as will the additional data that you should track, measure, and manage on your way to BIG. And while it’s important that CEOs and their financial teams present those numbers in a way that’s clear to internal stakeholders, you should also be able to present that data, at a moment’s notice, to a potential partner or c-suite hire who doesn’t speak your company’s language.

This is one of those areas where some CEOs may need to turn to their CFO or coach to create efficient dashboards and reports. “We’ve developed a number of templates to help provide some standardization of how you present the data,” Daniel Kim says. “You can put in your revenue drivers, drive your margin assumptions, which ultimately drive your cashflow statement and your balance sheet, and you’re now capable of forecasting out by quarter, by month, a number of years. And you could determine where your company is going based on historical numbers and your future assumptions. This really helps drive strategic decisions for where the company is headed, their cash use, should they invest in current products or invest in new products, etc.”

In addition to tracking things like KPIs and cash flow, Daniel’s templates can also be very useful for CEOs who are preparing for an exit, merger, or acquisition. Even if you’re not thinking about these strategies today, knowing what your company is worth could help you identify ways to improve your potential valuation tomorrow, creating more options to consider as you develop long-term plans.

3. Find a complementary CFO.

The best CEOs use humility and an awareness of their strengths and weaknesses when rounding out their C-suites.

So, are you really a numbers wiz who can carry spreadsheets full of financial data around in your head? Or are you just pretending to be because you’re afraid that delegating financial responsibilities might make you look weak?

Being honest about what you’re best at isn’t just going to improve your working relationship with your CFO — it’s going to give you more time to focus on the things you’re best at, and the things that only you can do for the company. And even if you are adept with the company’s finances, having another set of eyes on those numbers will only help to challenge assumptions, check for blind spots, and identify more growth opportunities.

“There really is no particular rule of thumb in terms of how strong a CEO should be financially,” Daniel says, “but they definitely work together with the CFO in concert and they are very complementary in multiple ways. CEOs tend to be much more strategic in nature, whereas they can then rely on the CFOs for allocating capital where it’s going to drive the highest return for shareholders. And so when you can marry that strategy together with a real robust financial review of the company, then you have a perfect storm, so to speak, where the two can come together and provide really powerful strategic decisions for the company. So a CEO needs to be aware of the numbers, a CFO can help deliver those numbers, and together they can really help drive the business forward.”

4. See the BIG picture.

Numbers may not lie, but in certain situations they can be deceiving. Just like growth-obsessed tech firms used customer acquisition projections to gloss over losses, focusing on one or two positive numbers could create an inaccurate view of the company’s true position.

That’s what happened to an outsourcing company Daniel Kim worked with that was growing fast but bleeding cash. Despite nine-figure recurring revenues, the firm just couldn’t maintain its cash balance and was racking up debt.

“They really had to hit the pause button to figure out what was going on,” Daniel explains. “After doing extensive due diligence and a real deep dive, we finally figured out two big conclusions. Number one, their largest clients had the best KPIs. No surprise there, they provided the best lifetime value in terms of revenue and they’re the lowest cost to acquire because they stuck with the company for the longest. So they generated tremendous returns. The problem was their smallest clients, which represented the majority of their thousands of clients and about one-third of the revenue. These small clients churned very quickly in a matter of months. And so that was a real problem because the cost to acquire these customers was very expensive. The next step of the analysis then became, ‘What do we do now that we’ve learned this and why is this happening and what are the steps we can take to remedy it?’ It really highlights the fact that sometimes you need an independent review of a company to really understand what is going on. They had done a great job managing and growing the business over decades, they just ran into a problem and they literally could not see the forest for the trees. And we were able to help the company identify the problem and then solve the problem.”

5. Connect cash and culture.

Financial analysis and management might seem like something that happens behind the scenes, outside the purview of your ground-floor workforce. But employees tend to be more aware of the company’s fortunes than many CEOs realize. Your workforce will notice if risk-averse owners aren’t willing to sacrifice equity or shell out for an acquisition that will improve the company’s situation and their own career prospects. And when you’re riding high, employees will keep tabs on who’s getting bonuses and promotions and who’s getting passed over.

CEOs have to walk a very fine line between encouraging and rewarding healthy in-house competitions that spur creativity and high performance while also maintaining a spirit of collaboration that keeps everyone moving together toward BIG. Compensation can be a motivating tool towards those ends, but if it becomes THE end, then your company will stall and die.

“Compensation tends to drive a big part of your culture,” Daniel Kim says. “It determines if you are working in a collegial atmosphere and going towards a common goal versus having a cutthroat, very protectionist culture. In the past, I’ve worked at investment banking firms that lost sight of their goals and lost their culture. Because we became too successful, money literally got in the way of our culture. That was a powerful lesson to me that we should have been more proactive in reminding our employees of our goals, and that money should not be the primary reason why you come into the office.”

Top Takeaways

1. Numbers don’t lie. Your assessment of where your company is and where you want it to go has to be rooted in the truth of your data.

2. Check your blind spots and surround yourself with executives, mentors, and coaches who can help you open your eyes and improve your leadership.

3. Money is not the end, it’s a tool that your company uses to put its values into action and achieve BIG goals.

CFO Coaching– Learn more about how the Financial Center of Excellence at CEO Coaching International can work with you and your CFO to get a handle on your financial situation, so your business is ready to Make BIG Happen.

Top 5 CEO Financial Must-Haves– As CEO, it’s your job to navigate through economic uncertainty and Make BIG Happen. This five-step CEO playbook will help you get your financial house in order.

About CEO Coaching International

CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average EBITDA CAGR of 53.5% during their time as a client, more than three times the U.S. average, and a revenue CAGR of 26.2%, nearly twice the U.S. average.

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