Series: Driving Smart Growth
Post 1: How Finance Leaders are Re-evaluating Financial Models
Preparing for Volatility
We’ve all seen the posts from Sequoia, Y-Combinator, and major media outlets. Markets are shifting and leaders are being asked to prepare.
As a founder or finance executive, how do you translate the tips (or mandates) from investors or shareholders into responsible, effective recommendations?
- Re-evaluate financial models in volatile markets
- Effectively track your spend and growth
- Incorporate tools and cadences to stay on top of decisions
- Run reductions in force or vendor cuts (if it comes to that)
Now let's get right into it.
Financial Modeling in Volatile Markets: Tips for Finance Leaders From Top CFOs
Even when the VIX is hovering in the low teens, finance leaders are in their forecasting files weekly tweaking and shoring up predictions. In today’s volatile market, most tell us they’re hard-pressed to go a week without making substantive changes to their model.
Reviewing the insights from the CFOs interviewed, we found there are three elements of an effective model:
Next we'll deep-dive each element.
Insight 1. Test key assumptions.
Whether on your funnel conversion or vendor costs, this is the time to reevaluate the fundamental (potentially static) assumptions you’ve baked into your model.
For example, in your growth model, what is the prospect to lead ratio? What data informed your current version? Is that data still accurate?
Do you believe your marketing investments will continue to return similar results in this new economy?
Making sure these core assumptions are identified and dynamic in your model will help you with more realistic growth numbers.
"Your model is only as good as your data and the assumptions driving it. Many of those assumptions will need to change based on the reality of today.”
Insight 2. Break your model into independent modules.
In a world where your model will need constant updating, it's helpful to break your large company model into a series of smaller modules that can be updated without impacting the whole model.
For example, if your company uses software tools (and what company doesn’t these days), have a section in your model dedicated to calculating those expenses. Be able to modify sections of this module without breaking other parts of the model.
In that section, make sure you’re getting the right inputs, whether it's headcount or usage-based metrics. It’s also useful to track per-seat costs per tool so you have the right outputs as your company scales (or reduces) headcount.
Having a slightly more granular model for expenses will give you a better sense of what those truly are with changing circumstances.
"Modeling is all about trying to provide effective recommendations to the business, which means constantly tweaking as the market shifts and your recommendations need to change. Having an agile model with several sections is something we're proud to have invested in so that we can make updates quickly and advise our teams well." - Ada Johnson, VP Finance at Heap
Insight 3: Evaluate the Granularity of Your Modules
Equipped with your modular financial model, you'll next need to figure out how detailed each module needs to be in order to get the insights you need.
We’ve all been there – your CEO sends you a slack to ask about a business scenario, and you’ll need to modify a structural component in your model to answer that question. Oftentimes, it goes something like this, “what if we spent 2x on Google Ads?” and behind the scenes, your FP&A team is breaking out your growth model into additional details for Google Ads versus other channels.
It’s worthwhile to develop a few “rules of thumb” for how granular you break down each of your modules. For example, if you have a growth module, you may want to break down even further into details about how each channel is performing so you can make more accurate predictions for the company.
While each business is different, here are some general modules and levels of detail you’ll want to set up:
- Growth: Acquisition by channel, funnel conversion, pricing, revenue, cash payment, retention.
- Headcount: By department, level, attrition, rate of recruiting, salary, benefits.
- Other expenses: By vendor, cost per seat or hourly rate, payment frequency, usage volume.
"The finance team at ASAPP is seen as strategists and advisors because we’re capable of providing advice to the business in real-time. For us, this meant getting very granular in our models so that we could share growth and cost scenarios with the board, CEO, and department leader, and proactively advise rather than reactively respond.
Additionally having the mindset that budgeting is an exercise and purposefully building a flexible model from the beginning allows for us to stay nimble and run various scenarios." - Ben Heben, SVP Finance ASAPP
Tracking Actuals Against Models
Now that you’ve updated your forecasting model to be more dynamic to market conditions, what’s the best way to track actuals and keep updated with company decisions? Sign-up below to get notified when that post is live next week.
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