Startup Goals Should Not Be at Odds with Financial Foundations
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6 December 2023 23:02 WIB
By: Shivom Sinha, CEO and Co-Founder of Bunker
The season where money was cheap, and investors were scrambling to invest in the latest shiny new thing is over. Startup funding deals in Indonesia have dropped by over 50% year-on-year in the first half of 2023, while total funding value has plummeted by over 70%. The period of investor “irrational exuberance” has now been replaced with prudent fiscal responsibility, considering the global economic situation is wracked with two regional wars, increasing U.S. interest rates, leading to the third weakest global growth forecast seen since 2001.
Although the valuation bubble for startups has burst, there are still opportunities for companies to address their markets with proper business planning, path to profitability, and up-to-date financial data to address future fluctuations and opportunities. One of the critical assets for such planning is already within the company itself, its general ledgers, which are the foundation of a company’s accounting.
Going back to basics, businesses’ financial goals are straightforward: make a profit and ensure you have positive cash flow. Profit means more revenue and fewer expenses. Cash flow means collecting cash faster and paying cash out slower. However, setting goals around profitability and cash flow does not make these goals inherently more achievable.
Sometimes strategic trade-offs need to be made: for example, utilizing penetrative pricing for growth, taking a longer time to collect cash from strategically important customers, or investing in product research and development or CapEx (Capital Expenses) to establish competitive advantages.
Like airline pilots, most CEOs and CFOs are used to ‘setting course’ or budgeting only twice a year and then bridging from one budgeting season to the next with minimal inputs (effectively on autopilot) with respect to capital allocation unless there’s a significant event. However, turbulence now is the norm, not an exception. Fortunately, the C-suite’s cockpit has evolved significantly, allowing for more consistent ROI (return on investment) optimization. However, this all begins with financial visibility.
Usually, this can be done via the general ledger, the record-keeping system accountants use to track and categorize financial transactions. Transactional data is entered into the system, automatically mapping profit and loss (“P&L”) and balance sheet – two of the three financial statements. The third financial statement is the statement of cash flow and is derived from the balance sheet and P&L.
For a CFO looking to develop a systems-driven approach to grow sustainably and drive profitability, general ledger-level visibility is critical. However, this visibility rarely extends to the depth of the general ledger, which offers a shallow, superficial financial view that obscures the detailed cash flow drives and levers underpinning an organization’s profitability and cash flow drivers and levers. This also leads to a lack of understanding of the lag and elasticity associated with manipulating those levers.
As multiple CFOs have shared with us, underinvestment in their functions prolongs the post-books-close FP&A (financial planning and analysis) process by weeks, which involves auditing, analyzing, and generating deep insights from a standard monthly financial reporting pack - at just a superficial level. This leaves no time to develop actionable insights from the general ledger on how to surgically course correct, drive revenue, reduce expenses, collect cash faster, and pay it out slower.
Yet, general ledger visibility can add more rigour to the FP&A system, leading to several profitability and cash flow goals. It can help bridge the gap between ‘real business spend’ versus timing journal entry nuances such as material accruals and reversals; overhaul data entry and month-end standard operating procedures to improve and maintain accounting hygiene; speed up the search for operationalize insights from the ledger itself; and find vendor-focused expenses that can be leveraged to drive negotiation around payment and pricing terms.
Creating an enabling environment where the broader team collaborates on FP&A helps boost engagement positively while making finances more transparent. Even when using a tool like Bunker, teammates will share when they have managed to save money on a subscription or negotiate for more credits. Their colleagues commend the win, reinforcing a sustainable growth mindset. This provides a critical boost to morale at a time of layoffs and financial uncertainty.
Indonesian startups are used to taking a ‘first principles’ approach to problem-solving, but despite their data-driven cultures, most lack the basics for profitability and cash flow goals: a solid understanding of their accounting and a fast, detailed FP&A process. Most critically, there is missing visibility of the most important, expansive, and detailed financial data source—the general ledger.
Fortunately, we’re seeing from our clients, both in Indonesia and abroad, that genuinely data-driven CFOs and management teams are increasingly investing in analytics and automation in their finance departments to get more technical and accelerate their strategic decision-making processes. Beyond the obvious tactical benefits, deeper and democratized visibility across the organization will empower teams, reinforce a cost-optimization mindset, and improve morale during a challenging time.
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