Top Financial Indicators to Master Business Growth in 2020

Too much money, too fast, with no
effective oversight on how to spend it. In the last few years this seems to be
the norm. The financial landscape is changing,
and after years of wild investments and unsustainable business models the
fundamentals of Blitzscaling methodology is put into doubt by the finance world.
This is definitely not the new normal. The debate is more polarised between
people believing the current startup model is failing miserably, and people
who defend it no matter what. Today we’re going to talk about metrics
for sustainable and fast business growth Without losing sight of concepts
such as profitability and cash flow. Hey everybody! I’m Can, I’m the finance
and strategy officer at Growth Tribe. Current abundance on cheap
financing and over-reliance on it is not sustainable. Therefore, growing
businesses have to be prepared to improve their financial health, face
economic downturns, compete with other growing companies to attract
capital and finance their growth phase. In this video we’re going to have a look
at which financial indicators are the most relevant throughout these steps of
business growth and why financial management with a focus on cash flows,
profitability, and indebtedness are key factors for a company to sustain its
growth and well-being of its shareholders, employees, clients, suppliers and
also the surrounding community. In other words, how fast can a company
afford to grow, and how do you identify the proper balance between consuming
cash and generating it? Let’s start by taking a look at general
stages of business growth. Across the years, different mindsets have inspired
entrepreneurs on where to concentrate efforts to grow a business. Good examples
are Lean movement and Blitzscaling But they all relate back to the 5
Stages of Small Business Growth framework published in Harvard Business
Review in 1983. For example, once a company has validated the proposed
existence by getting enough customers and becoming a viable business, it is
time to go beyond product-market fit and the simple relationship between
revenues and expenses. We would not only measure
the past and the current ratios, but also aim to get an accurate picture
into the future through forecasting. Let’s take operating cash flow
ratio, for example. This is simply how well the short-term
liabilities are covered by the cash flows generated from a company’s operations.
Let’s break it down. Cash flow from operations is the
cash equivalent of net income. It is the cash flow after operating
expenses have been deducted and before new investments or financing activities.
Current liabilities are all liabilities due within one fiscal year or operating cycle.
Hence, the operating cash flow ratio is a measure of the number of times the
company can pay off the current debt with the cash generated from the same
period. A high number, greater than one, indicates a company has generated more
cash to pay off its current liabilities in a given period. Then, during the next stage, the survival,
a company has to ask itself: Can we continuously generate
enough cash to break-even? Can we generate enough cash flow to
scale up to a size that is sufficiently large, given our industry? If the answer to both of
these questions is yes and the owners have a desire to move forward then we
enter into the success phase. And here things start to get a bit more
complicated. If the owners wish to keep expanding at a fast pace instead of just
solidifying the existing business and profitability, then they use the company
as a platform for growth. Here’s when companies might adopt some sort of
aggressive growth program that might emphasise speed over efficiency. In the
Blitzscaling book, for example, some cited practices which are still
prevalent are, “ignore the customer”, “provide whatever customer service you
can as long as it doesn’t slow you down”, “tolerate bad management”, “implement a
financial strategy that supports aggressive spending”. Even though these
sound irrational and the perfect recipe for failure, these practices in the last
10 years have been possible due to the ability of businesses to raise money in
rounds of funding from debtors, venture capitalists and private equity
investors. As highlighted by Ray Dalio co-chairman of Bridgewater Associates,
“investors lending to those who are credit worthy will accept very low or
negative interest rates and won’t require having their principal paid back
for the foreseeable future. They are doing this because they have an enormous
amount of money to invest that has been pushed on them by central banks that are
buying financial assets in their attempts to push economic activity and
inflation up. These investment managers have large piles of committed and
uninvested cash that they need to invest in order to meet their promises to their
clients and collect their fees.” The typical and recent example is
WeWork, a space leasing company. A case of unrealistic valuation and bad managerial
practices that you probably have heard about. During the 12 months leading to
March 2019 the company was losing more
than $200,000 every hour! Okay back to the five stages. In the
success-growth sub stage the company then allocates resources for growth.
It takes more than just focusing on operating cashflows to make the company
growth sustainable and financially sound. This financial health is also represented
by EBITDA and net income margins. Earnings before interest, tax, depreciation and amortisation is a measure of company’s operating performance independently of
its financing and accounting decisions or tax environment.
On the contrary, net income is the residual amount of earnings after all
expenses have been deducted from sales. When we divide each of these metrics by
sales turnover we get the respective margins. Investors tend to prefer reviewing
operating cash flows over net income because there is less room to
manipulate the results. Cash is king! If you want to have a look at an example of
how these metrics are presented, take a look at Morningstar where you can have
metrics and depth with a subscription. You can also access financial
information easily from Yahoo Finance for both public and private companies. The monitoring of financial health
continues in the take off stage. And this is a pivotal period
in a company’s life. If the company overcomes the financial
and managerial challenges of this stage, like resource planning and delegation, it
can become a big business. For example, the company does not have to engage in a
“race to the bottom” with its rising number of competitors. If not successful,
the company can perhaps be sold at a profit provided the owners recognise
their limitations soon enough. The final stage is resource maturity.
Here the company tries to consolidate the financial gains provided by rapid growth.
But also its inefficiency incurred for gaining speed. The company fully engages
in operational and strategic planning. For this, best financial practices are
fully implemented. Tools such as budgets and standard cost systems then become
natural. And obviously, the company can always continuously experiment new products
that could bring new revenue streams. It is not surprising that in the
annual list of the world’s top chief executives, published recently by HBR,
70% of the score that makes them to be classified among the best performing CEOs
in the world is due to financial performance. So consider that the current
environment of low interest rates and cheap funding is not going to last
forever. To be prepared for more adverse scenarios we revisited the stages of
business growth and highlighted how they interact with key financial performance
indicators. It is not about a one-size-fits-all solution. It is about
common steps of business growth and how they interact with proper financial
practices. These indicators help companies preserve their liquidity and
profitability while growing sustainably. Let us know what you think about the
current financial environment and your opinions about financially sustainable
growth in the comments below. Don’t forget to like and subscribe, and
see you next time! you

9 thoughts on “Top Financial Indicators to Master Business Growth in 2020

  1. Accessible to people without formal financial educations, but still relevant to people with years of experience – well done!

  2. Definitely a super important topic for business in the current landscape. Companies should know when to jump and when to slowly climb, and metrics help evaluate that. Thanks a lot for the overview and clear explanation, Can!

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  4. Lot of great insights some basics and other more advanced, learned new things today thanks Can.
    Any book or podcast you recommend on this topic ? Thanks !

  5. Super relevant with Uber’s embarrassing IPO earlier and WeWork like you mentioned. I see something similar happening with e-scooter companies now. Scaling before addressing financial concerns. Or even product market fit in some cases.

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