The vital role of financial planning and analysis in uncertain times
With rising interest rates and increased inflation, 2022 has turned out to be anything but predictable. As we move towards 2023, the ‘growth at all costs’ approach is out the window and the era of ‘profitable growth’ is here.
Over the past decade, many businesses, especially in the venture world, never thought of the word ‘profitability’. And why should they have? Demand was high and cash was cheap, so capital was rightly invested in the business to drive growth. Times were good.
But with such a focus on maximising revenue and accelerating growth, many businesses became complacent. They lost focus on tracking forecast accuracy, didn’t understand their unit economics and couldn’t build paths to profitability – three core KPIs of business health.
As capital gets more expensive and the investment environment dries up, companies are being forced to make strategic (sometimes difficult) decisions to navigate through the storm, and it’s the finance team’s time to shine.
“There is a lot less margin for error,” says Taimur Abdaal, co-founder and CEO of Causal, a business planning platform. “If you’re not intentional about making a shift to focus on your economics and manage cash burn, you could be in trouble. It’s time for companies to really understand the levers of their business, and invest in what’s working.”
Understanding their business levers means that companies need to look beyond their financial data to gain a clear understanding of unit economics, which starts with understanding and trying to improve on both the lifetime value of a customer (LTV) and customer acquisition cost (CAC).
“Once you have a baseline understanding of your unit economics, you can begin strategising on how to improve on them, and that’s where business planning comes in,” says Abdaal.
During the bull run, finance teams largely relied on financial data such as general ledger (GL) revenue to forecast growth, sometimes by adding a simple growth rate. Businesses would look at the market growth projections and match their growth to that, which is not scientific at all. With every penny mattering so much more than before, it’s up to the finance team to build accurate business plans that are based on financial and operational data – leads, conversion rates, product usage, etc. The snag: pulling that data into spreadsheets and then analysing it effectively is a laborious, error-prone and complex task.
“What we’re seeing is that accurate forecasting has become crucial for the future of businesses,” says Abdaal. “Many have started to look away from spreadsheets at tools that can directly integrate with systems like CRMs and data warehouses and so on, so they can plan with the right frequency and accuracy.”
This ability and need for continuous planning have pushed finance teams into the limelight as they share insights and plans across the business, acting as strategic advisors guiding executive teams and department leaders on key decisions.
“We’re seeing that change because finance’s time needs to be freed up. They need to automate their manual tasks so they can spend their time figuring out where the business needs to go,” says Abdaal.
The move to a sustainable growth approach also means a change in business culture. “It’s easier to make that cultural shift today than it was a year ago. In 2021, if you wanted to take things slower and scale up efficiently, you would have faced a lot of resistance from investors,” says Abdaal.
To help with this more cautious approach, Abdaal suggests firms should adopt a revenue-led planning framework that ensures companies only increase costs in line with revenue growth and can therefore better allocate resources. That means providing accurate forecasts that are continuously fine-tuned.
“If you’re super accurate with revenue forecasting, then you’ll have a much clearer idea of how much money is sensible to spend on increasing that revenue,” says Abdaal. “And that comes from having the right data flowing into that model, so taking revenue modelling extremely seriously should be the starting point.”
The most successful companies are also the ones that measure the performance of their finance teams based on the accuracy of their forecasting, he says. “For most companies, it will take a big cultural shift to start taking forecasting seriously, and having forecast accuracy as a core KPI is the best way to incentivise people to care about it.”
Q&A: Spreadsheets in modern finance
Taimur Abdaal, co-founder and CEO of Causal, a next generation spreadsheet built for finance, shares his thoughts on the future of spreadsheets
Why is finance so reliant on spreadsheets?
They’re incredibly flexible and incredibly powerful. You can use a spreadsheet to get a computer to do pretty much anything you can think of. The downside is that, because they’re so flexible and you can use them for pretty much anything, it does mean that for any specific task, there is probably a better solution. When it comes to financial modelling, you can do it in a spreadsheet, but once you reach a certain level of complexity, it becomes difficult to make and track changes, which can lead to mistakes.
What tasks are best suited to spreadsheets?
Spreadsheets are great for ad hoc stuff. They’re great for prototyping, but when you’re building anything more permanent that needs to be used by more people than just the owner of the spreadsheet, you want to start thinking a bit more about the right tool to use.
What are the limitations of spreadsheets?
Building and maintaining models in spreadsheets gets very unwieldy because of the way that formulas work – often the person who wrote the formula will be the only person who understands it. When you connect to different systems and pull in data from your accounting system or your CRM, pulling that data in is very manual. And when it comes to presenting or collaborating with others, spreadsheets can
easily be broken, so it’s hard to truly collaborate.
Why do finance teams need to look beyond the spreadsheet?
What’s important to finance is enabling them to free up their time so they can spend more of their efforts on being proactive. You want computers to do all the stuff that doesn’t require human judgement and you want humans focusing on things that humans are uniquely good at – working with other people and using their knowledge and their expertise. Spreadsheets haven’t actually changed in 40 years or so, so that’s what we are trying to do with Causal – create a tool that’s purpose-built for modelling and financial planning.
For more information, visit causal.app