Financial statements are the Rosetta Stone for a business. They are the most succinct way of communicating how a business operates to management teams and boards, who weigh the trade-offs of different investments.
In the early stages of the startup, financial statements aren't used much as a management tool. They are most often used to keep an eye on monthly burn rate. But as companies grow, startups hire leaders to manage marketing and sales and product and engineering. These functional teams require money to achieve their goals. Investments include recruiting, structuring sales quotas, developing software, buying ads, hosting events, or expense accounts to close customers.
Each functional team makes overlapping demands on the capital of the business. Different investment strategies can lead to dramatically different outcomes for a business. Being able to model and communicate those future scenarios is essential for good management.
At a recent board meeting one of the companies I work with, I saw a board management style I hadn't seen before. This board member is exceptionally good at managing a business through financial statements.
During the board meeting, this board member surfaced many the strategic issues facing the business in the next 18 months entirely from the financial statements: the structure of the sales and marketing teams, the timing of new product features, sales quotas, marketing budget, sales efficiency and future fund raising plan.
With the right lens, the balance sheet, the cash-flow statements and profit & loss statements tells the history of a business and projects its future.
23 October 2013