The longest serving Governor of New Hampshire and former head of Knoll Furniture John Lynch said it best: revenues must be greater than expenses. It takes money to make money is also true.
It seems so simple, so how do you do it?
In the latest of a series on the day-to-day of being CEO of Dyn, we’ll try to figure that out.
You always know when you spend your last dollar, but it takes a lot of foresight to know that you’re going to be essentially at that point in three months time. Said differently, you know when you’re going to fall off the cliff but you’re not going to see it coming.
Plenty of CEOs are disconnected from the finances of their company, which is sad. I think that you need to have an innate understanding of capital and operating dollars and also have a little bit of treasury and corporate finance know-how. Then it’s a good understanding of value. Sometimes, you want to pay top dollar and sometimes, you want to get something done.
It’s Kinda Like a Card Game
It’s unfair in some ways since many engineering-based entrepreneurs are steeped in higher order calculus and abstract mathematics. Finance is just addition and subtraction, so it has to be super easy, right? But we don’t have enough practice or practical education on finance growing up and don’t manage our personal finances enough like accounting departments do in thinking about revenue/expense rates, balance sheets or cash.
When we are left with the question of whether to build a feature/product or do a trade show, the numbers have to be in the equation. The “natural” leaders are constantly thinking risk vs. reward in everything (market position, technical differentiation, etc.), making the best bets along the way. You may not win every time, but if the odds are in your favor and you play enough hands, you cash in. Figuring out downside, upside, probable outcomes and when to fold? That is the true art.
It’s about managing the risks and rewards appropriately: making sure that as one bet is paying off, you’re playing another one and that the upside is staggered and downside is then limited. It could be that you play more aggressive and are finding the right plays to go all in on. If you focus on execution, probability does all the hard work.
Sunk Costs and Unknowns
How we traditionally go back and evaluate decisions bother me. We look for the 3-5 things we should have/could have done differently and then say, “Next time, we’ll avoid those because we’ll do things differently.” Imagine a poker player saying, “If I had only known they had a flush, I would have folded.” You’ll never know, so the only way to win is to play games where the rules and odds are in your favor.
I believe in learning from your mistakes, but for good reason, you probably made a decision that was rational at the time based on the facts at hand. This is a game where you don’t know what cards you have, nor what the house has. When you think that hindsight is 20/20, you craft a story to fool yourself because humans are storytellers. People have to be realistic about learning from their mistakes.
When you deal with changing plans, you always need to look at where you want to go rather than what you put in. Loss aversion is a strong cognitive bias, so don’t fall for it.
Most businesses today are less capital intensive. There is more on demand labor/supply of everything which makes rapid iteration possible. While it was a question reserved for the largest companies, even small companies have to be deliberate and calculated about what core functions they keep in house and what they have others do. In the end, there are no right or wrong answers, just different ways to put things together.
In what we do, our capital needs are fairly light and managing cash isn’t a big deal. Managing long term expenditures and revenues is done so we have a more calculated approach. We look at the rates of flows and how that draws down or replenishes reserves. (Good thing I remember stocks and flows from a systems dynamics course, plus many years of calculus and other math!) Keeping an idea on those rates and adjusting the levels is critically important.
We’re also not managing against a huge cash reserve from an investment (VC backed company), so some of the techniques are a bit different. Our timelines and milestones can be more flexible. Like all things in life, there are trade offs, but it’s one that I think our customers can appreciate.