Operations people create smart financial models. But they are often dangerous.

So I’ve seen a trend among a lot of startups these days which is to kind of have a VP or COO instead of a VP/CFO. They also manage the money, but they also go deeper into the business in ways that a “finance manager” simply cannot.

These people often come from strategy consulting or banking. And they are often excellent recruits, often very intelligent.

But here’s the thing: they build GIGO financial plans. Garbage-in, garbage-out.

What do I mean? The smart folks at Bain, McKinsey, Morgan Stanley, etc. will lay out a financial plan to tell you what you want to hear. For instance,:

  • If our CAC goes down, we can stretch the money 2 years.
  • If our business efficiency increases, our cash flow lasts 30 months.
  • And most dangerously, if the growth picks up a bit, then… well… we hit the plan!

This type of modeling is what you do when you sell. You sell various scripts, and ex-consultants, ex-bankers and ex-venture capitalists excel at that. They modify things, inputs and variables, to achieve the desired result.

Real Finances (e.g. Controllers, CFOs, VP Finance) don’t do this. In fact, they usually don’t know how. Instead, they tend to build financial and operational models that are very focused on the present. In today’s burn, and today’s income, and today’s problems.

It can be frustrating when you want to model stretch plane and super stretch plane. Most controllers in my experience cannot do this. They’re not great at helping you come up with a C-10 plan. But they can give you a very honest answer about how long your money will last.

The 3 financial plans you need for the year: C-90, C-60 and C-10

The fancy model GIGO, on the other hand, can make everything look rosy next year. And when that doesn’t happen IRL, the money runs out way faster than expected.

I’ve seen this so many times, over and over again. The “pattern” for this year and next year having its inputs manipulated by a very clever ex-banker/consultant/VC analyst to produce a desired outcome.

Beware.

At least don’t run your business and especially now your Zero Cash Date on these models.

And no matter what, force your VP of Operations to also build an L4M model. A fair model based on the last 4 months of actual results. Here’s how to do just that. In just 15 minutes, in fact:

Posted on October 29, 2022

Robert D. Coleman