Have you ever seen an ugly baby? Most of us have, yet no one thinks that their baby is ugly. In much the same way, entrepreneurs think that all of their ideas are home runs and most people won’t tell them that their idea baby is ugly.
Unfortunately, all entrepreneurs are going to make at least one wrong call. Because you are their wingman, you should be guiding your entrepreneur to take financially sound risks. But before you tell your entrepreneur their business sucks, there are a couple things to look at when identifying whether an idea or business is worth investing in.
If the idea or business is not profitable, you should not pursue it. This is the easiest way for a financial leader to identify that the business is not going to be successful. As the financial leader, you should be able to steer your executive team to a more successful and profitable road.
Churn. If your customers are leaving quicker than you are bringing new ones in, your business probably sucks. Churn is one of the KPIs that we use to indicate the success of our business. If you are not able to reduce that number in your business, then your business will likely fail. A business cannot survive without its customers, so this is a telltale sign that your business sucks.
If customers are leaving quicker than they are coming in, look at your current strategy and pivot. This may mean that your entire business strategy is not working or just a small sliver of it. The product may not match your audience. As a financial leader, it is important for you to understand both the sales and operational legs of your company. Finance doesn’t have to be simply a cost center. You can only cut so many costs in the business before you need to turn your focus on how to improve the business itself.
If you, the entrepreneur, or the person who came up with this new idea or business strategy is left all alone without any support from the team, that’s a problem. An idea cannot successfully come to fruition without buy-in from the team. Why? Because the team’s support and belief that this idea will be a winner is critical to its success.
Have you ever been told to do something that you truly didn’t believe in or want to do? Most likely, you didn’t put your best effort into that task. Other tasks took priority in your book so that you would not have to bring that idea to life. You may have spread your negative attitude towards “it” to other employees, essentially building a coalition against “it”.
I have been there. My clients have been there. You have probably been there (either on the ideation side or the fulfillment side). That is why it is essential to have a strong buy-in from the team when deciding to pursue a new business venture, idea, or strategy.
Oftentimes when someone isn’t in the day-to-day financials and doesn’t understand how an idea impacts the company, it’s easy to punch a few numbers in the calculator. This habit is what leads to people being calculator rich. Even if the person operating the calculator knows their economics, it’s easy to be blind to the bigger picture when you have a shiny idea sitting on your desk.
But after the dust has settled, it is important to nail the numbers down out to see if it is really viable to pursue. In my business, I consistently have to reevaluate whether the numbers actually add up after I have had a couple hours or days to sit on it.
Several years ago, I had a client who wanted to get out of a lengthy banking relationship. Red flag #1. This client had broken several debt covenants and were out of compliance. The bank was telling my client that their baby was ugly. They were put into a work out group, where it was the bank’s decision to either work them back into compliance or kick them out of the bank. Why was my client’s business so ugly? It started with their financials.
Instead of going through the process of fixing the ugliness of the financials, my client wanted to break up a long-standing and generally successful relationship. The owner was hurt and felt defeated. When I started working with the owner, I explained that there was an opportunity to fix the financials, get back into compliance, and grow like crazy. It wasn’t like they had severely strayed off of the pathway to success, but they were riding on the backroads. My job was to let the entrepreneur down easy.