The following is a guest post from Diya Sagar, CFO at AWA Studios. Opinions are the author’s own.
When a business is losing money, more often than not, the finger gets pointed at the chief financial officer. While CFOs know that we are rarely to blame, we have to accept our fundamental role in guiding a business to make enough revenue to cover its costs. Before accepting my first CFO job, I hesitated at the prospect of having to turn around a loss-making business. But now living through the experience, I’ve learned that while we might not be magicians, there are steps we can take to make finance work like magic.
Losing money doesn’t always mean a failing business
In the world of startups and venture capital, it is expected that businesses burn cash during the early stages of their existence. But beyond the first couple of years, or sometimes even longer, depending on the industry, a business that is still generating losses is typically considered a failure or destined to fail. While in many situations that may be true, there are several others where it is not.
To turn around a company, a CFO must first come to grips with the underlying reasons why it is losing money. Some of the reasons may be easy to identify: Are operating costs bloated beyond what is necessary to support the business’s activities? Or is revenue insufficient because the product or service just isn’t selling?
Other reasons may be harder to uncover. Perhaps the company’s position in the market isn’t yet strong enough to extract competitive unit costs, or the sales cycle takes several months longer than it should because the brand is a relative newcomer.
To be clear, not every company can be saved. Even the best CFO cannot turn a poor business model into a success story, but understanding whether your company is an uncut diamond or a painted rock will indicate if it is worth your turning around or turning away.
Know the right levers and pull them
Part of the challenge for any CFO is having to influence the financial outcomes of their business without having the remit to control all aspects of their business. However, it is exactly this limitation that should force us to focus on the levers that we do have influence over. To take a company from loss to profit, before assuming that drastic cost-cutting is required (although inevitably in some instances this may be necessary), examine the components of unit economics and how they can be improved.
At a basic level, the question is: How can you scale revenue without scaling costs by as much, and at what magnitude? Although the answers will vary across different industries, the common themes will include some combination of optimizing sales for price and volume, minimizing costs of production and right-sizing overhead to support revenue-generating functions. CFOs should get a firm grasp of how far their business is straying on each and begin pulling these levers to bring it in sync.
When a company’s product or service can be produced and sold at positive unit economics, that is the clearest signal that there is potential to make money. If scaling can then translate into gross margins that are high enough for a business or business division to cover its operating expenses, that’s when finance is working its magic.
Cut losses, but not at all costs
To state the obvious, a business should be lean and not carry unnecessary costs. But cutting costs to curb losses is the straightforward part. What is undoubtedly much trickier is the part that comes next, which is where to add costs when you have no more efficiencies left to realize.
If your business is near profitability or is already profitable, it is tempting to stay there. Conversely, this is actually the time to raise your risk tolerance, change tactics and invest for growth. Consider organic opportunities, such as investing more in marketing to grow your customer base, and inorganic opportunities, including M&A, to expand into new markets or strengthen core capabilities. That may involve leveraging the balance sheet or raising outside capital, with both paths involving an assessment of the cost of capital relative to returns.
Over the short term, the cash flow profile may not look as healthy as it once did, but with disciplined execution, generating losses for the sake of future growth should ultimately drive long-term profitability.
The timeline necessary to turn around a cash-burning business is a critical part of the equation, since operational changes can take months or even years to be reflected by the results on a company’s financial statements. When the numbers go from being in the red to being in the black, though, you know you have a CFO with flying colors.
