Strategic Finance? First, Try The Basics

One of my first CFO assignments was working for an E-Com business as the part-time CFO. The business was completely bootstrapped – the Founder had done well so far, however, was concerned that they weren’t making the right financial decisions.

Given a lack of cash, we discussed a reduced CFO package which primarily meant that I would look at their current management accounts, analyse them, make recommendations, support with decision making, support with debt/equity fundraising and shorter term liquidity management. All the stuff I love doing.

Except, within a couple of weeks it became clear that I couldn’t do any of that in the usual way. Why? Because the numbers—the ones that all this ‘strategy’ was supposed to rest on—were questionable.

Let me explain.

The Great Accounting Illusion

The company had outsourced their accounting function. A sensible idea in theory – it was a cheap solution, and it was managed by the same practice who were managing tax and reporting compliance. However, it was pretty clear that they were inexperienced in this field.

There was no proper month-end process. Management accounts appeared (when they did) several weeks late, presented without comment like some kind of abstract art. Accruals? Never heard of them. Prepayments? Nope. Cost of goods sold? Sort of, but based on invoices received in the month – a strict no no in the retail world. Proper revenue recognition? WTF is revenue recognition?!

Naturally, I didn’t trust the accounts. So I ignored them and provided the accounting firm with detailed feedback as to what was wrong with the accounts. I expected them to take this away, adjust their processes and improve over the next few months. Not having solid management accounts wasn’t ideal, but we genuinely thought we were better off estimating things ourselves than relying on the numbers were were receiving.

So I estimated. The merchandiser worked out our product margin, we added some guesstimates for shipping, customer service, payment fees, and Bob’s your Uncle, we had our own gross margin. The operating costs were accurate in the management accounts, so we could piece together a P&L.

We then used these numbers for pricing, breakeven analysis, cash flow planning, and fundraising forecasts. What could possibly go wrong?

Taking Control (Pro Bono of course)

After months of pleading with the accounting firm to get their act together, I gave up and took control of the financial control function myself.

Not officially. And certainly not for money—because naturally, the business couldn’t afford it. In the corporate world this would be described as a ‘development opportunity’. In the startup world this is a ‘if you don’t do this, the business won’t exist in 6 months’ opportunity.

I reviewed every process, or lack thereof. I re-designed and documented the month-end process – process notes and loom videos galore. In my opinion, my newly created processes were incredibly simple to follow. Basically, I rebuilt the finance function from the ground up, using a combination of Quickbooks, Excel, Loom , obsessiveness, and caffeine.

Then, I handed it back to the accounting firm.

Next month end came round...the same results as before!

The Junior Team That Couldn’t

It turns out the firm had put junior staff on the account. Really junior. I was junior once, but I was quite a inquisitive, ambitious and curious person and had some good senior leaders to guide me. However, the person who was doing most of the work at the accounting firm lacked confidence and didn’t have the right guidance. This was a f**k up at my end – rather than speaking to solely the practice owners, I should have really delved into who was doing the day to day work.

We demanded senior support (i.e. threatened to leave) and eventually got it. Then I began the handover again - one process at a time.

Finally, after months of slow progress, we had a working month-end close. Bank recs, AP, AR, accruals, deferred revenue, prepayments. All done properly. We had numbers we could trust.

Unfortunately, those numbers told us something we really didn’t want to hear. When the dust settled, I compared the real gross margin to the previous assumptions. It was about 5% lower. Whilst this doesn’t sound like much, for a business who is not quite breaking even yet, this can have quite dire consequences.

Where were the errors? A few little misunderstandings. Like how much payment providers were charging us – we had multiple payment merchants, some with quite complex pricing structures. The other thing was our shipping costs - again, we had been a bit optimistic with these estimates vs what actually came through on the invoices.

That 5% difference meant our breakeven revenue was now higher. But we’d already committed to an operating cost base based on the old assumptions. We had adjusted our pricing to increase demand (which was working nicely), but had we have known this our decision may have been different. We were under more pressure than ever before.

We analysed our entire cost base – reduced budgets where possible, cancelled subscriptions, and gave the leadership team one of those ‘going into war’ speeches with an aim to drive more sales.

Now, the business is chugging along nicely, but there are multiple lessons here.

1. Doing Things Cheaply Is Very Expensive

Outsourcing the whole Finance function can work - I have a great example of a business scaling to c.£10m in revenue, 50+ staff, all with an outsourced accounting practiCe and a full time CFO . But if you try to do it cheaply, you’ll get what you pay for. Or, as in our case, you’ll pay for it multiple times—first in fees, then in errors, then in clean-up, and finally in panic-induced funding rounds.

2. Get the right people for the right job

All accountants aren’t the same. Experience also plays a big part. Accountants who have only ever worked in practice often do not understand the importance of month end and actually what an internal Finance function truly does. Furthermore, junior staff need support – you can’t expect them to be able to do the same job as someone with 10+ years experience.

3. Month-End Close Is About Process, Not Platform

Everyone’s obsessed with finance tech. AI, automation, dashboards, real-time reporting. It all sounds very exciting. My LinkedIn feed is awash with all of this.

But here’s the truth: tech doesn’t close the books. People and processes do. You can’t automate your way out of chaos. And you definitely can’t automate judgement and subjectivity.

4. Sexy CFO Work Is Built on Boring Basics

I was brought in to talk strategy. Long-term funding, pricing models, scaling plans. But I couldn’t do any of that until I figured out what the gross and net margin was.

You can’t build castles on sand. You can’t forecast from fantasy (you can, but it doesn’t have any substance). You can’t do strategic finance without actual finance.

Sometimes, the most important thing a CFO can do is ask: “Do we actually know our numbers?” And if the answer is “sort of”, “maybe”, or “depends who you ask”, then congratulations—you’ve got some unsexy, foundational work to do. However, I have now started to find the financial control function sexy – I have always hated this and left it to others, but now I love delving into the financial control processes. The reason being is that it enables growth and proper decision making.

Final Thoughts

This experience taught me a lot. Not just about finance, but about relationship management, using estimations, and the consequences of skipping the basics.

Founders: please don’t underinvest in finance and then act surprised when the numbers don’t work.

Fellow CFOs: don’t assume someone else has got the basics covered. Check. Then double-check.

And to the startups out there dreaming of their Series B, remember this: before you start forecasting your unicorn status, make sure your COGS figure isn’t based on a spreadsheet from 2022. Really delve into your numbers and make sure you understand them - the worst thing that can happen is that you have to explain to your investors in your board meeting that you got your forecast wrong because you skipped the basics.

If you are the Founder of a small to medium sized business, and are struggling to navigate the complex world of Finance, please give me a shout. You can get me on info@mcquade-consulting.co.uk or WhatsApp me on 02034886726.