Ops Playbook #50

Hi Operators ⚙️

Believe it or not, I’ve been thinking a lot about the financial health of my business lately.

No reason. 

With the steady, predictable nature of the global markets, it’s a wonder we put any effort into financial planning at all.

For those readers that staked their livelihood on a series of yen carry trades, today’s newsletter is packed with financial tips that you’re sure to love.

Here’s what we’ve got going on today:

• Zero-Based Budgeting → The based way to budget

• Forecasting 101 →  A guide to to building an accurate financial forecast

• Manage that Cash Flow → Tips, tricks, and tax strategies

Ready? Let’s dive in 👇

P.S. Building a business can be lonely. Wanna solve that? Let’s connect on Linkedin

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Operator’s Library

• Growth models fail when they're overcomplicated – keep them simple with these tips (Dan Hock)
  

• Start a business during Gloom Times as there’s less competition (Andrew Chen)
  
  

• Software budgets are down 2%, as CFOs are more cautious in 2024 (OnlyCFO)
  
  

• Read this survival guide to before presenting finances to your company’s board (CFOSecrets)
  
  

• Here’s how to create a healthy startup budget in 6 steps (Brex)

I. Zero-Based Budgeting

Insight from Healy Jones

Time to cut costs? You’re not alone!

It might be time to give zero-based budgeting (ZBB) a shot.

ZBB is like hitting the reset button on your company’s finances—every dollar has to earn its place, and every expense drives the company forward.

So, what is it?

Unlike traditional budgeting, where you simply tweak last year’s numbers, ZBB requires you to start from zero each period. 

Every expense must be justified from the ground up. It’s an intense approach, but it forces a deep dive into spending, aligning every dollar with your strategic goals.

To put ZBB into action:

1. Set clear goals that align with your strategic objectives (secure another round, achieve profitability, etc.)

2. List all activities needed to reach those goals, starting from scratch.

3. Sit down with each team to analyze and justify every expense—if it doesn’t directly contribute to your objectives, it’s cut ✂️

4. Streamline spending by eliminating redundancies and unnecessary costs.

5. Compare your new budget with historical spending to keep it realistic.

It’s not easy, but you can think of it as giving your budget a full-body workout—no pain, no gain 💪

Learn more: Zero-based budgeting for startups: a comprehensive guide

II. Forecasting 101

Insight from Forecastr

You did it. You raised a round of financing.

The hardest part is over! Now all you have to do is lead the business to a successful outcome.

Piece of cake 🎂

When the check clears, the first thing your new board is going to want to see is a plan for how you’re going to spend that money - a forecast.

Now, there are various camps on the best way to build a forecast, so we thought we’d walk you through the basics.

Let’s look at some common approaches:

• Top-Down Forecasting: This method has us begin with the big picture. You estimate the total market size and then narrow it down to your potential market share based on factors like customer needs and competition. It’s particularly useful if you don't have historical data to rely on.
  

• Bottom-Up Forecasting: Here, we start at the ground level—estimating revenue based on the number of customers you expect to acquire, the price of your product or service, and customer lifetime value. This method works best if you already have some historical data to factor in.
  

• Scenario Analysis: As we all know, sometimes things don’t go as planned 😅. Using scenario planning, we create multiple forecasts based on best case, worst case, and most likely case. This will help you evaluate potential outcomes, identify risks and opportunities, and plan accordingly.
  

• Time-Series Analysis: If you have a couple of years of data to rely on, you might want to factor in some level of time-series analysis. This technique involves analyzing past data to identify trends, patterns, and seasonality. The end result is a more accurate forecast.

Now, because this is The Bottleneck (and we love to make things easy for you), here’s a little decision tree that should make choosing your method more straightforward 👇

Learn more: A guide to rolling forecasts

III. Manage That Cash Flow

Insight from Anil Grandhi and Daniel Groves 

Cash flow. 

Fun to say, right? Makes me think of a river of money.

The reality is, if you don’t manage it right, that river will dry up pretty quick.

Now, outside of the obvious (make more and spend less 🧠), there are some adjustments that most businesses can make when they find themselves in a tight cash position.

Here are a few tips we gathered:

• Leverage depreciation: Use bonus depreciation or Section 179 deductions to front-load an expense on capital assets. This reduces the amount of tax you owe right away, putting more cash back into your business that you can use for other needs.
  

• Negotiate better payment terms: Take a look at your supplier accounts and see if you can extend payment terms—say, moving from 30 days to 60. You can also offer your customers a discount for paying upfront, creating a win-win for both sides.
  

• Set aside a cash reserve: Always have money set aside for a rainy day. Aim to set aside 3-6 months of expenses.
  

• Strategic debt management: Know which debts work in your favor—like tax-deductible interest on business loans—and which don’t, such as dividends on equity.

Learn more: 7 more strategies for managing cash flow

How am I doing? 👋

I take all feedback I receive to heart. Keep it coming! Just hit reply and let me know – I'd love to hear from you!

Cheers,

Rameel from The Bottleneck

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