Why Most Founders Operate Blind (and How to Fix It with Strategic Finance)

Mark, thanks for joining me today.

0:15 Mark Lupton

Glad to be here, Stephen. Thanks so much for having me.

0:18 Stephen Brown

So Mark, we've gotten to know each other, we have some mutual customers and we've had some great conversations. We're going to talk about strategic finance today, but before we dive in, tell us a little bit about your background and how you got into ecommerce.

0:34 Mark Lupton

Yeah, absolutely. So Greenhouse Business Advisors got started four and a half years ago. But before that I was working as an analyst in a fractional CFO firm. And I learned a lot about the ins and outs of ecommerce, the ins and outs of consumer brands, and what to look for, what drives growth, what drives success, what drives failure oftentimes too.

And through the course of a few years I ended up becoming a partner in that firm, and then broke off and started Greenhouse myself. And that was four and a half years ago, like I said.

1:10 Mark Lupton

And so over that period of time we have grown to serve over 30 different clients. And we have a team of about four CFOs. Some are joining the team now, and we're even in the process of hiring another right now. And so that's sort of the foray into ecommerce and a little bit about Greenhouse.

1:33 What you want from the business, and other long term questions

Stephen Brown

Awesome. We want to talk about strategic finance. And when we were preparing for this, we decided let's talk about a long vision. And one of the hardest questions to ask any owner is, what is your exit strategy? What is your plan?

Tell me, why do you start there?

1:36 Mark Lupton

The most important thing for an owner to understand is what they want from the business.

Oftentimes they think about what they want for the business, and that is most pressing and very clear in everyday operations. You want the business to grow. You want the business to become larger in size. You want it to have a larger impact. You want to have more sales. You want to hire more people, et cetera.

2:10 Mark Lupton

But the question that I often see missed is, what do you want from the business? What lifestyle do you want from this thing? What's the dream that you have for yourself in 10 years, 15 years, 20 years?

And so the answer to that question may be very different than what the business is trying to become. And if there's a big difference between those two things, it creates a level of tension, a lack of clarity for the organization, an internal tension for the founder. And ultimately what the founder wants from the business drives strategy. It is the end game.

2:50 Mark Lupton

And so that's why I start there. Because I've seen it really create an untenable tension inside of a founder, and create a lot of lack of clarity, a lot of decisions that are not aligned with a consistent set of values and direction.

And as a fractional CFO, if I don't know clearly where the company's trying to go, then I can't serve the business as well as I need to. And so that's the biggest reason, I'd say.

3:24 Stephen Brown

It's a hard question to answer. Do you know what you want from the business with Greenhouse? If I were to ask you that question, do you have an answer?

3:31 Mark Lupton

Yeah, I do. And I will say I have an answer, but I do think that the most important part about that question is not having the right answer, but having an answer at any given time, so that you know what you're aiming for and that it's not subconsciously driving you, but it's driving you consciously. It's in the foreground.

3:59 Mark Lupton

And so for Greenhouse, what I want from Greenhouse personally is not some big exit to PE necessarily. There's nothing wrong with that, I think that's a fantastic thing. Truthfully, it's not even financial. It's financial insomuch that I can provide a good lifestyle for my family and provide for my family's future. That's what I want from Greenhouse financially.

But really what I want from Greenhouse is something that it can't fully give, which is some level of fulfillment in what I'm doing. I want to do meaningful work that has a meaningful impact on the business owners and those in their care. That is what I want from it. I want it to bring me a level of purpose and fulfillment that only that type of work can bring. And there are of course other things that bring purpose and fulfillment that are far beyond work, but that is certainly a key part of it.

4:50 Stephen Brown

Give me an example that you've seen where there's a disconnect between what a business owner wants from their business and how they're operating. Obviously we want to anonymize, but give me an example where that disconnect has caused issues.

5:02 Mark Lupton

Yeah. So I was working with, well, I guess we're still working with them, but I was working with a founder of a consumer goods CPG company that had a strong Amazon presence and wanted to get into retail.

With this idea that this is a retail product. That's what the thinking was. And so we really need to get into a lot of doors. We need to get into a lot of doors across as many regions and chains as we can. And we can do that relatively quickly. Well, there's competition that's going to fight against us, and so we need to expand quickly.

5:40 Mark Lupton

And the way that they wanted to do that was going to require quite a bit of outside capital. Quite a bit of necessary loss of control, and a lessening of their ability to steer the direction of the company. And once you get on the venture capital treadmill, it's very hard to get off.

So that was a pitched strategy, an operating strategy in mind. When I asked about what the business owner pictured for himself in 10 years for the company, and what he wanted from it, the answer was a lot different than that strategy. Which was, I'd like to create a legacy business that I can see my kids working in.

6:18 Mark Lupton

There's a natural difference between those two. One requires a level of control and a growth strategy that enables that to happen. Another one requires a loss of control for the sake of large financial growth. Neither are inherently better than the other, but they're competing.

6:20 Stephen Brown

Got you, that's a great example.

Now let's say you know what you want long-term personally as an owner. What other long-term questions do you ask a customer?

6:48 Mark Lupton

I'm going to keep going through the founder's lens, okay? So I'll ask about where they envision themselves. Sounds kind of odd for a fractional CFO to ask these things. I think it's directly tied to financial strategy, and that's why we're talking about it here.

7:07 Mark Lupton

Close your eyes and picture the desk that you're sitting at, the people that you're walking around, the activities of your day five years from now. Do you picture yourself in a corner office of a building with a bunch of people? Do you picture yourself at your desk in your room? Do you picture that you're making phone calls? Do you picture that you're in spreadsheets? What do you picture for your life during that time?

And when you really parse that out, you can hear a lot of structural assumptions around the business, what the business would have to be like in order to support that. So I'll ask that. That's another more personal question.

7:45 Mark Lupton

Other things I'll ask, and again we're shifting from the what do you want from the business to what do you want for. Those are different questions.

There are a lot of things that dictate enterprise value growth. A lot of things. And it's not just the financial statements. Buffett talks about the moat, everybody's heard about this before, right? It's not just the financial statements that generate that value. And so we want to think about all the different parts of the business that need to be strong in order to raise that overall enterprise value.

8:20 Mark Lupton

And enterprise value really just is a proxy for health in many senses. I think in the best senses, that can be argued, but in the best senses it should be a proxy for the health of the business.

And so we'll think about things about competition. We'll talk about go-to-market strategy with different products. We'll talk about what channels, what lines. We'll talk about the types of margins they'd like to see. Things along these lines are the what do you want for the business.

8:51 Stephen Brown

Okay, so when you say long term, what do you think about? 10 years, 20 years, 30 years?

8:54 Mark Lupton

I think about generally 10 years is where I think for long term. And this is not a standard that I'm saying you should have.

But I do think about 10 years because it's another life stage. Five years feels like you could live in the same life stage and be five years from now, depending on your life stage. But 10 years is like a jump in life stage. So generally people are thinking about, am I happy doing this then, in a new life stage? So that's what I'm normally thinking about. And again, I'm operating a lot in the question that is, what do you want from the business as a founder?

9:38 Stephen Brown

I agree with you. We use EOS, entrepreneurial operating system, here at LedgerGurus, and they talk about a 10 year vision. And sometimes I'll ask people, hey, where do you want to be individually in 10 years? It's kind of hard to wrap yourself around 10 years, let alone 20 or 30. I think that's probably a good time horizon.

10:00 Stephen Brown

Plus you think about how much change can happen in 10 years. 10 years ago, just looking at ecommerce, it was really entering this era of, I would say it's ecommerce 2.0, where Shopify and Amazon sellers, I think those technologies had been around a little bit longer, but really kind of hitting that sweet spot. And we had this huge ramp and then the last couple of years has been really hard.

And then 10 years before that, 2005, you were still building. There were some platforms, but it was still very raw. The customers I've worked with from that era, sometimes they're still on really old homegrown tech. And then 10 years before that, you're building servers, right? Amazon and eBay were ecommerce.

And so I think when you think about it just from the business landscape, how much can change in 10 years, it's hard to envision beyond that.

10:43 Mark Lupton

It really is.

10:56 Three year planning, and frameworks for prioritizing

Stephen Brown

Take it a step closer. So let's say you have a sense of where you want to be in 10 years. Let's say I want to have a profitable business that I could sell, I want to have an exit in 10 years. And now I bring it into focus a little bit closer.

Let's talk about medium term planning. What do you think about when you're thinking about medium term planning? Again I'm going to lean on EOS because it's the framework that I use. They talk about three years. And when they talk about a three year picture, they're having you kind of imagine qualities. And I find that people can think in three years a lot easier than they can in 10 years.

So what do you think about when you're talking about strategic finance in the midterm?

11:34 Mark Lupton

There's a lot more specificity you can have.

So first of all, I'll just say that I think that long term is fun and imaginative and sort of engages the heart of what you're doing. It reminds you of why you're in it. And so the challenge is to rewind that clarity that you have into the present. So you take steps back. You go from 10 years, maybe back to three, back to one, back to a quarter.

12:00 Mark Lupton

And so when I'm looking at three years, I'm thinking about the broad enterprise value drivers, and how to grow the strengths and also shore up the weaknesses.

So when I'm looking at a consumer goods brand, I want to look at their dependency on certain channels, dependency on certain advertising channels, their dependency on certain products, their dependency on certain suppliers, their dependency on certain people. And those areas oftentimes will show me where there's a level of risk or opportunity in a business.

12:40 Mark Lupton

And a lot of times, properly addressing those and seeing those in a fully realized, improved state takes three years. It's not as simple as just turn a light switch and all of a sudden you're running on Amazon and you've got a fully ramped up Amazon store. It takes time.

And so if we have a level of dependency on Amazon and we'd like to transition that to having customers purchase through our website as a more dominant sales channel, and owning our customers in that regard, that is a long journey. And so depending on your product and situation, et cetera.

13:20 Mark Lupton

And so I'm looking more so at the broader enterprise value drivers, and trying to understand which of those things can we see improved, and make a list of them all in a relatively ideal state. And I think three years is enough time to get to that place.

What about you? I'm curious what you think of when you think of three year planning.

13:52 Stephen Brown

I think you get into more tangible outcomes.

I mean, I've done five year pro formas when I was in tech, which I thought were these wild works of fiction to a certain degree. Like if A and B and C. But I do think you can think about tangible outcomes that are going to take some time.

14:10 Stephen Brown

There's a quote, I think it's from Bill Gates, that says most people overestimate what they can do in a year and underestimate what they can do in 10 years.

I agree with you. If we're thinking about ecommerce, you're not going to launch into a channel and have a lot of success in one year. But in three years you should have some traction. You should have some level of results. And if you don't, maybe you need to rethink that initiative.

Product lines, product takes time. Product can take years to develop. Chain orders, you're looking oftentimes at least a year.

14:50 Stephen Brown

So I think when you're thinking about three years, it's good to have a roadmap of, here are the products that I'd like to add, or the channels I'd like to get into, and have some specific plans, as well as the things you're not going to do.

So if somebody came to me and said, yeah, I'm on Shopify today and I'm going to expand into Amazon and wholesale and TikTok Shop in three years, I'd be like, okay, how much capital are you going to raise? The key to going fast is usually funds. Money can accelerate things, but this is not an industry that has a lot of investors at this point. And so you have to be realistic about what you can do versus what you can't do.

15:41 Mark Lupton

And what you should do, what you ought to do. There are a lot of things that are sort of eye candy to the consumer goods founder.

15:50 Mark Lupton

Channels. There are a lot of conversations that happen across brands and across founders about what they're doing and what they're trying. And there's a lot of really good information that you can get from being in a community of founders, there's nothing quite like that. But you have to assess the priorities and the things that will be most effective for your brand, and what your brand needs the most, independent of others.

16:20 Mark Lupton

You can't copy and paste the roadmap. You can't copy and paste expansion strategies, product expansion strategies. They're not copy and pasteable. There are similar things that you can draw from very similar brands, but ultimately you have to look at the uniquenesses of your brand, positioning within a broader market, and understand where the gaps are in your own positioning and try to fill those.

And then prioritize them. I think sometimes a hang up that founders can get into in their three-year planning is essentially saying, well, I'd like to see everything be better. I'd like to look at every single part of the business and all of it be better. But we have to ultimately prioritize and choose what are the most important pieces.

17:04 Mark Lupton

And as I think about it now, I don't know that a lot of founders even have a toolkit for prioritization of channels, or prioritization of operational opportunities.

So oftentimes a framework, I don't know if you've heard of this before, but there's a framework called Porter's Five Forces. Have you heard of this?

17:23 Stephen Brown

Yes, I have.

17:25 Mark Lupton

It's a very common one for those in the business schoolie world, but it's not as common in consumer brands. But it talks about the different competitive forces that could impact your business. And most people, when they think about those competitive forces, they think about existing rivals. They don't think about things like the power of a supplier.

17:47 Mark Lupton

If you're overly dependent on one supplier. Or the power of a customer base, if you're selling primarily into wholesale retail, how much power does that one retailer have over you? Think about new entrants or other replacements. What are people doing instead of buying your product? They might not be buying a rival's product, they just might be doing something that's different. And what is that?

That's an example of a framework that people can look through and identify, help prioritize which things that they want to see grow in their business over the next few years. And I've seen that be relatively helpful.

18:17 Stephen Brown

Now I know you've got an MBA, right?

18:30 Mark Lupton

I did.

18:32 Stephen Brown

And I have an MBA. Here's a little aside. I'm assuming you did case studies in MBA school, which is a really common school thing, let's study this business.

A podcast I got into in the last couple of years that I think is the best case study podcast. Have you listened to the Acquired podcast?

18:42 Mark Lupton

I have.

18:45 Stephen Brown

I'd just be like, go listen to this, pick a business you're interested in. They used to just do tech, now they've branched out into just big successful companies. And I'd be like, just listen to that and think about how to think about a business. Because those guys dissect it. It's a really cool podcast because it's multi hours, like buckle up. It's long, but it's really interesting because they tell the history, and they'll tell all the strategic decisions, and they'll do that analysis at the end. I'm like, this is better than any case study that I did in business school. A lot more interesting.

19:18 Mark Lupton

Absolutely. Yeah, you said something in there. Think about how to think about your business.

Operators often, out of necessity, need to operate one foot in front of the other and do that really effectively for a long time. Endurance and resourcefulness. But as much as MBAs and business schools get trashed on, one thing that it did help me with was making sure to see the forest through the trees, right?

19:46 Mark Lupton

And being able to have tools, lenses, or filing folders, whatever metaphor you want to use, to address the broader issues of the business and keep those front of mind. How do we take long-term broad enterprise value related things and keep them front of mind? That's part of what EOS tries to do. It's part of what we're talking about doing here.

20:09 Stephen Brown

That's what I like about EOS. You can read the books, you could really just read Traction and get a lot. But if you want to go a little bit deeper there's a handful of books, and I feel like it gives you a strategic framework for those who don't want to spend a ton of money.

Even MBA school, I don't know about you, but I thought they were pretty good. I think I got more strategic experience working in tech companies, where I was before this world. I lived in enterprise software and we did strategic planning up the wazoo. And I learned a lot through just doing it. When you're dealing with these product lines and big decisions.

20:50 Stephen Brown

It doesn't mean you're going to be successful. I could tell you lots of stories about failure. But I feel like there's power in strategic thinking. There's also power in the intuition, which I think a lot of founders have. They're intuitive, they're action oriented, that's good. But as you get bigger, intuition can be right, but the problem is now you're probably trying to move a group of people, not just yourself. And you're trying to get them on board and you're trying to think through more complexities. It's not as easy.

And so I think being strategic and thoughtful about what it means to do, let's say you're launching into retail, let's get into Costco, there's a lot of things you've got to think about.

21:35 Mark Lupton

And a lot of people to coordinate work between, and to motivate. Not just motivate initially for an initial push, but to motivate and keep aligned on a week to week to week basis. And that makes it all the more important that you believe that you've made the right decision, and seen it through different lenses, and prioritized it amongst other things that you could be doing.

22:00 Mark Lupton

You talk about thinking on the business, and to grab onto that theme again, it's very easy to get two biases that I've seen. Recency bias and confirmation bias.

Recency bias being over indexing on things that happened within the last month. You're saying these things that have happened within the last month are likely to continue, and so I'm going to make a decision based off of something that's recent, and I'm going to justify my action based off of something that's recent. And then confirmation bias is saying, I want to confirm what I already believe.

22:35 Mark Lupton

And so I see those things happen, and those ways of thinking create bad decisions. And ultimately strategy is trying your best to make good long-term decisions and execute on them.

And so I think those thinking pitfalls are really what we're talking about with strategy. How do you think about the business overall, long-term? How do you think about the business in the way that you make decisions? And where are you likely to steer the business in the direction it shouldn't go without knowing it?

22:55 Blind spots and bottlenecks

Stephen Brown

And I think if you look at businesses as they get bigger, planning and strategic finance become more important, because you're dealing with a larger organization, you're dealing with larger resources.

I think there's a balance. You kind of need that entrepreneurial intuitive thinking to avoid being stagnant. But you also need to be strategic, to think about, okay, well what's next, and what's after that, and what's after that.

23:21 Stephen Brown

And I think some founders, you see some people that can go the distance and you can see some people that can't, that they're really good at a certain level, a certain size.

And when you can know what you're good at, sometimes it's like, hey, maybe I'm not going to be good. I mean, I think about this all the time. Am I going to be good getting to the next level? I've been employed in companies this size, but can I lead a company this size? Am I the right person?

23:50 Stephen Brown

There are some guys here, I'm out of Utah, there are two guys that don't get a lot of press, they get some. One of the things that's cool about them, they've been serial entrepreneurs, and I've heard them on podcasts. They kind of know what they're good at. And when they get to the ceiling of what they're good at, they're good at starting businesses and they take them to a certain level, and I think they get bigger with each one. They're like, I think we can go a little bit further, but we did what we're good at, time to move on to the next thing. And they've done it over and over again.

They're not household names, you kind of have to be deep in the business and tech community here to know who they are. They're getting a little bit older. But I like that, that's really cool, because I've heard them say, take it to a point, then exit, start again.

24:40 Stephen Brown

I think one of the challenges I see founders have is they're good starters. Running a zero dollar business is very different than a million dollar business, is very different than a $10 million business, is different than a hundred million dollar business. It takes a different skill set and tool set. And sometimes you think you're going to enjoy it, and then you get to it and you're like, oh, this is different.

24:59 Mark Lupton

You mentioned that those couple of founders, they know who they are. That also insinuates that they know who they're not.

And I see that founders oftentimes get in a pitfall way of thinking where they guide strategy of the business based off their strengths. Which early on is necessary, because you have to lean fully on yourself. But later on it's not necessarily the most helpful. And so it creates these big blind spots.

25:30 Mark Lupton

It's easy to think about and dig into great detail into what you know and what you're good at. It's a lot harder to do that for things you don't know, and you need it more for things you don't know well.

So, say your background is in retail heavy or wholesale retail heavy CPG, but you've got a product that could do really well online. You're likely going to bring a team around you that could put together a great strategy to go into retail. But you might overlook, on accident and with no bad intentions, you might not give enough thought to which channels might be best for your product to sell through.

26:20 Mark Lupton

And I see that in the time. I see that you'll see some dashboards from within companies where the founders put together a really robust marketing dashboard in a spreadsheet from their past experiences as a marketer. And when you look at their operational KPIs and ask about those, it's someone else does that, or they're not very well put together. It's the same way of thinking. In an unfortunate way, but I've seen it get people into some trouble.

26:44 Mark Lupton

And it's been helpful to ask that question. What is the case against your company? If you're sitting on the outside of your company looking in, what is the case against it being valuable or healthy? So why is it unhealthy? Why is it unvaluable? Where will it fail?

And oftentimes I find that question brings out some anxiety. It brings clarity, and ultimately a level of relief, because you can attack those things specifically if they need attention. But I know that a lot of founders live in a space where those things are pushed a little bit to the side and we're focusing in on our strengths.

27:18 Stephen Brown

Well, when you get in, it's kind of the to the moon mentality. It's all upside.

27:24 Stephen Brown

And you don't think, I mean, we think about the last couple of years, it's just been one thing after another. There were many years of just grow, it was just awesome, awesome, awesome. And then Facebook algorithm changes due to Apple privacy changes that hit the algorithms, supply chain issues, now tariffs.

27:55 Stephen Brown

There's a book, Andy Grove, who was a seminal CEO of Intel and has had a big influence in the business world, not just the tech world, he's considered the father of OKRs, he has a book called Only the Paranoid Will Survive.

And it's really interesting because 20 years ago, who would have thought that Intel would be in trouble? And now here we are in 2025 and Intel's on the rocks, right? They're really struggling as a company.

Only the paranoid will survive. Assume crazy, assume bad stuff is going to happen and you won't be wrong. You might not know which bad stuff's going to happen. But you've got to have kind of a balance. You've got to have an optimism for, we're going to do this, this, and this. Now let's talk about our weaknesses, just make sure our weaknesses don't blossom.

28:37 Mark Lupton

Yes. There's a book behind your head on your bookshelf called The Goal by Eliyahu Goldratt. It's somewhere on my bookshelf as well.

28:41 Stephen Brown

Oh yeah, The Goal's a good book. I read that in MBA school.

29:07 Mark Lupton

It talks about the theory of constraints. Theory of constraints sounds super business schooly. We're just going to talk about business schooly concepts, I guess. But it was one of the most valuable ways of thinking about business that I have ever heard.

It really is the bottleneck concept. The idea that you only are able to move as fast as your slowest component. This is a manufacturing concept. So if you have a manufacturing line and there is one bottleneck, if you're trying to put a lot of resources to fix things that are downstream or upstream of that bottleneck, it's going to ultimately be a waste of money. And so the idea is that you put everything into alleviating that bottleneck.

29:50 Mark Lupton

And so growth is a series of alleviating bottlenecks. And in some way that relates to what you're talking about with paranoia. But where are the bottlenecks in my supply chain? Where are the bottlenecks in my marketing funnel? Where are future potential bottlenecks?

And you can take that to the broadest way of thinking about your business and strategy. And I think it's actually a great approach to strategic thinking, the idea of bottleneck alleviation. And if growth is a series of bottlenecks being alleviated over and over again, planning also should take that shape.

30:15 The annual plan, and what belongs below the P&L

Stephen Brown

Let's bring it into a near term focus, one year planning. Let me ask you a question. How often would you say you run into a small business that has an annual plan of some sort?

30:29 Mark Lupton

Pretty often. It depends on the size of the company. We're oftentimes working with companies between five and 50 million in size. And the ones who are around the eight figures have some semblance of that. But the closer you get to five, the less and less people have a real budget in place, or an annual plan of sorts.

30:52 Mark Lupton

They have general ideas about what they'd like to see done, a strategy of things that they're working on now and want to work on over the next few months. But normally it's not a process. And that's something that we come in and help execute, is that process, and build that foundational process for the clients and for those brands.

But I would say the larger you get, the more processes, but in planning processes. That is to say though, it doesn't always mean that they're good. And there is such a thing as a bad budgeting and planning process.

31:28 Stephen Brown

I kind of have my processes that I've used. I've used EOS as a vehicle to improve.

Tell me a little bit about some of the things you feel like a business should have in an annual plan, particularly around strategic finance.

31:42 Mark Lupton

Yeah. There are the obvious things. Sales plan, marketing spend targets, marketing efficiency ratio boundaries, these sorts of things. Hiring plan, overhead expansion. If you have manufacturing, there's all sorts of things within that as well, if you're doing that in-house.

The things that I think are more interesting are what's below the P&L. Oftentimes the P&L is the main focus of an operational plan.

32:10 Mark Lupton

And so when it comes to strategic finance, of course it's important to have a P&L level plan. And what I mean by a P&L level plan is, you have your sales, profitability on your products, so your gross margin, you have your advertising expenses and other variable expenses that come out every time you sell a product, merchant fees, you have your team payroll, G&A expenses, et cetera. So that's what's on the P&L.

But that doesn't tell you what the cash in the bank is going to be. What tells you what the cash in the bank is going to be is a forecast of your balance sheet.

32:50 Mark Lupton

I see finances and financial reporting and forecasts as just a story of your actions told in numbers. And so that story extends below the P&L. And that's where strategic finance comes in.

And so I think also about the debt stack that we have, the interest that we're paying on that, the cost of our capital. Do we in our growth plan have opportunity to get cheaper capital, to consolidate? As we expand our manufacturing, let's say if you do self manufacturing, how are we going to finance that equipment? Do we need to finance that equipment? Can we pay that in cash?

33:30 Mark Lupton

If we have a level of treasury built up, if we have some liquidity built up, how are we letting that money not just sit, but we're either reinvesting in the business or making dividends on that through high yield? Those are the sorts of things that are balance sheet related and that are not P&L necessarily.

How much inventory do we want to keep on hand? At what points in the year do we need to build up inventory? At what points do we expect to be lighter? When is that cash outlay going to come to purchase all that inventory versus when the sales will come in to offset it? All those are balance sheet and cash flow statement movements. And those things to me are vital from a strategic finance perspective, specifically.

34:01 Stephen Brown

I agree 100%. The way I think about it on the balance sheet, you talked about a couple different plans. I think about an inventory purchase plan. I think about a debt plan.

And some people are debt averse. And I'm like, yeah, if you're using it to, there's a concept of the cash conversion cycle that I tell people, hey, you put money into buying inventory. There's a delay before you can sell that inventory, before it reaches your warehouse, and then you have to sell that. That money has to come from somewhere. You can fund it to a certain degree out of profits, but there is a mathematical limit based on your profitability and your growth rate and your cash conversion cycle, by which you cannot fund a business with profits alone.

34:50 Stephen Brown

And so you have to think about, you talked about some sort of inventory purchase plan, a debt plan. I think those are the key things for a consumer product business. There can be other things.

But I did an episode a couple of episodes ago with Alek, the CEO of [unclear]. And we talked a lot about financing. He gave me a good answer to the question, because you always hear banks only want to lend you money when you have money. And his answer was, it's a risk thing. Because when you have no money, they look at you as higher risk, because they're not thinking ahead, they're not prepared for potential downfalls.

35:30 Stephen Brown

And so I think it's really good to have all those, know what you're going to need. And if you need debt capital, debt facilities, get them early. When you need them desperately, you're less likely to get them, or you're less likely to get the terms you want.

35:49 Mark Lupton

Right. Try and qualify to get availability early when you can, so that you build relationship and trust. And even getting a few reps, taking out a little draw on the line that you qualify for, even if it's small and you don't need it, paying it back, letting the lender see that, building trust over time. It really does make a difference.

36:11 Stephen Brown

What else in a one year plan? I think we've talked about a lot of tools, a lot of these plans come together in, I call it a budget. Some people call it a projection, forecast. When you're looking at a future looking profit and loss, what do you call it?

36:28 Mark Lupton

I think there are a lot of ways to look at it.

The way that I look at it, when I think about projections, I'm thinking about three year projections. When I'm thinking about a forecast, I'm thinking about what our latest estimates are on the future, whatever that period is. When I'm thinking about a budget, I'm thinking about something that you set in stone at the beginning of the year and you stamp it. You can adjust it, but it needs to be through a formal process in the middle of the year. But it is what we thought we were going to do at the beginning of the year, so you can see how far off you were. And you can assess, like we've talked about earlier, gaps in your thinking that may have led to the differences from what you thought earlier in the year.

37:07 Learning from being wrong

Stephen Brown

Which I think is really important, and this kind of moves us to more short term strategic finance.

You set a plan, and nothing goes according to plan. There's a learning opportunity there to say, why were we off? You're either going to be off positive or negative, either way there's a learning there. And my experience is when you learn why you're off and incorporate those learnings into the next plan, you do things better.

37:32 Mark Lupton

Yes. And the trap that people also often fall into is that the budget is irrelevant, so we don't look at it anymore. It's no longer relevant, quote unquote.

It's not relevant in helping you determine what year to date plus forecast together will estimate our end of year totals will be. It's not relevant in forecasting maybe the next few months. But it's very relevant in teaching you lessons about how you think and how to operate the business strategically going forward.

38:10 Mark Lupton

So I'll see a lot of budgets get made and get thrown to the side. And instead what will come is an updated forecast every single month, so that we can know and plan for next month, the following month, and the following, which is really important to do. That's forecasting. But don't be so quick to crumple up your budget and toss it in the trash. It has a lot of value for teaching you how to strategically run your organization.

I'll just say, it's amazing to me how far off you can be from a budget, and how hard it is to sometimes stare at that, swallow that finding that you're so far off, and then take action.

38:57 Stephen Brown

Well, and to your point, my recommendation when people are thinking about budgeting is you just start. And you're going to be off. You might be wildly off. Even when you're good, you could be wildly off. There are going to be market changes and you weren't planning on them, and that's okay.

But the process of planning and budgeting forces you to think about your business very closely. And when you run into those issues, you have a better understanding of how you can adjust. That's the one way I think about it.

39:31 Stephen Brown

The other point you brought up, and this is something that I do in our businesses, is almost always a mid-year adjustment. We got off, we thought it was going to be A, it ended up being B. So a tweak. I rarely do more than one adjustment a year, because it can be a lot of work to make those adjustments.

So you do a mid-year adjustment, like, oh, we missed hard, or boy, we underestimated demand, holy cow.

40:04 Stephen Brown

But I also see, when you build these models, you have an ability to adjust. Because your revenue plan, a lot of times your marketing plan drives your revenue, which then determines your inventory purchase plan, which then is going to dictate your debt strategy. And so they cascade.

So if you model these things nicely, you can make adjustments and say, oh, we're going to go get some more credit, guys, we're riding the wave but we don't have the credit to keep riding it. Or, oh man, we missed, let's scale back our inventory on the next order so we don't have all our cash locked up in inventory. Or those hires we thought we were going to do mid year, maybe we shouldn't do it.

40:23 Stephen Brown

My last company was a private equity software business, enterprise software. Lots of finance people, private equity loves finance. And it was very simple. When we were off, it got cut. We're missing our targets, cut back on spending, no additional hires. They'd rein it in.

Same thing I experienced in public companies. When things are good, go hire more people. When they were bad, no travel. They'd rein it in.

So I see these tools as something you can use during the year. Even if you're off, make the changes and see what the adjustments tell you. And then you're like, okay, what decisions do I need to make?

40:56 Mark Lupton

Absolutely. I was going to ask you if you see that those things are applicable to smaller businesses.

41:13 Stephen Brown

Yes, absolutely. One of the first things I brought into LedgerGurus when I came was strategic planning and budgeting, because that's what I was used to. This is what businesses do. You just get better at it.

And there have been years we've been off. We've been way above plan, we've been under plan. But I think when you force yourself to ask the question, why were we off of our plan?

Let's just talk about both directions. If the opportunity is there, you're usually like, yeah, let's go for it, let's get as much as we can. And if you're under plan there are ways you can adjust. But ultimately you want to say, what did I do wrong? How can I learn from this? And when you do that, you make better decisions in the future. You're more thoughtful about how you approach things.

42:10 Stephen Brown

And if you want to get really hardcore, I had a business I had to kind of keep alive, and I did multiple scenarios. That was my baptism by fire. I took over a small business that was running out of money. And I did multiple scenarios, and every month I'd update my scenarios. I would put in what happened. A lot of work, but it helped me see outcomes for the upside and the downside.

I would just tell people, have a plan. When you're off the plan, learn and adjust so you can make better decisions.

42:44 Mark Lupton

Absolutely. Before I went to business school I was working in a large Fortune 500 company, and there was a lot of time spent on forecasting and planning. It was a large part of our job. And we had a whole other job to do, which was actually deliver on that. But a lot of it was focused on forecasting and planning, and it was ad nauseam. It felt like it was overbearing and too much. In some senses it was.

43:20 Mark Lupton

But it enabled us to see deviations and to operate versus our really fine tuned expectations on a daily basis. And I do think that that same concept applies.

But oftentimes I don't think that businesses get to it, because the urgent always overtakes the important at an early stage. And then that way becomes a habit of working and living. And the bigger your business gets, you maintain these habits.

43:50 Mark Lupton

I think the business grows faster than our ability to build good habits. We need to proactively build habits in the same way we're proactively planning. And that's a hard thing to do when the urgent is very loud.

And it also is a hard thing to do if you're not certain that you want to be the CEO. If you just want to be in it for a few years, this is just for a few years, for your sprint, then you may not think it necessary or worth your time to learn how to become the leader of the next phase of your business now. But it's very important.

44:14 Stephen Brown

And I think every industry has key levers. And in consumer products it's inventory, inventory versus cash. How much of your cash is going to be tied up in inventory?

I think it's understanding your different profit margins, your contribution margins. How many dollars are left over after cost of goods sold and your variable sales expenses. And then being tight with your OPEX. Don't run a lifestyle business. When things are good you see a lot of big offices and extravagant, unnecessary expenses in a business. Running tight operating expenses empowers you to do more.

45:02 Mark Lupton

Absolutely. Frees you up to invest in the next phase of the business.

45:06 Quarterly rhythm and financing pitfalls

Stephen Brown

So we've been talking a little bit about how the one-year plan transitions into the ongoing. What are some of the other short-term execution things, maybe quarterly, maybe monthly, that you think are really critical around strategic finance?

45:19 Mark Lupton

Yeah. Well, the first rhythm that I want to call out is another EOS rhythm. I don't know if you're sponsored by EOS yet, but it's getting to that point in this episode.

45:29 Stephen Brown

We should be.

45:34 Mark Lupton

Every quarter, setting quarterly goals, the rocks, all the different terms you can use to define what you want to accomplish in a quarter, and tracking on a consistent basis against that is so huge.

From a strategic finance perspective, what you can be doing on a quarterly basis is what you should be doing on a monthly basis, with extra emphasis on the quarter end as well. Which is the financial review, where you're looking at your expectations versus what actually happened, and going line by line through those financial statements and understanding the differences.

46:10 Mark Lupton

And if you forecasted, or budgeted, to get our terms right, the P&L and the balance sheet accounts should have an expectation. And each account has an owner. Somebody in some way or another is responsible for those numbers being what they are. And so if there's deviation, there's explanation behind that.

So every quarter, especially, do an extra deep dive on those deviations. And at the half year, make the budget adjustments you need to, but still don't lose track of the reasons, the deeper, broader reasons why you may have deviated.

46:45 Mark Lupton

So quarterly, the financial review becomes really vital, where you're comparing budget versus actuals and identifying line by line differences from what you expected. And biannually, I would love to see every budget be re-vetted and re-forecasted if need be.

46:58 Stephen Brown

What are your thoughts on continuous budgeting? Like a rolling 12, this is something I've thought about doing but I've never done because it's so hard. You always have 12 months of budget. Have you done that? What are your thoughts on that?

47:12 Mark Lupton

I have seen it. It's not something that I'm always doing with clients.

47:17 Mark Lupton

It kind of comes back to the forecast versus budget conversation. I keep a forecast that is always pushing forward the assumptions that we put into it into a broader horizon. So you could call that a projection, maybe, if we're going by my prior definitions.

But I always have a financial model that is updating with actuals every single month. And then the forecast is showing the results of those actuals being played out into the future, and the assumptions adjust automatically and with some manual input. So I do have that always working for our clients so that we can run different scenarios. But that's different than having a budget that has been stamped. That to me goes back to more of a projection or a forecast that is updating itself on an ongoing basis. So I see those as different things.

48:15 Stephen Brown

All right, let's have one final topic. We've talked about this along the way, common pitfalls. We've hit a lot of them. What are some of the pitfalls we haven't talked about that you would like to add to the conversation?

48:25 Mark Lupton

Yeah. We talked about blind spots, and I think that's a general theme. You could take the concept of blind spots and apply it to different parts of your business. Blind spots and bottlenecks.

Are there bottlenecks and blind spots that you know are there that you're not addressing in each specific part of the business? So it's a concept of thinking. Again, strategy in large part is thinking about how to think about the business.

48:55 Mark Lupton

And so some of the pitfalls that I do see when it comes to strategic finance is financing in particular. Oftentimes people will go for easier forms of capital as opposed to forms of capital that are better. The classic example, this has been hit on all over the ecommerce finance creation space at this point, but the whole MCA thing.

49:21 Stephen Brown

Yeah, merchant cash advances, Shopify loans. It's easy.

49:22 Mark Lupton

Exactly. And so if there are new operators listening to this, there's always a new batch of people who are entering in and wondering about some of these types of merchant cash advances. Which is essentially, very little underwriting is required, meaning the application process is super smooth and easy. You get fast access to capital. You don't have to show them your financials almost at all.

49:50 Mark Lupton

And then you're paying a percentage of your revenue every period of time, depending on the term, at some very high frequency, for a period of a couple of months until you pay back the entirety plus the fee.

That is an unsustainable form of capital for growth. It is what I like to call a bridge. There's a difference between a bridge and a breakthrough. A bridge helps you go from one reality to another. And the other reality, the other financial reality, needs to be better than the one that you're bridging from, so that you don't have to rely on the bridge. You can't have forever bridges. You can have a bridge to get us to a new solid foundation.

50:35 Mark Lupton

And so a bridge would be like a merchant cash advance, where you're taking some money out. It's very easy to access. It's incredibly expensive. They say the fees are 17% or whatever. And you don't know that that's not actually an APR. That's not an interest rate, that is just a fee. And you're going to pay that back. It's actually four times that, potentially five times that. So it's very expensive.

And so you take that on and you get in the cycle of the whole merchant cash advance cycle. You're running out, you need more, you keep going. If you're thinking about that type of loan as working capital for growing your business, or as growth capital for growing your business, that's an inaccurate way of thinking about it. Lines of credit are totally different.

51:20 Mark Lupton

So we could talk a lot about the different types of debt and healthy capital. Sometimes friends and family funds are relatively easy to access, but the cost of capital there may be high from a control perspective, or from a personal perspective, a social perspective, relationships.

And so I see, from a strategic finance standpoint, people making uninformed decisions about types of capital, and not knowing what a sustainable form of debt would be, or a sustainable form of capital injection would be, versus just what should be only a bridge.

51:55 Stephen Brown

Awesome. We could probably take each one of these topics and talk about them for an hour if we wanted to. There's so much to unpack.

But hopefully this has given those of you that are listening a thought process about how to think about your businesses from a financial standpoint, and overall more strategically.

Mark, if somebody wanted to connect with you, what's the best way to do it?

52:16 Mark Lupton

Absolutely. Well, my email is mark@greenhouse.business. I love just talking directly with founders and anyone who would want to talk shop about these types of things. We were pretty high level in some concepts today, but I'd love to get more detailed if anyone would like to.

Additionally, you can go to our website, greenhouse.business, and find us there as well.

52:44 Stephen Brown

Awesome. Well, thanks for joining me today, Mark. It's always good to talk.

52:49 Mark Lupton

Thank you so much for having me. It's a pleasure.