MVP for your financial fluency

CEOs are intolerant of people who don’t have the financial acumen to understand how the business works and makes money – they just won’t tell you.

👋 Hi, it’s Greg and Taylor. Welcome to our newsletter on everything you wish your CEO told you about how to get ahead.

Early on, I realized that understanding how the business works financially was important to my perceived value on the team.

I didn’t go to business school, so I learned financial definitions, how income statements work, and company valuation on the job. It was most obvious in the early days of Section (5 years ago), when Greg and I would meet for breakfast in NYC to discuss the business and I would (no joke) be Googling terms on my phone under the table, or researching later in the office, to understand what he meant. 

It was a nerve-wracking and slow way to learn, but worth it – I earned the trust of my bosses and they asked me to build business models, participate in board meetings, and make financial decisions much earlier in my career than others. 

Today, we all have the benefit of AI to get this financial fluency faster and more effectively. So here’s the level of financial fluency you need to be a great operator, and how to (quickly) get it.

– Taylor

Strategic cheat code

Financial fluency is a cheat code for being seen as strategic and ready for more valuable work in a company or team. CEOs, CFOs, and other executives often express business strategy through financial terms, and they expect the people they work closely with to know them. Here are a few real examples from Greg in the last few months:

• “ProfAI has a chance to have software-like margins, so inference costs will be key.” Embedded in this statement is an understanding of gross margins – that a ProfAI user will pay $X to use the software Y times, which will cost us at Section $Z each time (the inference cost) – and we need that cost to be a “software-like” percentage of the $X the user pays.

• “I want us to be more like Accenture and less like Udemy, which will increase our value 3X.” Implicit in this statement is an understanding of valuations – that certain companies (and categories) are valued by the capital markets as a higher multiple of their revenue, based on how their business works.

• “If CAC gets over $1,000, the model is blown.” This statement implies that our customer lifetime value (LTV) is less than $1000 since investors will only fund customer acquisition costs (CAC) to a certain percentage of LTV. And if CAC is higher than that percentage, the company likely won’t spend a dollar more on marketing.

There are two parts of financial fluency needed to participate in these kinds of conversations:

1. Knowing the definitions of financial terms (what they mean)

2. Being able to interpret those terms through your business model

The reality is that executives get pissed when conversations or decision-making has to slow down to accommodate someone that’s playing financial catch up…or they just exclude them to start with.

How much financial fluency do I need?

Unless you went to business school, most people haven’t developed this financial fluency because they’re swamped with their day jobs. So you need the 80-20 of financial fluency – the acceptable level that’s expected and needed to be an effective contributor. 

Bottom line: Nearly every strategic decision your business makes is influenced by one of three things: making the company more money, finding more operating leverage, or increasing enterprise value. Therefore, you can’t fully participate in strategic decision-making until you grasp these three components:

1. You can explain in plain English how your company makes money. This requires an understanding of bookings, revenue, and ARR (and the difference between all three); your company's significant expenses (sales & marketing, cost of goods sold if you’re at product company, employee compensation, and operating costs); and margins (gross, contribution, operating, profit).

2. You can describe the 2-3 most important levers that, when changed, create operating leverage in the business. For most organizations, it’s some combination of what it costs to acquire a customer (CAC), how much that customer spends (ACV or AOV), and how long they stick around (churn, NDR, or LTV). It also usually includes margins, and the drivers of profitability. Which levers are most important, and the benchmarks for each vary by category or industry.

3. You understand how your business is valued by investors. Valuation impacts a company’s ability to access new capital and generate shareholder value and liquidity. The fastest way to figure this out is to look up companies in your category that are public and find their valuation as a multiple of revenues. 

How to build financial fluency 

Traditionally, you had three options: 1) go to business school, 2) take an exec education finance class, or 3) learn it on the job (like Taylor did). The first two options are expensive; the third is inefficient.

But we all just got handed a shortcut to build financial fluency: AI. If I were starting from scratch today, I’d use AI to:

• Learn financial terms and definitions, and how they relate to each other 

• Understand the financial levers and sensitivities in my business

• Coach me on how changes in the real world could affect my company’s performance (i.e. interest rate increases) 

To help you, we developed a prompt library you can use with any LLM to build financial fluency. To start, spend 30-60 minutes talking with AI to get a primer on the three components of financial fluency through the lens of your company – use our starter prompt below. After that, ask AI to be your proxy CFO and assess the impact of any new project or business through this lens.

Financial Fluency Starter Prompt

I’m trying to quickly become more financially fluent to be a more effective leader in my company. Act as my CFO-like teacher and help me learn and understand these three components of my business:

1. How the company makes money (in plain English): Quickly help me understand the difference between bookings, revenue, and ARR; the company's likely significant expenses, and how margins work.

2. The most important levers that, when changed, create operating leverage in the business: These could include CAC, ACV, churn, NDR, LTV, or margins. Based on the information about my company (below) help me think through and understand these for my company.

3. Company valuation: How investors or the public markets are likely valuing my company.

My company is a [public/self-funded/VC-backed] X-person [B2B or B2C] company in the [industry] industry. We sell [describe your product or service] to [describe your customer].

Our advice

Every company needs great operators. Every company also needs a few great strategic operators – and knowing how to impact the financial performance of your product, team, or company signals that you have strategic potential.

Don’t expect to drop some cool financial term and get invited to the next executive offsite. This will take time – but once you’re comfortable with your company’s financial profile, you can better understand the big picture. 

You can also better evaluate potential jobs, investments, and give advice to others. So go spend 60 minutes with AI and understand the three financial drivers of your business: how it makes money, finds operating leverage, and builds enterprise value.

Have a great week,

Greg & Taylor