Every founder that has built a viable business has created their own entrepreneurial story. It is the story that provides credibility to customers, to team members and to your market overall. One of the things frequently talked about in our firm is the critical question, “does the entrepreneurial story match the financial one?”. Many times, the answer is no. Too often, the narrative is far more impressive than the financial story, or there is just a very material disconnect. Have you really scrutinized that within your own business? Here is why it matters and what you should do about it.

So many business owners have incredible passion, vision and a unique ability to make something out of nothing, to literally advance things on ingenuity, drive, skill and dynamism. This however can create a false sense of security. I recall a conversation years ago with the owner of a 5-year old business that seemed to be a rocket ship, with incredible year over year growth, increasing profitability and new customers buying left and right. The founder had an arsenal of achievements. That same business nearly went bankrupt running out of cash a year later due to excessive marketing spending, stretched receivables and a bank that was not willing to stretch further. Worst of all, the financial story was there to read clear as day, the sad demise was foreseeable had the CEO looked.

You may say that is an extreme example. So why is this so critical? There are two primary factors 1) external scrutiny and 2) sustainability of the business.

External Scrutiny

At some point, as a business evolves and/or grows, outside potential or future stakeholders will scrutinize the business.

Business Sales - The obvious scenario for this is the sale of a business, where a buyer will do extensive due diligence to verify that the numbers, and the numbers behind the numbers support the “seller’s pitch”. In this case it is about lending credibility to future potential and having the financial foundation to do so.

Strategic Partnerships and Joint Ventures - In the same vein, strategic partnerships will require the same credibility to be gained. Not long ago, I had a conversation with a CEO who was presented with an amazing opportunity to create a joint venture with a vastly larger company. He sold the other party on his business initially, but when the potential partner studied his numbers, they saw issues with margins, spending controls, and balance sheet strength. Unfortunately, the deal fizzled.

Lending - Any business that needs financing from a lender will al

so have to match up its stories. Lenders exist to provide capital and manage risk. If they don’t understand where the business is and where it is going with cold, hard facts, terms will be affected, if not the deal altogether. will have far more success if the stories match.

Other Parties – Depending on the industry and size of business, key customers, key vendors, insurance companies, just to name a few, may all need to delve deeper into your business to assess risk as well. Will they like what they read?

Internal Sustainability

Equally important is the internal benefits of matching stories. Do the numbers in your business really support the narrative that you are convinced of? Why not? Does your narrative or knowledge of the underlying business tell you that you should you be generating more cash than you are? Does it tell you that you are running too lean to support that next level of growth? Does it tell you that despite all the promise on paper, that division/territory/product just isn’t generating enough of an ROI? Or sometimes trickiest of all, does it tell you that a manager or leader’s real performance is not up to par?

Most business owners I come across will tell you their business is successful. It is so easy to get caught up in the excitement of growth and new horizons. Fewer can easily defend that statement with financial facts. Your son or daughter could tell you they are doing well in school. Maybe their report card has some really high marks and a couple low ones. Wouldn’t you ask more about each subject? What is working in some and not in others? Why the grades are where they are? Your business should be the best non-fiction book you and your audience can read, based on facts. Does your business story need a bit of a re-write? Ask questions and start today.

High interest rates, at least in relative terms, are here to stay for the foreseeable future. And more increases could yet be on the way. We constantly hear from CEO’s asking for our crystal ball, and many of them very uneasy about the interest rate environment. While the long term effects of this are far from certain, and our crystal ball is as cloudy as anyone’s right now, business owners can act confidently by stepping back and really understanding the impact on their business.

How is your debt structured today? Lines of credit, which are almost always floating rates pegged to an index like Prime or SOFR, have increased along with the Federal Reserve’s actions. In the same way, should the Fed start cutting benchmark interest rates, those same lines would follow suit. Fixed rate date from a few years ago may actually look cheap today. You may also need new financing. What is the current and near term picture. For those businesses accelerating debt payments, does the current picture shift that strategy to different loans or even a pause altogether? While there are few general rules, a company with fixed debt at 4.5%, very cheap in today’s terms, may be well served to deploy capital in other areas of the business to drive returns than paying down debt faster. Or possibly it makes sense just to conserve more cash given continued uncertainty. The good news is that yields on cash are much higher today as well. The answer is less important than the thought process to get to it.

A great place to start is to model out your current and near term debt and debt service and then play with scenarios to see what further changes in interest rates does. How material is it to your business? Do you have a debt renewal approaching? What is the impact if rates continue to increase? This answer is often surprising at times to the high and low. There is no reason to be nonchalant or fearful until the impact is at least quantified.

How much margin for error do you have in your business? This is critical. Now that you know what the interest cost could be, how much can your underlying business absorb. A low margin business is much more susceptible to changing variables. While high interest rates are unfavorable for most businesses, it could be a difference between simply buckling down and weathering a storm in a safe harbor and seeing a small margin for error erode further that could necessitate immediate action like conserving more capital or deferring purchases.

How capital intensive is your business? Companies that generate revenue from real estate, heavy equipment and other long term assets are very capital intensive and typically rely heavily on outside funds. These business are the most sensitive to interest rate changes, and an environment like this could very easily make or break a deal. Manufacturing companies that might need to invest in equipment or businesses with high levels of inventory and long dated accounts receivable that depend on bank capital can also see significant impact. By proactively running the numbers, that potential impact can be quantified. It may necessitate shifts in strategy such as slowing innovation, revisiting terms or even altering inventory purchasing.

What about your customers? Or suppliers? Even after you understand the impact on your business directly, what about your key stakeholders? Do interest rates impact your customers ability to buy from you, leading to potential lost or deferred revenue? Might your suppliers get squeezed, causing them to get tighter on terms or possibly even leading to disruption of your supply chain. Do you know how susceptible to interest rates your customers or vendors are? Understand their businesses as best you can before it is too late.

And an ever cautionary tale – the impact of rates is unique to your business and where it is headed. Your neighbor’s structure, business model and strategy are equally unique so be careful to draw too many specific conclusions from what they are doing or saying. Know your numbers today, and what they could be tomorrow. Set your unique plan and execute on it with confidence.

Streaming giant Netflix recently rolled out the bold decision to crack down on password sharing. While controversial with many of its customers, from a business perspective, Netflix felt it had no choice than to act given the rising costs of its content library and the revenue loss from users gaining access to the platform for free by simply sharing a login.

The Netflix decision and the context behind it serves as a great reminder to re-evaluate your own business and its evolving market. While a decision as drastic as that by Netflix may not be in the cards, there are key learnings that could be gained in your business.

First off, each market is unique. It is very unlikely you are competing with Netflix. What is the dynamic of the market you compete in? Do you fully understand it today and where it is headed tomorrow? What are your competitors doing right now? Is there pricing pressure? Is the customer base growing, flat or even declining? Don’t just assume you know. Be proactive and really understand the dynamic. The rate at which markets are evolving is increasing. Even traditionally stable industries are seeing disruption. The proper lens is critical in evaluating any potential changes to the business, whether mundane or more radical.

Whether out of opportunity, or necessity, consider what changes make sense for your business. Inflation continues to be an issue in the economy. The costs to deliver your product or service have increased. Have you increased prices to keep pace? What about your delivery model? Does it allow you to charge a premium? A customer of ours has become known as a premium quality and service provider in its space. As competitors have moved toward volume and price competition, they have been able to command a pricing premium because of their business model. The key is making sure the customer perceives the difference. Ensure that any marketing and branding efforts support this narrative.

Does the delivery model need to be adjusted? There are countless businesses that have added a small tweak to the business model to drive customer stickiness. An engineering firm serving large commercial properties has doubled down on its technical acumen to design complex solutions for its customers. They are serving as a “quarterback” for entire systems, taking the place of multiple providers that then have to coordinate together. This strategy has allowed the business to command higher pricing and improve customer satisfaction. Higher margins and a stickier customer sounds great – it is likely not out of reach for you either.

All customer complaints are not necessarily bad. Complaints provide insights, but also expose opportunity. Brand Strategist Scott Wozniak had a brilliant, yet simple quote about pricing – “if 5% of your customers are not complaining about price, you are doing something wrong”. Notice he did not say all. 5% is still a small number. Don’t be afraid to lose customers. You want the right customer base, not the biggest one. Do you have customers abusing your system or your team? Who are the ones constantly grinding on price? Netflix feels it will be better off after losing customers. You might be too. Short term profit may suffer, but sustainability should be the aim.

Testing is key. Netflix tested this strategy in smaller markets before rolling it out in the U.S. That allowed them to gauge customer response and behavior. You too can test changes, pilot initiatives with certain customers, and study the results.

Bold decisions are necessary, especially in times of economic disruption. Constantly re-evaluate your business, its customers, and how you deliver to them. Disruption is your friend. Seek it, evaluate the options, and evolve. Some competitors will evolve faster, and they likely already are. You don’t have to be left behind.

We are now over a quarter into the new year. Like many companies, you may find yourself falling short of plan. That doesn’t mean the budget has all the sudden lost its value. It can be your best friend. This is not the time to panic. We see far too many business owners making reactive decisions to address performance misses, that either don’t have the desired impact or cause longer term damage. Don’t make that mistake. Take these steps instead.

First revisit the assumptions – are there any obvious flaws in hindsight? Where are you relative to the prior year? Was the plan based on repeating past levels of growth. Was the plan too aggressive? What learnings can be gained from this new look?

Once this valuable context is in your hands, a very powerful tool is the gap analysis. Done right, it can be an invaluable decision-making tool and drive improvement in the bottom line. By exploring the current state and understanding the gap to reach the desired state, businesses can take proactive actions in response. While on the surface, this is a very simple concept, the process to generate the right outcomes is critical. Here are a few keys for success:

What is the impact of sales going forward? What costs are directly tied to sales, that will move up and down as sales follow suit? What does the business look like at a lower sales level for the year? Could you accelerate sales at a lower margin? Or are lower margins just a reality for the business? Understanding the impact of sales changes on gross margin dollars is the tip of the spear as the analysis almost always starts at the top and funnels down from there. Could simply generating more sales in the rest of the year realistically get the business back on track? Maybe, but leadership teams can place too much confidence in the “we’ll just sell more strategy”.

Unless very confident, the answer also lies in costs. Understand controllable costs in the business. Costs like hiring, marketing spends, travel and entertainment, costs tied directly to sales, for example, are costs that can be modified to address a portion or all of the identified gap. What costs are controllable in your business? How much do they move the needle? What would the impact be of cutting these costs? If your gap is small, it may not make sense to cut if it risks future growth. It may just mean future planned spend is curtailed. Large gaps would warrant steeper cuts. What is essential is understanding the potential impact on top line, bottom line and future growth, using that lens to evaluate a decision.

Understand your overhead spend. While potentially a subset of controllable costs, overhead warrants its own analysis. How much more sales can your infrastructure support? Do you need to make additional investment to grow? Are you already at an overhead capacity? Planned investment may or may not need to be spent, which can greatly impact the numbers needed to shrink a gap.

The above items are good examples of variables that materially drive outcomes in planning. Set up a forecast framework that allows you to easily manipulate those variables to understand possible outcomes. While daunting on the surface, the simple reality in our experience is there are likely 5-8 categories that are really going to impact results materially. Focus energy and the what ifs there. The goal here is not to get the “new right answer”. The goal is to understand what the business could generate in income if you go down door #1, door #2 or door #3. This will lead to the confidence needed to drive the business forward, even if the performance to date is below expectations.

Perhaps decisions are made to discount product to drive sales, to pause planned investments, to actually cut payroll and marketing or all of the above. It could also mean simply accepting lower results and take the longer view. What are the options in your business to address the gap? With a proper gap analysis, you can confidently answer that question.