7 Financial Blind Spots of Business Founders

The enterprising visionaries who found their own companies are some of the most ambitious, and creative, driven people on the planet. But that doesn’t mean founders are good at everything. In fact, competency on finance-related matters is often one of founders’ biggest blind spots. Financial illiteracy is one of the top five reasons why startups fail to find success, according to 2023 research published in the Journal of the Knowledge Economy.

Does that mean founders need to become as knowledgeable as a CFO? Absolutely not. The most important thing that founders can do is become aware of their financial blind spots. Once founders are self-aware, they can surround themselves with trusted advisers who will bring specialized skills, experiences, and perspectives to the table. Then, they can empower their financial experts to identify and eliminate financial blind spots.

Let’s explore seven financial blind spots that are common among founders, plus proactive steps that companies should take to ensure that these blind spots don’t stall growth.

1. Not Doing Robust Cash-Flow Forecasting

Cash flow is one of the most important things for a business to get right. Without positive cash flow (or at least a clear plan for how to get there), the business risks not being able to pay its bills. Unfortunately, many businesses don’t know how to spot cash flow problems—nor do they understand how far out they should be doing cash flow forecasting. If a business is profitable, founders tend to breathe easy and not invest in cash flow forecasting.

My general rule of thumb is that cash flow forecasts should be updated every single week with a detailed view of the next three months. Moreover, businesses should be looking at least 12 months into the future at a higher level to provide clarity on potential cash needs. It’s also important not to let perfection be the enemy of good. In other words, all financial forecasting is wrong to some degree. Rather than let analysis paralysis thwart an organization’s ability to do cash flow forecasting, the business should just start doing it regularly. The business will get better over time.

2. Not Prioritizing Strong Revenue Collection Workflows

When founders initially set up their accounts receivable and accounts payable workflows, they tend to implement overly simplistic processes that assume a best-case scenario in which the company consistently invoices customers accurately and in real time and customers consistently pay in a timely manner. Such naivete can get companies into real trouble: In the absence of strong, articulated workflows, it’s common for companies to let timely invoicing slip through the cracks. A lot of the time, most customers don’t pay right away—in fact, they tend to delay paying until the deadline or need to be repeatedly reminded even after the deadline has passed.

I remember working with a client that wasn’t issuing invoices on time, and customers weren’t paying by the deadline. I worked with this client to design a workflow in which it called each client to outline payment expectations; this new workflow resulted in the average payment being made in 22 days instead of 45 days.

3. Not Focusing on High-Value Financial KPIs

Over time, businesses tend to expand the number of metrics they use to track financial performance. It’s not uncommon for someone to suggest an additional metric to track and then add it to the list. I’ve worked with companies that were tracking 30 different metrics but could not articulate how they were using any of these metrics to drive their decision-making.

The reality is that there are typically only two or three metrics that really drive financial performance. While most of these high-value metrics are unique to each business, a key universally applicable metric is contribution margin ratio, or margin percent, which reflects how much revenue is being brought in relative to how much money is being spent to produce that revenue.

4. Focusing Solely on Top-Line Growth

When businesses focus primarily on top-line growth, they tend to look only at whether the organization as a whole is growing at the expected pace. They don’t drill down into how specific teams and functions of the business are (or are not) contributing to this growth. Needless to say, different facets of a business don’t all contribute equally. Thus, when founders don’t parse their growth data at this granular level, they can easily miss specific facets of the business that are losing money or that are dragging down the company’s margin percentage.

One company I worked with decided to double down on sales reps in order to accelerate revenue growth. However, without the appropriate efficiency metrics in place, the company ended up just increasing operating expenses without the added revenue. Understanding how to grow profitability is key in today’s environment.

5. Inadvertently Worrying Investors and Shareholders

Most founders’ intuition about how to interact with their investors and shareholders is completely wrong. Founders tend to be reluctant to share specific information about financial performance, whether good or bad. When the news is bad, founders are fearful that investors are going to make or suggest changes that the founder doesn’t want.

When the news is good, founders are fearful that investors’ expectations will be raised too much and the performance won’t be sustainable. The key is for founders to put themselves in the shoes of investors: Investors need enough financial data to be reassured that their investment is safe. Thus, it’s important for founders to figure out what types of information will help reassure investors.

In one recent board meeting, investors wanted to understand the processes the company was using to close deals and what steps the company was taking to strengthen customer contracts. . These insights helped the investors recognize that despite imperfect financial performance, the company had strong plans in place.

6. Not Staying on Top of Regulatory and Compliance Risks

Founders face a dizzying array of constantly shifting regulatory and compliance landscapes. Whether it’s with taxes, insurance or financial audits, or any number of industry-specific obligations, companies cannot afford to let any of these risks slip through the cracks. Fortunately, companies can retain the services of as many experts as they need to stay on top of every regulatory and compliance risk. I recommend that every founder have a strong working relationship with a good attorney and a good CPA firm; they tend to consistently prove to be more valuable than what the company is paying them.

7. Failing to Recognize Volatility on the Horizon

Founders tend to struggle to recognize volatility on the horizon. The reason is simple: They aren’t looking in the right places, and they aren’t looking far enough out.

Take the example of a transportation services company that I worked with: The company was expecting and planning for a seasonal downturn in business during the cold winter months. But then the company put on its blinders and missed signs that business was not picking up strongly again in the spring due to an economic downturn. As a result, the company struggled to properly plan for and navigate this downturn. By putting more focus on recognizing economic volatility, the company was able to avoid being blindsided going forward.

Partner with Experts

Founders are susceptible to a range of financial blind spots, from inadequate financial forecasting to subpar revenue collection processes to focusing on low-value KPIs. While it’s important to be aware of these blind spots, founders don’t need to become finance experts; they can partner with experts. Moreover, most startups and smaller companies cannot afford to hire a top-tier finance team; that’s where fractional leadership can become a strategic asset.

Through a fractional partnership arrangement, budget-conscious companies can retain multiple finance professionals with different types of specialized expertise. It’s akin to companies that don’t think twice about retaining multiple “fractional” attorneys to help them navigate different specific legal issues. And the results consistently speak for themselves.