Revenue matters. Greatly. Anyone reading this newsletter knows that. But earnings and cash keep the company in your control. This lesson applies to all companies, from small start-ups to the public.

As noted by Ben Gammell (CFO of Brex): “I think we’re now in the place where we don’t need to raise additional funds to be a growing enterprise… As a result of that, I think it wrests some leverage…back in favor of the company so that we can be more intentional about if and when we do that, versus the need to do that.”

In 2021, I joined a company to lead the finance and operations teams. They had just raised tens of millions. I sat down with the lead VC and asked, “Great, we are aligned on revenue targets, but what do you see as acceptable burn relative to revenue?” We were losing money at the time. The answer: “Don’t worry about it. Just focus on revenue. You can figure out the rest later.” That comment cost us years of cash and eventually a lot of control.

Revenue depends on many factors outside your control, like customer demand, timing, and macro conditions (especially these days). But you have more control over your expenses. So when revenue is heading toward a miss, you still have the power to alter your spend. This is what sophisticated finance teams do, allowing companies to miss earnings targets only around 21% of the time, while missing revenue targets almost 36% of the time.

Offsetting a revenue miss has to happen quickly. We are talking weeks, not quarters. So set yourself up for success.

Budget in a Flex Fund

At the first company I joined, an increasingly long time ago, we would set aside about 5–10% of our budget for “Flex Funds.” This meant we would hold the money aside, invested, until the revenue was trending toward where we wanted it to be.

If revenue looked low, we wouldn’t release the money (thus controlling our earnings). If the revenue was on target, we would release the money to a list of ranked projects. This had the benefits of:

• Making hard budget conversations easier. We would talk about this before the budget was set. Then, during budgeting, if there was a big disagreement, we could simply agree that if targets were hit, departments could apply for the reserved funds.

• Increasing competition between teams. We promised to unlock the funds at certain times, which time-bound success metrics and made “if you do well you will get more” tangible.

• Navigating misses without deviating from plan. We just wouldn’t spend the unallocated money.

The benefit of a flex fund over a buffer was that it was time-bound, transparent, and oriented the company towards action.

Tip: Of course, there are accounting techniques (deferrals, etc.) to smooth the gap, but this can make things even worse in the next quarter. Dodging a little pain now for a blow-up later.

Tie your expenses to actions

You need a quick way to see what the company is actually doing, how much it’s costing, and the bets you are taking. This should run alongside every model or discussion. There are many ways to do this. Everyone who has ever worked in finance has been hit over the head with hurdle rates, optimizing IRR, making smart bets. But what nobody tells you is that this will always remain more of an art than a science. If there were any sure bets, you would already be doing them.

The art is found in separating your company into a series of actions (not departments or cost lines) and keeping it live. You don’t have to be too specific, but generally:

• Maintain a live list of running projects. This should be a baseline of all the major overarching buckets that your company accomplishes. Organize big to small.

• Don’t overcomplicate it. Do not overdo it and waste everyone’s time cost-allocating everyone’s time by hour. Instead, get your leaders together and get a breakdown of general projects each person is working on along with their bets.

• Line up each project’s cost and revenue (or potential). You want to see the potential for each project to add to revenue growth, or how much cost you can immediately save.

• Assign probabilities. Base this on feedback from the leads. You and the CEO need to have the final say, as people tend to be optimistic about their own projects.

• Use it. When revenue hasn’t grown as expected, you need to go down this list and then make the decisions you want to either postpone, implement, or cut depending on your revenue results.

Of course, when you have an investor who is asking you to grow at all costs, it will be difficult to not fund every project that has potential. But even then, it came in handy.

Tip: Consider the timing of winding down a project or ramping it up within the list. Especially when you are looking at making a change that impacts the P&L in weeks.

Diversify your tactics

Now, each of the company actions can be broken up into the tactics that achieve their results. Tactics are how you are actually going about the project (sales strategy, R&D techniques, distribution channels). These are sometimes tracked within KPIs, but often their operations rely on their relevant management teams. The issue is that oftentimes, even though the projects are different, the tactics overlap. So when a single tactic fails (for example, four projects targeting the same customers in slightly different ways), revenue fails everywhere.

You don’t want to be in a situation where you have to quickly shut promising projects because each one relies on a shared marketing strategy. Instead, you want the finance team to have reviewed the various tactics, ensured they are not overly co-dependent, and identified the ones that are working or not. So, when you need to make up a revenue shortfall, you can choose not only which actions to keep, but replicate the tactics that are working.

Tip: Assign a clear owner for each tactic so you can pivot without derailing the whole project.

In conclusion

Revenue will miss, but by instituting a flexible spending fund, maintaining a list of live investments and opportunities, and ensuring that your tactics are varied, you can control the revenue miss without jeopardizing your future.