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Chapter 5: Finance

"He had heard people speak contemptuously of money: he wondered if they had ever tried to do without it."

W. Somerset Maugham, author of Of Human Bondage

In my experience, people enjoy learning about Value-Creation, Marketing, Sales, and Value-Delivery – they’re easy to understand and visualize.

When it comes to Finance, however, eyes glaze over. Finance conjures up associations of “bean counting,” mathematical formulae, and spreadsheets overflowing with numbers. It doesn’t have to be that way – finance is quite easy to understand if you focus on what’s most important.

Finance is the art and science of watching the money flowing into and out of a business, then deciding whether or not it’s enough to keep going. Accounting is the process of ensuring the data you use to make financial decisions is as complete and accurate as possible.

It’s really not any more complicated than that. Yes, there can be fancy models and jargon, but ultimately you’re using numbers to decide whether or not your business is operating the way you intended, and whether or not it’s enough.

Every successful business must bring in a certain amount of money to keep going. If you’re creating value, marketing, selling, and delivering value, there’s money flowing into and out of the business every day. In order to continue to exist, every business must bring in Sufficient revenue to justify all of the time and effort that goes into running the operation.

Everyone has bills to pay and groceries to buy, so the people involved in the business need to consistently make enough money to justify the time and energy they’re investing, or they’ll quit and do something else. Accordingly, every business must capture some amount of the value it creates as revenue, which is used to pay expenses and compensate the people who make the business run.

The very best businesses create a virtuous cycle: they create huge amounts of value while keeping their expenses consistently low, so they make more than enough money to keep going without capturing too much value. As a result, they’re able to simultaneously pad their pocketbooks and improve the lives of their customers, since the continued existence of the business makes everyone involved better off.

Finance helps you watch your dollars in a way that makes sense.

Key Ideas in Chapter 5

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