The goal of any product is to create value for the business, with “value” typically translating to “profit.” There aren’t many product professionals who would argue that statement. At the same time, most product managers come from a technical or domain-expertise background that, yes, frequently leads to fantastic product and market expertise. However, this focused expertise also results in an often-overlooked gap between products and the financials.
In most organizations, regardless of maturity or size, the product team is tasked with surprisingly little when it comes to profit-and-loss analysis for their products. Most companies silo financial responsibilities with the finance team, which has little to no collaboration with functional areas like product. This isn’t happening because finance is hoarding financial information—frequently, the people who work in functional areas don’t understand the meaning of financial data. Even organizations with product centers of excellence often leave the financials to the finance team.
Yet, leaving the numbers to finance not only puts your products and your company at risk, but it also limits your career potential. Without a strong foundational understanding of profits, losses and other basics of finance, you won’t have enough knowledge to:
- Predict your product’s potential success
- Pivot when things don’t go as planned
- Recognize the signs that your product is nearing its end of life.
But if you develop the skills to predict and analyze the financial results your products can return, your colleagues (and leadership) will notice your aptitude—and your career will move forward.
Houston, We Have a Problem
The first step in building your financial savvy is evaluating what you know and understanding your comfort with finances. Oftentimes, people who have strong expertise in one area push back on learning about other areas. But, as Peter Drucker puts it, “Taking pride in such ignorance is self-defeating. Go to work on acquiring the skills and knowledge you need to fully realize your strengths.”
The reality of the world is that corporate leadership is increasingly expecting product professionals to know the financials of the business, not just your products. You must understand the organization’s financial results and how to interpret the financial data. For example:
- Profit and loss (P&L) statement: tells you the organization’s profit over a period of time. It shows both revenue earned and expenses incurred.
- Cash flow statement: displays the difference between the organization’s revenue and expenses incurred and summarizes how operations, investing, and financing activities affect the organization’s available cash.
Knowing how to interpret these statements is important, as that knowledge provides useful cues (e.g., how products are funded) that will help you build more relevant and compelling business cases.
It’s also important to remember that the language and priorities of finance change depending on who you’re talking to because different stakeholders care about different things. For example, the finance team cares about whether your product will surpass the hurdle rate (more on this later) while the sales team cares more about the cost of sales and projected cash flows.
Plus, every business can track and report product- and organization-level results differently, as can each industry, state, and country, so understanding those nuances and how they apply to your organization is important to gaining credibility as a strategic product professional.
Turn a Small Step into a Giant Leap
Once you have a better understanding of the finances at the organizational level, it’s time to make the connection at the product level. For example, I mentioned that the finance team cares about whether your product surpasses the hurdle rate. But what’s a hurdle rate and how does it apply to your product?
To invest in new product development, your company needs money to fund the development effort. The cash flow statement may show that there isn’t a lot of available cash, so the funds need to be raised differently. There are two ways the organization might raise these funds:
- Taking on debt, usually in the form of issuing corporate bonds, which require interest payments to those who purchase them
- Issuing stock, giving an ownership interest to those who purchase shares
There are costs involved regardless of which choice the company takes: Issuing bonds means paying interest while issuing stocks raises stockholder expectations for a return on their investment. The organization determines its hurdle rate, the minimum rate it must earn on a product, by combining these costs into one overall weighted cost of capital.
Say your company determines that its cost of capital, or the cost of funding the next product, is 10%. That means the hurdle rate is 10%—and any new product initiative must return at least 10% to be viable and add value. In your product role, you must know your company’s hurdle rate and be able to show that future expected cash flows from your product will surpass this rate. Far too often, the hurdle rate is not considered when planning or monitoring product performance, which leads to unhappy stakeholders. The numbers in your business case may have looked fantastic, but the performance of the product ultimately will not meet business expectations.
Understanding what different stakeholders care about and how they measure performance helps you make relevant and powerful business cases for your products. It also helps you in ongoing decisions across your products’ lifecycles, allowing you to quickly respond to changes and pivot when necessary.
Plus, you’ll see how your product’s performance affects the overall organization—and you’ll understand how the organization’s performance affects your products. Think about your existing products:
- Do you know your products’ internal rate of return?
- What are the future cash flow projections?
- How is your product being funded?
- How do variables like volume discounting by the sales team affect your product?
If you don’t know the answers to these questions, you can’t confidently ensure the success of your products.
The Eagle Has Landed
With a better understanding of why corporate financials are relevant and important to your role, don’t wait until you’re suddenly expected to present numbers, explain suboptimal product performance, or eligible for a promotion. Seek out knowledge as soon as possible.
Perhaps you don’t have access to much data today, but you can start small and put together the numbers for one of your existing products. Talk with finance and sales about important decision criteria like cash flows, funding sources, hurdle rates, revenue recognition, and discounting. They have the same goals as you: success, accuracy, and consistency.
As you get your arms around the financials, you might be surprised at how much data is available if you simply ask. You might also discover some serious gaps in how your product’s numbers are tracked. Improving how those financials are measured or how your team works with them can have extremely positive and highly visible results for the organization, not to mention your career.
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