Practical advice for product managers working with finance.
Finance isn't always about 💎👐, raising money, or mergers and acquisition. The less sexy part of finance matters just as much in keeping the 🚢 running.
For product managers with a design or software engineering background, when it comes to working with finance, I see a lot of misunderstandings. That’s partly because popular culture associates finance more often with wall street, stocks, and now 💎hands.
But for most product managers, you’ll be working with the less flashy but equally important part of finance: financial operations and it’s close cousin, accounting. What does that mean for PMs? How can you build better relationships when working with finance?
What is finance?
When I’m talking about finance, I’m talking about corporate finance or what NYU Professor Aswath Damodaran calls: business finance. This is finance that applies to any kind of business, whether a corporation or a sole proprietorship. Within corporate finance, there are four important components:
sourcing money: raising cash through debt, stock, or selling of products/services
deploying money: figuring out the best way to generate returns by evaluating different investment options (e.g., hiring engineers, buying software, starting projects, acquiring another company)
moving money: transferring cash or as David Schneider, Head of Finance @ Gainful likes to say, “Keeping the blood flowing.”
recording money: documenting the activities associated with sourcing, deploying, and moving money.
Why should product managers care about finance?
Half of a product manager’s job is to figure out ways to reduce the value risk. In other words, if we build XYZ products or features, how do I figure out if customers buy/use it (i.e., get value)?
Finance also cares about value, but finance defines value sometimes differently from product. Being responsible for “deploying money”, finance wants to fund activities that will generate the most money for the company with the least effort, whether it’s hiring people in operations, building software, or buying productivity tools.
Both finance and product care about generating value, but the metrics for value aren't always the same. Here’s an example:
Product: Value for a new feature is measured in increase in daily active users (DAU)
Finance: Value for a new feature is measured in increase in advertising revenue (assumed from increase in daily active users)
Three types of finance people you will encounter and their responsibilities
Earlier, I broke down corporate finance into sourcing, deploying, moving, and recording money. Now, let’s look at the different type of finance people you’re work with.
Finance People -> Head/Director/VP of Finance, Finance Manager, Finance Manager for [Marketing, Operations, specific business unit or functional area], Finance Associate
Responsible for sourcing funds
Decides where to invest those funds
Prepares financial forecast/reports (what will the money look like in the future)
Accounting People -> Head/Director/VP of Accounting, Accountant, Controller, Comptroller
Responsible for record keeping, generating financial statements
Sets policies for how to keep records
Financial Operations People -> Treasurer, Cash Flow Manager, Banking Operations Manager, Accounts Receivable / Payable Specialists, Payroll Specialists
Responsible for collecting money (invoices) and paying people (distributing cash)
Manages operational lines of credits and banking relationships
Manages other short term investments that can be easily liquidated for business use
Quick reminder here that job titles don’t equal responsibilities. At your company, it’s possible a single person is responsible for all three areas whereas at another company, those responsibilities are separated to specific individuals.
Your takeaway here is to understand how some titles can translate into different responsibilities.
Good Ideas for Working with Finance and Financial Operations
Talk in terms of dollars or what’s called “making the business cases”. This isn’t to say people in finance don’t care about good design or new technology. But in their role, they care about dollars. A project that will take 6 month? What does that mean in terms of dollars, which depends on the number of people and their salaries. A feature that will improve the user experience? What does that mean either for reducing operating costs or increasing revenue through better conversion? Calculating proposed project to potential revenue is one way PMs can speak a language preferred by finance. Even better, ask your finance counter what metrics they use to measure projects.
Data is finance’s weapon, try not to break it. To record accurately, you need data. To make forecasts, you need data. Finance is heavily data driven thus PMs working on building software have to understand the impact to the flow of financial data. "There was a critical project and we needed to ensure there were no breaks in the flow of data from the ecommerce platform to the various payment gateways and our sales tax collection platform," said David. "Otherwise, it would be very difficult to tie product sales with cash received. So, we created a data and definitions list that the PM could use to understand and ensure continuing data flow for my forecasts.” Thus, you should understand how changes to your product may impact data flows to financial systems used by finance.
Help automate away manual, repetitive activities to prevent mistakes. One way PMs can help is to identify and suggest automated processes to prevent human mistakes. “One time, someone on my team accidentally entered the wrong numbers, 12 digits, for a client’s banking information,” said Michael Vigario, US Head of Finance @ ACT Commodities. “He didn't mean to do that, it was an accident. Thankfully, the funds weren’t distributed and it got returned back to us. But it was held for 4 to 5 days, so it was still costly [with the amount of money we’re transferring. Now], we have an automated system and process that validates bank information during client onboarding, which saves us both time and prevents mistakes.” Think this type of mistake can’t happen? Read Citi $900M mistake.
Advice for Working with Accounting
Understand the basics. You don’t need a MBA or accounting degree. You don’t need to understand GAAP rules. But if you are a PM working on a product/feature that requires pushing data to an account system or talking to accounting, it’s helpful to have a basic understanding of what assets and liabilities means from an accounting point of view. While there are a lot of “courses” you can Google, here’s two free ones: CFI Accounting Fundamentals (you can skip and just read the sections on assets and liabilities) or University of Virginia’s Financial Accounting Fundamentals. The goal is to have some shared language. Tina Li, Head of Account @ Chowbus tells a great story of unintended consequences if you don’t have a basic understanding of accounting.
I worked with product and engineering teams that had an initiative to increase revenue through vouchers. They focused on driving customers to purchase more vouchers. Sales of vouchers, even if you got cash from it, we [in accounting] don’t recognize that as revenue, but as a liability. It isn’t until the customer redeems the voucher at a restaurant, does it get recognized as revenue.”
Ask questions to understand the fundamentals. Don’t have time to take the course? No problem because you can just ask. “I know you aren’t an accountant or versed in finance,” said Michael ask as many questions because for the moment, for this project, accounting really matters. Once a product manager understands the why and how, product people always can come up with suggestions.” Tina echoed the same point but differently. “At Groupon, we had to figure out how intercompany payment works between different Groupon businesses. Before solving the technical issue of which account a specific transaction should be recorded, we go back to simple examples.
Say you’re the Canadian business unit and I’m the U.S. business unit. You owe me money.
I invoice you in USD, not CAD because I want my money in USD.
On 5/3/2020, I invoice you $10 USD which is $12 CAD.
On 6/3/2020, you pay me $10 USD, which is $11 CAD (change in exchange rate)
The difference between $12 CAD and $11 CAD, that needs to be recorded somewhere.
“I boil it down using simple examples”, said Tina. “And you can do this with hypotheticals. Let's say in 6 - 9 months, [you’re thinking of introducing annual subscriptions.] We can discuss how that recording will look different and its impact to different teams, things [you as PM should consider.]”
Understand why end of month or certain time periods are busy because of the need to “close the books”.
At a minimum, you will close your books annually, because you have to file an income tax return every year, and you should prepare annual financial statements as well.
Most businesses, however, close their books at the end of each month. Sending out customer statements, paying your suppliers, reconciling your bank statement, and submitting sales tax reports to the state are probably some of the tasks you need to do every month.
This work must be complete by a specific time period to correctly submit tax receipts, pay suppliers, etc. Sometimes, they have to be verified by outside account firms. That’s why “closing the books” is a busy time.
Maintain a shared document for understanding. “[Accounting] is often brought into phase 2 of product conversations,” says Tina. “[So] having a shared document, even if you don’t go through it with me, allows me to review, pick and probe, see if something will impact accounting which gives me an opportunity to identify potential issues.” For medium to large projects, I recommend the working backwards “press release” and it’s companion FAQ.
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Special thanks to the following people for taking time to help me write this article.
David Schneider, Head of Finance @ Gainful
Tianyi (Tina) Li, Head of Accounting @ Chowbus
Michael Vigario, US Head of Finance @ ACT Commodities
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