Archive: Jun 2015

  1. Doing it all yourself? The financial hurdles business owners face.

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    Start ups don’t transform into fully-fledged professional businesses with fully-functioning finance directors overnight. There’s an awkward metamorphic stage, where a business is too small to have the skilled finance director they need – but large enough to be facing many of the problems a finance director deals with.

    We’ve seen businesses suffer when they lack the understanding of what a finance director would help them with, if they had one in place. Even if a business has a revolutionary product or service, they can still run into cash-flow problems or ruin themselves through poor financial and organisational management.

    The overarching role of the finance director is to implement processes to improve your business efficiency. These processes, and the skills and knowledge underpinning them, can be split into five categories.

    Budgeting business spending
    You shouldn’t just record what you’ve bought and sold: your business should have a budget, if it’s going to succeed. Budgets often look 12 months ahead, and are continuously updated. Progress is measured against plans, and projections are proportionally adjusted using differences between budgeted and actual spend.

    Financial Planning

    A business’s budget should inform and be informed by the business plan. Like the budget, these should be continually updated. A well thought-out plan will help ensure your business balances growth and keeps up with demand. It’ll also ensure you don’t get in the messy scenario of cash-flow problems, and the destructive habit of oscillating between generating revenue and building the business. The two should be done together!

    Financial planning is a continual process – and should be used in steering the company’s decisions, examined regularly at board and major meetings. Normally, a financial director would stay on top of these needs – preparing the analysis and papers needed, for founders and senior management to understand the numbers needed to underpin their decisions.

    Managing Cash Flow

    One of the outcomes of effective financial planning, is knowing your income is enough to pay your overheads. It’s all well and good knowing, albeit with 90% surety, your invoice will be paid in the next 30 days – but what if you’re owing others money in 15 days? Internally or through external support, you’ll need the knowledge to balance the books and communication skills to negotiate payment deadlines, to ensure you’re not up no-cash-creek without a paddle.

    As well as ensuring payment timescales keep an organisation’s head above water, you need to understand how your cost of acquiring business customers compares to and effects your business’s loan to value ratio (LTV). By keeping your business acquisition costs low and your profit margins high, your business should have a strong value. This helps keep your LTV low, allowing you to borrow at preferential rates – ensuring the sustainable growth of your business. Understanding the relationship between these two factors for your business helps inform marketing decisions: whether to spend more on marketing, potentially providing a higher return, but over a longer period; or to invest less in marketing and have a faster payback period.

    Understanding HR & Legal Procedures
    Large companies have dedicated legal staff or even teams. For smaller but still professional businesses, the role of understanding HR and legal procedures often falls at the finance directors feet. For many founders and senior executives, legal and HR documents read like a foreign language. However, it’s important your business gets to grips with staff and subcontractor contracts.

    Businesses have hundreds of HR issues they must manage on an ongoing basis. Staff who are supported, through reviews and having the right reward mechanisms in place – such as the option to buy shares in the company – are more likely to stay loyal, acting as true ambassadors you can be proud of. You should be aware of the going rate your staff could expect in the wider market, and reflect this in reviews and rewards.

    Staff retention is especially important when you’re small. Unsupported staff, or those that feel they’re behind the iron curtain and living in George Orwell’s 1984, won’t hang around for long. Similarly without having the knowhow to handle legal threats, lease conditions, copyrights and intellectual property could leave your business becoming tangled in a legal web.

    Measuring Success and Failures
    There’s more metrics than just profit and loss. Understanding what to monitor when, and how this information infiltrates business plans and board meetings, is essential for efficiently running and growing a business. If your business hasn’t yet got a competent finance director, consider setting different metrics for different areas of your business. Speak to the teams or team-leaders involved, to understand how they informally track their progress – and use this to inform how and when to capture metrics. Like budgets and financial plans, business metrics should be analysed and reviewed on a regular basis.

  2. Painting a picture with financial budgets

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    More often than not, financial budgets aren’t used effectively. Instead of being a useful tool, staff see them as a bother and necessary evil. They paint a dull or even threatening picture. When this occurs, motivation is often eroded, and this can lead to the beginning of the end for some companies.

    Financial budgets should paint a clear picture: a living snapshot of progress on financial components of a company’s strategic plan, rather than a list of targets that must be met. Budgets should be used in conjunction with staff reviews and other assessment procedures, to monitor the achievement of a company’s entire strategic plan.

    Painting a pretty picture

    There are several techniques to help staff see financial budgets as a useful tool. Firstly, budgeting should be a dynamic and open process, done in conjunction with developing and reviewing overall company strategy. The entire spectrum of staff should be included, allowing decision making to be influenced from the bottom up. This helps motivate staff and provides ownership of inputs and results.

    Effective budgets allow careful resource allocation to maximise results and align with (not dictate) the strategic plan. Expenditure such as IT, marketing, capital expenditure and recruitment of staff should all be linked with the strategic goals. Senior management, supported by the finance department, can then ensure the budget works within the constraints of cash-flow and contingencies. Their goal: to balance the budget to provide sustainable growth.

    The experiences and expertise of middle managers can often be missed in setting budgets. Involving them in developing your organisational strategy and objectives will provide much more useful results than if they’re only plotting progress. Allow them to think how they can help monitor its success, beyond simply filling in boxes on a spreadsheet.

    Financial budgets should be seen as a monitoring tool: not a straightjacket of what must be achieved. Managers and even staff can have their initiative stifled by aiming to precisely meet budgets without any leeway. No financial forecast is perfectly accurate. Effective strategic plans, financial forecasts and staff should be prepared for this – and use variances to identify internal and market sector changes.

    Developing a culture of accuracy rather than ‘beating the numbers’ helps ensure the budget holistically looks at your organisation and the processes within it – rather than individual staff members or departments. This helps avoid the culture of ‘us and them’ and silo mentality. Organisations should look outwards towards customers and competitors, rather than warring internally; and rewards should be linked to achieving financial and non-financial objectives relative to the market.

    Financial budgeting and forecasting processes should be streamlined, to achieve greater speed and accuracy. Here at SouthWestfd and The Finance Department we have found companies were able to decrease their time spent on budgeting by an average of 22%, whilst increasing their profits by 11%. A win-win enabled by heightened awareness of priorities, performance, and communication throughout the whole business.

    Companies should measure their performance against strategic goals and objectives throughout the year, including but not restricted to financial budgets. The frequency of monitoring depends on the size and complexity of the organisation, but should be carried out at regular intervals all year. The most successful companies monitor performance on a continual basis, applying fast response times and flexibility to market changes.

    Condensing progress into one-page ‘dashboard’ reports of key performance indicators can help ensure company directors and senior managers have a picture they can easily refer to. This is one way the most successful companies are able to stay ahead of the game: having a continuous and live understanding of their performance, preferably linked to a risk register.

    Blog by Jerry Davison, MD, SouthWestfd