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

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.