How Do I Grow The Finance Function For My Start Up? A Short Guide

Many start ups started as one or two budding entrepreneur's with an idea and vision, which grew into a income generating business. In the early stages the founders and owners are the Sales team, the Finance function, the Supply Chain team and so on. They do absolutely everything!

There are only so many hours in the day, so as the business grows it makes sense to outsource the businesses non core activities to experts, implement technology or to employ staff to do this for you.

So, as a start up, how do you evolve your support functions in line with the business? In this article, I will cover off the following:

1. The bare essentials of a Finance Function
2. The value adding elements of a Finance Function

THE BARE ESSENTIALS

If we strip the Finance function down to its bones, we are aiming to ensure that there are processes and procedures in place to:

1. Record costs and income into the accounting system
2. Ensure that cash from income is received
3. Pay our bills
4. Meet any statutory reporting requirements and submit tax returns

As a small business you probably have an accountant that you pay £100–200/month to who will manage all of the above for you. However, when you start generating large volumes of transactions, the last thing your accountant wants to be doing is to be entering 100 invoices a month, and there are more efficient ways to do this, which we will look at now.

Order to Cash (O2C)

The order to cash process describes the mechanism by which your business records a sale into your accounting system, generates an invoice for the customer and receives the cash from that sale into your bank account.

From experience, your business needs to utilise technology to its fullest here!

Most small business accounting systems (such as Quickbooks or Xero) will have in-built invoicing capabilities. The system can be linked to your business bank account and periodically a report can be ran to match the income into your bank account to the relevant sales invoice therefore ‘matching’ the cash received with the invoice. This advancement of technology is a life saver as opposed to the old days of writing out invoices on word and sending them by email — this saves time and ensures automatic of transactions into your systems.

If you have a moderate volume of invoices to send out then the owner/founder can manage the above process or employ a admin person to do this, however with a business whereby there are high volumes of transactions e.g. E-commerce or a software business you should aim to automate this, such as building functionality into your website whereby if a customer clicks ‘buy’, it generates an invoice, takes the customer to a payment portal and once paid sends an invoice to the customers email address therefore saving the business endless man hours of sitting in front of a computer.

Periodically, the business can then download a report from their website provider, make a bulk entry into their accounting system and then check that the bank account has received the cash therefore ‘matching’ the items. This can be managed by an in house bookkeeper or your accountant.

There are loads of quirks to your individual companies’ operations that the above may not address, however there will be a computer whizz out there who has thought of a solution which will save you time and potentially money. If they haven’t, then you have identified a potential opportunity for your next start up (I will be happy with 5% of all earnings as a commission!).

Purchase to Pay (P2P)

The purchase to pay process describes the processes involved whereby the business makes a purchase of an item or service, records the transaction in the accounting system and then pays the supplier.

There are various options available here:

• Employee a bookkeeper to record all of your transactions into your accounting system, keeping a record of the dates by which the invoices are due. A weekly or monthly payment run can then be processed whereby all transactions are paid. Again, use technology - there are systems out there that will enable bulk transactions to be paid rather than having to enter each payment into your online banking
• Alternatively, you could outsource this function to a 3rd party whether this be your accountant or a transactional services provider. This is probably cheaper, however the banking will need to remain in house for security reasons
• Finally, technology is advancing faster than ever — there are systems out there where receipts can be uploaded to a portal and the system recognises certain information and works out where to post these to into your accounts. If you combine this with an automated bank payments system then you have a really slick process in place

Aim to use technology to execute all of the boring, repetitive and manual tasks where possible.

As your business matures you may want to implement a purchase order process/system. This would ensure that those with the relevant authority levels in the business have approved any spend, and invoices will not be paid without a valid purchase order number. For the purpose of this article I have assumed this isn’t needed for now.

Reporting and Tax Submissions

Now that the P2P and O2C processes are set up, all of the transactions have been recorded in your accounting system, which now matches your bank account balance (with the exception of pending payments).

Now to call in the Finance professionals!

There are loads of various submissions that different businesses have to complete. In the UK for example, a Limited Company will have Corporation Tax returns, Companies House submissions and potentially Payroll and VAT submissions.

This is a job for an accountant or tax advisor — this is generally a complex area so let an outsourced accountant manage this for you to mitigate the risk of non compliance and to minimise your tax exposure.

THE VALUE ADDING PART

The above processes summarise the basic Finance processes to have in place, but why do large organisations have Finance departments with 100’s and 1000’s of employees?

That is because a Finance function can evolve into a value adding beast that helps your business make the right decisions. Power to the accountants!

Route to the Top: MBAs and Accountants lead the FTSE 100 | Robert Half UK

As you can see from the above article, 20% of FTSE 100 CEO’s are chartered accountants. There is a reason for this - finance professionals are constantly assessing your business on its profitability, its cash requirements, potential financial risks, amongst many other things that can add value to your business.

The Finance teams within these large organisations are there to not only manage the ‘bare essentials’ covered earlier on in the article but are there as advisors to the business so that the right decisions can be made. This is typically described as ‘Commercial Finance’.

So what is Commercial Finance when its at home and how can it help your start up? Here is list of a few activities that can be managed by your commercial accountant:

• Investment /Lending— as a start up you may require external funding through investors or through borrowing. Both parties will want reassurance that their cash is in safe hands and will be put to good use. Commercial accountants speak their language and can create financial models and presentations that articulate the potential returns the business can make
• Forecasting and budgeting. All successful businesses have a financial forecast or budget that they use as an operational target, as well as for activities such as cash flow management for example. Again, an accountant will be able to quickly and efficiently build a reporting process so that you can analyse your financial performance and also recognise any financial risks or opportunities
• Decision making — do I go with Option A or B? What does each option cost and what would be the returns? What about if we tweak this a bit? These are daily questions that a Start Up owner or founder will ask on a variety of things. Use a commercial finance professional to assess your options rather than you slaving away over an Excel spreadsheet for hours

This list is not exhaustive — there are loads and loads more activities that a good commercial finance professional will be involved in. They should act as your ‘business partner’ and sounding board.

Having worked for years in various organisations’ finance functions the CEO usually firstly consults their CFO regarding most decisions.

But these large organisations can afford to pay for these people, so how do I scale this down for my small start up?

The answer is outsourcing-there are many commercial accountants out there (myself included), who for a reasonable fee will charge by the day for these services. Maybe, agree to have 1/2 day a week of their time to go through the key items, and as your business grows you can utilise more of their time.

There will be a point where you will feel that employing a CFO/Finance Director is a wise option. Only do this once your business has enough surplus cash, but until that time outsource it.

So to summarise, a way in which to scale up your Finance functions could be as follows:

1. Use technology to do the boring, manual and repetitive processing activities
2. Use an accountant/tax advisor to do the tricky technical submissions
3. Outsource the commercial finance function to a consultant

…and hey presto, you have your own mini version of a FTSE company Finance function.

If your business needs support in any of these areas, please drop me an email on info@mcquade-consulting.co.uk