THE 3 STAGES OF BUSINESS FINANCE
I have worked in the Field of Finance and Accounting for over 10 years now. I started my Finance career at British Gas — a large FTSE listed company with 100’s if not 1000’s of employees within their Finance department. Since then, I have worked for a variety of large organisations, as well as supporting really early stage businesses that are just starting out.
From these experiences, it is clear that businesses of different sizes and stages have vastly differing Finance and Accounting needs. Before Christmas, I decided to investigate this further by conducting some market research, which consisted of a survey and speaking to business owners.
This article summarises the findings of this research. At some point, I will create a glossy white paper which delves into this subject in more detail, however the below are the key findings.
Firstly, lets look at the business cycle from idea stage, right through to growth stage. It is also worth thinking about why a business is created in the first place.
For example, an individual who decides to provide freelance web design services may start a business as a lifestyle choice — freelancing allows them to work when and where they want, and with who they want to. They may not want to build a global powerhouse and grow a large business.
Alternatively, a tech business is likely to want to scale their business. They will likely they will go through the motions of raising finance, whether this be debt or equity, and will have a degree of complexity to their business.
These two extremes above, will both have very different requirements in terms of finance and accounting support. So, let’s explore these 3 stages further, and how these stages apply to different types of businesses, and businesses at different stages. From the market research I conducted, there are 3 clear stages to the Finance function of a business:
1) Staying compliant
2) Fostering growth
3) Building a leadership team
The majority of small businesses will fall into this stage and will never leave this stage. As the title of the stage suggested, ‘Staying compliant’ is where the only finance/accounting requirements relates to financial administration. The types of activities that this includes will be things such as:
- Corporation tax returns
- VAT returns
- Companies House submissions
- Self-Assessment returns
In a nutshell, the above consists of recording accounting entries into a system and generating the reports to the relevant bodies that require them. Usually, businesses will outsource this work to an accounting practice that is a specialist in this field. As a rough idea, a business would pay anything between £60-£350 per month (depending on the size and complexity of the business)
Within this stage, business owners will usually have a sound awareness of how their business is performing and how their business is performing, so would not depend on their accountant for commercial support.
Let’s take our example of the freelance web designer. Let’s say that they charge £500 for a website design, and they can turn this around in a day. There are roughly 210 working days in a year, which means that if they are working at full capacity, they will be earning £105k per annum (less any expenses). This is simple maths and doesn’t require any complex financial analysis in order to optimise the business. Therefore, they probably won’t need an accountant other than to manage the activities I mentioned above.
However, let’s say that the web designer wants to scale their business by creating software that allows business owners to build their own websites. Potentially, this could turn into a global business (take GoDaddy for example). Therefore, their finance/accounting support requirements change and they move into the next stage…
During this stage, the business is preparing for or experiencing growth. There are many aspects to consider here, such as: how do I fund the growth? How do I price my products or services? What volume of sales do I need to make to breakeven and achieve the desired profits? Should I recruit staff or outsource labour? The list goes on — all of these questions should be answered through detailed financial analysis, that provides insights as to what the right business decision should be.
By this point, the business needs to start thinking like a large business. Large businesses manage their finances in an ordered and structured way and make decisions based off facts and data, rather than intuition.
My advice is that businesses split their financial support into 3 areas:
1) Financial operations: the types of activities described in the ‘Staying compliant’ section
2) Financial planning and analysis: ensuring that the business has a sound financial plan, which is refreshed periodically. Actual business performance is compared against this to gauge how well the business is performing vs the plan
3) Strategic decision making: As with all growing businesses there is a constant cycle of decision making. Ideally, each decision should be appraised by your Finance counterpart so that they can advise as to the financial implications of the decision
I will explore each of these areas in more detail:
Whilst we know what needs to be delivered (please see the ‘Staying compliant’ section), how we deliver these starts to change when a business reaches this stage. The business is growing, therefore the volume of transactions will increase, as will the complexity of the business.
Most traditional accountants start to get out of their depth at this point (most are used to their clients giving them a load of receipts and invoices once a year, so that they can calculate tax and produce accounts, rather than a monthly reporting cycle).
Businesses that are scaling need (as close to) real time information for decision making purposes. This puts greater pressure onto the finance team as they have to ensure that all transactions are posted into the accounts in an accurate and timely manner. To do this, it is advisable to start bringing some expertise in house — a skilled bookkeeper that is dedicated to your business will not only help to keep your administration in order but will also help to ensure that financial data and information is available in a timely fashion.
Another need of businesses at this stage is cash flow visibility (not cash flow management — we will cover this off in the next section). Scaling businesses can be sometimes constrained by cash flow. Maintaining accurate accounting records will ensure that the business has visibility of two major expenditures: VAT and Corporation tax. These sneak up every quarter (VAT) and each year (Corporation tax), so having sight of the amount of these is important so that you can provision for these cash outflows.
Next week, I will be publishing an article that focuses on scaling Financial Operations specifically so keep an eye out for this!
Financial Planning and Analysis
Maya Angelou once said ‘You can’t really know where you are going until you have known where you have been’. This is really applicable for this section.
By ensuring that you have your Financial Operations in order, the real time data is there. This can be turned into insightful information about how the business has performed. However, what use is that if you do not know where the business is going?
This is where a sound financial plan comes into play. I was astounded to find that the majority of small businesses (under £5m turnover) do not have a financial plan. I am a huge advocate of planning — before we even consider a financial plan, the business needs to create visions, mission statements, strategies, and operational plans. Finance should be heavily involved in this process, with one of the outputs being a financial plan which articulates the business plan in a numerical format.
Now that the business has a plan, we need to compare the financial performance of the business vs the plan. This should be executed through a month end process, whereby the financial performance (up until the end of the previous month) is compared with the plan. Analysis is performed to understand any deviations from the plan, and this is presented to the management team of the business via a monthly review. This allows the team to understand where the business is being challenged, and where it is doing well. Collectively, both Finance and the management team can then discuss any future risks and opportunities.
The final stage of financial planning and analysis is re-forecasting. Periodically, the business needs to collate the risks and opportunities and build them back into a revised plan. This provides the management team with foresight as to how close they are to their original plan and enables them to consider any corrective initiatives that may bring the business back on track.
As part of this final stage, I would also strongly suggest managing cash flow on a weekly basis. As mentioned above, one of the biggest challenges for growing businesses is cash availability. Therefore, close management of cash is highly important. A weekly cash flow review, where the cash inflows and outflows for the next 10 weeks, is a wise move. This encourages the decision makers to really focus on being frugal, which ensures that careful consideration is made whenever someone signs a cheque!
A daily part of business is decision making. Founders and management teams do this constantly. It is vital that you involve your Finance professional in this process, as they will look at the decision from a slightly different perspective. As part of our professions, we are trained in techniques and tools that can help to support these decisions e.g. NPV calculations so are trained specifically to support decisions.
Growing businesses will often seek external funding from investors and lenders who will want reassurance that the business is being well managed and has sufficient financial direction and controls. Finance play a key part in this process, often creating the financial plan and helping with the messaging of the business direction.
The Strategic Finance section is an ongoing process and is very much the development of a relationship between the management team/Founder and the Finance team. This relationship involves using Finance professionals as sounding boards and involving them in the process. By doing this, the business will have a well rounded approach to decision making which should result in better decisions being made.
Whilst the business is in the ‘Fostering Growth’ stage, it is likely that this function will be outsourced to a consultant (such as myself). Typically, a business will pay c.£500–4000 per month for a professional, that has solid experience and expertise. The amount that is paid is dependent on how much support is needed.
The reason why scaling businesses choose to use consultants at this stage, is that Finance professionals are expensive. Employing one full time is not wise whilst a business is scaling. During this stage, cash is scarce and committing to a large salary each month isn’t a wise idea. Using consultants maintains a degree of flexibility for the business.
BUILDING A LEADERSHIP TEAM
Once the business is comfortably trading, has reasonable cash reserves and has some certainty about the future of the business, it is time to employ a Finance Director or Chief Financial Officer. These professionals are expensive so expect to be paying upwards of £150k+ per annum (depending on where in the country you are).
Despite the cost, the FD or CFO will become an integral part of the leadership team. They will take ownership of the long-term financial plan and will hold the rest of the management team accountable for delivering. By this stage, the business is likely to have investors. The FD and CFO is a great communicator with investors, as they speak the same language.
Finally, the FD/CFO will start to build a Finance team. All of the activities that I have mentioned in this article will grow in size and complexity and having the right team in place is crucial. Given the complexity, a lot of focus will be placed on ensuring that processes are optimal.
I hope that this article has provided business owners and founders an idea of how Finance professionals should be used in the business. I specialise in providing services for businesses in the ‘Staying compliant’ or ‘Fostering Growth’ stages. If you would like to discuss how I can support your business, please drop me an email on firstname.lastname@example.org or feel free to set up a call via my Calendly www.calendly.com/mcquade_consulting
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