Member Article

The basics of financial control and why it’s important

Steve Cordiner explores how to stay on top of the financial small print of your business, so you’re alert to problems ahead and ready to exploit new opportunities.

The Covid-19 pandemic and its likely aftermath represent an extreme reminder of how unforeseen events can blow even the best-run businesses off course. But how do businesses protect themselves against uncertainty and upheaval?

The reality is that this crisis simply underlines why it is so crucial that management teams understand exactly how their business is performing at every level, including where the weak spots and vulnerabilities may lie.

Unless your management team has strong financial controls and high-quality reporting in place, it doesn’t know how the business is performing or whether it is strong enough to weather a storm.

Your instinct for the progress the business is making is no substitute for a detailed understanding of its finances based on the most up-to-date data. There is no greater truth in this than when businesses are trying to make decisions on a forward-looking basis, when the world around them is changing rapidly.

Securing that kind of understanding isn’t straightforward - and it becomes more difficult as your business grows.

Navigating unexpected issues

Successful early-stage businesses too often get caught out by an unexpected hiccup in their finances that they would have seen coming if they had studied the detail, or should have seen coming if they had the right people around them. And even if you do not find yourself in trouble, how can you confidently make key decisions or invest for the future without having a good idea about where you stand or where you will end up?

For these reasons, well-run companies and good leaders prioritise good quality reporting, building processes and structures to ensure a constant stream of intelligence on their financials.

This is the key to ensuring growth is sustainable - whether new customers are profitable, for example, or whether existing customers are staying with you,

Above all, this structured approach enables you to track progress. If you are making changes to pricing or increasing your marketing spend in different customer acquisition channels, you will be driving blind if you can’t measure the impact.

It gives you a means to make smart decisions - including whether your investments for the future will deliver returns in time for you to pay your bills next week or next month.

Data and reporting

Every business therefore needs to take control of its data and its financial reporting, closely monitoring the key performance indicators that will reveal how well it is progressing and what owners and leaders should be concerned about.

This data should be central to decision making, used regularly, and produced in a consistent way. If a piece of data is not useful, you are monitoring the wrong things.

For many businesses, the best way to tackle this challenge will be to get help from an accountant to get the basics in place.

That doesn’t have to mean hiring a finance director if your business is not ready to make this step, but if not, look at buying in services from an accountancy firm or a specialist adviser. You can then overlay digital marketing and data insight specialists as the sophistication and complexity of the business grows.

Identifying the right metrics

The key is to identify the right metrics for your business. Some indicators will be important to every organisation. Data on cashflow and debtors, for example, will help you avoid the trap of being unable to pay bills because revenues have yet to come in, a problem that trips up many fast-growing companies. Data on sales, costs and margins are essential for almost every firm so they can track performance.

However, most businesses need a much deeper set of key performance indicators (KPIs) to really understand what is happening with their business and this will vary depending on the type of business.

An online retailer will naturally be focused on website performance and cost of customer acquisition, for example.

A software-as-a-service (SaaS) provider might be particularly focused on churn rates. The more thoroughly a business understands how effective its sales channels are, its customer value dynamics and its growth rates, the bolder and more ambitious it can be while still being confident of remaining in control if buffeted by unforeseen events.

To identify what needs to be in your reporting, think about your objectives for the business and work backwards. Where do you want your business to be in, say, two years’ time and what are the staging posts towards that ambition?

What will it take to achieve your goals? Your reporting data should then include all the metrics you need to tell you whether the business is on track.

Managing growth

As the business scales, it will generate more data, but larger fast-growing companies still need to concentrate on the performance indicators that are most relevant and important.

Keep linking these metrics to your business strategy and objectives, updating them over time if those change, so that financial reporting provides a ready reckoner on whether you’re making the right progress.

As the business grows, it is likely that the number of people who need access to this reporting will grow - the data may even become the default for assessing whether managers are delivering on the objectives you set them.

Finally, never lose sight of the fact that behind all the data and reporting, what you’re really looking at is how your people are performing and the quality of your proposition.

It’s paramount that your managers and people understand what the business is monitoring and why, so that they know what they can do to help.

This was posted in Bdaily's Members' News section by Steve Cordiner .