If you are a business owner or you are planning to create your own company in the future, in this article I’m willing to share a few things I’ve observed during my experience working as a finance professional in various companies – small or large. Definitely these things will improve your company’s health and will create synergies between various departments (once those are being created).
1. Consider finance team as a partner
One of the most frequent things I’ve observed during the years is that the operations team (in this case might be the business owner) is doing everything without even considering the existence of a finance team. Each purchase that the company is doing has accounting/tax implications; being aware of this and involving your finance team will be truly beneficial. Sometimes it can save money, sometimes it can save time, and most of the time it can save both. The situation is even more complex when we are talking about import – export activities. If you during your early business stages, a wrong decision can really hurt your business. Just to make everything much more relevant I will share an example.
Let’s suppose you are trying to sell goods you are buying from abroad (China being the most popular manufacturing hub) and willing to sell those goods inside the EU. Most european countries will require your company to pay the VAT immediately after those goods are reaching the customs from the arriving country. It will generate an outflow of cash and most probably you will have that cash “blocked” for a period of time until you will reclaim it from the tax authorities.
What I wanted to highlight with this example is the importance of considering your finance team as your partner; early involvement of a finance team can save your company from failure.
One of the most common reasons why companies fail is ignoring cash flows.
This point is more relevant for a small business than for a large corporation. Usually large corporations with activities spread all over the world are able to leverage such a network through their relationship with a big bank or sometimes through a specialized intercompany specialized in treasury activities. I won’t go further with more details, but here you can find a list of things that large companies are doing to actually lower their costs while operating a centralized treasury function.
Coming back to small companies or startups, I’ve seen that many people aren’t aware of the importance of cash flows. Usually for finance professionals it is obvious that cash flows are important, but as many founders have a technical background it might be not so obvious. Please do not make a confusion between cash flow and earnings, these two concepts are different. For more details about this you can check professor Aswath Damodaran’s course.
Some things to be considered:
- Negotiate longer payment terms with your supplies
- Try to collect the funds from your customers on time or offer a small discount in case they pay earlier
- Go back to your business plan and assess deadline (product delivery timeline, initial costing, expended income, etc)
- Churn rates, low recurrence purchases, number of new clients
In order to avoid your business running out of funds, make sure you are working with your finance team in taking all necessary measures to avoid this.
3. Define a yearly budget and monthly/quarterly forecast
This may sound obvious and you can say “why do I really need this?!! I’m just wasting my time on some other bureaucratic task while I have some other things more important to do”. Indeed, you might have some other important things to do, but this is really important as well.
It is really important at any stage during the development of your company, but it’s even more important if your business reaches the stage when multiple teams are involved (marketing, customer service, engineering, operations, manufacturing, quality, etc). It will provide a tool for setting up your company’s goal for the short term (1 year), it will give a direction to your teams and even it will be a good metric to compare your results.
Forecasting and budgeting will be a great opportunity for all multiple teams to sit together and to brainstorm about new markets that the company can enter, new products to be developed by the company or just using a different pricing model that can lead to an increased profitability.
As a conclusion, you shall involve your finance team in decision making processes and do not forget that the finance team is your business partner. If you do feel that your actual finance team isn’t doing the job in being a real business partner, my advice is to not wait in getting a great business partner.
Wish you all the best and great success in your entrepreneurial journey!