How finance teams build strategic capabilities and grow companies
It’s easy to get stuck doing things the way you do because, well, you’ve done it that way for a while.
The same applies to business operations. With years under your belt as a small business owner, you’re not well positioned to see all the opportunities hiding in plain sight; sometimes you need a pair of fresh eyes—along with real qualifications—to identify areas for further growth.
Case in point: finance.
Long relegated as an ancillary service suitable only for straightforward number-crunching tasks and tax preparation—they’re possibly the most underutilised occupational resource among today’s small business.
Finance expertise is a crucial ingredient in strategic planning and revenue optimization. We’ve prepared this guide for those who have gone without such skillsets.
Financial strategy 101: The duties of modern financial teams
What does a modern finance team look like?
Generally, you can count on teams filling the following basic roles:
- Management Accountant: Tasked with preparing, interpreting and analyzing financial reports, and handles communications with external auditors.
- Controller: Manages accounts receivable, handles invoicing, cash payments and outstanding debts. Makes sure accounts receivable reconciliations are completed; identifies overdue and uncollected debts.
- Auditor: Analyzes all financial transactions, ensures their legitimacy, authenticity and proper record-keeping. Establishes that policy controls are in place and enforced, and raises questions on any accounting discrepancies.
- Bookkeeper: An entry-level position that covers data entry, coding, and the management of records and processes.
Beyond the aforementioned number crunching, what do finance teams actually do?
Their most essential elements of finance teams are as follows:
Bookkeeping is the most basic job of finance and accounting teams, and sees them recording and managing day-to-day transactions—interpreting them, analyzing them, tracking expenses and sales—compiling it and making sure it’s current for dependable analyses. Bookkeeping includes reconciliation, which is the act of cross-referencing transactions to ensure accuracy. You’re going to want to make sure that all the receipts that you wrote match the amount of money that was put into the bank account. If they don’t tie out, then you will need to investigate.
Cash flow management
All businesses need a steady stream of funds to afford their expenses.
Managing it means looking at the cash that flows to and from your business, and planning in such a way that the stream doesn’t slow to a trickle, or worse - run dry.
It also involves creating and managing credit and collection policies to make sure that vendors and creditors are paying on time, and paying you on time.
Budgets and forecasting
Using data on your company’s financial standing, finance teams help owners and managers plan staffing, asset purchases, and expansions across each function—doing so at the lowest price possible. Historical records and the business’s goals are then used to forecast potential growth and future needs.
Advising on long term financing
Finance departments are also involved in helping companies understand and achieve the best financing mix.
The idea is to optimize profit while keeping your company in good standing to later get longer-term financing at the lowest possible rates.
Finance departments and accountants have your back by helping you keep track and submit the paperwork and tax payments on time. By making sure your company keeps a good relationship with your government’s revenue collection body, you lower the risk of late payments and errors that can lead to heavy fines and penalties. They can also help automate the payroll which can automatically deduct and submit wage withholdings or “pay as you earn” personal income taxes.
Financial reporting is more than compliance. Here, finance teams can help turn raw accounting entries—including funding sources, cash reserves and expenses—not just into financial statements, but reports that can be used to tell the story of your business.
Strategic decision-making assistance
Last, but far from least, accountants’ grasp of markets, your expenses and revenues make them an ideal partner for bouncing ideas off of. Additionally, they can help you figure out financing on large purchases, dividends and reinvestments, financing mixes, and much more.
Their job is to make sure that your funds have the most per-dollar impact possible in the short and long term.
What a stellar finance team looks like
What's the marker of a good finance team?
- Employ a diversity of skill sets and areas of expertise. That means technical and professional skills and an ability to work as a team.
- Strategic in nature—Immediately demonstrate a priority of working towards clear goals and achievable goals.
- Maintain a consistent focus on the big picture.
- Persistently aiming to improve efficiency.
- Proactive in helping you plan for the future instead of fighting fires
- High emotional intelligence, with the cooperative and communicative potential to work well with other team members. Raw data must be made into digestible communications and strategic advice.
- They understand your company value and will help build key performance indicators.
- Offer upgrades in technology and processes—improving efficiency through automation, big-data competent.
In-house or outsourced?
Once you understand your need for financial services, your first likely concern is how to go about acquiring such services.
Of course, your two broadest options are directly hiring accounting talent or outsourcing your financing function to another organisation.
Outsourcing & direct hiring, compared
As a small business, hiring a full-time finance veteran may be cost-prohibitive, but the benefits may be high. Outsourcing, on the other hand, offers several advantages—even beyond cost savings.
Hiring is expensive and lengthy. Recruiting and screening talent is a months-long process that costs you productivity and money.
Money management only gets more complex and time-consuming as your business grows.
Managing a full-time employee will eat up a great deal of your time, distracting you from the big picture and limiting you should your financing needs change.
Outsourcing lets you scale without the lag of a months-long hiring process.
Outsourced firms face immense pressure to respond to client needs, and by doing such services at scale, they have acquired a tight grasp of the field.
What’s more, outsourcing allows you to acquire the expertise of multiple team members—an expense that would be unaffordable to most companies if limited to full-time staff.
Automating and improving core accounting processes
Outsourced finance experts can be a significant value-add to your accounting processes and technology. If your local talent pool is only comfortable with spreadsheets, you’re missing out on automation services that help minimise error, save time, and help combat fraud as well.
Additionally, like American Presidents, your books age rapidly—quickly growing harder to maintain as team members come and go and new technology and processes go unnoticed.
Taking on a third party helps you keep current and gain an edge over slower-moving competitors.
Neither money nor accountants grow on trees. According to the American Institute of Certified Public Accountants (AICPA), an estimated 75 per cent of currently employed certified professional accountants will retire within the next 15 years. On top of that, there simply aren't enough next-generation candidates coming in to replace them.
Your best bet in finding top talent may lay in outsourced accountants.
Considerations for hiring outsourced accountants and book keepers
Assuming you’re curious about hiring outsourced talent, there’s a great deal you should know to make sure you get the best possible services and the lowest possible price.
Pay attention to the following factors when evaluating an outsourced firm:
Proven track record of success
More important than the number of years they’ve spent in business, ask potential outsourced agencies about their partnerships with clients. Speak with them if you have the time.
So long as clients keep coming back, you can check this off your list.
Processes and capabilities
Process and project management are critical aspects for the completion of any project. Ensure your potential provider handles onboarding smoothly and can share information with you effectively.
If they can’t run you through their processes in a transparent manner, you may have found a dud.
Note also that accounting firms vary a great deal in the financial services offered. You won’t be able to count on any given firm handling both bookkeeping and taxes, so be sure to communicate your needs clearly.
Technological infrastructure and platform requirements
Scaling finance is difficult without cloud access. If you’re not already on the cloud, and they don’t propose any cloud-based solution, they’re likely outdated.
At the same time, they should be platform-agnostic. Suggesting solutions that may function well is fine, but if they only work with dedicated, specific software, they’re likely more interested in selling you add-ons than providing tangible benefits.
Success metrics and KPIs
Sometimes success is in the eyes of the beholder. Be sure your finance partner knows the KPIs that constitutes a job well done.
Remember, the main benefit of outsourcing is cost efficiency.
You should see an apparent reduction in operational costs compared to hiring, and one significant enough to be affordable in the long run.
Collaboration is all about communication. Ensure your accounting partner effectively communicates all roadblocks, progress, and successes. They should be able to guarantee a response time. If you experience long periods without communication or long waits for a response, you’ve gone with the wrong one.
The same applies to deadlines. Discuss how they meet and communicate about deadlines. Ask if they have backup plans for those they might miss. Running a business is hard enough, it’s important that accountants have your back and help you stay on top of things.
Vendors should be able to take on your accounting function independently. Ask if their solutions are end-to-end and if they can operate with minimal supervision.
Though any form of outsourcing will require dedicated time for management, you need to find a balance that efficiently uses your time while getting the work done right.
Customer addresses, credit card numbers; your data is likely sensitive, and it should be in good hands.
The importance of financial reporting
The words “exciting” and “reporting” are seldomly used in the same sentence. That said, good financial reporting, a core tent pole of any functioning business, must be readable, digestible, and interesting enough to compel readers to finish.
One study reported that 81% of surveyed CFOs believe that data storytelling is essential to support strategic insight.
That’s because effective decision making requires financial experts to both report and contextualise your company’s financial state. This task requires financial and creative experience to order various sets of numbers into accurate and narratively-pleasing reports for stakeholders of all backgrounds.
Reporting is much more than files sitting on a server. They’re roadmaps, stepping stones towards future growth. For instance, if you’re looking to buy an expensive piece of equipment, you can look to financial reports to see how much profit you’ll need to offset the cost. Looking back at past performance is cross-referencing a great way to find room for optimisation.
Companies can use these reports as internal management tools for decision-making. Small business owners can look at their assets, liabilities, and other pertinent information to glean insight into their current market standing. This ultimately helps you determine how best to improve your services and operations.
That’s not all, though. They also help you with the following:
- Obtaining Loans: Show that your business is managed responsibly and is turning a profit.
- Taxes: Financial statements give you a great starting point for totalling your expenses and business tax deductions.
- Making Good Investments (learn which expenses are costing you the most, and find ways to lower that expense, maybe through economies of scale, alternate methods and processes, or new technology.
What does good reporting look like?
How does one identify quality financial reporting without a financial background? The following considerations should equip you with enough know-how to get started.
Simple and effective language
Good financial reporting practically requires complex jargon, right?
Good financial communications appear in plain English, not drowning in university-prep terms. Simple language is most easily recalled and processed, making jargon an absolute no-go.
Or, as Warren Buffett once wrote: “I pretend that I’m talking to my sisters. I have no trouble picturing them: though highly intelligent, they are not experts in accounting or finance. They will understand plain English, but jargon may puzzle them. To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform.”
When reading reporting, ask yourself if the writer aims to inform rather than impress or deceive.
Inverted pyramid structure
Communications should get to the point right away. That means hooking readers and viewers with juicy metrics upfront.
Be mindful of how effectively they keep you engaged. If you weren’t knee-deep into the nitty-gritty of operations, would you have any interest in following along?
The most important details should be covered at the top, followed by the rest in descending order of importance. It should resemble a success story, starting with relevant metrics, explaining the journey’s challenges, and close by showing how present-day realities influence future performance.
Compelling visualisations are great at demonstrating the impact of otherwise dry facts and figures. Reporting should contain enough visualisations to get the point across—and do so without needing more explanation.
Effective communication involves anticipating the likely concerns and questions of the audience and then integrating accurate responses in the material.
In financial reporting, you can be sure your audience, whether if it’s for the management team, investors or other stakeholders, is concerned with the following questions:
- Is the business making a profit or losing money?
- What are the business’s assets, and how do they compare to their liabilities?
- What is the business’s working capital, and do they have a positive or negative cash flow?
- Did the business reinvest the profits it made?
- Is there a potential for growth in the company? Do they have the capital to expand?
Fundraising is an uncertain and angst-inducing process, but one central to your company’s survival; that’s why you’re going to want financial help along the way. Overall, a whopping 73 per cent of businesses use financing to cover startup costs, inventory, growth efforts or lengthening their runway (The length of time a business can last without more money).
Business fundraising generally falls into three categories: debt-based, equity-based, and asset-based.
Debt capital is provided primarily by banks. It’s often the first recourse for new small business owners.
In essence, you're borrowing money from the bank that you repay at a fixed or variable interest rate—generally on a monthly basis.
The benefits are high, but banks are very cautious. In 2015, banks approved only 38 per cent of applications from startups that were less than five years old.
Before you start, you’ll need to figure out the amount you’ll need to borrow, the loan that’s best for your goals, and gather the relevant documentation. You can use a loan calculator for the former, but be sure your loan amount was calculated with secondary expenses in mind, like utilities, maintenance and insurance.
Good cashflow forecasting is also crucial here. You’ll need to show how you expect to pay back the loan and prove it with projections based on past performance.
Overall, It’s a very stable financing method, transparent, and the rates are often lower than Accounts Receivable financing. Unlike equity financing, banks won’t dilute your ownership. However, the process moves slowly, and the collateral requirements may be a hurdle for businesses without physical assets (making debt especially difficult for tech companies).
Equity capital is on the other side of the spectrum in terms of business control. Here, you’re selling a permanent stake in your company to investors, not taking out an IOU that you’ll later payback. As part-owners, investors will influence your company’s operations and strategic planning.
The financing amount is formed in a percentage based on your company’s valuation.
Note that such financing is primarily geared towards companies with high growth potential. And unlike bankers, investors have a high tolerance for risk. If you’re not looking to grow fast, or greater funding wouldn’t get rid of roadblocks towards rapid growth, then it’s probably not for you.
You may be likely to raise money this way more than once as your company scales.
There’s another sub-field of equity investors, cashflow investors, that may work for companies that equity investment won’t work for, like restaurants. These are more casual investors looking more for a return on their investment and for everything that comes with helping a potentially cool business grow.
These investments won’t be as high value, though, typically for amounts less than $50,000. Those who apply should note that a promising cashflow forecast is necessary.
Finally, you have hybrid financing, which split the difference between many of the requirements and positioning of equity and debt financing. The two most popular and available types are accounts receivable financing and royalty-based.
Accounts receivable financing
Potentially the oldest form of financing—it’s written in prehistoric Mesopotamian law—such financing allocates funding based on a company’s outstanding invoices.
The lender will take a fee, and then provide a loan based on the dollar amount of outstanding invoices. Upon agreement, the lender will provide a substantial portion of those funds, with the rest to be released upon repayment of the initial loan.
This method is more accessible than traditional finance, and technological advances have allowed it to provide liquidity within days. It’s also available for companies of all sizes. To qualify, you’ll generally need to provide information on the turnover amount and show a good credit history.
A favourite among Shark Tank shark, Kevin O'Leary, royalty-based financing is an exciting option for businesses that maintain a healthy profit margin.
Like accounts receivable, businesses receive funds based on future revenue. The financiers are repaid by guaranteeing them a specific cut of each sale until the royalty is paid back. This means that your revenue ultimately determines the length of the financing period.
Royalty-based financing is particularly adequate for companies whose revenue is seasonal, giving them a steady cash flow during slower months. It's very flexible, doesn't require heavy collateral, you don't have to give away partial control, and because it’s less regulated, you don’t have to do nearly as much paperwork. It’s a particularly good option for fast-growing companies that could easily scale their revenue if they had financing.
On the other hand, such financing tends to strain cash reserves, making paying down debt harder. It’s also not ideal for those with small profit margins, as, unlike equity, you have to pay it back no matter what.
Financiers will want to see current sales figures and look for high-profit margins, a high sales volume, and a sufficient customer base.
How to improve financial reporting
Few things are more important than guaranteeing the accuracy of the data you use to base your most significant decisions.
Key in the duties of any bookkeepers is the proper maintenance, organisation, and accessibility of financial reporting data.
Collect and normalise your data
Since financial reporting data is derived from many sources one of the most considerable challenges in maintaining accurate data. Therefore, collecting data and normalising it are crucial tasks.
To do so, you’ll need to create a standard process for collection and normalisation. Templates encourage those entering data to do so carefully and consistently, helping everyone avoid time-consuming manual reformatting projects.
While this task may sound daunting, it need not be manual. Data analytics platforms, like gini, can automatically draw and connect disparate data. What’s more, using such a resource allows another set of eyes on your financial data; their pattern-recognition capabilities effectively let them discover insights that you may never have found otherwise.
Organise your data
- Your data should additionally be structured to be highly searchable. Controls like filters and tagging make analysis a breeze, and it’s well worth the effort to sort your data into such a state.
- Build and define datasets that can be managed through filters, and other metadata controls
- Report guidelines, templates, and standardised formats help all produced reports maintain a standard of quality—these should apply universally.
- Additionally, consider applying an appropriate level of permissions to the most sensitive data sets. Only those who need to see such information should.
Work from a single data source
Keeping your dataset accurate means protecting it against tampering—accidental or otherwise. One of the best ways to ensure the accessibility and dependability of financial records is to centralise them in one location—the cloud, preferably.
This way, no matter where financial workers are, they’ll retain access to the same shared dataset. Authors, editors, reviewers, and auditors can access from anywhere, and an audit trail will help tie any changes to the responsible user.
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Intentional changes are correctly implemented instantaneously instead of sending around several versions of a master file, which invites human error.
Note that you’ll want all feedback within the document rather than scattered across emails, chats, and offline conversations. That way, everyone stays on the same page.
Keep a financial reporting master file
In addition to having financial documents accessible on the cloud, you should maintain a sole master file designed to be the end-all-be-all of reportable financial information.
Ideally, maintaining and approving this file should be the responsibility of the CFO or the most senior financial team member.
Finance teams are most focused on increasing the profitability and stability of your business. There are many methods, processes, and technologies that assist in this task in this endeavour; the following are the top five ways financial expertise can boost your bottom-line:
- Lowering expenses
- Increasing revenues
- Forecast cash flows and helping them budget
- Restructure Financing
- Identify Key Performance Indicators (KPIs)
1. Lowering expenses
Again, being so close to the business puts you in a difficult place to assess which functions cost you needlessly. Among the many areas where accounting experts can find financial room:
- Expenses: They’ll take a historical look at the expenses your organisation burns through regularly. By comparing operational costs against industry standards—and taking a deeper look into current expense levels—cost-saving measures can be found. Businesses often find that bulk purchasing and early-payment discounts will add extra cushion.
- Supplier negotiation: In our daily lives, we often accept the asking price as is. However, financial experts have a keen understanding of average prices and negotiation tactics. Cutting your expenses from regular suppliers can give your profit margins a substantial boost.
- Labour cost: It’s only natural to develop a personal relationship with employees and desire to keep staffing levels steady. Financial experts can tell you if there are more cost-effective ways to get the same job done—cutting overtime, optimising schedules, consolidating tasks; there’s usually room for improvement.
- Reducing insurance premiums: Your financial consultant can also assess your insurance coverage—particularly identifying unnecessary coverage and shopping around to find discounted rates. It may not be worth your time to sit on the phone, but saving money is what they do best.
2. Increasing revenue
It’s unlikely that your customers will tell you that they can and would pay more for the same goods and services—that’s what accountants are for.
They’ll determine how your products match up against the market—of course, any increase in pricing will prove to be a substantial boon to your margins.
Sometimes it’s not about the quantity you're selling overall but the precise mix of high- and low-margin products and services. An accountant can review your product selection to identify underperforming products and those that aren’t driving the kind of revenue you need. Those should be dropped.
And while advertising technology still soars over many business owners' heads—for good reason—financially-minded experts can assess the return on each dollar spent on marketing. Finding areas to increase spend means more rapid customer acquisition.
3. Cash flow forecasting and budgets
You don’t increase profits without creating a plan to do so. Among accountants’ largest value-add is their expertise in developing budgets and business plans based on historical data.
Setting target goals for profitability helps you lay down the precise route to get there. Using a combination of industry benchmarks, cash flow and capital analysis, and an understanding of the most valuable members of your client base, accountants can create business plans for the next three years. key expertise often lies in.
4. Restructure financing
Part of keeping a long runway involves assessing the portion of your funds going to the financing of your business and associated expenses.
Whether it’s for loans or credit cards, your expenses in financing can make up a significant portion of your overall costs. Effective accountants will look for more affordable refinancing to reduce their cost and interest. They’ll also carefully examine your runway for future cash shortages and additional borrowing that may help fill those gaps.
5. Identify KPIs
You may be well-schooled on identifying when business is good, but understanding the various measures that combine to accelerate growth and profitability is another thing altogether.
Accountants can help business owners identify a few Key Performance Indicators (KPIs) that are widely used amongst their respective industries. For instance, manufacturing emphasises direct costs to determine profitability in products, while revenue per hour or billable hours may be more appropriate for service-based companies.
Understanding your KPIs means uncovering new opportunities for greater profitability. Work with your accountant to determine 1 or 2 key KPIs each quarter, and just focus on improvement there before moving to others. This kind of focus makes making improvements more achievable and less stressful.
How it all adds up
The role of finance teams in a company is more than just keeping the books up to date for the sake of appearance. Advances in technology are automating processes and empowering finance teams to be a strategic driver of a company's growth.