Creating a strong financial management environment for your business

What financial management practices should you have in your business, and where can you start? Jake Standing of Plus Accounting shares his thoughts.

It’s been all change over the past few years, with Coronavirus, Brexit, and the war in Ukraine being three of the larger events impacting employment, consumer behaviour, capital markets and supply chains across the world.

This has a bearing on all of us, personally and in business. Inflation rates in the UK are still high at 8.7% for the year to May 2023, and the current Bank of England interest base rate is at 5%, making borrowing money far more expensive than in recent years.

Volatile macro-economic conditions can be tough, but can also give rise to a whole new wave of innovation and entrepreneurship. Financial management is a part of that puzzle, and I’m going to focus on three main questions that help business owners find success.

Where are we now?

Understanding the current position of your business finances is vital. As a business owner, you will (hopefully) know what margins you are making, and you will be busy striving to make sales to achieve those targets for the month. 

However, understanding how much cash you have now and in the coming weeks is extremely important. You could be smashing all sales targets, but if you aren’t collecting the cash quickly enough then it could be hard to make large payments, such as payroll. Or that looming tax bill that was larger than you were expecting…

We all seem to be time poor. Pareto’s law says that 80% of ‘consequences’ comes from 20% of ‘causes’. In business terms, this boils down to 80% of your results coming from 20% of your effort. Are you focussing on the right 20%?

What can I do?

• Understand your key metrics and the position your business is in, on a regular basis. Use technology as your co-pilot to get this information and compare to your plan.

• Write down a list of risks and opportunities, scoring each with what ‘impact’ it would have and the ‘likelihood’ of it happening. Most of your focus should be on those highly likely, large impact risks and opportunities. 

Where do we want to be?

Having long term strategic goals ensures that the business does not lose sight of what they wish to achieve and helps align the organisation with a ‘North Star’. This can be a destination that the whole team can get behind, and often successful teams are brought together to define what this looks like.

Strategic goals are usually aspirational, but achievable, and tend to be measured by reference to Key Performance Indicators (KPI’s). These can include several financial and non-financial metrics and can be used to measure the impact that a business has.

The timescale that a financial model should cover is around three to five years. This is the period which is often requested when looking to raise funding, be it equity from a funding round, or when approaching banks for a loan. They are also useful to form the basis for year-on-year budgeting, which can enable teams to work within a pre-defined framework to go and deliver ‘the plan’.

What can I do?

• Develop a longer-term strategy – identify what your strategic objectives are. What does your business stand for, and what are you looking to achieve in the next 5 years?

• Engage your team and budget owners when setting targets. This ensures ownership and, hopefully, incentive to go and deliver on the plan.

How are we going to get there?

So, if you know where you are, and where you want to be, then the final question to ask is how are we going to get there?

Generally, an action plan is created which determines what will be focussed on, who is responsible for ensuring the success of that action, what the desired outcome will be and by when. Check-ins are usually arranged as an ‘accountability check’ to see if everything is going in the right direction.

From a financial perspective, most plans boil down to two key points:

1. Maximising income – this could be from new or existing clients, with new or existing products/services. 

2. Getting the most value from outgoings – reviewing supplier arrangements, reducing or removing unnecessary costs, where appropriate. 

Of course, there are many ways to plan and measure progress against that plan, particularly within asynchronous teams. You don’t have to have a meeting every time you wish to check progress!

Even with all of that preparation, I’m reminded of a sports quote. 

“Everyone has a plan until they get punched in the face.”

Let’s just hope we have the resilience and agility to go again. I’m sure we will!

Jake has spent his career working with entrepreneurial businesses as an advisor and as part of in-house finance teams across the world. He provides strategic financial support to business owners, helping them to understand their financial data, develop short to long range plans, and utilise automation as a co-pilot working for their business. Get in touch with Jake via LinkedIn or email – jakes@plusaccounting.co.uk