One of the blessings and curses of owning a small business is the freedom to run that business as you please. A lack of forced structure often attracts entrepreneurs to start their own businesses. It’s important, however, not to mistake a lack of structure for freedom. In fact, many business owners who refuse to impose structure find that they no longer have freedom. Their business owns them as it takes all their time and money. Freedom (in a business context) should really be reframed as the freedom to choose the processes and structure that work best for you and your vision. And of course your business finance function needs structure to ensure your business works for you rather than the other way around.
What financial information do you use to run your business?
It’s tempting to run your business based on your cash balance. If it’s getting high, great, that must mean you can pay yourself more. If it’s low, then you must need to bring some more business in the door. While your cash balance can be an indicator of your business’ health it leaves a lot out of view.
Do you review financial data (besides cash) on a regular basis?
Other data points to consider regularly:
- How much cash on hand is advanced fees or even advances for materials?
- What are your upcoming cash needs? Are there non-routine expenses coming?
- What’s your average monthly burn rate? (and therefore how much do you need to average in sales to cover it?)
- Monthly profit (Cash basis – cash in vs. cash out)
- What’s your business’ capacity and how close are you and your team running to capacity?
- How much Recurring vs. non-recurring revenue do you generate?
Who do you need on your team?
I know that list might have felt overwhelming, but that’s only if you looked at it as a pile of tasks to add to your plate as the owner. The approach of “Who not How” is a better way to approach gaps in your finance process. Is there someone on your team who’s great with numbers and order? Can you ask your current accountant about these services? Try asking colleagues and industry leaders what their financial team looks like.
The truth is, most businesses don’t have effective finance functions. Finance hasn’t evolved as the business has grown. A good finance function should identify financial problems before they occur. This requires roles and processes that occur regularly just like marketing, operations or any other area of your business.
Here are roles and responsibilities you want to consider. Keep in mind that these are not necessarily different professionals, the key is, however, that each role has an owner and that the owner understands their responsibilities. These roles and responsibilities can be performed by someone on your team or outsourced in part or full to another firm or contractor.
Finance roles:
- Bookkeeper
- Classifies transactions (weekly or monthly)
- reconciles accounts to bank statements (monthly)
- Produces financial statements for management and CFO (monthly)
- Tax planner
- Estimates tax liability (quarterly)
- Reviews tax payment progress toward estimated liability (quarterly)
- Reviews for opportunities to reduce tax liability (semi-annually)
- Tax preparer
- Prepares tax return (annual)
- Reviews for opportunities to reduce tax liability (semi-annually)
- CFO
- Business Strategy (helps translate the owners vision into financial projections for the next 1, 3 and 5 years) (semi-annually).
- Annual and monthly Sales projections by product line (Quarterly or Monthly)
- Defines capacity in terms of output and Revenue (Quarterly)
- Spending budget for the next year (Annual or Quarterly)
- Review and analysis of monthly and quarterly financial reports (at least quarterly)
- Budget to actual
- Cash reserves
- Liabilities and Debt
- Monthly cash profit and loss
- Accounts Payable – Bill Payment
- Tracks and processes:
- Recurring and non-recurring bills
- Use of credit where beneficial
- Limits methods of payment for ease
- Evaluates the effectiveness of vendors
- Tracks and processes:
- Accounts Receivable – Invoicing and Collections
- Tracks and processes:
- Billing for products and services (including reimbursable expenses)
- Follows up on outstanding invoices
- Other areas: Speed of Collections, limits methods of payment for ease
- Tracks and processes:
- Payroll and employee benefits
- Considers additional benefits and cost of effectiveness of vendors (payroll company, benefit providers)
- Adds new employees payroll workflow and updates changes as needed for existing employees
Recent Comments