Financial Management. In a Growing Business

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1 Financial Management In a Growing Business 1 Introduction Financial Management is core to the survival and success of any organization or business. This note clarifies why it is all the more important if you are embarking on growth journey, and explains the key components of financial management using an easy to remember metaphor of a journey to an unfamiliar destination across unknown terrain because running a high growth company is just that. You are there to reach your goals but the journey ahead is new to you. The risks are often high, but the reward if you reach those targets is enormous. The purpose of good financial management is precisely to help you reach those targets by the best roadmap without running out of cash, and deal effectively with the risks you will meet along the 2 What is different about growing companies? For companies with high growth aspirations and potential, financial management is crucial to reach your targets without running out of cash along the way. The cashflow pressures, risks and need to make multiple major crucial commercial decisions in high growth companies mean that financial management shoots up the priority list. Whereas a steady as she goes company with flat sales, little innovation or major change from one year to the next may survive with weak financial management, the same does not apply in a high growth business. Compare a small business on a growth path against for example the local hairdressers on the corner, in business for years with a steady level of sales. Most growing companies must invest significantly in new product development for example a small food company must invest to create new recipes, test new products, develop new packaging, ensure regulatory issues are addressed for new products, finding a manufacturing solution etc. All of these cost money upfront. If you sell on credit to other businesses and you want to grow you will need to plan how to finance the credit period, and if you manufacture product you may also need to finance inventory needed to service the customer orders. As the company grows these challenges grow too, and even in a profitable company cashflow often becomes ever more challenging as bigger amounts of money are tied up in debtors Copyright: Artemis Consulting, Moira.creedon@gmail.com Page 1 19/08/2016

2 and inventory during the growth phase. Companies that are not growing are under far less pressure after the initial working capital needs have been financed, the level of capital needed to finance inventory and debtors is static whereas the growing company is dealing with growing amounts of money locked up in the warehouse and in your customers bank accounts. The lucky hair dresser does not usually give credit, and does not hold inventory. As a company develops and grows major financial questions will inevitably arise that require sound financial analysis to avoid making costly mistakes. For example should we outsource production? If so for how long before it makes sense to bring production in house? Should we take up an opportunity to develop a new product to address a market gap even though developing the product will require a significant level of investment? Should we try overseas market expansion again even though that will require putting considerable money into the market before any sales materialise? Should we invest in expansion of our operations/ production facilities/ sales team Should we change our pricing strategy to gain higher market share? How do we price our product at a level that gives us healthy profits but positions our product competitively in the market place, Are we exposing ourselves to financial risks such as foreign exchange, internal fraud, customer credit risk and if so what should we do about it? All of these decisions need careful sound financial judgement to avoid over extending your business, or investing in products, markets or equipment that simply will not deliver an adequate return. 2 So what is financial management, and what does good look like? There are 5 major components to financial Management: a) Planning and Reporting systems Agree, set and deliver on targets. This is explained below using the analogy of a SATNAV Good planning pulls together many of the other components of financial management to plan you need to get accurate product costings, make decisions about pricing, funding, which markets to chase and how etc., and pulling together al of these issues in a coherent finabcial plan will tell you whether your pricing, costing and volue assumptions add up to a viable business. Reporting systems are then importat to keep you up to date at all times as to whether or not your plan is working. b) Cashflow Management: Ensure that the company has enough cash available at all times to deliver on the goals and plans set by the owners. This includes raising capital; setting up systems to ensure that the company cash is neither wasted nor pilfered; chasing payments from customers and others (incuding grant bodies) and paying suppliers, employees etc. Copyright: Artemis Consulting, Moira.creedon@gmail.com Page 2 19/08/2016

3 c) Financial risk management systems Foreign Exchange, Commodity input price volatility, Debt, employee fraud. All of these create risks that need to be measued and addressed d) Compliance Reporting to external stakeholders as legally required promarily for tax purposes, this means setting up good systems so that you can efficently deliver VAT, PAYE, PRSI and Annual returns, and also ensure that you are as tax eficient as possible, ie availing of all possible advantages available to a small byusiness of your type e) Financial/ commercial Decision making systems Commecial decision making to optimise profitability and create shareholder value 3 Financial Management is about reaching your targets in the optimal way without exposing the business to too much risk To understand what financial management is all about imagine you are sitting in a car somewhere horribly cold, about to set off on an important journey to a distant cross border destination you have never visited before. You know you will have to make the journey under really tough winter conditions, and the route and terrain are completely unfamiliar to you. Ask yourself what you would like to have in that car. If you are sensible you will make sure to have: a) A good SATNAV: A CLEAR PLAN AND TIMELY ACCURATE REPORTING SYSTEM While the more old fashioned may still prefer the map, a SATNAV gives you the optimal route to the destination you are aiming at, will tell you how long it will take to get there and even how much it will cost. This is like the financial plan for your business what exactly is our top target for each of the next 5 years and beyond that, and how exactly will we deliver on these targets for example how can reach our target turnover of 9m and profits of 1m by Most importantly for small business, the plan shows you the cashflow implications of your proposed growth trajectory. Companies are often shocked that the working capital implications of growth (meaning money tied up in inventory and customer credit) can mean that a profitable business produces very little cash. Copyright: Artemis Consulting, Moira.creedon@gmail.com Page 3 19/08/2016

4 The SATNAV is a simple metaphor for the planning and financial reporting elements of a wellrun company. You would not leave home to an unfamiliar faraway destination without clarifying the best route, and taking a SATNAV to make sure you stay on route. Financial management at its core includes agreeing clear targets with all stakeholders - banks, shareholders, management and employees. So for example to borrow money from the bank you will need to commit to targets on revenues, profits and cashflow generated for each year until the loan is repaid. You will then need to plan in detail how to achieve this - the best route to reach these targets. Don t wait for the bank to force targets on you, make sure you set your own agenda and set your own targets in line with your own risk appetite, lifestyle aspirations and value system. Pulling together your plan simply means working out what volume of products you can/ plan to sell at what rice and product cost, and then planning the level of overhead spend you will need to support that volume of sales what management, sales and product team will you need? How much marketing will you need to do? Hpw much will administration and premises cost you? You will also need to set up reporting systems to monitor progress. Just like the SATNAV tells you where you are and how long it will take to reach your target, financial systems should give accurate updates on progress vs. plan all the time (management reporting systems) and guide us back on track whenever we deviate off the route - i.e. off budget. This means that it is important to develop a culture in the business whereby the financial forecast is really important and if you miss the months target you pull together as a management team to take corrective action to get back on track quickly. It also means that if you have good reporting systems you can maintain strong credibility with your bank by keeping them updated on progress, and also where appropriate explaining why at ties you are off track. Good reporting systems means timely, accurate and adequately detailed to be able to identify accurately why the company is off track on delivery of the plan. Nobody would try to drive to Moscow in the middle of Winter without thinking through risk management issues and having a clear route to destination, yet many businesses stumble along without a really clear destination, without thinking through financial risk management until it is too late, and a very high proportion of SMEs have no real planning systems let alone reporting systems. b) A full fuel tank and some form of ongoing access to cash and if you are crossing very difficult terrain (central Australia?) a plan of where to stop for fuel. CASH MANAGEMENT This is the cashflow management element of financial management in a business you need to raise the right amount of capital from the banks and shareholders to make the upfront investment, and then monitor the level of cash at all times including looking ahead always to when you night run out of cash and where you might raise it. Establish good links with your bank even if you don t think you will need to borrow. A growth opportunity may arise that requires investment and you will be glad to have the links already in place to access the money if you choose to take up the opportunity to expand. Copyright: Artemis Consulting, Moira.creedon@gmail.com Page 4 19/08/2016

5 c) Snow chains, a puncture repair kit and blankets in case you get snowed in. RISK MANAGEMENT You will automatically think ahead and assess the risks you are going to be exposed to and prepare accordingly. Likewise a business should assess their exposure to Foreign exchange fluctuations, commodity prices (is your business impacted by the price of milk powder? Sugar? Cocoa?) debt pressures, credit risks and supplier failure risk. If any of these issues could potentially damage your business seriously, you should look at putting risk management processes in place to deal with this. Often the best risk management systems are the simplest. For example if you have revenues in sterling and all your costs are in euro, consider whether you can transfer some of your costs into sterling by purchasing inputs in the UK. d) personal and car related papers of passport, licence, tax and insurance COMPLIANCE REPORTING Just as you have to be able to produce these papers when asked, you have to have a system in place to produce the necessary tax reports on time annual returns, VAT returns, PAYE and other employment tax returns and any other sector specific sports you need. These means you have to have a cost effective book keeping system in place to capture all transactions all costs and all revenues, so that it is easy to then convert this information into the legally required formats to satisfy the tax authorities. If you are the early stage of your business sort this out as soon as possible. Most small businesses outsource tax reporting (the tax returns need to be signed off by a registered professional accountant), and many also fully outsource book keeping until they are big enough to pay an internal book keeper. If you choose to outsource these functions try to find an accountant who deals with other small businesses like yours and get word of mounth references from companies in a similar situation to yours. Dont useyour brother in law just because he happens to be an accountant, only to discover too late that he has no experience of small business and is a highly specialized tax consultant advising off short companies how to minimize their tax bill. e) car dashboards dials that work, inclding a rev counter: KPIs and commercial decision making systems It would make you pretty nervous if the fuel gauge was out of action or the warning lights didn t work. This is like reporting systems that include clear well chosen KPIs, so for example you need to onitor the level of cash and how you are using the cash, and just like the warning lights you need to be scanning for risk factors at all times. The Rev counter is the dial that tells you when to change gears as otherwise you will be wasting fuel. In a company this means decision making systems around pricing, investing, product portfolio management etc that ensure you are not wasting money. While many small businesses tend to use gut instinct to make decisions around whether or not to invest in new products and often believe passionately that this is the right way to do it because they feel a more considered and analytical approach might stifle entrepreneurialism, the reality is that gut instinct is great until you make a major costly mistake. Establishing light touch decision making systems whereby your company only invests after preparation of a high level business plan will save you a lot of money in the long run. Copyright: Artemis Consulting, Moira.creedon@gmail.com Page 5 19/08/2016

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