Each of these esteemed professionals shares their expertise as part of our Business Basics collection, and include vital info for small business managers. This month, we have been speaking to Andy Burrows about the important finance fundamentals you must master in order to spark growth in your business.
Qualified as a chartered accountant, Andy has more than 20 years’ experience working at a senior level in finance for large and small businesses from several industry sectors. He is now a well-respected blogger on finance subjects, and is founder of Supercharged Finance, an online training organisation for finance and accounting professionals.
Read the full Q&A with Andy, below.
Business management information, like cash flow, balance sheets and profit and loss statements, is a fundamental part of proficient company financing. For managers/owners lacking formal financial training, what advice would you give on how to use this information to drive and measure growth?
I don’t really see historical financial information as particularly useful for driving and measuring growth. But it is definitely essential for keeping control of the health of the business.
Knowing what every figure in the balance sheet represents is fundamental, and helps you avoid nasty financial surprises. The P&L is a check that the business is profitable; and if you can divide that into products, customers or divisions, then that gives you insight into the performance of the business. With cashflow, I’d advise always having an up-to-date forecast to make sure that you head off cashflow issues as early as possible.
However, for driving strategy and growth, non-financial measures are probably most useful. And in your business plan, you have to highlight the things that will make your business strategy successful. That could be sales leads, website clicks, conversion rates, supplier relationships, capacity, and all sorts of things. If you capture and analyse the data on those critical things, then you’ll have your finger on the pulse when it comes to whether the growth strategy of the business is being executed successfully.
There are many funding options available to SMEs in the UK, but studies suggest there’s a lack of understanding about the kind of support and resources available. In your experience, what is the most effective way to raise capital to fund business growth? And which initiatives should businesses look into first when seeking funding?
One of the key things in the early years is to be well networked in things like the local chamber of commerce. Take every opportunity to meet and get to know bankers, lawyers and accountants in the local area. Just keep talking about what your thoughts are for the future, and many times those conversations will lead to someone offering assistance with an aspect of your business. And then when it comes to raising funds, you will know who you can turn to.
Be wary of private investors. If private investors offer funding, do not just jump at it. Always get an accountant to review their proposal and give you their commercial view. They are normally primarily out for themselves.
I would highly recommend hiring a part-time Finance Director or Virtual CFO, for these critical periods. Just their intangible commercial experience, without necessarily doing much work, will help you avoid 80% of pitfalls, in my experience.
Finally, remember that growth strategies are made up of multiple parts, so it may be worth considering a mix of different types of funding. For example, overdraft facilities are good for covering working capital stretch in high growth periods, whereas long-term loans (or even leases) are better for major assets such as plant and machinery.
Overtrading is a very real risk to SMEs, and, if poorly managed, can cause serious imbalances in a company’s cashflow. What steps should managers/owners take to avoid overtrading, and ensure their working capital remains in balance with their ambitions for growth?
Really, it boils down to putting the fundamentals of the business first. In other words, in making decisions, never lose sight of the effect on cashflow and cash position. Here are a few points to break that down into practicalities.
First, in the growth plan, make sure there is an accurate cashflow forecast model, and that includes worst-case and best-case scenarios. Identify the working capital requirements, and make sure there are flexible facilities (probably bank overdraft) in place to draw on as and when you need it.
Second, have a cashflow forecast prepared as frequently as you need to. In many cases this will be weekly, but it could be monthly. It depends on the timing differences between the cash inflows and outflows.
Third, be prepared to turn away business on the basis of the speed of cash conversion. That is to say, don’t allow potential customers to have better payment terms than you can afford, at least not without checking the figures with your part-time Finance Director/Virtual CFO.
Fourth, manage cashflow very carefully. Make sure your customers are paying you on time, and don’t pay anything out without checking how much you can afford.
In your experience, what impact (both directly and indirectly) does the financial decision-making of managers/owners have on a company’s P&L and Balance Sheet? And what can businesses do to mitigate the risk of poor financial planning?
I don’t tend to think in terms of ‘financial’ or ‘non-financial’ decision-making. There are business decisions, all of which have a financial impact. So, of course, all the decisions and actions of owners and managers have an impact on the P&L and balance sheet. And that’s what makes it imperative that managers/owners have a good understanding of the financial dynamics of the business (e.g. cashflow, product/customer profitability), and employ an experienced Finance Director (full time or part time) as soon as they can afford it.
With planning, in particular, there is a saying that, “those who fail to plan, plan to fail”. In which case, mitigate the risk by doing a good financial business plan. If you don’t feel confident, get an experienced finance person to do it. And, get them to set procedures and controls (credit control, cashflow forecasting, etc.) that help you to keep within the parameters of the plan.
Developing a sound business plan is the essence of long-term growth, and allows businesses the opportunity to forecast profit, loss and financial health. How vital is business planning in being able to manage company finances? And do you think a concrete business plan can help SMEs avoid potential growth financing hiccoughs?
Yes, I absolutely agree. As I said before, “those who fail to plan, plan to fail”.
Those who just want their business to tick over can probably afford to just let things develop naturally. They probably don’t need much of a plan.
Those who are trying to grow their business, or stimulate any change to make it perform better, will need a concrete business plan.
For one thing, a business plan moves you from aspirations and dreams down into tangible, concrete actions to take. The financial plan is merely the likely financial outcome of the strategic business actions you take. Anyone can put some numbers in a spreadsheet and say that’s what the P&L will look like in a year’s time. But you have to know what the drivers are, and what has to happen in order to arrive at that outcome in reality, and therefore what actions need to be taken.
Once you’ve got that, you take the actions, and then see if the effect was what you expected, using both non-financial KPIs and a quick look at the P&L.
For another thing, putting together a full financial plan helps you, as I’ve already spoken about, in avoiding financial crisis from overtrading or underfunding. It helps to make sure your growth is profitable, and predicts where you may come under pressure and at risk with your cash.
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What three questions should business owners/managers regularly ask themselves when planning for growth? And what advice would you give to businesses concerned about the financial implications of funding a period of growth?
First and foremost, keep asking why. Why do you want growth? Reminding yourself of what this growth means to you, what it will achieve for you, will guide your actions and decisions, and will help you to persevere when things get tough.
Second, ask who and what the growth depends on. Then make a plan to manage those things and those people.
Third, ask who has your cash and how you can get it in your hands quicker.
My over-riding piece of advice for businesses concerned about the financial implications of funding a period of growth would be to get someone on board who is a finance expert. Running out of cash is a real risk, and your financial controls will come under pressure. So, get someone on board who can keep the business safe while you go and get the new business!
We’d like to thank Andy for chatting with us about business finance. If you’ve enjoyed this piece, you may wish to check out the following entries to the Business Basics series.
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