I have provided part-time controller services to many businesses over the years. The level of financial management in businesses varies from business to business. There are a number of broad categories that could help in managing your business finances.

No Financial Management

The least capable of businesses ignore financial management. Documentation is gathered up during the year and given to the year-end accountant in order to prepare annual accounts and tax returns.

In this scenario, the management effectively runs the business with reference to the bank statements. You are frequently surprised by the actual results when they get them. You have no financial systems, paper or computerised. You often pay VAT and PAYE estimates during the year and balance them up at year-end.

The problem this causes is that you get lots of surprises.  You will not know how you are doing until your external accountant does your accounts at year-end.  You seem to be constantly blindsided.  You could be losing money.  You are likely to get caught with bills that you were not expecting.  Living in this sort of environment is stressful.  You probably find it hard to sleep at night.

I would advise you to start by getting you to put in some systems, preferably computerised. It would capture basic information on sales, purchases, cash in and out.  You will know at any point how much you sold, how much you bought, who owes you money, who you owe money to, and you would know how much VAT and PAYE are owing.

Basic Financial Management

The next group is companies that have a book-keeper, either internally or outsourced. They have some sort of book-keeping system – most likely computerised but it could also be paper-based.

These companies record purchases, sales, and cash transactions. You process payroll during the year and prepare and submit their own VAT returns.

Usually, the only accounts that you get are the annual accounts from the accountant.  You will have some idea of how you are doing as you will be able to get sales reports and some cost reports during the year. Your business is likely to get surprises when you receive the year-end accounts.

I started referring to this level of financial management as “No Offences” as they comply with the legal requirements only.

The problem here is that you have little or no visibility as to why you are getting the results you are getting.  You are making decisions based on instinct rather than facts.

I would advise you to put in place a monthly routine so that you first check that the numbers in the system are reliable. I would set up a process to identify any adjustments that are needed to get accurate profit figures.  Also, I would identify key reports and have your bookkeeper start to give you a monthly financial reporting pack.

I refer to this level of financial management as “No Offences” as they comply with the legal requirements only.

Integrated Financial Management

As we go further up the capability ladder, your business will have either internal or outsourced resources who will prepare management accounts for you. They usually analyse sales and costs so as to get some meaningful information. They may do stocktakes during the year or, if not doing a full stock take, they will generate an informed estimate of the stock levels.

If this is your business you will usually have computerised financial systems but these may not be integrated with operations systems.
You usually prepare an annual budget and, in the management accounts, actual results are compared to budget figures. You will be investigating differences. In this way, you are building up your understanding of how your business work and what affects the profitability and cash flows of the business.

The business will also use that budget to generate costs for their budgets or services.

On a monthly basis, management will review these management accounts and will refer to them when making significant business decisions.

I started referring to this level of financial management as “No Surprises”. They have a reasonable sense of the financial results as they go through the year and when they get the annual accounts, the results tend not to be a surprise.

If I was advising you, I would be double-checking that you are focusing on the key performance measures.  I would be very focused on understanding why your results are varying from what you expected.  I would be drilling down into the numbers to know how profitable each product is.  I would be also looking ahead to see what is happening with cash and to make sure that we don’t hit any problems.

Strategic Financial Management

The highest level of financial management capability that I come across is what I call Strategic Financial Management. In this scenario, your business will regularly prepare a long-range business plan which will include financial projections. The financial projections will comprise profit and loss, balance sheet and cash flows.

If this is your business, you will usually have a full time or part-time financial controller who will provide financial inputs, interpretation, and analysis to the management team. The financial controller also provides guidance and direction to the accounting staff.

The projected financial statements will be consistent with each other. It will allow for sensitivity analysis ie testing what might happen to profit and cash if a key input varies.

The projections will be updated regularly – at least annually, but often quarterly or every four months.

These businesses can anticipate cash squeezes, funding needs and will take action to address these before they cause problems for the business. They also know which products or services are generating profits and which are not.

Also, they usually have financial systems that are integrated with the Operations systems so that they have very good insights into how operations are driving the financial results.

I refer to these businesses as “No Regrets”.  You know that you have a good business. You make every effort to ensure that the business achieves it’s potential. In years to come, when you look back, you can feel confident that you gave it your best shot and you have “no regrets”.

If I was advising you, I would be making sure that you keep doing what you have been doing.  I would be looking for further improvement – better analysis, faster reporting, reducing the work involved to get the information.  I would expect to be spending more time with you looking ahead – evaluating opportunities and assessing the impact on the profitability of any changes that are coming.

Over to you?

Where do you think you fit into this classification?

If you want to improve your financial management and need help, feel free to call me or drop me an email. With a small bit of information about your business, I will be able to assess the level where you are, identify some improvements and help you implement these.