Finance Operations: The Construct

Building a company’s finance operations function is a critical, but sometimes overlooked step in business growth.

Finance Operations: The Construct

Whenever we think about the question, “How do we grow our company?” we must think about it from multiple perspectives. Yes, you must increase revenue / sales. We will likely have to accommodate for delivering more or different work. We may need more people, access to more resources, real estate, enhancements in logistics, etc. Foundational to all of these decisions, however, is enhancing our company’s ability to manage its finances, and our company’s finance operations needs to fit our business’s needs and goals.

The easy way to start the conversation is: How does your company manage its finances?

In a lot of conversations, that response has to do with what might be called, “reactive bookkeeping” – meaning that financial management is mainly concerned with how much money is in AP (Accounts Payable), AR (Accounts Receivable), and how much is in the bank account. When a bill pops up, it is added to the list of what needs to be paid. When clients pay, payables get paid, which is hopefully before the payables are due.

Not much fun at all.

when you want to hire an employee, or purchase equipment or other resources. You might say something to the effect of, “when we get paid from XYZ, we’ll make that purchase.” Hopefully, unless something else has happened, once that invoice or those invoices have been paid, you go and make the investment that you are seeking.

Limitations to Reactive Bookkeeping

The challenge of this approach is that it truly limits a company’s ability to operate as effectively as it can. It doesn’t support a lot of the planning, investing and optimizing activities that allows companies to get the most from their capital. Like any other resource in the company, we want to be able to leverage the company’s capital and capture a reasonable return on investment.

If you think about a bank, for example, they have a plan for getting the most return on every dollar that goes into the institution. While the dollar is a fixed amount, investing the dollar, if even for 24 hours, can result in a return. So, if that return is 1% and you do it a million times (1 million dollars) a day, that is $10,000 per day. Further, they make money with customer fees, interest on loan payments, foreign exchange (Forex) investments, etc.

How does this apply to a company?

If you were to invest $2,000 in a marketing campaign, you would expect to get business as a result of it. If you were to invest in hiring an employee, you would expect that that employee increases the company’s capability / capacity in a way that increases revenue and hopefully profit. If you were to invest in a building, you would do so with the expectation of increasing productivity, efficiency, and other factors, ultimately increasing profitability and perhaps increasing the company’s valuation.

Every financial decision needs to be evaluated in terms of how it will benefit the company, and we need to be able to measure how successful each investment is. You will always want to have definitive responses to the questions, “Did we accomplish XYZ in ABZ timeframe and produce EFG results?”

Financial Operations: The Construct

When referring to “The Construct,” it refers to how the finance operation is built. When referring to the Finance Operations, it is the establishment of what needs to be done and the systems and processes that are required in order to be able to produce the same results, consistently with respect to managing the business’ finance. It should also contain the “playbook” which contains the answers to the “what happens when…” evaluation.

Components of the Finance Operations

Without going into depth in each of the areas, the Finance Operation is a system – a group of components that work together – in order to make the operation work.

  • Budgeting – documenting all of the expected income and expenses over a timeframe. Your budget is like your baseline or standard. You’ll use it to help understand how the business is performing against expectations and make adjustments based on that performance
  • Cash Flow Forecasting – helps to stay on track with your budget and alerts you to when steps are needed to be taken to pursue additional cash
  • Financial Reporting – typically used to monitor company income and expenses, what the company has and what it owes, and cash flow. This can be used to drill down to client and project level, used to track budget versus actual performance, planning and forecasting
  • Financial Analysis – evaluation of reports, looking for trends, and understanding of what the financial reports actually mean
  • Investments – leveraging cash from other sources to be used to invest in the business with a foreseeable positive return. The question to ask: With the money that is raised, how will the business be better off / in a better position?
  • Resilience – how the company will react if internal or external impactors create changes in the business. For example, if the market requirements suddenly change, your financial operation should contribute to what next steps will happen in the company
  • Tax Planning – being able to make knowledgeable decisions with regard to taxes, how they will be paid, how to ensure the company is in compliance, and avoid costly audits, penalties and interest
  • Technology – Investing in reliable financial management software can speed up training, improve accuracy, automate tasks, support advanced reporting, and provide real-time data.
  • Skilled Team – all of this is nothing without skilled professionals – whether internal or external – to manage it. Many have said that it is wise to outsource it until it is less expensive to hire your own. The challenge in either case is finding the right one.

With clarity on the framework for the financial operation, the next step will be to assemble the parts and pieces into a reliable system that provides the company with an advantage. It is important to start with a clear understanding of what is needed by the business in order to avoid over or under investing.

What all of this means

The Construct of a company’s financial operation is essential as it grows. It must be far more than bookkeeping and should not be reactionary. A reactionary approach to financial management is like driving your car by looking in the rear-view mirror. You need to have the tools to enable to you forecast where you are going and adjust quickly in order to protect the company’s interests.

Aepiphanni is a Business Consultancy that provides Advisory, Management Consulting, and Managed Services to business leaders and entrepreneurs seeking to improve or expand operations. We are the trusted advisor to those seeking forward-thinking operational and strategic solutions to help them plan for and navigate through the challenges of business growth. Learn more about us at https://aepiphanni.com or register for a complimentary discovery session at http://coffeeandaconsult.com.

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