Whether a business is small, medium or large, they all need confidence the finances are being run properly.  The ‘Finance Department’ is the term often used to describe the financial management in a business.

So what does a ‘Finance Department’ consist of?

Perhaps a good place to start is to highlight the key objectives of the ‘Finance Department’:

  1. Manage accounting transactions as accurately, efficiently and cost effectively as possible.
    1. Set up system to achieve various outcomes
      1. Accurate and timely management reporting and analysis
      2. Customer and Supplier account management
      3. Stock management
      4. Job/project management
      5. Cash/bank account management
      6. Assets/liabilities management
      7. Payroll management
      8. Tax/compliance
      9. BAS/GST management
      10. Fraud and waste minimisation
  2. Provide management, lenders/investors and shareholders with accurate and timely information:
    1. Profitability compared to 3 Way
      Forecast
      1. Overall business operations
      2. Segmentation i.e. by product/service/project type, division, branch, customer, salesperson etc.
    2. Balance Sheet and Cash Flow performance against 3 Way Forecast
    3. Financial modeling and forecasting
    4. Non financial KPI reporting
  3. Comply with regulatory requirements:
    1. Tax Office
    2. ASIC/Companies Office
  4. Risk Management

 

If these are the objectives of the ‘Finance Department’, how do we make them
happen?

Here is a list of the tasks required to achieve the objectives of the ‘Finance
Department’:

  • Bookkeeping
    • Recording transactions
    • Reconciliations
    • Paying Suppliers
    • Collecting customer
      payments
    • Payroll
    • GST/PAYG Returns
  • Accounting systems
    • Accounts
    • Job/Project management
    • Stock management
    • Ecommerce
    • Reporting
      • BAS
      • Management/Departmental
  • Investor/Lender/Shareholder Relations
    • Reporting
    • Compliance
  • Tax/Compliance Accounting
    • Tax returns
    • Tax planning/advice
    • ASIC reports
  • Financial Strategy & Reporting
    • Strategic planning, goal
      setting and KPIs development
    • 3 Way Forecasting
      • Profit and Loss Budget
      • Balance Sheet Forecast
      • Cash Flow Forecast
    • Management reporting, analysis and direction
    • Pricing and costing of products/services
    • Finance function management
    • Risk management

When you look at the list above, there’s quite a bit involved in handling it all.  Most businesses do it on an ‘ad hoc’ basis, i.e. it’s grown without much forethought over a period and consequently aspects of it don’t gel very well and end up costing way more than necessary.

The way it generally works in a small business is that someone within the business does the bookkeeping or it’s outsourced.  This is fine, however issues can arise if the person overseeing the bookkeeping doesn’t have a thorough understanding of it.  They are open to not just fraud, but mistakes that can be costly. Additionally an external accountant handles the tax and compliance.  

Whilst the example above is quite typical, it misses out on a very important aspect of financial management, being the strategic angle.  Financial strategy is vital if the business is going to be profitable, sustainable and ultimately valuable.  Just entering transactions into an accounting system and getting the tax done each year, misses out on massive opportunities to build the business performance and value.

When we say ‘financial strategy’ what do we mean? There’s an old saying:

“If you aim at nothing… you’ll reach your target with amazing accuracy”!

Financial strategy begins with a ‘Profit & Loss Budget’.  A budget is vital if you want to achieve a desirable outcome.  It gives something to measure actual results against throughout the year to ensure you meet your target by the end of the year.  As well as a ‘Profit & Loss Budget’ a ‘Balance Sheet’ budget is useful to ensure the business can sustain its operations over a period. I.e. will it have enough cash to pay for everything, or will it need to borrow or seek lender/investor/shareholder funding?  Thirdly a ‘Cash Flow Projection’ sets out exactly how much cash will be available at any point in time, so that it can be managed proactively.

On top of budgeting and forecasting it’s also vital to calculate the best pricing for products and services.  This is often done on an ‘ad hoc’ basis without clarity over exactly what items cost.  If cost isn’t clearly defined, it’s very difficult to price items to ensure profitability.  This may seem like a simple exercise, but often it can be quite complicated if there are a lot of components involved in what’s being delivered.

It may seem obvious that the external accountant is the best candidate to fulfil the strategic aspect of financial management.  The trouble with this assumption is that external accountants are often focused on tax and compliance issues.  Many typical tax/compliance accountants haven’t worked in a commercial environment and therefore aren’t conversant with internal business processes.  This doesn’t mean they can’t do it… it just means they will probably struggle to find the time and bandwidth to get it done.

The solution to this situation is to find someone with the strategic and logical focus to slot into the gap between the bookkeeper and the tax accountant.  Most small businesses can’t afford or justify a full time resource… so an outsourced solution can be the answer.  The strategic aspect of financial management within a business is the realm of a CFO (Chief Financial Officer).  A Virtual CFO is a great solution to ensure the strategic aims of the business and its owners are met.

For more details on the small business finance function download our eBook ‘11 Steps to Business Numbers Made Easyhttps://cfooncall.com.au/downloads/11-steps-to-business-numbers-made-easy/