How to measure Entrepreneurs Success

how do entrepreneurs define success and how might an entrepreneur's success benefit you | download free pdf
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Dr.OliviaSimpson,France,Researcher
Published Date:03-07-2017
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Financial management and business success – a guide for entrepreneursAbout ACCA ACCA (the Association of Chartered Certified Accountants) is the global body for professional Financial management accountants. It offers business-relevant, first-choice is at the heart of qualifications to people of application, ability and ambition around the world who seek a rewarding running a successful career in accountancy, finance and management. business. It affects every ACCA supports its 178,000 members and 455,000 aspect, from managing students in 181 countries, helping them to develop successful careers in accounting and business, with the cash flow and tracking skills required by employers. ACCA works through a business performance network of 95 offices and centres and more than 7,110 Approved Employers worldwide, who provide to developing plans that high standards of employee learning and development. Through its public interest remit, ACCA ensure that business promotes appropriate regulation of accounting and owners can make the conducts relevant research to ensure accountancy continues to grow in reputation and influence. most of opportunities. Founded in 1904, ACCA has consistently held unique This guide highlights core values: opportunity, diversity, innovation, integrity and accountability. It believes that accountants bring how financial value to economies in all stages of development and seek to develop capacity in the profession and management can encourage the adoption of global standards. ACCA’s help your business, core values are aligned to the needs of employers in all sectors and it ensures that through its range of and how to make sure qualifications, it prepares accountants for business. ACCA seeks to open up the profession to people of you have the financial all backgrounds and remove artificial barriers, capabilities you need. innovating its qualifications and delivery to meet the diverse needs of trainee professionals and their employers. More information is available at: www.accaglobal.com © The Association of Chartered Certified Accountants May 20163 1. Introduction Running a business can be intensely The right financial capabilities remain The right financial capabilities satisfying but also hugely challenging. vital throughout the life of your business, Business owners face a multitude of whether you are just starting out, have remain vital throughout the demands on their time, balancing the need an established business or are looking life of your business, whether to prioritise and deal with a range of towards a final exit from the business. you are just starting out, urgent tasks while also finding time to look Your financial management needs will have an established business at the bigger picture. continually evolve as the business grows or are looking towards a and circumstances change. final exit from the business. As an entrepreneur, you may well be driven Your financial management by a passion for what you offer, and focused Successful, growing businesses take a needs will continually evolve on what customers want and how you can proactive approach to financial gain an edge on your competitors. You will management and to making sure that they as the business grows and also recognise how important it is to be have the right capabilities. Financial circumstances change. able to raise the financing you need. In fact, management plays a continuous role in financial management can contribute much both day-to-day management of the more to achieving your business goals. business and broader strategic planning. Senior management must recognise how Business planning helps you identify, the needs of the business change as the assess and capitalise on new opportunities. business grows, and make sure that the It lets you think through your options and organisation has the financial skills that will create an action plan that minimises costly help the business look to the future. mistakes. It is also a crucial tool if you need to convince financiers and others to As a business owner or manager, you need support your business. to recognise the importance of financial management. You may be able to delegate Skilled financial management is critical for some of the tasks involved – to employees putting your plan into practice. Effective or outside experts, but you yourself need administration, compliance and cash flow to be always looking ahead, ensuring that management are just the starting point. your business continues to develop the Financial skills let you track and measure financial capabilities it will need to achieve performances, identify problem areas and its full potential. new opportunities, and minimise risks.1. Introduction 4 EPOS NOW – CASE STUDY ‘We’ve been profitable overall Jacyn Heavens was inspired to start Those difficulties have now proved to be since the early days, but now Epos Now by his own experience of a blessing in disguise. Over the five years we look separately at each how difficult it can be to run a business since Jacyn set up Epos Now, the without the right financial information company’s annual turnover has grown to marketing campaign, each and controls. Epos Now helps retail and reach £10m, with over 150 employees source of new sales leads, each hospitality businesses overcome this by and 10,000 customers. Right from the sales channel. Looking back, even providing point-of-sale systems that let start, financial management has been in our most profitable months them keep track of transactions and critical to the company’s success. we’ve made big losses on some understand their performance. individual channels but we never ‘Initially, we focused on spotted it at the time.’ Before starting Epos Now, Jacyn had growth in revenue and our been running a café bar. He quickly profit margin. As a self-funded At the same time, the company has realised that there was a problem. business absolutely everything invested heavily in automation. Improved we did needed to make money. systems give Jacyn and his team ‘I knew how much I was paying We were living month-to- real-time access to accurate key suppliers, and I’m a natural performance indicators. month, and cash flow was haggler, so I was sure I was crucial. That focus meant we getting a good deal. But I’d only Despite all the success, Jacyn admits could cope when the launch of know what our total outgoings that his initial planning was not as good our first software was delayed were by looking at the bank as it should have been. by four months. Otherwise, statement. The bar could be we’d have folded.’ ‘I saw the opportunity in the buzzing, full of people, yet I’d market, and thought “let’s have less at the end of the night As the business has grown, the emphasis give it a go”, but I’d never than I would on what felt like a has shifted to building predictable, recommend this now – I got quiet day.’ recurring revenue. Quarterly results and lucky. I remember the day, later future trends are more important than the Jacyn was desperate to know what was immediate here and now, and financial on, when I met a new employee. going on: what his income really was, management has become more detailed. I realised we had to have a more what products were selling well, what structured approach. With people margin he was making and most dependent on the business for importantly whether the business was their livelihoods, you can’t just actually profitable. rely on gut instinct.’ CREATING THE CULTURE Developing the right financial capabilities, and making the best use of them, requires the right culture in your business. At the top of the organisation, owners and managers must understand how financial management can contribute to the success of the business. Approaching financial management as a chore to be delegated leaves you at considerable risk if things go wrong. Employees need to see how financial management can help them perform better, rather than merely imposing controls on them. Training is likely to be required for all employees, not just financial specialists. Information should be shared across the business wherever it will help individuals do their jobs and understand how they are contributing to business success. A reasonable degree of financial transparency can both reassure and motivate staff. Developing advanced financial capabilities will take time and money, and needs to be balanced against other demands on the business. Your business will maximise its success if you plan ahead to see how financial management can help achieve your goals.5 2. Business planning PLAN FIRST The planning process lets you think through Whether you are starting a possible courses of action and what might Business planning is not just an exercise happen. You plan how you will deal with any new venture, looking at new that you have to go through to raise challenges, overcoming any weaknesses your opportunities for an existing financing for your business. Business business may have and making the most of business or updating your planning has a critical role to play, at every your strengths. You can identify potential strategy, planning is essential. stage in the life of your business. pitfalls, such as overstretching yourself financially, and work out how to avoid them For a busy entrepreneur, it can be difficult – without suffering the consequences. to find the time for planning. Working on a business plan rarely seems as urgent as Developing the plan also helps you focus on more immediate tasks. Yet whether you are the assumptions you are making and areas starting a new venture, looking at new of uncertainty. You can take steps to reduce opportunities for an existing business or uncertainty and control risks, or choose to updating your strategy, planning is essential. avoid excessively risky opportunities altogether. Anticipating what might happen Even if you have no need for external – good or bad – allows you to think in funding, regularly reviewing and updating advance about how you would respond. You your business plan offers significant benefits. minimise the risk of being forced to react to Preparing a business plan pushes you to unexpected events with hurried decisions. identify and assess the opportunities and threats facing your business. It helps ensure The whole planning process acts as a that you have an in-depth understanding of checklist, helping to ensure that you think your market, the competition and the about all the important issues and that broader business environment. nothing is overlooked. You choose what the best options are. You decide where to Creating the plan forces you to make focus your efforts and what you need to do choices. Which opportunities will you pursue? to give yourself the best chance of success. How will you trade off conflicting options, Without a plan, you are running your such as continuing to invest in new product business by trial and error. development while also controlling costs?2. Business planning 6 Your approach to planning should ACHIEVING YOUR GOAL Being part of the planning recognise and include the whole team Effective planning starts with deciding involved in the business. That allows you to process helps to engage what you are trying to achieve and takes get their input and make the most of their the team and encourage this all the way through to creating a knowledge and skills. Being part of the everyone to work together realistic plan. It should encompass all planning process helps to engage the the following aspects. towards a common goal. team and encourage everyone to work together towards a common goal. • Your long-term goal. What really matters to you? What is the purpose of The completed business plan acts as a your business? As your business reacts powerful communications tool. Within the to changing circumstances, how will you business, it enables everyone to understand keep on track? • Your objectives. What would you like to achieve in the next 12 months, 24 months and 36 months? Why have you chosen these targets, now? Is there an opportunity you want to exploit, and why do you think it exists? What are others in your market doing? • The strategy. How can you take best advantage of the opportunities you have identified? What are the key risks and how can you control them? What assumptions have you made and what would it help to know? • Tactics. How will you put your strategy into action? Who will do what, when? • Financial review. Can you afford your plans? Which tactics are likely to be the what the strategy is and how what they do most cost-effective? How will you needs to fit with it. Externally, you can use monitor progress? the plan to help explain your business to lenders, investors and other key business A ‘SWOT analysis’ can be a useful starting partners and convince them to support you. point. The analysis focuses on identifying the strengths and weaknesses of your business, Perhaps most importantly, your business and looking at the opportunities and threats plan provides a blueprint, helping to guide you face. This helps you to plan the best your day-to-day management of the way to make the most of your strengths business. Regular review lets you see how and take advantage of opportunities while well the plan is working and how it needs reducing and controlling risks. to evolve as circumstances change. ‘Are you working hard to ‘I’m a businesswoman and I get achieve continuous business it. Sometimes having a plan is success? Always keep financial like driving with a satnav that management at the heart of takes you the wrong way up a no decision making.’ entry street. But the alternative, Uresha Walpitagama FCCA, no plan, that’s much worse, you’d Director – Staylanka Bookings end up driving in the wrong (Private) Limited, Member of ACCA direction for miles and the trip Global Forum for SMEs ends up costing you substantially more unnecessarily.’ Rhonda A. Best FCCA, Director at Alexander Bain, Member of ACCA Global Forum for SMEs2. Business planning 7 PLANNING CAPABILITIES Membership of business associations is The better your often a helpful step in gaining access to Pulling together a business plan involves a data and information about your particular understanding of the wide range of knowledge and skills. type of business. environment in which your business operates, The better your understanding of the Equally, astute analysis of the data that environment in which your business the stronger your plan your business holds, such as sales trends operates, the stronger your plan will be. will be. for particular products or customer groups, That includes understanding customer can be very revealing. Understanding what requirements, what your competitors offer has happened in the past helps you refine and key market trends. Your understanding your plans for the future. of the wider business environment should cover regulatory, economic, social and FINANCIAL EXPERTISE technical factors affecting your business. What are the key tax, labour and Financial calculations and forecasts are at environmental laws? Are there any special the heart of business planning. incentives for your type of business? Specific, numerical forecasts make it easier Equally, you need a clear understanding of to check that your expectations are realistic. your own business strengths and How will you achieve any sales growth you weaknesses. Your plan needs to cover the are forecasting? Have you taken into full range of business functions: sales and account all the costs you are likely to incur? marketing, purchasing, production, human resources, administration and finance. As a believer in your own products or 80% What people, skills, premises, equipment services, you may be overconfident about and financing do you have and what do of businesses employ your sales prospects. Looking at these in you need? What are the particular fewer than 10 people more detail provides a useful reality check. problems that are holding you back? A 1 How many sales calls will you need to (OECD, The Dynamics of Employment Growth ) good plan will be based on hard data and make? What percentage of enquiries will research, not just a ‘feeling’ that something convert into sales? is a good idea. Wherever possible you should be talking to customers and testing Pulling your expected revenues and costs out ideas before committing yourself. together in a cash flow forecast lets you identify any expected cash shortfalls in Your completed plan should pull together advance. It gives you time to arrange any all this information, creating a vision for the financing you need, and helps convince business, setting clear objectives and lenders and investors that you have your providing an action plan. You also need to finances under control. 8-14% be able to turn those plans into numbers, of companies go out with forecasts of the implications for cash You can also vary your assumptions, looking of business each year flow and profitability. at different potential outcomes to help you (ACCA, Financial Education for understand how risky your business is. 2 Entrepreneurs: What Next? 2013 ) Most entrepreneurs find that they are What if your sales turn out to be 10% lower strong in some areas of planning, but than expected or a key supplier puts up weaker in others. You can strengthen your their prices? How can you protect yourself planning ability by making the most of against possibilities like these? everyone in your business. Individual employees often have a keen Unless you have all the financial and understanding of where their particular area planning skills you need, you will want to of the business is succeeding – or going turn to a suitably qualified external adviser wrong – and how it could be improved. such as your accountant. You may also want to develop your own skills or those of your employees. ACCA-X online training offers free and low-cost courses covering business planning and related financial skills. 1 http://www.oecd-ilibrary.org/science-and-technology/the-dynamics-of-employment-growth_5jz417hj6hg6-en 2 http://www.accaglobal.com/content/dam/acca/global/PDF-technical/small-business/pol-tp-fefe.pdf2. Business planning 8 STARTING UP The way you invest your own money, or any The approach you take to investments from friends and family, can If you are starting a new business, it is likely also have important consequences. You managing your business that your resources – both people and may want to reduce your risks – for finances – and even your money – are very limited. At the same time, example, by providing your financing in the personal finances – can the decisions you make at this early stage can form of loans secured against any business have a huge impact on your future prospects. make a big difference to assets. Doing too much to reduce your own how creditworthy you are risk might, however, deter other sources of Initially, you may have a choice of different finance from supporting your business. seen to be and how keen business structures, such as whether to investors would be to form a company or a partnership. Your The approach you take to managing your choice can affect the legal requirements for support you. business finances – and even your personal your business, whether your personal finances – can make a big difference to assets are at risk, how profits are taxed and how creditworthy you are seen to be and so on. You may also want – or be legally how keen investors would be to support required – to organise your business in a you. Even if you do not require extra way that clearly distinguishes between your financing at the outset, you may want this personal activities, assets and liabilities and flexibility as your business grows. those of your business. A thorough, realistic business plan is The right financing is critical. As well as particularly vital at the start-up stage, making sure that your business is adequately whether you are seeking external funding financed, you should aim to use the right or not. The plan helps you set the right kinds of financing. For example, borrowing course and avoid many of the mistakes you 5% too heavily might make your business might otherwise make. unnecessarily risky and limit your options if of small start-ups grow to employ you need further financing later on. more than 10 people within three years (OECD, The Dynamics of Employment Growth) START-UP ADVICE In a start-up, recruiting an expert to deal with issues such as those discussed above is unlikely to be an option. Most start-ups find that their first finance recruit is a bookkeeper rather than a more highly qualified financial manager. Even this tends to be delayed until the volume of business justifies it. Instead, financial management is typically the responsibility of the owner-manager. That may not be a bad thing, as it means that key decisions are getting the top-level attention they deserve. In practice, however, unless you are an experienced entrepreneur or come from a financial management background, you are unlikely to have the personal expertise needed. The solution is to take the right advice. • Your accountant is likely to be your key financial adviser. Involve your accountant at the planning stage to take full advantage of their expertise in areas such as business planning, raising business finance, tax planning and setting up financial management systems. • You may be able to involve individuals with business experience and financial expertise in other roles: for example, as a mentor or a non-executive director. • Whomever you get support from, check that they have the right expertise and are helping you in the right areas. If you are going to rely on a bookkeeper, make sure they know how to prepare a cash flow forecast and will warn you of potential cash flow problems. • Once your business is up and running, you are likely to find yourself under constant pressure to deal with urgent tasks rather than broader business strategy. Meetings with your accountant and other advisers can help you refocus on the bigger picture. From the outset, your aim should be to look ahead. Your business plan should tell you what you are trying to achieve and the kinds of financial management capabilities you will need to reach your goals.9 3. Financing the business YOUR FINANCING GOALS • Financialflexibility. Your business should Your business plan – and the retain flexibility, for example so that you Your business plan – and the cash flow can obtain additional money to help you cash flow forecasts in it – gives forecasts in it – gives you a clear indication pursue new opportunities in the future. you a clear indication of the of the financing the business needs. As financing the business needs. well as identifying your initial requirements, • Business control. You will want to retain the forecasts look forward, identifying what control of the business, with lenders and additional financing you may need in future. investors placing as few restrictions as possible on what you can do; and you In fact, the right financing can do more than will want to restrict their entitlement to a just providing the cash your business needs role in decision-making. to function: it can also minimise costs and reduce risks. Careful consideration of your • Financial risk. You will want to limit your financing goals will help you decide what personal financial risk, and the risks to your financial priorities are. Although you any family and friends who have may not be able to achieve everything you invested in the business, minimising the would like, you will have a better risk of losing more than you can afford if understanding of which trade-offs you are things go wrong. prepared to accept. • Personalfinances. Your financing plans • Financial strength. You will want to should take into account how much ensure that you will be able to cope if income you require from the business, your business is less financially and to what extent you are prepared to successful than you hope or if you face a limit your income in order to reinvest in sudden, one-off cost. the business. • Financing cost. You will want to • Business strategy. Your ability to raise minimise the costs of financing, whether financing will determine whether you that means the interest you pay or the can afford to invest for growth or need share of the business you give up in to focus on controlling costs and return for funding. generating cash.3. Financing the business 10 As well as clarifying your goals, building a if the business climate changes or lenders Whatever financing you deeper understanding of your business become unwilling to support you. finances helps you demonstrate your raise, it is essential to expertise to potential sources of finance, Whatever financing you raise, it is ensure that it is used for making it more likely that they will be essential to ensure that it is used for the the intended purpose as willing to support you. intended purpose as planned. Losing planned. Losing financial financial discipline by diverting money to discipline by diverting alternative projects, or for personal use, UNDERSTANDING YOUR FINANCING can be disastrous. OPTIONS money to alternative projects, or for personal Significant financial expertise may be WORKING CAPITAL use, can be disastrous. needed to understand and evaluate the different financial options you may have. Understanding the impact of different ways of managing your working capital can be Your assessment of how much financing you particularly important. need will be based on your business plan and the cash flow forecasts you produce. You also You may be able to reduce your financing need to be able to assess how much impact needs significantly by limiting the credit uncertain events, such as disappointing you offer to customers and negotiating sales, could have on your financial position. extended credit from suppliers. Actively managing the way you collect payments You need to be aware of the different types from customers, for example by chasing up of financing, and the roles they play. For overdue debts, is likely to be essential. example, it makes sense to fund long-term 50% investments with long-term loans (or equity) At the same time, you need to consider the of start-ups fail within five years rather than relying on short-term financing. broader business impact of your terms of 3 Other options, such as leasing vehicles or (OECD, Entrepreneurship at a Glance, 2015 ) trade. You might need to be willing to offer equipment rather than purchasing them credit terms that match those of your outright, may increase your total borrowing competitors, or find that you are forced to capacity and offer more financial flexibility accept a major customer’s terms if you want than relying on bank borrowings. to do business with them. Your financing plans need to take into account customers’ Whatever financing options are available, real behaviour – for example, in some you need to be able to compare their countries late payment is almost routine. costs. This might include assessing how interest payable on borrowings compares Working capital can be a significant with the less direct costs of equity limiting factor as sales volumes grow. You investment. You also need to understand may need to identify ways of financing this, the tax implications – for example, whether such as by using factoring to borrow interest payments are tax-deductible and against outstanding invoices. Taking out a whether you can recover any sales tax paid long-term loan might be a better option on equipment that you lease. than continually relying on an overdraft. In many cases, businesses find they have Any financing method you use to increase relatively limited financing options: for your working capital must be carefully example, relying on the owner’s resources or evaluated, in the same way as your other funding from family and friends. In situations financing needs. If profits are not high like these, it is essential to avoid unsuitable enough to cover any extra costs, you may forms of finance, such as long-term reliance need to take deliberate measures to limit on informal lending at high interest rates your speed of growth. that the business cannot afford. ‘Many businesses find that tight Financial tools such as measuring return on financial control and strong capital employed can help you compare the expected profitability of a project with supplier relationships help your cost of financing. A broader analysis them avoid the need for extra can look at the most appropriate balance financing altogether’. between different types of financing. For Rosanna Choi FCCA, Partner example, a business that needs to invest in CWCC (Certified Public uncertain, long-term projects should avoid Accountants Hong Kong), Chair too much borrowing. Excessive reliance on of ACCA Global Forum for SMEs short-term finance can leave you vulnerable 3 http://www.keepeek.com/Digital-Asset-Management/oecd/industry-and-services/entrepreneurship-at-a-glance-2015_entrepreneur_aag-2015-enpage13. Financing the business 11 ACCESSING FINANCING EXPERTISE CREDITWORTHINESS Understanding all your Understanding all your options, and For banks and other lenders, the security of options, and making the making the right decisions, requires the money they lend you is crucial. As their right decisions, requires specialist expertise. For example, few return is limited to the interest they charge, specialist expertise. entrepreneurs understand the detailed they focus on risk, assessing how working of leases, or have the time to creditworthy you are. devote to finding out more. The assessment is based on several You are likely to turn to your accountant for factors and different sources of information. advice in some areas. For example, you You can take simple steps to improve might consult your accountant when you how creditworthy a lender is likely to think need to make major financing decisions, you are. such as starting a new business or funding a major expansion. • Establish your identity. Make sure you are registered (for example, to vote) or You might also want your accountant to have an identity card. review your overall financing structure on a regular basis, alongside preparation of • Build a record of good financial your annual accounts. management. It is a good idea to start creating your financial history as soon as Other financing issues, such as keeping possible (for example, by opening a cash flow forecasts up to date and savings account). managing working capital, will need more 36% frequent attention. You may want to • Use your account. Banking cash you develop in-house capabilities to deal with receive and paying expenses from of business failures are caused by these as part of your wider approach to your account, rather than dealing with inadequate financial management bookkeeping and financial control (see cash all the time, helps build up your 4 (Turnaround Management Society 2014 ) page 13: Financial control). financial history. • Pay on time. Whether you already owe money and have interest payments ATTRACTING FINANCE to make, or need to pay suppliers, show that you can be trusted to make Banks and investors need to be agreed payments. convinced that you have a good idea and know what you are doing. In • Stick to your credit limits, for example many cases, they will want to see a if you have an overdraft or credit card. business plan demonstrating that you Show that you can control your have a good use for the financing you borrowing needs. want and will make enough money to provide a return. • Obey the rules. If you are already in Credibility is essential. Do you have business, make sure you are complying evidence to back up what you say in with any regulatory requirements: for the business plan? Can they believe example, filing financial returns and what you say about your current paying taxes on time. finances and your future financial prospects? Have you shown that you • Avoid borrowing too much. Even are personally committed to the making too many applications can worry business (for example, by putting in lenders if they think it is a sign that you your own time and money)? are desperate for money. • Be creditworthy both personally and in business. Your personal creditworthiness can have a big impact on how a bank treats a business loan application, particularly for smaller businesses and start-ups. 4 http://turnaround-society.com/companies-fail-2014-survey-results/3. Financing the business 12 IS YOUR BUSINESS INVESTABLE? Investors will want to look ahead, to see ‘Cash flow information’ how big a return they might get on their Like lenders, potential investors will want investment and when this might be. Again, is what banks say is to know that they are not taking an your business plan is the key to convincing the most important excessive risk. They will also want to know them to support you. factor when deciding how big a return they are likely to make if things go well. whether to lend. ‘Banks’ lending decisions are (ACCA Financial Education A lender focuses on the downside in your based on customers’ financial for Entrepreneurs) business plan – how likely it is that your behaviour. Customers with a business will fail. For an investor, the good track record can borrow upside is equally important – how much more, at lower rates.’ your business could grow. Your business Anne Kimari FCCA, Chief plan needs to show that your business will Operating Officer, African Academy not just survive but thrive. of Sciences, Member of ACCA Global Forum for SMEs For many investors, the quality of the managers is a key concern. Do you/they have the right experience? And where you lack skills, are you getting the right support and advice? Figure 3.1: Financial capabil ities and business success SKILLS Own skills Employees’ skills Training Accountant / bookkeeper Other advisers INFORMATION FUNDING Business plan Personal savings Accounting processes Friends and family IT systems Supplier and customer funding Management information Retained profits External financing 13 4. Financial control KEY CONTROLS • Effective cash management is also a key Good financial control offers far ingredient in demonstrating your Good financial control offers far more than financial control to lenders and more than just keeping track of just keeping track of purchases and sales. investors. Over time, good cash purchases and sales. Rather than approaching financial control management improves your financial as a chore to be left to the bookkeeper, reputation and creditworthiness. your aim should be to see how the right capabilities can improve your business. • Managing customer and supplier payments professionally – for example, • Basic record-keeping is an essential chasing overdue payments politely but requirement. As well as recording firmly – helps improve your working transactions, you want to use data to capital position without damaging generate useful information. Are costs relationships. under control or are there opportunities to save money? Are you achieving your • Your financial controls help you to sales targets? comply with tax and other regulatory requirements. For example, you need • You must have an up-to-date picture of accurate information to complete tax your cash position. This lets you minimise returns and pay any tax required. bank charges (for example, by making sure you stay within borrowing limits) • Strong controls help reduce risks: for and put any surplus cash to good use. example, making it more difficult for suppliers to overcharge you or for • You must keep a clear distinction unauthorised payments to be made. between business and personal finances. Any personal loans to the business, or money drawn from the ‘Credible financial statements business, should be clearly recorded. don’t only help businesses Personal borrowings from the business access finance – they can should be limited. reduce its cost as well.’ Hastings Mtine FCCA, Managing Partner MPH Chartered Accountants, Member of ACCA Global Forum for SMEs4. Financial control 14 LOOKING AHEAD You need to decide how best to organise Financial control becomes the financial capabilities you want. Financial control becomes more useful if more useful if you can you can look ahead as well as keeping • How up-to-date does information need look ahead as well as track of the past. to be? For example, you might want keeping track of the past. your cash position and cash flow • Cash flow management lets you forecast updated daily. anticipate your future cash position. You can take steps to arrange any additional • What areas will you deal with personally, financing you will need before it and what will you delegate to becomes a crisis. employees or external suppliers? • Your cash flow forecasts feed back into • What skills do employees (and external your budgeting and planning process. suppliers) need? For example, you have You know what will be affordable. to ensure that any customer contact is handled in the right way. • Planning ahead is vital for effective tax planning – when you start a new venture, on a continuing basis thereafter ‘We don’t produce management and as part of planning an eventual exit reports just for the sake of it. from the business. They tell the board what’s going on and where action is needed.’ Gabriel Low, Head of Accounting and HR Shared Services APAC, GEA Group AG, Member of ACCA Global Forum for SMEs BUSINESS GROWTH Successfully managing a growing business means dealing with continual change. Manual systems that were adequate in a smaller business may no longer be able to cope with an increasing volume of transactions. You may also require increasingly sophisticated financial management skills. For example, if you start exporting you may need to understand other countries’ tax and regulatory systems, and be able to deal with customers in multiple currencies. At the same time, it becomes impossible to have hands-on involvement in every area of the business. Tasks increasingly need to be delegated. Instead of doing things yourself, you need financial control and management reporting systems that give you a full picture of what is going on. It is often possible to detect the warning signs of systems that can no longer cope. • Delays. As the workload increases, it becomes increasingly difficult to keep up to date with transaction processing, management reports, company returns and so on. • Quality. The number of errors and inconsistencies increases, while problems recur without the fundamental cause being identified and addressed. • Over-reliance. The operation of systems comes to rely on the one individual who really understands what is going on. • Exceptions. An increasing number of issues arise that have to be dealt with on a one-off basis because the system cannot really cope with them. • Morale. Employee morale suffers as they are asked to perform mundane, repetitive tasks • Customer satisfaction. Complaints increase and sales begin to suffer as customers experience the knock-on effects of poor systems. • Finances. Headline figures and key ratios deteriorate as financial systems prove inadequate.4. Financial control 15 DEVELOPING YOUR CAPABILITIES review whether external service providers Wherever possible, you continue to have the right expertise to Your strategic plan can help you decide meet your changing needs. should aim to make sure what improvements in your financial you are ready to capitalise capabilities you need and the best way to In larger businesses, the ability to share on new opportunities make these happen. Wherever possible, information among several employees you should aim to make sure you are ready rather than waiting until becomes increasingly valuable. For to capitalise on new opportunities rather a lack of capabilities is example, a suitable system would allow a than waiting until a lack of capabilities is bookkeeper to update transaction records already holding you back. already holding you back. Make the best while key information and analysis is shared use of your networks for support and with management. Up-to-date information advice. This might include family and needs to be readily accessible. Information friends with business experience, local can also be shared externally, for example business contacts and online networks. with your accountant. Well-planned systems can link in with those of business You may want to develop the capabilities customers, distributors and suppliers. of your in-house financial team gradually. For example, you might want to support Choosing the right solution for your your bookkeeper through a training particular business takes careful planning. programme (such as ACCA-X) to help their Your overall investment in financial skills keep pace with your business growth. capabilities – whether you are paying for Eventually, you may decide that you need a additional employees, higher salaries for step change in your in-house capabilities, more skilled employees, training costs, perhaps to deal with a particular use of external providers or upgraded opportunity or challenge. Upgrading your systems – must be affordable and offer accounting and financial control systems value for money. can provide substantial benefits. More sophisticated systems can deal with the See the ACCA guide Building your growing volume and complexity of your Financial Capabilities: A Guide for financial transactions. The right systems 5 Growing Businesses. make it easier to collect the information needed for tax and other regulatory returns. Robust systems also help to satisfy ‘By acting as a “checklist” to regulators (and others) that your business is ensure that nothing is overlooked being properly managed. – that everything is considered – strict financial management At this stage, recruiting a financial expert, will put the business owner in with suitable qualifications and experience, a position to make smart and may be the best option. informed strategic decisions, thus ensuring the future In addition, many growing businesses prosperity of their business.’ continue to use outside specialists – such Eilis Quinlan FCCA, Principal Quinlan as their accountants – for advice in more and Co. Accountants, Member of complex areas. This typically includes ACCA Global Forum for SMEs regulatory compliance, other legal issues and tax planning. You should regularly ‘Running a business is tough, especially in the current economic climate, and business leaders need every advantage they can get. Learning to speak the language of business – accountancy – provides credibility and improved business competence. There’s a quote that’s often used in business – ‘revenue is vanity, profit is sanity, but cash is king’. If you run a business, you need to understand how to measure, forecast and make decisions to control revenue, profit and cash. With online courses like ACCA-X you can gain the foundations you need to build a successful business, at your own pace, using practical examples based on real life scenarios – all for free.’ Valli Rajagopal, Head of Learning, ACCA-X 5 http://www.accaglobal.com/content/dam/acca/global/PDF-technical/small-business/pol-afb-bfc.pdf16 5. Business improvement Financial management is at its most Financial information can provide vital Financial management is at powerful when you use it to drive early warnings of impending problems. improvements in the business. For example, tracking customers’ its most powerful when you payment patterns (using your own sales use it to drive improvements Accurate and up-to-date information puts records or data from credit rating agencies) in the business. you in a position to make intelligent and can help you identify customers who may informed decisions for building your future be under financial stress and risk becoming success. Identifying a small number of key bad debts. performance indicators that have a major impact on your business helps you to focus Benchmarking your business against on the issues that really matter. A similar competitors and other businesses – for focus on a small number of targets helps example, comparing key financial ratios employees in different areas of the business and other indicators in published accounts to understand what their priorities should – can help you understand where you are be. Monthly performance monitoring is different and where you have opportunities essential for long-term success. to make improvements. More detailed analysis can give you deeper Developing your financial capabilities can insights into where the opportunities for contribute to improved performance improvement lie. For example, you can across the business. For example, look not just at overall levels of profitability, improving sales people’s financial but also at how different products and awareness can help them understand what customers contribute to this. Analysing flexibility there is on pricing and payment competitors’ prices and your own sales terms. Analysis of sales margins and salary data and margins can help you identify benchmarking against the competition can where changing your pricing might boost help you decide appropriate pay levels and overall profitability. bonus schemes for employees.5. Business improvement 17 INVESTMENT DECISIONS INVESTMENT ADVICE An independent, Major investments to drive improvements Unless you already have the financial objective view can need careful evaluation to ensure that you expertise you need, you should get help help you avoid being understand the potential financial and with financial evaluation. This may include over-optimistic business impact. preparing a cash flow forecast for the new opportunity, identifying key risk factors and and overlooking • How high a return does the opportunity assessing how much impact changes in potential pitfalls. offer? What increase in profits do you your key assumptions might have. expect from making the investment, and how does this compare with your An independent, objective view can help cost of financing? you avoid being over-optimistic and overlooking potential pitfalls. An accountant • How risky is the investment and how or suitably qualified bookkeeper should also much risk are you prepared to take? be familiar with the tools that can help you How would you assess an investment that assess different investment opportunities, promises a moderate but guaranteed compare them with each other and return against a more speculative consider them against your cost of funding. opportunity that might provide spectacular returns or fail completely? Common investment evaluation methods include discounted cash flow analysis, • How quickly would the investment pay which makes it easy to compare the returns for itself? The longer it takes, the higher you expect from an investment with its the risks are likely to be. For example, initial cost. A similar tool, the internal rate an investment in new production of return, lets you compare expected equipment might be overtaken by a returns with your costs of funding. The newer technology or made redundant more straightforward measurement of by changes in customer requirements. payback period tells you how long it would take to recover your investment. • What would the impact be on your cash flow and overall financing position? An experienced adviser can be particularly What will be the best way of financing useful if you are competing over an the new investment? If you stretch investment opportunity. For example, if yourself too far, what might the impact you are interested in taking over an be on your ability to finance the rest of existing business you will need to work out your business and take advantage of your negotiation strategy and set a limit on any other opportunities that might how much you are prepared to pay. come up? ‘Continually evaluating and • More broadly, how does an opportunity improving your organisation’s fit with your existing business and overall capabilities is essential if you want strategy? For example, investing in the ability to offer a wider range of products to maximise its effectiveness’. might be a worthwhile way of increasing Bright Amisi FCCA, Managing customer loyalty even if the new products Director Avante Advisory Services add relatively little to your profits. (Pty) Ltd, Member of ACCA Global Forum for SMEs5. Business improvement 18 ‘Financial management BUSINESS EXIT plays such a vital role For many entrepreneurs, a successful business exit – often involving both selling for business survival the business and retiring from an active management role – is a fitting end to years and growth. It’s like a of effort. The exit may bring your involvement with the business to a close, but telescope into the future, preparation for a successful exit typically begins far in advance of this final date. guiding you to walk For potential investors, understanding how they will realise their investment is often around pitfalls and find a key issue. Entrepreneurs looking to raise funds from investors may need to have the shortcuts on the way some idea of their exit plans before the business has even started. to your goal.’ Effective exit planning needs to start early and take into account a whole range of Ken Lee FCCA, Lee & Lee issues in order to maximise the value of the business when you sell. Associates, Member of ACCA Global Forum for SMEs • Timing. What will be the right stage in the business lifecycle to get the most interest from potential purchasers? • Succession. Who will take over from you when you retire? • Systems. Are management systems, legal agreements and so on robust? • Tax. What will be the most tax-efficient way to extract money from the business? You are likely to need advice to help you plan and carry out the business exit. You may want to ask someone with experience of similar transactions to act as an adviser or non-executive director. It can be a good idea to put together an ‘exit team’ charged with managing the exit process. An employee with relevant financial training and experience may be best placed to lead this team. You will also need to ensure that the team has access to appropriate specialists with experience of similar transactions. This may include your existing accountant (and lawyer) but also more specialised corporate finance advisers. Specialist financial and negotiation skills will be important.PI-FINANCIAL-MANAGEMENT-ENTREPRENEURS ACCA The Adelphi 1/11 John Adam Street London WC2N 6AU United Kingdom / +44 (0)20 7059 5000 / www.accaglobal.com