By Steve Attwell is Managing Director of SMB UK & Ireland at Sage

Not all fledgling business owners or entrepreneurs dream of being the next Mark Zuckerberg, Anita Roddick, Sir Alan Sugar or Jerry Baldwin. With one in four people wanting to start their own business*, the majority do so to be self-sufficient and don’t harbour big dreams at the beginning. Whether they’re setting up a coffee shop, or a florist with tycoon ambitions, having a good finance team is often not at front of mind for entrepreneurs when they start out.

Yet even if few entrepreneurs set out to build a good finance team, a growing business can't manage without one. Financial capability shouldn’t be an afterthought - regardless of how entrepreneurial or creative the business is. Without a strong balance sheet and a beady eye on cashflow, success is only going to be limited or short lived.

Shoebox to show stopper!
How can a small business owner ensure in-house financial capabilities grow with the business? Does this mean taking money out of the business that could be better used to drive and support growth? Or is it in itself one of the best investments they can make?

Fortunately, it doesn't all come down to money or personal expertise as much as vision and sound business planning. Building on this understanding and on robust research, Steve Attwell, from Sage explores the finance function's journey from shoebox to FD with practical tips for business owners and their advisers.

Most SMEs will have a marketing plan and basic idea of profit and loss, but setting up a few key performance indicators and robust finance function from the start can provide a good indication of the health of the business.

As long as they are clearly derived from your actual business plan, these KPIs will arm you with the information you need to control the broad direction of the business, from business development to cashflow to supply chain management, and help create strategies that help you with inevitable obstacles — from falling demand or rising costs to late payers.

Whatever you do must suit your ambitions realistically. Look at strategic capability of people in the business and allocate functions — HR, marketing and sales, admin support and finance.

Think big thoughts
It is said that 50 percent of all marketing is wasted, but which half? The same could be said for business support software and intelligence systems. Think tactically from the start as you want the flexibility and freedom to choose a solution that evolves with the business.

One of the best ways of doing this, as championed by one of our Business Partners, K3, is to take a big business approach. Think like a bank and adopt some big world thinking by asking “what if?” and stress testing your business plan. Within corporates, finance teams have huge input in these tests.

John Chinery at K3 recommends: “Growth is uneven so knowing and testing every stage of your business is vital as there will be a transition point when the organisation recognises that ‘off the shelf’ processes and systems no longer support the complexities of the operation. The instant and real benefit is that the business has a highly functional, scalable yet flexible suite of business tools allowing you to prepare and take remedial action when issues arise, whilst driving efficiency across the enterprise.”

Plan for the unexpected
When it comes to expanding your offering, your finance team can help you assess the business case for new products, services or customers. Recent ACCA product innovation insight from 400 pan-European businesses championing new services revealed some interesting observations.

Lack of funding was cited as the main reason for service failings. The survey revealed that companies with well-resourced finance functions employing highly scalable cost effective business intelligence were the most successful.

Many SMEs think like a person: they make X, sell Y and charge for each widget. Typically they don’t look at building business capabilities until they have £1m turnover or more.

However, analysing business activity at the earliest opportunity in the business cycle can reveal significant benefits when making one-off capital investments. Employing business software — like our Sage 200 Suite - with integrated CRM, business intelligence and financials platform, for example, gives you a great tool for analysing transaction information and assessing the true drivers behind customer purchases. A software application such as this gives SMEs a greater understanding of customer loyalty and trigger points and helps them invest to support those customers trends which can drive growth.

Credit Guardians
One of the biggest pressure points for any small business is cash-flow, so my advice is to think like a bank. By treating credit as a product that should be sold as such, it doesn’t have to be a headache. And properly costing credit can be key to a business’ success.

Ultimately, credit costs, so know your customer John Chinery at K3 advises: “Weighing up risk factors and customer relationships can be helped with a little information from project accounting tools — it’s important to know what it costs to manage a customer. As a result, you may find that it is more cost effective to rely on few major clients, or move to multiple small customers.

Deciding how much credit you should be offering customers can be a challenge, so trust your finance function to help hold on to valuable customers by communicating a clear credit policy, rather than dealing with it on the hoof. Look to your finance software as it can act as an early warning system long before a credit situation becomes a risk. CBI-ACCA research shows that many ‘at risk’ business owners work with outdated financial information on those they do business with on a daily basis.

The mantra for credit is ‘forecasting, forecasting, forecasting’ as your cash flow is the first thing any bank or business angel will look at. Know when money comes and goes as you won’t convince anyone that you have control of the business if you don’t.”

Health Check
Keep and work with product lifecycle analysis that is in one place so you can then form decisions around Customer Relationship Management (CRM). Traditionally this is a space that has been owned by sales departments, but finance needs to get involved. I would advise being realistic when it comes to cash flow. Assume that not everyone will pay on time and work on a 20 per cent loss with the business when it comes to payment.

Hoping that a few numbers will provide a good indication of the health of the business is never a good strategy. Business software doesn’t just look at net profit and the bottom line, so adopt key performance indicators and project accounting forecasts that convert overheads to direct costs or project costs and employee time.

A helicopter view of the business won’t tell you everything, but will tie-back/cascade performance to objectives and help you grow. Think of your KPIs as the dashboard of a car - fuel, miles to go, miles per gallon - that maximise your journey. Use real-time data to your advantage.

Online businesses do more analysis than traditional businesses with non-financial information, so look at this model and use it regularly, even if you think the business hasn’t really changed.

Each of these areas is key to any new — and importantly, any growing — business. If used, they can deliver or drive something that will help them connect with customers at every touch point and turn passion to planned future business success.

For further tips for growing businesses and their advisers on building their finance function, watch the following webinar from Sage, Sage Business Partner K3 and ACCA: https://event.on24.com/eventRegistration/EventLobbyServlet?target=registration.jsp&eventid=592541&sessionid=1&key=5C6975498264C542268F22139C7B28EF&sourcepage=register