Business blood flow and health: orderly finances

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A great business idea, a company founded on its basis, rapid development, horizons of new markets and constantly growing profits - an idyllic picture of a successful business. Too good to be true?

A successful idea and growth are truly inspiring factors, financial experts agree. However, they remind us of an important point - in the idyll of business growth, quite simple fundamentals such as financial flow management are sometimes forgotten.

There are now areas in the market whose rapid development and growing demand for business services are dictated by the circumstances of the times - one such sector is renewable energy, the development of which is driven by increased energy costs and increasing pressure to counter the effects of climate change.

"It's really good news that there are sectors where new businesses can start and grow. As experts in our field, we do not want to extinguish the inspiration that accompanies a manager who has caught the vein of a successful business. We just want to remind them - take care of your finances so that they become a bright illustration of business health", says Inga Miliauskienė, head of financial and business consulting department at Grant Thornton Baltic.

Financial management is a necessity for a growing business

According to Inga, there are cases when the head of the company feels that "something is wrong" and calls in an external financial specialist. Accounting books are opened - and lo and behold, there is no profit. There is a loss in the lines of the company's budget.

"Managers wonder how this could have happened, start learning things from scratch - how to manage inventory, what kind of accounting requirements to set. Everything would be much simpler if more attention was paid to financial management from the beginning", notes Inga.

Even a small company that can't afford or can't afford to hire a chief financial officer (CFO) at an early stage shouldn't leave the finance side to itself. "If the company does not have competence in financial basics, an external CFO can handle all the necessary functions and ensure that the business will not face problems due to disorganized finances in the future", says I. Miliauskienė.

According to her, financial management is a fundamental subject in order to grow, expand or attract external capital: The main tasks are financial planning, control and financial decision-making. It is not always easy to do this for the manager themself, who at this very moment is burning with the business idea and growth, but it is necessary to find time and use the necessary competence.

Financial hygiene and discipline

Financial flow management includes financial monitoring, analysis and optimization of the company's income and expenses. These actions make it possible to ensure that the company has sufficient funds to cover short-term obligations, such as paying bills, purchasing inventory, and paying salaries. Disciplined monitoring of working capital can help you forecast income and expenses, monitor whether these forecasts correspond to real-time capital flows, and ensure that customers pay their bills on time. Such discipline allows thenm to avoid undesirable consequences, such as higher costs of late payments, helps to take care of the right amount of inventory and maintain good relations between the supplier and the customer.

"An external financier can be equated to a senior financial officer of the company, depending on the company's needs. However, despite the titles, the purpose of this role is to create a business-friendly financial environment. This is taking care of the daily flows of funds, taking into account the expected investment, the degree of risk. It is also possible to predict the return of the business to the owners. It sounds simple, but it requires knowledge", emphasizes I. Miliauskienė.

Managers usually notice that the financial lines are not perfect during the development stage, when it is obvious that there is an opportunity to go to new markets, to grow the business, and for this there will not be enough own funds. And if external capital is needed, it is also necessary to orderly secure the company's financial base.

"For a company that is completely new to the market and only cares about product introduction and marketing, scrupulous financial supervision is not yet so vital. For example, startups often use business angels, who help take care of this "boring" part. However, development often becomes relevant for companies that have grown a bit and have been operating on the market for several years, then they realize that it is necessary to regulate their financial flows", I. Miliauskienė describes the circumstances when a business may need an external financial advisor.  

It is important for a manager to know and ask the right questions

One can ask, is it really necessary for a business manager to know finances, or can he rely on their accounting specialists?

"If the manager doesn't provide important guidelines, accountants can add lines in their own way, choose their own accounting programs, count inventories at their own discretion. In order for everything to run smoothly, the manager should know the basics of financial management and be able to submit critical questions for accounting, formulate requirements for submitting financial statements so that they testify to the true health of the business. In my opinion, the basics of finance are necessary for a business manager," the expert believes.

If a manager is comfortable with finance, it will likely be easier for them to achieve their desired investment or working capital goals. A wrong description of the company's situation, a disorganized financial base can hinder good cooperation with investors and credit providers. On the contrary, strong financial arguments will be of great importance when investors or lenders make financing decisions.

"As you can see, applying for funding is approached formally and simply: numbers are evaluated. Thus, the manager must have the right numbers at his disposal, and if they do not control the information, they will be the weaker party in the negotiations. Therefore, I suggest to the managers not to leave financial management somewhere on the margins, next to the ambitions of growing the business", teaches the expert of "Grant Thornton Baltic".

According to her, uneven financial flows can make budget planning difficult, and for a fast-growing business, it can be important to invest in equipment, inventory, and other forms of capital. Businesses can become burdened by short-term liabilities, which can have serious consequences - commissions, fines, and ultimately, a threat to the company's reputation. "The manager must know all this if they want to continue to see that great picture of the business idea in reality," says I. Miliauskienė.

An external financier is not forever

When does a company or manager no longer need outside financial advisors, even though they have been great so far? According to Inga, it is not difficult to understand that. When a growing company needs a permanent person to oversee the day-to-day financial flows and, to put it simply, to attend company meetings every morning - then the financial advisor ends his project work in the company.

"The external financial advisor can remain the right hand, but if it no longer covers all the requests of the business manager, it's time to make a decision. When development processes begin, foreign markets are conquered, financial partners are sought, complex growth takes place, there may be a need to have a chief financial officer within the company. However, external assistance can always be used to monitor and control the company's financial plan," explains Inga. 

 The original article is in Lithuanian language

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