When you ask why, nobody can give you a straight answer. In this episode, I want to help you understand why that may be happening, and why the thing that you think you need to do to fix it may actually make it worse.
Why Driving More Revenue Is Not Always the Answer
For most businesses, when they see a profit dip, the automatic answer to fixing that is to drive more revenue. Let’s trade through it. If we can get our revenue up, that will fix profitability and everything will be okay.
Now, sometimes that does work, and sometimes it makes the situation worse. And it makes the situation worse when you don’t have a full understanding of your costs, or your pricing strategy is not fit for purpose, or you’re inefficient, or working with the wrong types of customers.
The challenge that I see all the time is that you have these growing businesses that need to increase their cost base, and they’re making all of these decisions without the right tools in place to help them understand the consequences of those decisions, and to help them understand what the business needs to do to be able to cope with that additional cost.
The One Function That Gets Underinvestment in Small Businesses
This is perfectly normal for many, many businesses. Businesses are biased to grow marketing functions, sales functions, and operational functions. You need to get the work in, you need to convert the work, and you need to be able to deliver the work. And for most business owners of small companies, they are wired to know that they have to invest in those three functions.
The one function that gets underinvestment all the time in small businesses is finance. And that is the function that is going to help you understand what’s really going on — if it is properly resourced, properly set up, and effective.
A Real Business That Was About to Make Things Considerably Worse
I recently started working with a business that is fundamentally a really good business, but they have gone through rapid growth. The issue that they’ve started experiencing recently is low profitability, and the profitability keeps on getting thinner and thinner. Their solution before working with me was: we need to get more revenue, we need to grow more, we need more turnover, more customers, that’s what’s going to help fix the profitability issue.
And what I asked them to do was stop. Hammer time. Can we just take a step back and understand what is going on with the costs in this business? Let’s look at each of the revenue lines. Let’s get into the detail of what the true costs are for each of those revenue lines, so that we can understand if growing out of this is a realistic possibility.
They did the analysis, and what they brought back was eye opening. They had margin shrinkage. They had issues with profitability. They had loss making product lines all over the place. And their solution of let’s just keep growing to try and fix this would have made the situation worse.
Why Did They Find Themselves in This Situation?
When they were turning over 1 or 2 million, they had one bookkeeper. Now that they’re doing 6 million, they still have one bookkeeper. Their finance function isn’t a finance function, it’s a bookkeeping function. And there is only enough resource in that department to process information, not to analyse it, not to report it, not to give the business owner what they need when they need it.
So decisions are being made in a vacuum. They’re being made on gut. They are being made on the opinion of people in the business instead of the facts and figures to help guide proper, objective, good quality decisions. And as a result, this business was about to make their situation considerably worse.
Four Signs Your Finance Function Is Not Fit for Purpose
How do you know if you’ve got a finance function that isn’t fit for purpose, that isn’t giving you what you need? In my view, there are four key things.
If management information does not arrive on your desk between day 10 and day 15 without you having to chase or ask, that is an issue. If you do not have the right forecasts in place, that is an issue. If you don’t have the right KPIs and the right departmental reports that give you daily and weekly information so that you can understand what’s likely to happen in the future, you have an issue. And if you don’t have a P&L budget that is detailed and reviewed on a regular basis — one that is more of a business plan in numbers rather than a spreadsheet that doesn’t get looked at, then you have an issue.
Your finance function should be there as an intelligence and analysis function. That is the way I want you to think about it. For more on this, the Mind Your Own Business series goes deep on the financial building blocks every growing business needs.
Why Business Owners Underinvest in Finance
It is common for business owners to not really fully grasp what they need from finance. They don’t really understand the information that they need, the significance of that information, and how the information should be used. So the default thought is: if we put more money into finance, that is just more overhead and we’re not getting the value that we need from it.
And I’m here to tell you that is absolutely not the case. If you are a growing business and you do not have proper information to hand, timely information, then you are going to sleepwalk into a whole bunch of avoidable problems.
The Four Most Common Finance Function Problems
So if this situation is happening to you, why are you in this position? The first issue might simply be that you do not have enough headcount. Not enough people in finance means there’s not enough resource to do the processing and to do the analysis.
Another issue I often see is that there’s plenty of resource, but that resource is not being used effectively, because people are doing loads and loads of manual work that automation or software could fix. And therefore, again, there is no capacity for analysis.
The other issue I see is that there isn’t the capability. There are plenty of processes in finance, but there is nobody with the capability to analyse information and present it to you in the form that you need to be able to understand what’s really going on.
Finally, the other issue I see all the time is that businesses expect their accountants to do all of the heavy lifting. Most people are paying their accountants to do compliance work but have completely unrealistic expectations of what those accountants should really be doing. If you are paying your accountant for management reporting, sitting down with them on a monthly basis, and as a result analysis is coming out that you’re actioning and that is informing strategy, that is okay. But if you are just getting some information from your accountant every now and then, that is compliance, not analysis.
Two Practical Starting Points to Fix Your Finance Function
What you need to understand is what you really need in your finance function, and I would urge you to get really clear on exactly where the gaps are.
One of the most straightforward fixes for many businesses is to sit down with your accountant and have a conversation about what’s going on in finance and where the gaps are. That can often be a really good starting point. Your accountant might not be able to fix the problem for you, but they can certainly help you understand what the problem is.
Another really solid option is to get a fractional FD in place. If your business is over 5 million and all you have is a bookkeeper, getting a fractional FD in place is really smart. You get the expertise that you need without having to pay the full wage. You can have somebody in for a day a week or a couple of days a week, and then you get the capability that you need without having to spend huge amounts of money on that person.
Those are two legitimate, good starting points, speak to your accountant, or get a fractional director in to help you shape your finance function and give you what you need. This theme of making smarter decisions with the right information is also explored in depth on marcosoares.co.uk, where you’ll find a wide range of practical resources for growing businesses.
You Cannot Make Good Decisions in a Vacuum
The key thing here is that you cannot make decisions in a vacuum. If your business is growing, you need a robust finance function. I want you to reposition this in your mind as a data, analysis, and intelligence function — not as a bookkeeping function. And if you want to get bigger, better results, then you absolutely need the right information to hand at the right time. And the only way you can do that is by having a properly resourced finance function.
For more content like this, subscribe to the Marco Soares YouTube channel, new episodes every two weeks, each one designed to help you grow your business and make it less dependent on you.
