Small business operational finance — Making the most of limited resources
If you’re running a small or growing business you’re most likely in a perpetual state of trying to squeeze as much as you can out of limited resources and run as efficiently as you can. This isn’t necessarily a bad thing… as they say, necessity is the mother of all invention.
Having moved from a ‘corporate’ environment into the small business arena myself I’ve noticed that in the latter you’re much closer to the effects of your decisions, your wins and your mistakes. This can be both a blessing and a curse. A blessing in the sense that it affords one more opportunities to learn from one's’ mistakes but a curse in the sense that these opportunities are often painful and far more visceral than academic.
Here are some of the things I’ve learnt (well, more correctly that we’ve learnt) and some practices we’ve implemented over the years at NONA to help us ‘get things right’, as much as we can, in the realm of operational finance management.
1. Make your budget (actually) work for you.
I say ‘actually’ here because far too often, the budget setting process is a purely academic exercise and far too removed from reality. In order to avoid this and get the most benefit from the exercise we try to:
- Pick the right time-frame. Often setting a budget for a whole year doesn’t translate into reality for most, thinking in a 90 day world has benefits other than just quarterly reporting, if that is considered a benefit. It makes your budget more tangible and digestible. If you’re under the pinch you might want to focus on an even shorter timeframe and think in months, though in my experience this isn’t advisable for any lengthy period of time. Picking the right time frame to focus on for YOU is important.
- Be flexible but don’t make excuses. We can’t predict the future and things will happen between you setting your budget and that time period elapsing over which you have varying degrees of control. Be hard on yourself where you’ve clearly not done what was needed to achieve your goals. Where things seemingly outside of your control had a negative effect, accept them and then try and figure out how to remove your exposure to such events, if you’re not, you’re just explaining things away. Where things outside your control had a positive effect, acknowledge your luck and figure out how to leverage similar events so that next time it’s not just luck. If you’re not, you’re taking false credit. Remember, there is a strategic side to budgeting.
- Set budgets that stretch you but that don’t set you up to fail. This one is actually quite difficult. We aim to set budgets that make us think ‘hell yeah’ when we hit them while avoiding ones which are downright unrealistic and demotivating. Doing the latter makes everyone unhappy.
- Translate your budget into goals. Simply put, the better you can align your budget with individuals’ goals and motivate individuals to work towards those goals, the more likely you are to get there. Setting a budget that gets sent out once to a group of people and then ‘sits in a desk’ for a time doesn’t help very much. It is important that it is a living and constantly reference resource and guideline. You might even want to assign line items on the budget to individuals to really create a sense of ownership
- Get to the right level of granularity. Just rolling forward budgets from period to period isn’t always appropriate. Often a deep dive into where your money is going is really useful, especially when you’re under the pinch. Zero based budgeting can be a useful tool in this regard. It’s also useful to talk to people about what costs are ‘nice to haves’ vs critical requirements. It’s easy to assume that because something is being purchased it’s critical. Often, there are things you might think mean a lot to people which they don’t really care that much about (or visa versa)… Never set a budget in isolation.
- Focus on alignment with:
— Your Strategy
Essentially, your budget should really be a kind of execution plan in numbers, for your strategy. Your strategy, in turn, should be aligned with your vision, purpose and values. If you’re clear on what these are, your budget should make sense in the context of these. If it doesn’t, you really need to ask yourself: 1. If you’re doing the things required in order to execute your strategy? and 2. If your strategy is really aligned with your vision, purpose and values?
— Your Value drivers
Figure out what it is that drives value in your business and nurture this. Whether it’s your people, market position, a manufacturing process or whatever else, your budget should indicate cultivation of your value driver’s. Even if you’re running a lifestyle business and are happy with the status quo. The world is a competitive place and changes rapidly. Unless you’re working to keep it, you’ll likely lose it.
- Believability & Skin in the Game — In the book ‘Principles’ by Ray Dalio, he talks about the concept of ‘Idea meritocracies’ and ‘believability’ (just because someone holds a top position doesn’t automatically mean they have top ideas) and in N.N. Taleb’s book ‘Skin in the Game’ he talks at length about… well ‘Skin in the Game’. These are ideas I resonate with quite strongly. When allocating budget to initiatives, departments or people. We find it useful to keep these principles in mind. Ideally you want a good balance of these things as having one often isn’t enough. If you’ve ever been underwhelmed by the outcome of a consulting or contracting engagement with ‘believable people’ and feel the budget wasn’t used to its full potential, you likely achieved ‘believability’ with not enough ‘skin in the game’. If you’ve been underwhelmed by the results on an internal initiative you might have had enough skin in the game but too little believability (in the form of experience or domain knowledge). As mentioned above, when aligning budgets with goals of departments or individuals using these ideas in the form of questions as a gut check can be very useful to avoid disappointment in the results or outcomes you achieve. Simply put, constantly ask yourself the question “why is this person making this suggestion believable”. If you are not comfortable with the answer, do not ignore this and either work to get comfortable with the answer or consider that you might not have the right person in that seat.
2. Controls & control environment:
I’m not going to wax lyrical on useful control measures you should put in place in your business (I don’t know what you do), you can find these in auditing and accounting textbooks. Rather I’m going to detail the way we think about controls at NONA.
First off, we try and employ a good order of implementation. The simple principle here is an 80/20 one. Most of the time you’ll get 80% of results from 20% of the controls or procedures you put in place. Clearly, this is where one should always start — start by implementing the things that are high impact with relatively low effort. Only once these are being done and being done effectively should you start tackling the small incremental improvements.
The high impact / low effort things also often aren’t the ‘sexy’ or interesting things to do (often they’re the opposite) and people won’t always gravitate toward them naturally. As a result, some coaxing is often necessary. You might instinctively jump into implementation of a control because it’s familiar, natural or comfortable for YOU but in reality, they’re often not the ‘most important thing’ to do.
A side note here is getting used to the practise of approaching your to-do list in the order of least desirable first — the effects of this are very rewarding.
Secondly, you want to avoid the ‘rabbit hole’. If you’ve ever worked in a bank or an audit firm or the like you likely know what I’m talking about. An environment where there are so many controls that it feels as if you need to fill out 3 pages of documentation before going to the loo. In some environments this is probably necessary, like in banking or auditing.
There is a tradeoff however, between control and creativity and productivity. If the control isn’t critical, consider the tradeoff before implementation. Automate as much as you can and in the event you find yourself in the rabbit hole, look at your competition. If the competition isn’t experiencing the same problem(s), you can probably learn from them. If they are, the pain point is real and there might be an opportunity for disruption — be creative and try to take advantage of this.
We live in a convenience economy and customers no longer want to pay you so that you can pay people to fill out forms and tick boxes. That’s not what you’re offering. Strong, robust control environments effectively create trust. Unfortunately this, in many industries isn’t enough of a selling point any longer. Consumers want both convenience and trust.
3. Reporting — speak the same language:
Often you will need to make decisions based on financial information and different information will be required in order to make different decisions. Sometimes you’ll want to know the EBIT, sometimes the PAT and sometimes all you’ll be interested in is cash flow. When requesting or preparing such information, it’s important to stop and clarify exactly what information is required and what the intent is in order to avoid confusion and frustration.
If you’re reporting as the finance function, be detailed and explicit in what you are reporting so as to minimise confusion. Find out and understand what decisions the information is being used to make.
If on, the other hand, you’re requesting the information, especially if you’re not well versed in financial lingo, encourage whomever it is you’re requesting information from to question your requests to better clarify and understand them. Try to make sure everyone is reading from the same book and on the same page. It’s easy to assume everyone is by default but always worthwhile making sure.
4. KPI’s, metrics & tracking
KPI’s, metrics and the like are far more difficult to ‘get right’ and make meaningful than most would like to admit. Sure, there are some fundamental principles, but it’s important to realise the second and further order effects of using certain metrics to assess and drive performance. Here are some guidelines we find useful, which is not to say we’ve perfected this dark art.
- Keep things simple: If you set overly complicated KPI’s you’re unlikely to get good engagement with them… simple.
- No measure is perfect: No KPI is perfect, they’re always based on an assumption of a correlation between two things and these correlations are generally impossible to measure accurately and in isolation. Most of the time you will need to settle for an imperfect measure. This is okay, the perfect one likely doesn’t exist. Your aim should be to find one’s that work, not one’s that are perfect.
- Finding one’s that work: How do we find one’s that work you ask? Well, you need to experiment (don’t be afraid to change or try measuring new things). Limit your ‘experiments’ to one at a time to limit ‘noise’. Assess other factors that influence the correlation over the time period and adjust for these where necessary. Finally and importantly, ask for feedback and approach the process as a collaborative one. Doing these things should give you a good idea as to whether your KPI’s are having the intended effect or are creating blindspots.
- More doing — Less measuring: Sometimes we get too caught up in measuring things and overlook the activities that we need to focus on to get where we want to be. In line with keeping it simple and finding the measures that work for us. Monitoring and measuring too many things isn’t practical and often counter productive (unless you’re in the business of data) be deliberate in how you allocate your time and effort in such endeavours. Remember to keep the list to important things that will actually affect action. Also, automate as much as you can.
Pay people their worth, not what you can negotiate them down to. Aiming to underpay people won’t serve you in the long run and you’ll end up failing to attract and maintain good talent. If you’re on a budget and can’t always afford what the competition is paying, figure out ways to compete for talent outside of just money. As it turns out, money isn’t the only thing we humans care about. Further, from a motivational perspective, you’re also more likely to get better results through leveraging intrinsic motivational factors when compared to ‘carrot dangling’. This being said, expect your team to work hard.
People like to achieve things and get better at things, it makes them feel good. Give people the opportunity to achieve things, get better at things and do so with an appropriate level of autonomy — then ensure they take them.
6. Cash is King:
Cash is almost always the lifeblood of your business. Make sure you collect your money on time, pay your bills on time (building good supplier relationships goes a long way when you’re taking strain) and always consider the cash effect of your strategic decisions. Take comfort in the fact that Cash Flow has been giving business owners and entrepreneurs sleepless nights almost as long as people have been doing business, you’re not alone. People often forget this and tend to obfuscate questions around late payments and cash flow difficulties.
If you’re collecting, don’t expect it to always be easy or pleasant and be willing to have tough conversations. If you’re on the other side of the coin, be honest and be early, proactively communicating payment delays will go a long way with your suppliers (or at least the individuals you deal with). It’s also a positive signal that you’re aware of and actively managing your cash flow.
7. Keep abreast of new tools:
One of the benefits of being a small business today is the reduced cost of implementation when it comes to new systems and tools. Not too long ago, deploying a digital Human Resources Management System or utilising powerful Business Intelligence tools wasn’t really an option for small businesses. These things were costly and specialised. With the rise of Web apps however the tables have turned somewhat. As a small business, it’s not a huge task to migrate to a cloud based accounting system, document storage system, implement a new HRMS etc. On the other hand, the cost of change for larger businesses is far higher and the changes take much longer. New tools to streamline business are being released literally all the time. The chances are that there is likely an app out there already which you could benefit from which isn’t too pricey. Keep an eye out for these and maximise the benefit you’re getting from the tools you’re using wherever the cost of change is low.