Financial System of the Business: What are the reasons to evaluate it?
The purpose of a well-built financial system of a business is to help it achieve high profits, at the same time stay systematic, predictable, and with a minimal level of risk. This is achieved through correctly estimated goals, a developed strategic financial model, regular financial planning, and synchronization of all business areas.
When the financial processes are set up correctly, they reduce the risks of disruption and abuse, regular financial and non-financial reporting shows the current and potentially possible state of the business just well. As a result, everything works harmoniously, and all units of the company move in one direction.
Today we’ve collected 5 criteria to help you evaluate the current state of your business. Check it according to them, and if you answer "yes" to at least one of the questions, then this is an excuse to start dealing with the finance system of your business.
Now, let’s start!
Criteria N1. You’re dissatisfied with the profitability of the business and its income
Turnover and profits are growing, and your income remains at the same level as at the start of the business. And actually, often entrepreneurs do not know how much they earn.
Another option is when the owner simply earns little for himself, leaving everything in business and forgetting about himself. In this case, the dividends and the owner's salary may not be separated, and the business uses the owner's money free of charge. The introduction of a financial system in such cases will help to increase the owner’s real income and its regularity.
What to do?
Estimate whether your business is profitable or unprofitable. It will take you literally five minutes to do this. Take the net profit for the business (for example, for a year) and subtract this amount from those salaries and bonuses that you do not pay to yourself while performing certain functions.
Who are you in your business besides the owner: CEO, commercial director, development director, chief technologist, marketing specialist? Who else? Do you pay yourself dividends as an owner, bonuses as a salesperson?
Consider honestly to get a real idea if your business is profitable. If there is no profit left, your business is essentially not a business - it’s your self-employment kind of thing. And at the moment when you want to move away from the operating system, even partially, you will have to pay extra for your functionality. Do you have funds for this? Realizing the real profitability of a business is the first step towards starting to build a financial system for your task.
Criteria N2. You have no picture of what is happening
You do not know how much you earn, which products or services are profitable for you, and which are not. You do not know exactly what is happening in each of the company's departments.
You make decisions based on intuition, not numbers. This creates the feeling that you are marking time. You do not understand what is happening with finances, and your financiers do not have answers to business-related questions. There is no single reporting, and your idea of the business and real numbers differ from each other. The reports do not beat each other: one department estimates sales reports, others the profit, and as a result, the data doesn’t come together.
The introduction of a financial system at this stage allows you to understand where you get your profit from and where you lose money. You get a real picture, and through numbers and finances, you can customize the work of the business for the owner's goals.
What to do?
Lots of medium-sized businesses around the world do not have a financial system or a model. And this is surprising because a financial model for entrepreneurs is both a map and a compass for moving towards their own goals. Start by brainstorming and developing a financial model for your business.
A working financial model allows you to synchronize 3 key blocks:
- your personal goals and objectives as an entrepreneur,
- the current business situation,
- the necessary steps to get from point A to point B.
Depending on the size of the business, you can create a financial system yourself, buy a ready-made one, entrust your financial managers, or hire a freelancer. The most important thing for the financial system is to have an emphasis on business, business processes, and non-financial indicators. The last ones allow you to understand what is happening in your business at this very moment, plan the future and constantly check what is happening with your business overall.
The task of a financial system is to give you space for making decisions. You can twist these numbers, understand what you want, how much you want to invest, produce, etc.
Criteria N3. You are in an eternal rush and cash flow gaps
You have not been able to manage in the old way for a long time. You cannot go on vacation and must always be in touch with your employees so that the business does not fall apart. All tasks and approvals are closed to you, and if you do not have time and control over those tasks, the work of the company stops.
Key performance indicators are not implemented in the business and employees do not understand their areas of responsibility. At the same time, every month you have to come up with a way to close the cash gaps. Your top managers are not looking for new ways to improve efficiency, they are not collecting accounts receivable, they are not negotiating delays with suppliers, and they are completely unprepared for possible crises.
Motivation doesn't work for business goals, there is no transparent control system, it is not clear who works well and who is useless, employee income does not depend on the state of business.
Establishing a financial system will allow you to build operational planning and budgeting, and synchronize all business units. The owner gets more peace of mind due to the presence of points of regular planning and control and debugging of financial processes.
What to do?
Check how your system is built for the approval and control of payments. And if suddenly it is not there, then at least start with the introduction of a payment calendar. As the owner of a company, you must control one of the key resources of the company - money. If you never got into the approval of payments, did not have a procedure that was understandable to all participants, or are accustomed to fiddling with all the invoices brought in by employees, then this aggravates cash gaps, leads to a decrease in profitability and an eternal lack of money.
You can start by implementing a payment platform that will ease your and your employee’s workflow. Wedoio offers you the November First solution for you and your business. You can visit https://novemberfirst.dk/ and learn more about the solutions they provide.
Moreover, Wedoio provides webshops with the November First - Uniconta integration solution that allows you to automate your online store or management system. Contact us today and book a 15-minute meeting to learn details about these solutions and the ways you can increase your profits.
Criteria N4. You do not work with risks
You are used to developing your business only with your own money and are afraid to attract other sources of funding. All your available funds are already in the business. At the same time, you are the most vulnerable link, both legally and financially.
Your personal “airbag” has not been formed, and there are often no alternative sources of income. In case of any problems, all your funds will be lost irretrievably. And as your business grows, your risks increase and you don’t know how to work with it.
By building the legal and financial system of the business, you can transfer the work of the business to borrowed funds, and keep the same amount in personal assets. A competent financial system allows you to maintain the balance of your own and borrowed money in the business.
What to do?
Look for alternatives for how else you could use the money that is currently invested in your business. For this:
- Estimate the current turnover and turnover in the near future if you plan to increase your revenue.
- Estimate: if for this turnover, which is essentially your funds as an owner, you would receive some percent, then what kind of return would you receive on this amount of funds. And if even a bank deposit will give you a great return, then think about how effectively you are using the funds you have.
- Chat with the banks where you are served, see what they have to offer you. If you come well prepared, with the right financial model that says that you are able to take the loan and understand what exactly the money will go for, then your chance of getting credit is extremely high.
Criteria N5. You have no basis for the development
As a business owner, you don’t know the prospects of the business and don’t understand whether it is worth expanding further. There seem to be a lot of plans but you have no idea what will be more profitable for you and with what funds you should implement these plans. You don’t have time to think about your traffic strategy, so your business develops spontaneously and unpredictably.
Borrowing funds for business development is scary, and you don’t know where to start.
Putting things in order in finances frees up the entrepreneur’s time to engage in the development of the company, think about plans based on the real picture, and make decisions based on pre-estimated data.
What to do?
- Formulate for yourself - why do you need this business to exist?
- Estimate how much money you personally need.
- Look at the numbers to see what configuration the business needs to be in order for you to achieve your goals.
- Make a roadmap: what needs to be done for this by directions (marketing, sales, production, etc.).
Here is a checklist for assessing the financial system of a business
You can answer either “yes” or “no”, and if there is even a small number of “no”’s, then you know what to do next! Here we go:
- Has your business not been profitable over the past year?
- Has your business stopped growing in the past 3 years?
- Have you received your dividend for the past year?
- Is your business' net profit percentage less than 5%? (Calculation formula: dividend / revenue x100%)
- Are you not paying yourself for all the functions you perform in the company?
- Can you tell how much you earned last month without looking at the reports?
- Are you unhappy with your income?
- Do you earn the same as when you started your business?
- Are you unsure which of your products/services are unprofitable for you?
- Do you receive reports from finance managers once a month?
- Are your finance managers often unable to answer your clarifying questions?
- Do you have a single place/solution where you can see the current state of the company's finances?
- Do you have an up-to-date financial system?
- Do you have a financial model, but you only looked at it once when you prepared it?
- Are all tasks and approvals closed to you?
- Do you have a payment approval procedure?
- Are your business units providing you with data that doesn't compete with each other?
- Are all your available funds in the business?
- Do you use borrowed funds?
- Do you have an “airbag” (financial reserve) equal to 12+ months for family expenses? (for example, money for spending $4000x12 months on your family)
- Do you have a business development plan in numbers for the next, let’s say, 5 years?
After you figure out for yourself whether your business and its financial system need improvements, you can start the main brainstorming on how you and your employees can resolve this issue.
If you’re looking for a solution that can resolve your problems by automatically managing your workflows - go ahead and contact us right away! Wedoio has a number of integration solutions for every kind of webshop and management system, that can help you automate your business processes and eventually, make higher profits. Get in touch with us and book a meeting directly with our specialists by clicking on the button below.