10 Steps to Engineering Financial Success in Business. From working with many companies across sectors, some that are very successful and others that are still a work in process, we have learnt that financial success in business can be engineered.
There is a golden thread that can be seen in each success story in our modern business environment. I have sought to break these observations down into ten critical steps.
Financial success begins with a change in mind-set (steps 1-6). It’s made efficient by way of automation (steps 7-9). It’s brought to fulfilment through scaling (step 10).
Before we get started, I’d like to introduce you to OldCo and NewCo. OldCo and NewCo are both established companies operating in a similar industry to yours. They both earn product and service income and have both been quite successful to date.
OldCo subscribes to the old school way of doing business. They believe that if it’s not broken, why fix it. Subsequently, they are not very interested in new technology and processes, but instead focus on what they know best.
NewCo on the other hand has had a change in mind-set. They believe that technology, innovation and access to the right information give them a competitive advantage in a fast-paced global business environment. These two companies will serve as our examples in the ten steps below.
STEP 1 – RETHINK FINANCIAL SYSTEMS AND CONTROLS
It is no longer the companies who have access to the information that hold power, but rather the ones that are able to sift through, analyse, interpret and execute on a wealth of available information. This holds true when dealing with internal information as much as when looking at external factors. In rethinking financial systems and controls, access to financial information that is produced accurately, timeously and effortlessly yields huge decision-making value. A control environment that limits risk and Standard Operating Procedures (SOP) that leave no gaps will help you leverage two key drivers of your company’s value – profitability and risk.
Case Study
NewCo has access to live financial data because their bank feeds are automatically updated to their financial records and matched daily. NewCo has a time tracking system implemented that makes sure every minute of consulting work gets invoiced.
OldCo sends a box of slips and bank statements to their accountant, who prepares financial records on a system that only works on one computer at the accountant’s office. Management reports are received every three months (or six months if they are busy). OldCo’s staff make out invoices when they remember to, based on hand-written notes in their diaries of time spent.
STEP 2 – RETHINK FINANCIAL REPORTING
To quote Karl Pearson: “That which is measured improves. That which is measured and reported improves exponentially.” Only when identifying, tracking and reporting on the key metrics of your business are you able to improve them significantly. Traditionally boring management packs can be transformed into valuable decision-making tools when available for scrutiny at board meetings.
Case Study
NewCo has access to accurate financial information neatly compiled three days after month end. Targets for key metrics allow the team to identify inefficiencies and actively improve ratios.
OldCo does not really look at management reports at board meetings. There is too much else going on. The packs received from the accountant are hard to read and make sense of anyway.
STEP 3 – RETHINK CASH FLOW
Cash flow is the life blood of every business. But somehow it remains an area that is not monitored on an adequate level by most directors. Rethinking Cash Flow means implementing the right tools and templates that enable you to plan ahead and pro-actively identify cash constraints early on. This way, rough seas can be effectively navigated and disaster prevented.
Good habits around managing cash flow could often be the difference between survival and closing your doors in times of tribulation.
Case Study
NewCo has a cash flow tool that enables them to monitor cash flow closely. Checks are done weekly, even daily in periods where money is tight. NewCo forecasts cash flow months in advanced, enabling them to identify large cash flow needs like annual software licence renewal or asset purchases well in advance in order to secure finance for it.
NewCo can check monthly inflows and outflows before making big decisions like hiring a new management level staff member.
OldCo checks their bank statements when they receive them to see how much is in the bank now. They are frustrated with their bank who can never assist fast enough when they need bridging finance. This has threatened the company’s continuity before. OldCo makes decisions that affect cash flow based on gut. Their credit rating is not great.
STEP 4 – RETHINK COMPLIANCE
The difference between passing an internal due diligence and failing one could be the difference between getting a big new contract that takes the business to the next level and losing one that has material downside effects. Rethinking compliance means understanding the value of having all the boxes ticked so that business can flow unconstrained.
Case Study
NewCo takes compliance seriously. Up to date financials, tax clearance, good governance and a strong BEE rating is getting them new business from corporate and government.
OldCo does not pay much attention to compliance. They omitted to take the new codes seriously, ended up as L8, subsequently losing the 30% of their business that used to rely on government contracts. OldCo also did not set up or submit their last financials at CIPC or SARS. Supplier non-compliance on a short deadline caught them off guard, resulting in them losing their biggest corporate client.
The list goes on…
STEP 5 – RETHINK RISK
An understanding of the unique risks of your industry, your business model, your leverage, the global business environment and a technologically advancing playing field is critical to business success. Risks are evolving.
- New York’s scrap yards are full of yellow taxis who never thought that their industry could be disrupted by an app.
- Banks are shivering because of the evolution of FinTech and BlockChain. That and many other business risks has made their lending policies to SMEs more conservative.
- The Rand has plummeted, sending companies with predominantly foreign suppliers into liquidation.
- Cloud technologies are replacing slow, expensive hardware and software spend, making many older technologies obsolete.
It requires a keen mind to stay on top of the new business and financial risks presented by our fast evolving business space.
STEP 6 – RETHINK OPPORTUNITY
New risks are creating unprecedented new opportunities in your industry, for your business model, around your leverage, in the global business environment and in a technologically advancing playing field. Those who can adapt fast and move first will reap the biggest reward.
Case Study
NewCo has built an industry first online platform that extends their reach to thousands of new customers overlooked by OldCo’s traditional model. They have broken into the UK market where they earn R22 to the Pound. This has significantly increased their profit margin.
Understanding the tools of digital marketing and brand building has seen their sales grow steadily despite a stagnant local economy. They have been accepted into a Dutch business acceleration course, through which they met an angel investor that offered them a low interest rate loan to serve as expansion capital.
STEP 7 – AUTOMATE ACCOUNTING
Using the latest in cloud accounting software technology, there is no reason for this process to take up so much of your time. Implementing the right system could drastically decrease time spent on capturing transactions.
Case Study
NewCo uses Expensify to capture slips and costs. This automatically feeds through to their cloud accounting package, which also auto-allocates bank feeds directly to their accounts. Cloud payroll software automatically feeds payroll into their accounts.
OldCo keeps a box of slips and some Excel spreadsheets. They will see the full picture when they get management accounts from their accountant in a couple of months. Sort of.
STEP 8 – AUTOMATE DASHBOARDS
Creating high impact, fully integrated live dashboard puts the information you need at your fingertips. NewCo’s directors can monitor key metrics live from anywhere in the world.
STEP 9 – AUTOMATE OTHER SYSTEMS
Automation is key to ultimate business success. It allows the entrepreneur the freedom of continuing to create and innovate while their business is running successfully in the background with little to no inputs from him/herself. NewCo values efficiency. They have implemented many systems and processes that make running their company easier:
- Enquiries and communication automatically feed to their CRM system, building a strong database for sales lead generation.
- Retainer clients sign up online. Their engagement contracts are automated into the process and so is a debit order system. Retainer invoices go out automatically and receipts are matched accordingly. No one needs to make out invoices or follow up with retainer clients.
- NewCo has created digital content of all their best practice approaches to business. E-books, audio courses and how-to videos on a subscription model generate a passive stream of income that ups their bottom line.
Automation and systems integration adds significantly to a company’s efficiency and value.
STEP 10 – BUILD TO SCALE
The ability to scale is what takes a good company from success to significance. Rethinking your processes, finance, business model and opportunities to build a scalable company is key.
Case Study
With automated systems, good margins, solid control over cash flow, multiple revenue streams, and a culture of innovation, NewCo is built for scale. A Dutch VC, a local enterprise development fund and a Clifton billionaire have all offered to give them access to the growth funding needed to go global.
The limiting factors to uncapped growth were identified early on and eliminated. They are building a company that will employ thousands, make millions and sell for hundreds of millions. Less than 5 years from now, NewCo will likely be listing. At the same time, OldCo will likely be filing for bankruptcy.
These ten steps seek to challenge you to understand the value of rethinking finance and systems, automating processes and building for scale. For South Africa to make growth a reality, we need to build more, better, faster companies that can employ our people and create wealth for our nation.
We must realise that we are now operating on a global playing field. The speed of change is rapid and the use of technology a necessity. Best of luck in your endeavour to build companies that are profitable, investable, scalable and very successful.
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