Business owners don’t need to be finance experts but do need data for decision-making

Article credit: Sage 

Despite the fact that Tom Coward has spent a decade managing startup finances, he’s not one for complicated jargon. 

Financial tasks are split into two categories, says the CFO of Cytora, a platform that helps insurers to underwrite more accurately. There’s what you can do yourself or ‘DIY’ and what you give to an accountant.

This binary approach complements Coward’s refreshing advice that, as a small business owner, you don’t necessarily need to have financial expertise, but what you must do is arm yourself with the data to aid decision-making for your future.

Business owners can make smart decisions early on without complication, from reimagining a strategy for your finances, to dealing with funding and forecasting.

What is the best way for a small business owner to approach their finances from day one?

Divide your financial tasks into two categories:

1. Do it yourself (DIY): Business critical things like cash flow forecasting and business plan modelling.
2. Hire an accountant: Things you must do but aren’t a value add for you like VAT reporting and statutory accounting, and repetitive things like payroll, payments and invoicing.

If the DIY category becomes too much and you can afford it, bring someone in-house. You can start with a portfolio finance director who does this for two or three companies.

As an entrepreneur, do you need to build financial expertise?

You don’t need to be an expert in finance. You need to be an expert in your business.

You don’t need to be a finance expert to track how well your ads perform over time, and no accounting course will teach you whether to expand in-store or online first.

What you need is the financial data to support these types of decisions.

Reimagine your strategy for managing business finances to align with this cycle:

• Plan
• Implement
• Measure impact
• Iterate.

Train your thinking to repeat that cycle continuously and you will have what you need to build a future for your business.

Though entrepreneurs don’t need to be financial wizards, they need to track certain numbers, right?

You need to know what your key performance indicators (KPIs) are. They are specific to each company, but knowing these intimately is so important to your success.

If you don’t know what the measures are and aren’t able to track them over time, you can’t see whether a change you’ve made has had a positive or negative impact.

Let’s say someone has been managing a side hustle for a while. How will an entrepreneur know when it’s time to make it their sole source of income?

That depends on how ambitious the business idea is. If it’s a big enough opportunity, you can bet that you won’t be the only one trying.

If you’re shooting for the moon with the next big thing, it’s tough to make an impact with it being anything less than your top priority.

You can take an incremental approach and run some tests to gradually make your side hustle your main source of income, but the only way to reach the full potential is to commit to it 100%.

Many startups need funding to get started? How should they decide between getting a loan and seeking investment?

This is an age-old question to which I say it’s about how confident you are that you will be able to repay. Think about it like this:

• Taking out a business loan is usually the cheaper option. You maintain control of your business because there is no equity attached to the funding, but there is little flexibility with the terms of repayment. You can also use personal assets like your home to secure a loan.
• Investments are more costly because there is equity involved. This means you will no longer have absolute control of your business. You will not usually have to use any personal assets to secure the funding, but you will have to earn interest and buy-in from investors that are not easily impressed. You will have to show significant earning potential to garner interest from investment firms.

How should entrepreneurs prepare for funding? What does a bank or an investor expect to see as a demonstration of finances?

This varies, depending on the risk profile of the bank or investor.

From their side, they are deciding whether the potential reward is high enough for the risk they are taking by investing or offering a loan.

If it’s a low-risk investor like a high-street bank, you will need to show that you are a capable individual and have a fully baked business plan.

If you are soliciting investor angels or venture capital firms, you’ll need to show you’re a capable individual and you are taking on a big enough total addressable market for the potential rewards to be worth the investment risk – meaning you’ve done the research and there’s plenty of people who need to buy what you are selling.

To sum it up, investors are looking for companies that will make them hundreds of times the money they invested, whereas a bank would look to make just a little bit more than they invested.

When should entrepreneurs think about employing staff?

It takes time to find and hire brilliant people, so don’t rush it just because you are busy.

First, start by prioritising your work.

If you are set on focusing your time only on key business priorities and need more capacity, explore other options like contractors and even finding a co-founder.

If you are sure you want to hire in-house employees, I recommend you start the process months before you need them.

Wrong hires cost time, money and energy. Invest your time in finding the right people for the role with the passion and abilities needed.

The extra effort will be worth it.

When can an entrepreneur expect to pay themselves a salary from the business?

In general, you shouldn’t be distracted by money problems which prevent you from focusing your full attention on growing the business.

If you’ve received an investment, you should be highly incentivised by the potential success of the company, so your main compensation will be in equity, not salary.