Wednesday, August 31, 2011

Why You Should Have a Finance Person

I ran across Brian Hamilton’s post on Inc. magazine’s website, entitled “The 7 Biggest Financial Mistakes Businesses Make”. It seems like the finance function should be well prepared to help someone avoid these mistakes, since they are financial. How?
Mistake #1 – Hiring in advance of revenue
A finance person can assist the business owner or CEO a couple of different ways. First, we know how to forecast. We can do daily forecasts for one month, one quarter, or one year. We can do monthly forecasts for a quarter up to twenty years (or longer if there is really a need). Part of any forecast is a sensitivity analysis of primary drivers, and should you have a shortfall in revenue the forecast would show your loss exposure.
Secondly, treasury people deal with bank accounts, know the cash that goes into them and where it came from, and know why the cash leaves these accounts and where it goes. If revenue has not hit the bank account and payroll is going up, the treasury person is going to know very quickly that this is not sustainable.
Mistake #2 – Borrowing Money When You Don’t Really Need It, but When the Bank Is Willing to Lend It
The finance person is the one who will understand and explain the impacts to the business of different capital structures, and the pros and cons of each. This goes to financing strategy, which is an integral part of the company or business strategy. They go hand in hand. The finance person intermediates the interchange between the two strategies.
Mistake #3 – Not Paying Payroll Taxes on Time
The Treasury folks, especially if they are responsible for accounts payable, are well-versed in payment requirements and the activities needed to be in compliance with regulations, rules, and policies.
Mistake #4 – Pricing Too Low
This is another case where company / business strategy and financing strategy intersect. Sensitivity analysis of the cash flow forecast will identify the impacts of different pricing structures. In addition, identifying the various components of strategic pricing elements: cost, cost-plus, relative value, avoided cost, consumer surplus, producer surplus, and net benefits, are all at heart financial calculations.
Mistake #5 – Permitting Accounts Receivable
The finance person is the one who will understand the working capital impacts of this decision, the cost involved, and the risk issues, and have the ability to mitigate and manage these impacts to the extent possible.
Mistake #6 – Counting on One Major Source of Revenue
A proper financial forecast and sensitivity analysis will contribute to avoiding this mistake, along with sound financial risk management principles and practices. Finance people at a very young age are taught that diversification is one of the top risk management practices that can be undertaken.
Mistake #7 – Hiring Too Much Overhead
A finance person can assist with this activity as well, excluding finance of course!
I would love to hear your thoughts about the Value of the Finance Function or your stories on this topic if you have them.
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