Business Finance System
When I was first given a responsibility as a finance manager, I tried to map a basic model needed by the company. First, as I wrote in my previous article, I need to know the business goals to set up a model specifically to achieve those goals.
To be noted, not every business is the same, and not every well-known brand has a sustainable business system. Some business put their first focus on product creation, marketing, and selling their product. And they just do fine, great, even. Just when they want to scale up the business, management issues might arise.
The common arise issues &/or questions:
- I cannot handle this by myself anymore
- I think I need to invest more in resources (machines, goods, or labor)
- Where do I get the money?
- Where & how do I start this whole scale-up project?
As a growing company at the time, our goal is to get enough cash flow (targeted with a number, ofc). Then, as a finance person (or roles), we need to define the main cause related to the cash flow problem. In this case, the problem was there was not enough control over the company’s cash flow itself. And there’s that, my business objective for finance has been set.
Things I do next are focused to achieve that goal. In corporate finance, the areas that are managed are not far from matters like cost & budget, investment, financing, tax, capital management, projections & targets. Even so, every decision & model that needs to be made will lead to fulfilling the business objective for finance.
1. Investment Model
Let me get this straight, when I talk about investment, I talk about a money expenditure for long-term gains and not about trying to have short-term profits only. That’s why in investing, we need to put more effort into analysis and planning.
For businesses, an investment could mean adding more operational assets, hiring new staff & professionals, or even acquiring new/existing businesses.
Based on the business objectives, we could analyze what type of investment fits the most to fulfill it in the most effective and efficient ways. What do we have so far? What do we need to increase? What do we need to decrease? What do we need to invest in? What risks we are facing in what we invest in?
And then planning your investment is another thing. By knowing when to invest and where to acquire it we can save more resources than we realize. Planning might involve the projection of investment return. Then we’ll know if the investment could make profits or just another money spending. Planning can help us in saving the cashflows, decreasing depreciation, saving more net profit, etc.
2. Cost & Budget Model
Now we have the investment model, next is to model our costs & expenses. Modeling cost & budget will save much of our time to analyze the business’s spending and make a better judgment for further improvement by assessing the value input against value output.
There are two basic steps in cost & budget modeling. First, you’ll want to categorize the cost, might be by its purpose and/ or its behavior. You’ll understand which is your business cost driver and which isn’t. Then you can start forecasting (based on historical data) and make some projections. This cost & budget model will enable you to see the details of all the needs and wants expenses that will be made by the business. And by then you might want to align your budget allocations to the business & finance objectives. Is it the most effective & efficient enough for business? Are the models versatile enough with the business natures?
3. Financing Model
The financing model is to determine how you would like to finance business activities to achieve its business objectives. The three most common financing models can be used:
a. Debt funding
is where you borrow some money from other parties and you’ll need to pay it back plus the interest. Debt is kinda interesting. Some of the people I know are antipathy to using debt for their business. But from a finance perspective, using debt for financing your business is one of the companies’ strategic moves to reduce their WACC (Weighted Average Cost of Capital) or to put simply, total expected return on their business.
b. Equity funding
is where the business is ricing its capital to the sales of shares. Or if you own 100% of your business, then you put some fresh cash into your business as capital injections. But if you are selling the shares of your company to gain more capital, make sure your investors understand your business’s prospected return. They might want to compare the investment they put on your business against other investment instruments.
c. Operational funding (cash flow generator)
is where you rely on current production capacity and increase cost efficiency while saving cash in the process. It might take a longer time to achieve the desired capital, but if you have the time and persistence, it is very possible to achieve it. This model could be the least riskier model. The business owner is the one that bears all the risk (despite the employee).
From those three models, it is possible to combine the financing model. By doing research, analysis, and planning, you might come up with the best mix.
4. Tax Model
is a model that helps you plan your taxes to reduce and minimize tax expenses so there’re no over-paid taxes or do not exceed the actual amount.
Every country & region has its tax regulations, so to plan it well, you need to understand and analyzed all the taxable products and income at your business.
Knowing which one is taxable and which is not will help your company to make more efficient tax expenses. A strategic decision can be made whether your business would have tax savings, tax avoidance, or any other tax model/method.
5. Capital Management
This phase is about actuating, controlling, monitoring, and evaluating the whole process. It is possible to have plans re-adjustment in the middle of the process. Re-aligning the budget, investment, financing, and income & cashflow projection is natural but needed to be discussed between the board & managers hence the decision will impact the whole organization.
Conclusion
These five are not the only things to look at in the finance system, but I might say, based on my experience, those are the basic things we can look at to have a financial model and system in our company. By thinking thoroughly, sometimes a business might not need external funding, or some of the businesses in a certain industry are better to have debt for funding their projects. The better your understanding of the business, the better you know how to manage your finance system for your company. By the end of the day, the finance system is like a backbone for your business that supports your business to stand and to move more agile.
