When does entrepreneurial financial planning become a necessity?

Entrepreneurs are constantly dealing with new challenges popping up as they try and grow their venture. Structured financial support can help to better inform a founder about their business and help them make decisions more quickly. In short, your financial data is organized on a month-to-month basis, and can help answer the most pressing questions surrounding a new venture: cash burn, scenario analysis on sales projections, and strategic decisions such as office expansion, available product development spend, and new hire capabilities.

The benefits listed above seem clear enough, but why is finance still a neglected function in new ventures? This is often because entrepreneurs see finance as a non-critical function that supports business decisions when in reality it should lead business decisions.

We created Exbo Group to create a more proactive approach towards financial operations. Exbo Group’s Chief Financial Officer (CFO) support service aims to install financial planning in early and growth-stage businesses, and improve the information-based decision making in these companies.  

In this month’s blog post we tackled the question: When does entrepreneurial financial planning become a necessity? Below we’ve highlighted a few events that would make having a finance capability or hiring a CFO a necessity.

 

1. You’re increasing spending

As your business grows, so will your business expenses. Major expenses such as Cost of Goods Sold, payroll, and marketing will increase. In a recent study by CB Insights, 29% of the post-mortem startup companies researched said they failed because they ran out of cash. An additional 18% of firms said they were no longer in business because they were unaware of what pricing was necessary and what discounts were possible given their cost structure.

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Financial planning tools such as budgeting and monthly cash management can help eliminate these failures. When these tools are implemented and performed on a regular cadence they create constant feedback loops for better, information-based decision making. A CFO who understands the nuances of a particular company’s daily business operations can understand and communicate the actual month-to-month expense picture.

  

2. Significant gaps in accounts payable or accounts receivable

Significant gaps in your accounts payable or accounts receivable signals disorganization in your company’s financial processes.

Gaps in accounts receivable present an obvious problem, as it significantly harms your regular cash flow. If you find that invoices are coming in weeks or months late, and some are not being paid at all, this may be an indication that processes need to be improved. Problems with accounts payable, however, can be just as disruptive. Late penalties, missed due dates, inefficiencies, and errors can lead to issues getting the services you need, and can eat up your most important asset: your time. This is where a CFO can help to establish consistent and scalable AP and AR processes that can lead to improved cash flow and less disruptions to your business.

 

3. You’re No Longer the Only Consumer of Your Financial Data

When you started your business, the company consisted of you and a couple of employees. The scrutiny in which your financial statements and books were reviewed was minimal. Now things are changing. Maybe you’ve taken on more equity holders, merged your company with another to gain a horizontal advantage, or report to a board of directors.

If management, investors, lenders, and other external parties are now taking a look at your financial records, it is important to properly display such information. That is when proper financial planning can ensure your P&L statements, balance sheets, and cash flow statements are all properly reported. Communicating with financially savvy stakeholders also takes time. That is when trusted advisors with experience can help interface and manage the required reporting processes.

 

4. You’re getting ready for a large fundraise

When you need a capital injection to help fuel the next leg of growth, the financial picture displayed by your company will be one of the largest factors when determining the fundraising decision. This process may also be extremely time consuming for key decision makers as they handle requests including special investor reports, detailed short-term and long-term cash management questions, and sales milestones or projections that lead to profitability.

This is another job a CFO will help deliver. While organized financial statements will allow for quick responses to these additional requests, the experience of advisors who can handle in-depth requests and have previously been involved with a raise will allow for a smoother fundraising process. A CFO with a high level of visibility and familiarity with your daily operations, culture, financial needs, and future goals will facilitate a more complete communication of the company’s long-term value.