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Business Basics: The Finance Fundamentals you need to master for growth

How to use business management information to drive and measure growth

Small to Medium Enterprises are quite exposed to the changes in the external environment. In the earlier phases of their business life cycle and before maturity, SMEs fight for their survivals; some little mistakes and wrong decisions can result in devastating consequences on their going concern.


In this scenario, during the growth stage even if the managers are experiencing profits and increasing sales, significant threats stand around the corner: everything in this phase happens very fast and any organisational weakness and a weak business model could turn an extraordinary moment into a nightmare. It is essential that the SME chases profitable growth and generates cash and profit.


Some of the critical questions that owners and managers need to answer are:

Is the business profitable? Is the business generating cash? Is in the long term the financial structure (the gearin, the debt – equity mix)  right balanced?

In this context, a sound understanding of the financial statement plays a central role.


Cash is different from profit: a capex investment is a cash out item and does not represent a cost , conversely,  the depreciation is an non cash operational expense.


The need for financial understanding is critical and the business must be followed in at least three dimensions.

  1. The profit and loss to track the profitability. Is the business is able to generate profits? I.E. revenue covers costs.
  2. The financial statement to track the short term cash generation and to monitor the long term financial structure debt/equity mix.
  3. The business generate cash and the financial structure, the gearing,  is balanced.

The decision makers will face the need to precisely understand and answer to the previous questions, the abrupt change in the environment during the growing stage will add incertitude that must be assessed via financial report.


Effective ways to raise capital to fund business growth

There are some fundamental questions to answer before raising capital.

Do I need external finance? Do I need debt or equity finance? Do I need short or long term finance?

A general suggestion is to look for external financing when you are at the investor ready stage. Is the company business model efficient? By reworking on the actual term and condition with your customers/suppliers, you may reengineer the cash conversion cycle by reducing the financial needs and improving the DSO, DSI and DPO.  


Has the business considered to reinvest the retained earnings? By increasing the profitability and changing the dividends policies you may generate one of the best long -term funding: the auto financing.


To challenge the business model is a necessary step, because the chances to obtain external financing, in case the company presents weaknesses, is remote and unprofitable: the bank will apply higher interest rates and the venture capitalist will require harder term sheets and more control on the business.


The typical medium long term debt finance solution is a loan. The institution, a bank or a private FCA registered company, asks to repay the loan at fixed intervals against a predefined interest rate. This instrument is generally secured by collaterals such as the company’s assets and by covenants, operational constraint, such as limitation to distribute dividends before the repayment of the debt.


On the other side, long term financing could be provided by equity. Equity must not be repaid but is expensive, the company must give away a percentage of its control so that the term sheet and the conditions applied by the private equity could be quite unaffordable.


My personal suggestion is to consider a debt solution if the company is profitable, alternatively a debt/equity mix within a reasonable gearing. If the control is given away, the company should expect to lose some strategical drive and conflicts could rise from the new investor. The venture capital firm could interfere in the company management, they could impose a heavy and bureaucratic reporting.


It is very important that the SME recognises the timing of the underlying asset that needs to  be funded. The rule of thumb is that current asset must be covered by current and short term financing, while fix asset needs more medium and long term instruments.


The working capital could be typically covered by short term financing such as overdraft and factoring invoices. Fix asset is covered by long-term financial instruments.


How to avoid Overtrading

Overtrading often occurs when companies expand their own operations too aggressively with evident issues in term of working capital and financing. Hyper growth represents an opportunity and a threat in the SME business life cycle. This could be a unique opportunity to scale up in a very short time but the risk of over trading is high.


The momentum here is to transform overtrading in profitable growth, but what are the steps that could minimise the risks of overtrading and ride the unique opportunity to scale up quickly?


The first and basic need is to start this phase with a ready and consolidated business model. The company should have developed a consistent and coherent bottom up strategy. Is the market we are targeting in line with our strategy? Some trade off choices between profitability and term and conditions could be suitable: focus on less profitable customers in exchange of better payment terms.


Another tactical area to focus on is the cash conversion cycle. The company should have defined its Cash Conversion Cycle. For instance the company could choose to get on board customers that pay at 60 days instead of 90, even if less profitable.  Another component is to control the DSI, days on inventory. The company should operate as lean as possible. The goal is to minimise the lead-time from the receipt of the raw material to the finished good. The DPO is related to the suppliers’ payment and in general the SME tends to match it with the DSO. My suggestion is to apply the norm because it would be risky to annoy the suppliers and lose their loyalty.


In case you still face financial gap in the hyper growth phase, it is possible to  access to short term external financial instruments, such as factoring and overdraft. This is expensive, could reduce the operational freedom ie the need to balance the overdraft without notice and introduces some kind of accounting complexity.


Overtrading is risky but if the SME business model is strong and scalable, it is worth taking.  It represents a unique opportunity to quickly scale up organically the company.


Financial Decision Making

Any business decisions will directly / indirectly impact on the financial statements. For sake of simplicity let’s simulate the impact of a strategic and an operational choice that typically decision makers are asked to take.


What is the financial impact of a recurrent strategic decision such as a new investment in a new technology or in a new product line?  The effect of this decision will be in term of capex investments and financial returns. The cash out will impact in the financial statements and the returns will flow, hopefully, as additional profit in the P&L. What about product pricing increase? This will directly impact on company revenue, in their receivable and in the cash collection.


Operational day by day decisions such as changing the collection days, will impact immediately on the financial statement and in the generation of cash.

All the managers and the decision makers need to have a sound financial knowledge to evaluate the consequences and effects of their choices. Additionally the financial reporting and planning culture should be promoted to all levels and functions, instead of being considered a statutory  disclosing exercise, a waste of time keeping few qualified accountants busy.


The Importance of Business Plans

Determine the financial impact of the business decision is important, but not sufficient. The backward looking approach is fine but it becomes effective only if, complemented by forward looking actions. The importance of a control system lies in the fact that it is able to outline what did go wrong and to identify the future corrective actions to bridge the gap.


The growing stage is a complex phase in the company business life cycle, the environment is difficult to predict, there is limited visibility and high uncertainty of the future outcome. In this context there is a prolific school of thought, that recons no utility in the planning and budgeting process especially in erratic periods. Provided that there is low likelihood to hit the projections, better not to produce the budget and save the time and costs. In my opinion the more the environment is unstable the more budgeting and planning becomes key to success. In an unstable environment the company certainly needs to draw a possible scenario, a reference to follow, to evaluate the deviations of the actual results over the projection (backward view) and take actions to recover (forward view). The scenario comes from the company strategy and it will be used as an operational control system to manage the company consistently.


The likelihood to hit the financials  in term of profit and cash are low but the budget needs to be accurate not precise. It does not matter that you hit the sales figures and you generate profit  in the exact way you expected, but it needs to generate sales and profit in the direction to what was planned.


Without a planning process the company is basically blind and do not have any reference to compare. The company is unable to answer to its basic questions: Are we following the right path ? Are we executing and generating the right level of cash and profit?


More over the budget must be exploded into relevant and operational KPI’s and cascaded through out the organisation to grant an integrated and coordinated system of control.


All the organisation will look at the financials that are more relevant for their functions. Sales and Marketing will look at the Sales and customer satisfaction. Operation to headcount productivity and finance will keep an eye to cash collection and disbursements.


Advice for Planning and Funding a Growth Period

Do we have a growth strategy ? Is the growth aligned to our strategy and mission?

The company must follow a broad strategy, a SME simply has not enough resources, needs to be focused in some market / product. It could be that the strategy changes over time but this must be controlled , clearly communicated and cascaded thought out the organisation. At the strategic level the company should also determine different growth paths, such as should we grow organically or by external acquisitions? The latter is faster but expensive and very difficult to implement especially if there isn’t a consolidated strong business model.


Are we growth ready?

The company needs to have in place some kind of control system and some KPI’s to follow: A sound financial planning system enters in the equation in order to evaluate the profitable growth in term of profit and cash generation.

If the company is not hitting the target it needs to understand why and detect the most appropriate corrective actions. Maybe the overall strategy should be revised, may be some processes must be reengineered.


Do we have the right talents in place?

Developing a strategy is a question of people. You need the right mix of talent and skills playing the same team. On one side the visionaries able to set up the path and on the  other side individual able to implement , execute the strategy and reporting the results.


Mario d’Aragona

Mario is a seasoned finance executive, who serves as CFO for fire & security, food, energy and clean-tech global companies. He has turn-around experience and managed to re-finance growing businesses. Mario is the Managing Partner at TML Venture Ltd. and supports companies in finding tailor-made investment solutions. His industry focus is on renewable technology, energy and food companies.

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by Andrew Foster, VP Consulting EMEA, AppZen


As we enter a new year filled with ongoing change and uncertainty, a few things are still clear. Though digital transformation has long been a familiar story told across the finance sector, businesses are recognising the need to adopt new technologies as a matter of urgency. As a result, 2021 will see a huge shift towards embracing technologies that transform finance procedures.

Anant Kale, Co-Founder and CEO, AppZen, shares his finance predictions for 2021:


The year of accelerated digital transformation

The current pandemic forced companies of all sizes, across nearly every industry, to virtualise their workforce, almost overnight. But in the coming year, finance leaders will be turning their attention to wider digitalisation efforts.

Kale explains, “Last year, the focus was on how to quickly keep up with changing business needs, with CIOs focusing on business continuity in a remote work environment—conferencing and collaboration tools, network upgrades, and so on. As we finally caught our breath, this next year will bring even deeper transformation. Rethinking and reimagining business processes in an AI-first world will keep enterprises agile, efficient, compliant and allow them to scale without relying on adding huge headcounts, which will be critical to the bottom line.”

Andrew Foster

Consequently, more CFOs will be driving the push for AI-powered programmes to be implemented into finance operations to accelerate digital transformation, streamlining operations across the entire enterprise and ensuring business resilience.


Expanding digital transformation – beyond the basics

Over the past year, the drive to enable remote working across the whole organisation has meant the deployment of a wide variety of technologies. Yet, most of these solutions are not in areas that directly increase the finance department’s efficiency. This year, finance leaders will be prioritising two specific functions that are prime for disruption and enhancement – AI-based invoice processing and expense auditing.

“Increasingly, AP invoice processing decisions will be made in the autonomous zone, where intelligent systems can independently make decisions that don’t require human second guessing or manual review,” said Kale. “With autonomous AP, systems that are capable of evaluating all aspects of invoice entry, matching, accounting approvals and even risk and compliance, AP teams will be able to move from operations to more strategic AP concerns.”

AppZen’s recent survey of top CFOs and finance executives confirms the need for deeper transformation in 2021. Currently, 59 per cent respondents report they still haven’t automated ingestion and extraction of data from invoices. Unsurprisingly then, a notable 43.5 per cent of organisations still take seven or more days on average to process an invoice. Organisations with more proficient automated processes only take 2.9 days to process an invoice on average — a considerable difference that supports the need for increased automation and AI uptake among modern finance teams.


Adapting for expenses in the 2021 work-world

CFOs will need to budget for different types of business expenses in light of the new environment. With an evolving workforce that includes remote, on-site and hybrid workers, they need to rethink their strategies and plan scenarios in ways they’ve never had to do before.

To this point, Kale comments, “Business travel will come back in some form later this year, but more importantly, the nature of expenses that have traditionally been associated with travel and entertainment (T&E) will change. Instituting routine audits and implementing clear expense policies will be critical to avoid fraud and abuse or unreliable financial data, which cost businesses nearly $3B dollars a year—and that was before the pandemic.”

As the spend environment becomes more complex, spend visibility is more vital now than ever. Finance leaders need to have the right tools in place to identify these new types of expenses – such as the number of video conferencing licences acquired, home office equipment, and productivity software – and properly assess spend priorities.

Flexibility is also crucial. In a rapidly-evolving environment, a one-size-fits-all policy isn’t up to standard. “How enterprises create and allocate budgets has been completely disrupted and what worked in the past won’t work in 2021,” declares Kale. “We’ve gone from a relatively certain, predictable way of carrying out business operations to a time where only the unpredictable seems certain, which requires agility, speed, and scale to ensure longevity and continuity.”



Despite challenging times, finance leaders are showing optimism for 2021. This year will require adaptability in the face of evolving global economic conditions in order to meet not only wider company needs, but those of employees as well. Embracing new technologies will continue to transform operations across every level of an organisation and enable business leaders to drive both productivity and profitability despite the uncertainty ahead.


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By Andrew Warren, Head of Banking & Financial Services, UK&I at Cognizant


There has long been a paradox at the heart of the financial sector – customer loyalty remains high despite overall trust in the banking system being very low. In any other sector, low trust would lead customers looking for services elsewhere. Generally, however, the major banks have been able to retain their clients despite, rather than because of, trust.

This customer loyalty does not always pay, with research suggesting consumers could be overpaying by £2.9bn in areas such as mobile, broadband, home insurance, as well as, notably, mortgages and savings. Whether the result of customer lethargy, lack of awareness of the possible cost savings or low expectations of the service banks provide, this has encouraged complacency in the banking sector.

This could, however, change as our post-pandemic reality begins to bite. People may have used the extra time from the lack of a commute to do some research and shop around for better alternatives, as well as harbouring frustrations over a perceived lack of support in recent months. Coupled with the possibility of a period of negative interest rates, we could soon be heading towards a perfect storm, where both retail giants and small local businesses start to question the value their banks actually provide.


Digital native challengers are shifting the landscape

One viable reason for the supposed loyalty consumers have towards the major banks has been the lack of real alternatives. With all of the traditional high street institutions offering services that were largely interchangeable, switching services seemed more effort than was really worth it when perceived benefits were so minimal. However, this changed with the arrival in recent years of challenger banks such as Monzo, Starling and Revolut, which continue to grow in popularity due to ease of use and better customer experience from sign-up through to their intuitive apps.

The primary advantage of the big banks is their liquidity, historical reputations and longstanding customer base. However, the agility and user-friendliness of the challengers is shifting the landscape, and the continued reliance on legacy systems leaves the traditional players struggling to surpass, or in most cases match, the innovative services and products fintechs are able to bring to the market.


Customer expectations setting a new standard

As personalisation and smooth technological integration in other sectors, such as retail, raises expectations of similar offerings across all service industries, this could soon become a key battleground for banks.

With the challengers currently looking better equipped to respond to these consumer needs, here are some of the steps banks can take to modernise their offerings and retain customers’ loyalty:

  • Embracing human science – the financial sector has long favoured data science in its behavioural analysis. Almost anyone can understand basic data; it is how semiotic algorithms can be used alongside this that will reveal real insights that can be used simply to help understand people better, their fears, their hopes and their aspirations.
  • Adapting to modern trends – the lockdown has, by necessity, modified and in some cases accelerated, many of the established habits of both individuals and businesses. These range from an increased adoption of cashless payments, to remote working, the propensity for saving vs investing, attitudes towards fraud and risk appetite, and loyalty. As a result, some customer journeys, which had become the cornerstone of banks’ or lenders’ strategies, will now need to be adapted. For example, products, pricing and customer treatment strategies will need to be updated, and the entire value-chain of customer touchpoints should be digitally enabled. Financial institutions will now need to ensure speed and quality of their response to this change.
  • Using innovation to level the playing field – the systemic advantage the big banks have over more agile challengers is in liquidity access. It is an advantage that potentially will be scrutinised in the COVID-19 enquiries we can expect to see in the near future, particularly around the provision of the various governmental support schemes and loans for which these big banks initially had responsibility. As that advantage then reduces, the need for real innovation grows. This means building business models and deploying technology that can deliver value and differentiation. For example, the major banks have more channels than their digital-only counterparts and, therefore, more data to draw on. The result is a better focus on customer journeys, with modern cloud-based data management platforms central to this. The quantity and detail of data can play in banks’ favour, allowing constant ongoing improvements to customer communications and simplifying self-service options in an increasingly remote world. It is important that banks continue to ensure they are thinking outside the box and keeping pace with other industries that are innovating in their response to the pandemic.
  • Personalising the process – technology is already helping to speed up processes and improve self-service banking operations, particularly with predictive and smart decision-making through AI and ML. The advanced use of chatbots is an example, along with increasing tailored content and interfaces in apps and on digital platforms. However, the end goal is personalisation across the whole customer journey, not only through technology but also call centre operatives who still form a critical role in trouble shooting and need an up to date view of the customer in order to be able to do their job. Technology can also help analyse how these human interactions can then become more personalised.

The major banks retain a crucial position in UK society for the support and confidence they offer their customers. However, as in so many other sectors, the coronavirus pandemic could come to be seen as a watershed moment in their evolution. With the challengers continuing to gain momentum, banks certainly cannot afford to stand still. It is the ability to have a data- and technology-driven approach, as outlined here, that can help them retain their dominance and justify customer loyalty now lockdown is beginning to lift. Should they fail to do so, we may find ourselves in a very different landscape than we do today. By focusing on the steps above, banks will start to level out the playing field.


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