When is the right time to set up a formal finance function in your burgeoning startup?

by Startacus Admin

Establishing a formal finance function for your startup? Carlo Gualandri, Founder and CEO, Soldo outlines when and where to start...

Most startup business owners set out with either themselves or a trusted employee in charge of finances, often as a way to keep complete control. But as the business starts growing, taking on more clients and personnel, it soon becomes impractical, prompting them to consider establishing a formal finance function.

Successful entrepreneurs know that SMEs with well-developed financial capabilities are much more likely than others to be growing rapidly and sustainably. Developing a formal finance function is therefore critical for planning, especially for predicting cash flow – the lifeblood of any business. The impetus for such a function often comes from investors or supply chain partners, but when is the right time to heed the call and where do you start?

Make sure the basics are in place

An emerging finance function consists of three essential building blocks – a bank account, payroll, and accounting software. These will be the foundation on which your finance department will build all subsequent work, so should not only cater to your business’s current needs but also anticipate future needs.

A dedicated business bank is not only a legal requirement, but it facilitates supplier payments, cash flow management, tax dealings, and profit calculation. It is useful to do a proper assessment of your current business account before setting up your finance function. Look at aspects such as compatibility with the technology you want to utilise, whether the banking fees are competitive and whether it caters for all the services and integrations you need.

Sourcing the right business bank is similar to the process you would follow for any other business supplier. Shop around for the best price, service, and benefits for your business with thorough research.

Also, consider additional tools such as software for payroll and accounting to supplement your business cash account. There are plenty of software offerings out there, so take your time to source a solution that best aligns with your needs. Cloud services, for instance, can be accessed anywhere and on any device – smartphones, desktops, laptops and other mobile devices. This makes it easy to stay in touch with your team while simultaneously having real-time control of your business’s cash flow.

Manage expenditure

Startups often overlook spend management early on by tracking expenses through employees only. Such an approach could quickly spiral out of control as costs rise and the employee numbers increase. For that reason, an efficient spend management solution is the next item the new finance department would need.

Research by Soldo found that almost a third (29%) of emergent businesses in the UK and Ireland struggle when choosing what business priorities to spend on. Nearly a fifth (18%) acknowledged that they didn’t have adequate financial insight to make good spending decisions. A way to track and regulate expenditure is, therefore, imperative to support sound decision-making.

The ideal opportunity to address spend management and get complete financial visibility is when you set up the finance department. Progressive companies should also consider spend automation, since automating recurring tasks will enable the finance department to spend more time on complex, analytical tasks.

Put data to work

Extracting the multitude of financial data your firm generates daily can yield useful information for managing your business more effectively. With accurate and even real-time data at their disposal, your finance team will be able to identify opportunities or inaccuracies quickly.

Reliable data is also a prerequisite to attract investors and finance providers. Being able to present an accurate picture of the money entering and leaving the business signifies financial health and organisation, which makes it much easier to convince investors of your business’s viability. They will be more at ease to hand over ready money if your business has a slick and well-functioning finance department.

Set yourself up for scalable growth

While it is indeed difficult to envisage what the future holds in the current climate, businesses can still put plans in place to ensure the new finance department can scale alongside a growing business. The first step is to select sustainable software.

Cloud-based platforms have the most significant advantage since they are more likely to be supported for the foreseeable future and even receive regular updates. Automation is another requirement for scalability as it deals with many of the tasks that scale linearly with a budding business, such as receipt tracking and data input.

Operating without an effective finance function is most likely set up for failure. Conversely, a well-developed finance team transforms small businesses and helps them release their potential by increasing their profitability, streamline processes, and achieving faster, sustainable growth for longer.

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Published on: 6th September 2020