Building Financial Discipline at an SME
A successful business has financial discipline embedded within its organizational culture
Financial Discipline is about getting one’s numbers right. It requires setting clear goals, periodic measurement of performance, analyses of variances and taking corrective actions. Ultimately, it is about earning more than planned, spending less than necessary, saving as much as possible and investing wisely. It’s just good old-fashioned frugality with the help of an expansive ERP.
Nevertheless, it is not always easy to get it right. The reason being that a business has multiple moving parts that must all come together, all the time, to make it work. This in turn, involves ensuring that the small, mundane things are addressed precisely and decisively every single day. In the push and pull of business, these small things often fall by the way side, other commitments take priority and bad habits and efficiencies creep in. Once financial indiscipline sets in, it is hard to get rid of.
Signs that a Company Lacks Financial Discipline:
Lack of financial discipline is one of the crucial factors that hampers a company’s growth. The major tell-tale signs are:
Missing forecasts frequently.
Constant ‘explanations’ for low profitability. For some businesses, profitability is always around the corner.
Habitual delays in payments- falling behind in statutory dues and salaries is a big red flag.
Outdated operational systems and practices such as lack of basic accounting software.
How to Address Financial Indiscipline:
The secret to good financial management lies in good business management. It is not just about a strong finance team; it is about the strength of your business. The key to building a strong financial discipline is as follows:
Ensure strong fundamentals: First and foremost, get the basics right. Deliver a great product or service, create a strong sales funnel thereby giving your business the option of what accounts it accepts; sell on favourable terms and monitor costs closely. Successful businesses do this every single day.
Manage the Predictability/Margins Trade-Off Optimally: CFOS love predictability while also craving high margins and these two rarely go hand in hand. Long term contracts come with low margins while high risk success- based revenues come with healthy margins. A successful business must find the perfect balance between this trade- off.
Don’t buy turnover by using your balance sheet especially if you are much smaller than your customer: Credit is the grease that makes the wheels of a business go around. However, compromising on payment terms to win deals is not a sustainable strategy. Businesses that go down this road, often start to get lazy, dilute their product or services in terms of quality and/or innovation, thus creating a recipe for long term disaster.
Watch the big costs, not the small ones: It is so common to see small costs get all the attention while the big expenses are treated as holy cows, that cannot be touched. Controlling small costs often achieve nothing except irritating internal and external constituents. Don’t be scared to question the big costs and to manage them very carefully. You will never have to ration the trips to the coffee machine for your employees.
Measure performance constantly and objectively: Good businesses track performance against forecasts constantly, analyze variances and make changes as needed. This creates an early warning system to track slippages and take immediate corrective action. Create mechanisms to ensure that poor performance is not rationalized or goal posts changed to justify the results. Most importantly, do not shoot the messenger. Poor performance is rarely the fault of the finance team. Instead, empower the team to produce numbers and to communicate them without a feeling of fear or favour.
As Jim Rohn states, “Discipline is the bridge between goals and accomplishments “. A successful business has financial discipline embedded within its organizational culture.