The Three Pillars of Healthy Finance
August 18, 2020
Sabina Bahna

Ah, finance! What an interesting topic! – said…not that many people…not so often.

The simplest definition of finance goes something like this “Finance is the management of large amounts of money, especially by governments and large companies”. Equaling finance and money is intuitive, and rightfully so, however one might argue that this definition does not do justice to the complex world of financial systems.

The next few paragraphs try to shed some light over the three most important aspects to consider in the quest of achieving financial health, as,say, a medium-sized IT company in Bucharest, but not only. Buckle up!

      I.  You gotta love data

This far into the 21st century, it is safe to say that almost everyone understands the importance of data. And the financial departments of companies are no exception.

Acquiring, organizing, and preparing the right datasets stays at the core of most smart business decisions. It does not matter whether you use Excel or Power BI, what’s important is how wisely you manage these business intelligence tools, in order to get the most insightful…well, insights, of your company’s data.

What does this data comprise, you might wonder? The answer to this question is: pretty much everything.

From the new pack of coffee for the office to the new set of laptops the company just invested in, from the small bank fee, to the generous invoice of an important client, and from the employee’s salaries trend to the evolution of the exchange rate in the last period, everything matters, and everything must be taken into account. If you don’t believe me, ask any accountant trying to figure out the quarterly income tax of their client company. Spoiler alert: it is not an easy task.

The simplest way out of this mess is this: centralize everything, be rigorous, prompt, and conscientious, and forecast as much as you can – future is key. Oh, and don’t forget interconnected datasheets. And graphs! Nothing better than a nicely colored graph to offer you a visual overview of your data… Anyway,where was I? Ah yes, finance! Onto the next pillar.

      II.   Profits – are they everything?

Ok, now that you have your data nicely organized and interconnected, the next step is to know how to interpret it, what to look for.

Ask any capitalist what the main goal of any business is, and perhaps the vast majority will give you the same answer: profits. However, as we will see, profits can be tremendously misleading. Instead, I might suggest another, more important concept – cash flows.

Picture this: It’s July 1st. You have just opened up your own small bakery. How exciting! Your life-long dream to become a baker finally came true.

After some advertising efforts, you find your first client – a cake shop who wants to buy 1000$ worth of sweets from you by the end of the month. Say no more, you invoice the 1000$, send the bill due August 1st to the cake shop, and get to baking. By the end of July, you have a list of expenses:flour, eggs, milk and other raw materials: 100$, the salary of your one employee: 500$, electricity and other utilities: 100$. Reasonable, you think to yourself. But then 1st of August comes, your suppliers and employee have been paid, and the cakes shipped. You spend the day staring at your bank account, eagerly waiting for those 1000$. But instead of a bank notification,you get an email: the cake shop you worked with just got bankrupt, they can no longer pay your invoice. In all that despair, your accountant calls you –“Congratulations!”, he says, “last month you’ve invoiced 1000$ and only spent 700$ - you have a healthy profit margin of 30%”, but as you look at your empty bank account, you realize that all you’ve got is a broken dream.

“Revenue is vanity, Profit is sanity, but Cash is king”. This right here is the difference between profit and cash flow, between bookkeeping, or accounting, and finance. If you find it hard to believe, search for Amazon’s yearly profit margins. You will be astonished to find out that they are close to 0% - and no, this is not a typo. Their secret is strong reinvestments and continuous growth, but that is a whole other story.

The key takeout shouldn’t be that profit margins aren’t important, on the contrary – especially for small and medium sized, self-sustainable companies, it means a great deal: they encompass how well the company manages expenses and how reliable its clients are, i.e. its overall health. Besides, you need profits to reward the added value the company makes and to be able to finance future organic development – they just aren’t the whole story.

The cash flow - profit enigma is only one example among the many financial and business aspects to which any respectable CFO must pay attention. It requires lots of dedication, knowledge and creativity – and it can yield amazing results.

But that’s the nice story, when things are normal and catastrophes such as, say, a global pandemic don’t happen. What then?

      III.   Oh, no, there’s uncertainty!

No financial department is complete without taking risk management into account – and the last few months have been the perfect exemplification of this reality.

Risk management has been intensely researched in the past decades, and even more so since the internet boom, when companies became more interconnected and exposed – and it is a big deal, especially when it comes to huge multinational companies. We’re talking entire departments specialized in managing risk and having to make important, literally billion-dollar decisions, involving dividend payments and capital structures – and you know, other complicated, finance stuff.  

What we’ve learned is that when risk comes knocking at the door, how it finds you prepared is everything. Leaving the finance department aside, the entire company’s mindset is crucial – no matter your role in the company, attention to numbers and how you allocate your budget should be a priority -not only when there’s a critical situation, but always. When your foundation is strong enough, not even a virus can tear it down.

Of course, using money wisely in times of crisis becomes the number one concern, now more than ever – expenses and overall budgets must be thoroughly re-analyzed, new data and insights not previously considered might have to be included.

Another thing we’ve learned is that a good financial system is never reactive to or based on cost cutting, but it is based on prediction, alternatives, continuous adjustments and optimum cost spending, while linking all the layers of a business: strategy, execution and people. We did that since the very beginning and it proved so rewarding, both when things get tough and when celebration is in order. It is the result of teamwork, from each individual completing time sheets in an accurate and timely manner to being able to invoice on time and according to the value created.

However, when you’re a small, local company fighting a crisis, there’s only so much you can do, finance - wise. Instead, we might argue that what truly matters are the people. People as in employees whose morale is continuously kept up – maybe through a daily coffee Zoom meeting? People as in clients who feel that they can count on you in difficult times, and in return you know that you can count on them. People as in suppliers who know that they have a trustful client.

I’ve started this article by saying that finance means money, but what’s money good for, if not for people? If not for making the world even a tiny bit better?  

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