On Linkedin (and not on Linkedin), I read and listen to complaints about how companies in general don’t pay Finance enough level of attention In my professional experience, I can say that in general, this is a true statement. 

It doesn’t mean of course that there isn’t a single organisation that doesn’t want to control their costs or revenues. Any company wants to make profits and stay in the market over time. However, despite planning a good strategy, based on research, with a well designed marketing campaign, etc., I often observe that finance is often left behind, especially in the operational level.

One of the key ratios for a business survive in the long term is the so called Working Capital. That is the capacity of a company to deal with their short-term liabilities. It’s basically how much cash you have plus receivables plus inventories less creditors, tax liabilities and short-term loans. You can also divide it. If the result is lower than 1, you may run into difficulties to cover payments in the short-term. This can lead to problems over time, such as failing to meet payments, including salaries. If not solved in time, in the worst case, it can lead to business failure.

Why do I say this? Basically, because many companies forget about two crucial processes in every business. These are Accounts Payable (suppliers and creditors) and Accounts Receivable (customers and debtors), especially, but not always, the first one. Treasury should also be included, but companies usually follow up on their bank balances more often.

These two processes are treated by many companies as pure administration work. I usually say that Accounts Payable is considered a “book and pay” department. You can tell by looking at the books. Old outstanding balances, recorded payments but not invoices, debit balances… The same can happen in Accounts Receivable, but in a different way.

When these two processes are not well maintained or forgotten, it can distort significantly the financial statements. Managers don’t have much time to look at the figures, so they just take for granted what it is there. If costs are not recorded (e.g. because invoices are missing), they won’t only see what looks “better results” in the Profit or Loss. Also, in the Balance Sheet Statement, the liabilities will be lower than they actually are. 

Despite it can be normal that balances aren’t perfect, if they are materially inaccurate, there could be a higher risk of wrong decisions.

For example, let’s imagine that the electricity supplier has a large debit balance because electricity invoices are not recorded, but these are being paid by direct debit. The consequences will be:

1) Higher need to book accruals, which can increase the risk of errors in reporting, if these are forgotten

2) As there is more risk of missing costs due to missing invoices and later, accruals, costs and liabilities might be understated

3) When analysing the profitability of the business, managers might think the business is doing better than it actually is. Also, when calculating the cash flow forecasts, the business might think that they have more resources than they actually do.

4) This can lead a company to take higher risks due to poor quality information. 

5) If the problem is not fixed in time, this can be built up over time as a snowball. By the time this is detected, it might already be too late. 

There are more consequences than that. The point in all this is not to defend that companies focus all their resources in finance. Of course not. However, these transactional processes should not be left behind.

There can be several approaches to mitigate these issues, but the starting point should be looking at the process itself and seek ways to remove inefficiencies. Then it shoud be improved. Corporate companies have more complex processes, but small companies and freelancers may benefit from small and reasonable adjustments. Here below you have an example of an Accounts Payable process for a freelancer or small company:

• Documentation: have your fiscal data ready and available to provide it to suppliers. If possible, don’t pay a supplier until you receive the proper invoice. If this is not possible, try to get a proforma first, or sign a contract.
• Set up a correspondence or e-mail address where you receive all the billing. Some services are billed automatically and paid by card like your website and the invoice can be sent to you.
• If you do the accounting yourself, build a matrix with suppliers, accounting numbers and coding, their fiscal data, payment methods and contact emails or phone, etc. This is basically Master Data and you usually maintain this in your accounting system. If you don’t have one, a spreadsheet will do. This can help you track how you have to pay and where and who to contact in case you have issues. Make sure you stay compliant with GDPR.
• If you paid something, chase the invoice, so that you can deduct taxes and control your costs.
• As the business evolves, you might need to upgrade your system. Automate as much as you can.

Some of these tips can be applied as well to Accounts Receivable process. Hiring an accountant is strongly advisable, as she can look at your business and provide solutions more tailored to your needs. The most important, though, is to have your finances as much in control as possible.