CFO, entepreneur, Finance, Innovation, Strategic Finance

How & Why Tech companies today are seeking help today

It may come as no shocker to tech firms across the world that ‘Tech development’ as an industry has been slowing down. Large enterprises don’t seem to be buying as frequently and fervently as before. Smaller development projects seem to have dried up. Growth estimates (Gartner Q1 2017) to 2020 hint at a 3% CAGR over the next 3 years.  At the same time, for the first time in history, 6 among the 10 most valuable firms in the world are technology companies! If the logic of stock price being indicative of future earnings, something seems to not add up. What is really happening and what should a tech company be doing?

Understanding it takes some retrospection.

What happened while I was working?

Over the 20-year period beginning in the mid-80s, there was a flurry of businesses which jumped on the convergence of affordable computing and leap in telecommunication and the opportunity it threw up for businesses across the world. Large enterprise technology development efforts with large organizations starting to implement technology as infrastructure to add efficiency in operations and bring data sets together became the new age conquerors of this portion of the information revolution. Some big names that emerged were the IBMs & Oracles of the world and closer to home, the Patni, Infosys and TCSs of the country.

Around 2005, a new buzzword emerged with the improvement in telecommunication ecosystems across the country – Cloud. Information could now be stored anywhere and accessed anywhere. One did not have to maintain physical infrastructure to be able to house information, which meant that a small business could now hire only the infrastructure they needed at the efficiency of a large data center. Smaller organizations now jumped in as infrastructure costs and setup costs was virtually nil and barriers to entry were virtually eliminated. A few years in, a tiny revolution was brewing with the name of SaaS. A new revenue model of charging for use and value rather than the committed models that existed. This picked up immediately as now the cost of subscribing to technology solution was close to nil. The ‘innovators’ and ‘early adopters’ of early 2005 now made way for the ‘late majority’ in less than 5 years.

Business as usual was threatened for the first time.

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business, CFO, Finance, management

What can a CFO do for a startup?  

Business owners at the early stages of their startup are a jack-of-all-trades, trying to handle every aspect of their business for the simple reasons that they might be under-capitalized or trying to cut cost. When the business starts to grow organically, there arises a need to employ appropriate people for the various roles in the organization. The services of an accountant may be enough to provide support for recording the day-to-day financial transactions in the initial stages. Once the business moves into the growth stage, when the activities of the business are increasing, the need for strategic financial support is felt to consolidate data and provide the company with a strategic road map. This is where a CFO comes in.

The responsibilities of a CFO is no longer limited to financial reporting, audit and compliance, planning treasury and capital structure. It now encompasses the roles of corporate portfolio management, capital allocation, investor relations, performance management to name a few.

A CFO is not just a glorified book-keeper, he plays a number of important roles in a startup that are critical in providing a strong financial foundation for a growing business.

  • A CFO is like a steward to the business, working to protect the vital assets of the company, ensuring compliance with financial regulations and communicating value and risk issues to the board and the investors. The CFO will ensure that the business has important financial controls which include management of cash flows, establishing credit policies and implementing procedures to measure and evaluate optimal inventory levels.
  • As an operator, a CFO provides a variety of services such as financial planning and analysis, treasury, tax and other finance operations, to ensure the business is efficient and effective financially. An effective CFO handles projects that require significant quantitative and qualitative analysis in order to arrive at an understanding of the options that are available. Developing a company’s annual budget and interacting with the business owner and department managers to ensure that the final product accurately and objectively reflects the real requirements of the business will be the responsibility of the CFO. He might also conduct a thorough analysis of a company’s future capital investment requirements as a first step in securing additional financing.
  • CFOs take a seat as the strategist at planning table and help influence the future direction of the company. They are vital in providing financial leadership and aligning business and finance strategy to grow the business. In addition to M&A and capital market financing strategies, they can play an integral role in supporting other long-term investments of the company. . A CFO would also play a key role in any effort to seek investment from the public financial markets or to launch an initial public offering (IPO).
  • CFOs as catalysts can stimulate and drive the timely execution of change in the finance function or the enterprise. Using the power of their purse strings, they can selectively drive business improvement initiatives such as improved enterprise cost reduction, procurement, pricing execution and other process improvements and innovations that add value to the company.

Bringing in a skilled and expert personnel onto the board of the business will help give a strategic direction to the business. Outsourcing the financial support for the business will give the owners free time to focus on other aspects.

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Cost Centres for Small Business

Managing your business costs and revenues is a challenge. To survive, you have to sell enough products/services, and collect money and manage your costs.  The latter can be more difficult than you think, particularly when you don’t have good breakdown of costs.

Without careful monitoring of costs, any business can find that costs can spiral out of control quite rapidly. This does not mean you spend hours and hours monitoring costs in minute details, but you should be able to get an overview of all costs at any time. One way to do this is to use cost centres in your accounting system.

What is a cost centre?

A cost centre some section/portion/unit of a business for which costs can be identified and someone is accountable for these cost.  Normally, a cost centre has a budget which includes all costs traceable to the cost centre. These cost could be anything from wages to telephone to motor expenses, once they can be traced to the cost centre

In a small business there may be only one or two cost centres.  Because you will be looking at small numbers of transactions, there is no need to split things up into smaller cost centres as costs can be more readily monitored against budgeted figures. However, for larger businesses, operating as a single cost centre is probably not good enough.  It is also not going to be an easy task to monitor whether those responsible for cost control are doing their job effectively.  A breakdown of costs down into each cost centre helps control cost of each cost centre and the business as a whole.

20140627-163257-59577785Identifying cost centres

Some businesses are easy to split into individual cost centres – for example, a manufacturing company with six factories, a head office and a distribution warehouse could be split into 6 individual cost centres for each factory, a head office cost centre and a separate distribution cost centre. A business may need to go into more detail to keep a tighter control of costs – for example, each manufacturing plant might make several different products, with several different machines/processes for each product. It would be possible to treat each machine or process as a costs centre in this case.  This would allow the business to keep a good eye of how profitable each product process is. Sometimes too, a business might treat support activities like human resources, finance and logistics as cost centres too. There is no end to how detailed cost centres can be, but remember to be a cost centre, it must be possible to trace costs directly and someone must be responsible for the costs.