How much should you spend on financial management?15th December 2021
I recently read a post on LinkedIn, where a business owner explained exactly how much he spent on his finance function.
In the previous company he owned, he invested just 1% of his turnover in financial management.
As a result, he had no budget... no cash flow forecast... no monthly management accounts... no hard financial data on which to base decisions...
The company went broke.
So in his new company, good financial management is a top priority. He now invests around 4% of his revenue in his finance function.
I respect him enormously for making such a serious investment. He’s absolutely right that if you haven’t got control of your finances, you haven’t got control of your business.
But perhaps you saw that 4% figure, and started wondering: “Is that normal? Is that a lot? Is that a little?”
How much should you invest in your financial management?
I don’t believe the answer is a set % of your turnover.
Rather, there are two criteria.
- Is your financial management fit for purpose?
Whatever you’re paying, you need to make sure you’re not just getting reports about how you did last month or last year...
You need information that helps you make better decisions for the future. That includes all the reports that business owner mentioned like cash flow forecasts, budgets and monthly management accounts - plus help interpreting them.
If you’re not getting those things, then you’re not spending enough (or rather, you’re not spending correctly...).
- How complex is your business?
Take a business with a £3 million annual turnover. Maybe you only have two core products and one office. You serve one market and your business model is quite straightforward.
It’s going to be relatively simple to get the numbers we need to understand your financial position and make better decisions.
Now take another $3 million business, with 15 different products and sales across Europe.
It’s going to take a lot more data - and a lot more work - to figure out how efficient you are, which parts of your business are most profitable, where you’re over-spending, what the financial opportunities are and so on.
So you’ll probably have to invest more, to get the numbers you need.
In short, the size of your company isn’t the deciding factor - complexity is.
I hope that gives you some insight (ahem!) into the economics of financial management!
And if you’d like to have world-class financial management that helps your business grow faster and more smoothly, please do get in touch today. Just email or call us on 01279 647 447.
We can talk about how we can help you. And I can help you understand what your investment might be, too.
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