This guide sets out the reasons why you need to consider finance as an integral business function early in your business’s life, what you should do early on, and the benefits this will bring.

The benefits of including finance as a function early in your business’s life🔗

Considering finance in the early days allows you to gain insights about the performance of your business and will give you the confidence to talk to investors and finance specialists about your business using the language of finance. Below are four key benefits to including finance as a function early in your business’s life:

Show investors that you know your numbers🔗

Any investor will want to understand your current business performance (financials and key metrics) and your growth plans, and they will expect you to be able to explain this to them. If you don’t know your numbers then you won’t be able to set out this key piece of information, which investors use to make investment decisions.

Keeping good records of your current financial performance will ensure you have the reporting of your business performance to date.

Being able to articulate the key metrics / drivers around revenue, costs and cash that are going to make your business grow, and how you can control them, will ensure that you can set out to investors what your growth plans are and how you intend to get there.

Start to plan strategically🔗

Articulating the key metrics / drivers around revenue, costs and cash that are going to make your business grow, and how you can control them, will allow you to translate your growth plans into a financial model.

You can then use this model to start to plan more strategically; to plot out different scenarios and make decisions about where to invest in order to get to where you want to go.

Be able to speak the same language as your outsourced finance specialists🔗

When engaging any specialist outsourced support, it is always easier to do if you have taken some time to invest in articulating your business’ needs and learning the language of that speciality before talking to a specialist. You know your business best.

Use your network to extend your understanding of finance and to seek referrals to recommended specialists.

Don’t run out of cash🔗

Being able to plan ahead, even for just a few months, will give you confidence that you are not going to run out of cash or will indicate how quickly you need to raise more cash.

What you should do early on to establish finance as a function🔗

Here are the finance actions that I always recommend to early-stage founders:

Build a network🔗

• Peer to peer
• Investors
• Attend events: keep attending events and seeking out founder networks that have finance and funding in their programmes
• Network: take the same approach to networking as you would do for product/GTM/sales inspiration and validation

Ask LOTS of questions🔗

• Once you have built connections, ask questions.

Get tools in early🔗

Embed tools which integrate directly with your accounting platform to give you the foundations for very smooth financial operations as you scale

Suggested early-stage tech stack to keep your accounts in order:

• Cloud accounting software
• Business bank account
• Subscription management tool
• Spending cards / spend management tool (look for ones with a free starter package for Founders)
• Customer billing tool

Outsource compliance🔗

• Get a compliance accountant to handle your annual statutory accounting and reporting obligations.
• Consider also using them to handle VAT and Share Scheme tax where necessary.
• Essentially outsource anything where HMRC are involved…

Get to grips with your financial data🔗

Be comfortable and confident in discussing the financial data of your business, including:

• Sales - value of contracts signed with customers in a period
• Revenue [note, this is different to Sales. Revenue is the value of the goods/services that you have provided to customers in a period]
• Cost of Sales
• Gross Margin
• Operating costs
• EBITDA
• Net Profit
• Cash flow
• Working capital

A note on the finance tech stack🔗

At the moment, Xero is the dominant cloud accounting tool used by small businesses in the UK, but the tech and the market is constantly evolving so use your new finance networks to listen out for new trends, especially around consolidated platforms that combine multiple elements of the finance stack in one platform

What does my finance function need to do?🔗

Finance is a broad term. It is not just about filing your accounts once a year. The finance function in a business will have a large range of responsibilities. These fall into three broad categories:

Reports and Analysis🔗

• FP&A (Financial planning and analysis) At different times you will need to model and plan for the future; whether you are pitching to a potential investor or reviewing performance as a leadership team you will need to have plans, variance reporting and analytics to hand, so you can interpret and make decisions from
• Cash management “Cash is King” still rings true. We may not carry cash around in our wallets anymore, but our business bank accounts still need to be in credit and the movements of cash in and out and any FX (foreign exchange) need to be considered. Businesses can get caught out when the quarterly VAT return and repayment is due to HMRC…
• Reporting: you need to know how you are doing and how you are doing versus your plans
• Controls and governance Important as you scale and have more people working in your systems and data, and also as you need to prove your credibility during due diligence or audit in the future

Compliance🔗

Compliance accounting

• This broadly comes into effect once a year when filing statutory accounts and corporation tax returns with HMRC and Companies House.

Business taxes

• VAT
• Business rates
• Payroll taxes (national insurance) - don't forget to budget this additional cost on top of the agreed employee salary

Bookkeeping and Payroll🔗

The purchase to bill payment process

• purchasing, bookkeeping, paying suppliers

The sales to invoice payment process

• ensuring your customer can and DO pay

Payroll

• Last but by no means least - the most important payment you make each month. It needs to be accurate and paid on time. And you need enough cash left to make the payments

The below graphic shows who is responsible for each of these categories. Remember, as the founder, early on - you are the finance lead (and probably the bookkeeper) and you need to direct your accountant on the compliance requirements

A note on Accountants🔗

For anything that requires filing with HMRC or Companies House, I recommend working together with an accountant. But don’t just let them tell you what you need - find out what you need and then go and find the best accountant to provide that service for you.

Invest in obtaining a base level of financial literacy around UK Compliance needs, so that you can understand what they are telling you. As such, you can also challenge their advice and recommendations. Conversely, they should invest time to understand your business so that their advice and actions are tailored. Seek out referrals for valuable accountants.

Evolve your finance function to fit your business’ needs as it grows🔗

You don’t need a full-blown complex financial model from day one. A simple table setting out the key metrics / drivers around revenue, costs and cash that are going to make your business grow, with a narrative around how you can control them, is a great start point.

As with all other teams, your finance function will evolve as your business grows and needs change. But you need to be aware of the choices you have around resourcing and be able to engage and hire specialists who are best placed to fill your needs. There is not a one-size-fits-all approach to designing your finance function - you can design it to best suit your needs and the needs of your business as it evolves.

There is a lot to learn and figure out about finance (on top of your operations, sales, marketing, product, engineering etc.), but there is support to help you grow your financial literacy. Founders will always help founders and there are plenty of professionals without founder hats who are willing to help, too.

Want to know more about financial models? Follow the link to my Founder Hub article on how to build your first financial model.