The story of our financial director, Elena Rodionova, is that very case when the vocation became the career.
Victories in city school mathematics competitions. Graduating from Kharkiv State Academy of Food Technologies with flying colours. Working as the chief accountant from the age of 24. Elena tells us about the role of the financial director in a company, how to control and plan funds in business, what financial errors are most often made by entrepreneurs-beginners.
Victories in city school mathematics competitions. Graduating from Kharkiv State Academy of Food Technologies with flying colours. Working as the chief accountant from the age of 24. Elena tells us about the role of the financial director in a company, how to control and plan funds in business, what financial errors are most often made by entrepreneurs-beginners.
On vocation
“Here everything was simple and clear from the very beginning. Mathematics was my favourite subject at school. I used to win city competitions. I knew at once where I would like to go afterwards. Kharkiv State Academy of Food Technologies (former institute) was a conscious decision, because accounting in food service is the most complicated. If you learn to do it there, you will be able to do it anywhere.
I was lucky with the time of studies – western course-books had just appeared, and all the teaching staff were practitioners. The business was growing and needed skilled accountants. We absorbed real business. Therefore, right after the graduation with honours I was invited to be the chief accountant of a company”.
I was lucky with the time of studies – western course-books had just appeared, and all the teaching staff were practitioners. The business was growing and needed skilled accountants. We absorbed real business. Therefore, right after the graduation with honours I was invited to be the chief accountant of a company”.
Who is the financial director and what is his or her difference from the chief accountant
“The chief accountant records already made transactions, organizes operative supervision of materials and supplies keeping, identifies the results of the company performance and prepares financial reports to governmental bodies. She or he is responsible to the state for the reliability of the tax and financial accounting reports.
At the same time the financial director plans and participates in working on the company performance, as well as prepares profit and loss report to the owners.
The financial director organizes and plans the company cash flows. She or he determines where to take money for the development and how to use the company earnings efficiently, how to work and creditors and investors, and how to reduce production losses”.
At the same time the financial director plans and participates in working on the company performance, as well as prepares profit and loss report to the owners.
The financial director organizes and plans the company cash flows. She or he determines where to take money for the development and how to use the company earnings efficiently, how to work and creditors and investors, and how to reduce production losses”.
What should the financial director do?
A well-known advisor Fedor Nesterov singled out 5 functions of a financial director:
For a small company money is in the first place, followed by security and planning, whereas the effectiveness is in the last place.
For a medium enterprise, with standard procedures in management, plans are the priority, followed by money, effectiveness, information and security.
For a large company, where business processes are to be optimized, money and effectiveness are in the first place, plans and information – in the second, and security is in the third”.
- Money (company provision with resources),
- Planning (plans and distribution of resources),
- Effectiveness (profitability indicators, what resources meet targets),
- Information (provision of all stakeholders with the information, required to make decisions)
- Company financial security.
For a small company money is in the first place, followed by security and planning, whereas the effectiveness is in the last place.
For a medium enterprise, with standard procedures in management, plans are the priority, followed by money, effectiveness, information and security.
For a large company, where business processes are to be optimized, money and effectiveness are in the first place, plans and information – in the second, and security is in the third”.
The key working rule
“When you work on cutting costs, it is important to minimize losses, but not to worsen the product quality due to cheaper ingredients”.
Five main errors of any business
1. Company cash desk is not a wallet of the business owner
For the owner of a startup the most dangerous thing is to confuse the company revenue and his or her payment. It is a must to divide the wallets. It is necessary to pay a salary, to understand, how much the work costs, if you hire another person. At a certain stage it is possible to refuse from the salary, but it is to be accounted in cost and profit & loss calculations. Remember: your salary is not the revenue of your business.
2. Inaccurate records of expenses
It is critical to organize full and detailed records of expenses from the first day. Only this way you will understand the real company standing. For beginning entrepreneurs frequently do not record tiny expenses and pay for something from their own pocket.
3. Incorrect planning or lack of plans
Incorrect planning is when your wishes do not correlate to your resources. For instance, to increase the volume of sales by a million, it is necessary to realize, how much extra current assets you will need and where to take these resources, know the duration of your operations cycle.
4. Receiving funds on your current account is not yet the revenue of the company, and, vice versa, the company profit is there, but there is no money on the current account!
From the very first day it is a must to have three major financial reports (to be discussed later). Otherwise one can find him or herself in the situation when deals are closed, sales are there, but actually there is no money on bank accounts.
5. Incorrect approach to your product pricing.
There are 2 approaches to pricing procedures:
For the owner of a startup the most dangerous thing is to confuse the company revenue and his or her payment. It is a must to divide the wallets. It is necessary to pay a salary, to understand, how much the work costs, if you hire another person. At a certain stage it is possible to refuse from the salary, but it is to be accounted in cost and profit & loss calculations. Remember: your salary is not the revenue of your business.
2. Inaccurate records of expenses
It is critical to organize full and detailed records of expenses from the first day. Only this way you will understand the real company standing. For beginning entrepreneurs frequently do not record tiny expenses and pay for something from their own pocket.
3. Incorrect planning or lack of plans
Incorrect planning is when your wishes do not correlate to your resources. For instance, to increase the volume of sales by a million, it is necessary to realize, how much extra current assets you will need and where to take these resources, know the duration of your operations cycle.
4. Receiving funds on your current account is not yet the revenue of the company, and, vice versa, the company profit is there, but there is no money on the current account!
From the very first day it is a must to have three major financial reports (to be discussed later). Otherwise one can find him or herself in the situation when deals are closed, sales are there, but actually there is no money on bank accounts.
5. Incorrect approach to your product pricing.
There are 2 approaches to pricing procedures:
- Price = all costs + preferred profit. This approach works only when the product is unique. Usually it does not last long. More often, unfortunately, this is the mistake of novice’s wishful thinking.
- Profit = Market price – Costs – Losses. The price is determined by the current market, i.е. this is the price, at which it is possible to sell your product or work / service. Then we deduct all costs and losses from it. Focusing on cutting costs and minimizing losses, we will be able to steadily increase our own profits. Certainly, remembering to increase sales.
Three major financial reports and why we need them
“The size of a business does not matter. Any company must always keep 3 financial reports: the balance sheet, profit and loss account and the cash flow statement.
Only having them enables us to understand what is actually happening in the business.
1. The balance sheet is the equation between assets and available resources to secure them.
2. Revenues and expenses (profit and loss account) show the profitability of the business. What you have earned, how much you have spent on that and what is left. This is the evaluation of the business profitability considering shipments – when sales are made, but money might not have been received yet.
3. Cash flow statement demonstrates company actual cash flows and solvency. In other words, it shows the money physically flowing in and out of the company.
Seemingly, why should we monitor the cash flow if the business is profitable?
Here we encounter the concept of the “cash deficiency”. This means that formally you have earned money but physically it has not been received yet. But you need to pay salaries, rentals and taxes.
If you have nothing to pay withy, and the rent conditions are rigid – the company may shut down. Though under the P&L the business is profitable.
And vice versa. If a large amount resulting from a closed deal has been received on the account, it does not mean that this month the company has earned a lot. This money cannot be just withdrawn as the revenue or spend. It is required to know at any time the compulsory payments to be made now, in a week, a month, and what debts are to be repaid.
Moreover, there may often be a delusive situation, when money is on the account, but the business itself is lossmaking. Just compulsory payments have not been made.
Successful business is simultaneous meeting three pre-conditions (E. Goldratt. The Theory of Constraints):
Only having them enables us to understand what is actually happening in the business.
1. The balance sheet is the equation between assets and available resources to secure them.
2. Revenues and expenses (profit and loss account) show the profitability of the business. What you have earned, how much you have spent on that and what is left. This is the evaluation of the business profitability considering shipments – when sales are made, but money might not have been received yet.
3. Cash flow statement demonstrates company actual cash flows and solvency. In other words, it shows the money physically flowing in and out of the company.
Seemingly, why should we monitor the cash flow if the business is profitable?
Here we encounter the concept of the “cash deficiency”. This means that formally you have earned money but physically it has not been received yet. But you need to pay salaries, rentals and taxes.
If you have nothing to pay withy, and the rent conditions are rigid – the company may shut down. Though under the P&L the business is profitable.
And vice versa. If a large amount resulting from a closed deal has been received on the account, it does not mean that this month the company has earned a lot. This money cannot be just withdrawn as the revenue or spend. It is required to know at any time the compulsory payments to be made now, in a week, a month, and what debts are to be repaid.
Moreover, there may often be a delusive situation, when money is on the account, but the business itself is lossmaking. Just compulsory payments have not been made.
Successful business is simultaneous meeting three pre-conditions (E. Goldratt. The Theory of Constraints):
- You have a satisfied Consumer today and tomorrow.
- You have satisfied staff and partners today and tomorrow.
- You have profit today and tomorrow (i. е. your business breaks even and there are no cash deficiencies – you plan and comply with the schedule of revenues and compulsory payments).
Business management books
In addition to my favourite abovementioned book by C.Walsh, I recommend:
- Eliyahu M. Goldratt, Jeff Cox. The Goal: A Process of Ongoing Improvement.
- Thomas Corbett Throughput Accounting. Learn How To Apply The Theory Of Constraints To Management Accounting.
- Vladimir Savchuk Practical Encyclopedia of a Financial Manager.
How profession influences private life
“The financial manager always thinks as if he or she were the business owner. It means continuous assessment of decisions, risks of money losses. This automatically happens in the private life too. Everything is assessed via digitalization.
And also there is always a question in your mind: “How much does it cost?”
On the other hand, profession helps a lot. Home budget and planning major purchases are conscious, you are knowledgeable in dealing with taxes and legislation.
But the point is that the work, selected by vocation, enables to feel internal balance and value of your everyday routine actions.
And also there is always a question in your mind: “How much does it cost?”
On the other hand, profession helps a lot. Home budget and planning major purchases are conscious, you are knowledgeable in dealing with taxes and legislation.
But the point is that the work, selected by vocation, enables to feel internal balance and value of your everyday routine actions.