The FINANCIAL — Forecasting cash flows, over-focusing on minor details, investing in non-profiled activities, improper budget planning, inadequate financial calculations when taking critical decisions and unqualified relations with financial institutions are the main mistakes that companies make when managing their financial portfolios.
The FINANCIAL — Forecasting cash flows, over-focusing on minor details, investing in non-profiled activities, improper budget planning, inadequate financial calculations when taking critical decisions and unqualified relations with financial institutions are the main mistakes that companies make when managing their financial portfolios.
The types of problems tend to depend on the size of the company. But as the experts claim, such mistakes are common at most Georgian companies.
“The biggest mistake made by companies whether large or small is forecasting their cash flows,” said Andrew Coxshall, Managing Partner in Georgia of KPMG. “Businesses often have good salespeople who can sell the products or services and have good technical people to make the product or provide the services but not enough attention is paid to how the cash flows in and out of a business. The result is often that businesses run out of money and cannot pay suppliers or their staff which results in problems in providing products and services to customers.”
“The most common error is that companies do not spend enough time putting the budget together. They do not do the budget in sufficient detail. They do not involve the right people in the process and, finally, they do not compare the actual results to the budget and find out why there are differences.”
“One thing that all entities should have in common is a strategy that they are following,” said John Robinson, Audit partner at Deloitte CIS. “Often you find that short term decisions are made about the use of excess funds without real consideration of what the longer term goals of the organization are. By the way this is not necessarily Georgian specific.”
“The same is true when entities enter into cost saving programmes. Often some immediate savings can be made that in the longer term can create greater problems for the entities – therefore thought-out strategies are required to analyse and understand the consequences of the decisions that are made. This is where getting external help can really benefit one. Enterprise cost reduction strategies are common services provided in many markets around the world and are generally effective. Again, many companies try to do this themselves and fail. They often feel that it is hard to justify the cost of advisors at a time when they are under pressure to reduce costs. If this was, however, thought of as an investment, the decision might perhaps be different,” he explained.
Almost all problems are related to the inadequate planning of different issues. “Companies should have short, middle and long-term plans. Daily activities to achieve these goals and fulfil the plans should be well organized as well,” said Aieti Kukava, CEO of Alliance Group Holding, financial company based in Tbilisi.
“Other mistakes include focusing too much on minor details (using too much stationary etc) and not paying enough attention to the big issues such as working out which products are profitable,” Andrew Coxshall added.
In addition to these Kukava names other mistakes that companies should take care to avoid: failing credit history, expanding staff before growing the income, inadequate credit decisions including extra or unnecessary loans, ineffective price policy, being oriented on one source of income, excessive outsourcing, inadequate management of risks and saving money on insurance.
Large companies may often have more resources to manage their finances than small firms but larger companies can be more difficult to control. “For example, a large power utility may have problems in production in a remote region that will impact revenues in the future that the finance people are not aware about. Whereas, a small business owner/manager will often be involved in all aspects of the business and will be more aware of issues. However, the small business may not have enough financial expertise to deal with some financial issues that can arise, for example foreign exchange rates,” Coxshall explained.
“To continue to grow, businesses need to find the balance between working capital needs and investment expenditure. If too much cash is tied up in working capital, then not enough will be available to invest in new technology, financing etc, to innovate the products and services that a company needs to grow.”
Experts say that the responsibility of financial growth is not only up to financial managers but the whole staff. The job of a finance manager or finance controller is exactly that, to manage or control the finances, but everybody in a company can contribute to profitability. A sales person should make the sale but follow up with the customer to make sure that they pay. Likewise, a worker in a factory could suggest ways to make a process more efficient which will lead to greater profitability.
“In general I advise my client companies to predict money movement, effectively manage accounts receivables, always improve margins, self-cost and operating costs, and increase diversified income,” Kukava noted.
Discussion about this post