Finance functions: How to start? 🤷🏽♀️
Quite often I find myself having conversations with CEOs and founders about the best way to structure a finance department.
So today I’ll go through the best structure based on the 3 basic distinct functions for a finance department in any company.
Bookkeeping and accounting
Treasury and cash management
Financial planning and analysis
Bookkeeping and accounting
Bookkeeping and accounting will basically record all the transactions of the company and keep track of the correct accounting classification.
In Accounting, you recognize revenue and expenses on two bases: accrual and cash. The difference lies in the timing of the recognition. With accrued accounts, the recognition of revenue would be on the period in which it is earned, and expenses would be recognized when incurred - regardless of the cash flow timing. Examples would be you issuing an invoice to a client in January, but the actual payment would only happen in February. You recognize the revenue in January - regardless of the cash inflow being in February.
Treasury and cash management
This is why it is important to have a distinct treasury department (or at least function) that is focused on actual cash balance management. This function will be focused on the actual cash flow and will be critical to maintaining liquidity. Accrual revenue and expenses may create misunderstanding about the actual cash flow and you may get in trouble in case you base your forecasts on the PnL statement.
Finance Planning and Analysis
Your bookkeepers will necessarily create the financial statements for either tax purposes or accounting practices, but what you really should be focused on is the planning and analysis of the financials.
The finance department is powerful because they have visibility of all the company, so please ensure that you have highly qualified staff taking care of your financials. They will be able to see trends, ratios that would enable you to make more informed business decisions by understanding your margins.
🎧 Podcast recommendations
▶️ Business Breakdowns - Amazon Aggregators: If you haven’t heard about the funds that have been acquiring amazon sellers across the globe, this episode is for you. This is the new franchisee model adapted to e-commerce.
▶️ MFM: Dr. Andrew Huberman: It’s incredible to think that Dr. Huberman has only been in social media for less than 10 months. He has been everywhere in the longevity and mental fitness space recently, and this interview shows a little bit about his growth strategy (as a business) and the health tips to improve your life.
This is Open Books - a weekly newsletter carefully curated by me, Leticia Souza. Every week I’ll be compiling relevant topics around finance and financial strategy - from choosing your first accounting system to how to successfully close a fundraising round to your business.
In a world full of noise, I aim to bring clarity and direction to your finance processes so you can manage your business in peace. If you find the content useful, do your friends a favor, and please share this newsletter with them.
See you all next week 👋🏼
Leticia
Great podcast on MFM!