I'm currently reading The Outsiders: 8 Unconventional CEOs 📖 - a book that was on Warren Buffett's must read list in 2012. One of the points it makes early on is about the need for CEOs to be good investors 📈 at heart. They are stewards of capital and so constantly analyze inputs to make the best decision for shareholders and the business.

The same holds for small business, with one tiny wrinkle: a drastically smaller finance team. 🤏

Until your business gets to $10 million in revenue, it's unlikely you have more than 1 or 2 accounting staff. And you definitely don't have a full time Tax or FP&A (financial planning and analysis) leader on staff. It's a blindfolded knife fight from $0 to $5 million, 🤼 then from $5 million to $10 million the blindfold comes off and you realize you're fighting a drunk monkey.

This means you, as the owner, have to get pretty in the weeds on your business 🔬 - not just operationally, but on the legal and finance side as well.

So today, we're getting into higher level finance set-up of a SMB - for owners by owners:

• The overview 🔭
• The key variables 🌎
• The inputs to variables 🦠

SMB Finance Cycle

At a high level, finance at every size of company looks like this:

Accounting feeds Tax which feeds Financial Planning which drives Accounting, and it goes on. 🔄

Without good accounting, tax is impossible to do. Losses can swing into income, making tax outflows impossible to predict. And without predictable cash outflows, good luck budgeting and forecasting into the future. 🤷‍♂️ And this lack of forecasting makes the business reactionary, which only delays the accounting team in getting you good financials.

It's a SMB death spiral. 🌀

But done right, the opposite is true. A faster and more accurate accounting team makes taxes easier which allows for a better forecast, better investment decisions, and a more proactive approach to business. 🏎️

Now, if it were that easy, everyone would be making money and finance would be easy. But they're not - and it isn't. There are outside factors that impact each component above.

The Outside Variables

These outside influences are where a lot of the problems can stem from - either they're set up incorrectly or missing entirely. At large businesses, these are table stakes. ♣️ But that concept does not exist in SMB and start-up world - nothing can be taken for granted.

Here are the outside variables on the core finance function:

The accounting process will only be as good as the information that is fed into it. 📥

The tax process will only be as efficient as it's set up to be and adjusted for over time. 🛖

And the financial planning process can only be as good as the priorities that are fed into it from the owner. If an owner is unclear on any of these variables, the core finance function will suffer. 🔍

For the majority of SMBs, this will mean getting outside help. But it's never a set-it-and-forget-it solution. Outside advisors can never care more about your finance function than you can - because it impacts the quality of decisions you make.

Okay. Last layer to add. What are the inputs to these outside variables and core processes that make up their impact on the finance function?

The Inputs to the Variables

Here is my take based on personal experience running a small business and working with thousands of them:

The most likely culprit for a breakdown in the finance process are any number of these items in red. ❗

A badly set up accounting system can either delay or render useless the financials that owners need. 📆 And owners need to ensure a base level of controls in that process to know they can step away from granular finance processes without being robbed blind.

Tax help is hard to come by - but owners need more than just filings completed. They need the other bits of tax strategy and non-financial tax discussions that come with running a business.

Once these are buttoned up, they have to be able to share clear goals and objectives and layer those into the finance process to be proactive. 👨‍🏫

The Takeaway

You can't delegate anything in this cycle 100% - not until you're out of the game entirely.

These core functions, variables, and factors drive better decisions for yourself, investors, employees, and the business as a whole.

CEOs have to make hard capital allocation decisions every day - missing core parts of this process is playing on hard mode.

🫡

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