Introduction

Why is financial management necessary? I open this book with a seemingly paradoxical question. While the answer may appear self-evident, in practice it’s not always so.

I’ve encountered and continue to meet senior managers and entrepreneurs who genuinely believe that financial management isn’t crucial for building a successful company. This perspective is flawed. Many operate under the misconception that finding the right idea, crafting a business model, negotiating with counterparts and assembling an operational team negate the need for managing finances, at least during the initial years of a company’s existence and, often, not even in the first decade.

I’m convinced that this mindset is a relic of the post-Soviet management model. Those familiar with that bureaucratic system became exhausted by planning but never truly grasped the intricacies of sound financial calculation and organized budgeting. In that environment, where competition was scarce and profitability often obscured financial scrutiny, there was little impetus for implementing robust financial management: competition was absent, and the profitability was such that money was not counted. Additionally, the explosive economic growth and lack of competition in various sectors were periodically disrupted by crises and currency devaluations. The absence of crisis management experience hindered the development of economic planning habits and systematic financial management for most economists.

During the first two decades of Russia’s market economy development, profitability, often achieved through unofficial financial schemes and legal structures for tax optimization, served as the primary yardstick for financial management effectiveness. The ability to negotiate financing with banks and other financial institutions was deemed a critical skill for financial managers. Meanwhile, factors like the quality and depth of management accounting and reporting, effective liquidity management, internal process organization and automation, and the implementation of transparent internal control systems – parameters widely accepted as key indicators of financial director effectiveness in Europe and North America – were deemed inconsequential, and sometimes even detrimental, to the businesses grown on the former Soviet grounds.

Few would dispute the notion that a commercial enterprise must strive for financial independence in the foreseeable future. Even in the case of esteemed yet loss-making companies, particularly in the technology sector, eventual profitability and steady, sustainable growth over a predictable period are pivotal factors in determining a company’s value. And achieving this is inconceivable without competent financial management.

During the first two decades of market reforms, Russian enterprises’ senior management displayed little interest in establishing effective financial management practices. Similarly, most entrepreneurs remained indifferent due to either shortsightedness or tacit approval from their enterprise’s leadership. It sounds unbelievable, doesn’t it? Yet, that’s precisely how it was, and several factors contributed to this apathy.

Why bother constructing a transparent automated internal control system when tax authorities could effortlessly uncover illegal tax optimization methods through it? Why adopt long-term budgeting and forecasting systems when top-managers found it expedient to base decisions on situational assessments, believing that high results and substantial profits were a result of their foresight, while failures were attributed to the inability to plan effectively amidst Russian instability? Why overhaul the mindset and motivation of midlevel managers to adopt a customer-oriented, competitive service approach when, for the past two decades, the prevailing approach had sufficed, and retrained managers might simply leave to establish competing businesses?

So, why is it unfathomable to envisage building a business without financial management? Even in companies lacking a designated financial manager, fund movement is regulated, albeit perhaps based on common sense rather than specialist intervention. Failure to manage finances can swiftly precipitate business collapse: «sudden» cash shortages, employee demotivation due to non-payment of obligations, counterparties refusing cooperation due to payment defaults, fines and tax authority audits, fraud, and managerial errors in a competitive environment.

You may wonder how many companies and entrepreneurs have succeeded in building prosperous businesses without regular financial management. Here, the infamous survivorship bias comes into play. While we’re familiar with success stories, we often overlook the percentage of new businesses that perish en route to achieving their objectives, as well as the factors influencing their survival. Experienced investment managers recognize that in a burgeoning market, anyone can turn a profit, but in a stagnant or declining market, only a select few prevail. Unlike the «fat years» of explosive growth when mediocre managers could easily run companies, in times of crisis and stagnation business survival hinges on well-prepared processes, managerial acumen, and entrepreneurial skill. This is within reach of only a privileged few – the most successful and fortunate companies. Nevertheless, effective organizational management, comprising technical tools alongside the right corporate culture – data-driven planning, process organization, technology application and automation, team selection, a strategic decision-making approach, and motivation – are the cornerstones of regular management.

What distinguishes common sense from professionally constructed management? The former occasionally falters, and the absence of a dedicated finance manager can lead to the absence of management accounting and the emergence of strategic risks. Another significant risk factor is that the longer a company evolves and internal processes develop without a corresponding specialist, the more challenging (and painful) it becomes to restructure these processes in the future and transition to regular financial management.

Any sustainable business hinges on timely financial decision-making. In broad terms, this encompasses everything that determines its health and longterm entrepreneurial success: accurate assessment of business opportunities, efficient resource utilization (not solely financial), timely engagement in specific projects considering prevailing and anticipated economic conditions, partner and employee selection, motivation, and much more.

Upon conceiving an entrepreneurial idea, financial management becomes imperative: one must assess possibilities, calculate required resources for realization, and evaluate associated risks. Even in daily life, financial management permeates all activities. Each of us engages in numerous iterations daily, choosing products at the supermarket, evaluating the option of using a taxi instead of the subway, weighing the risks of purchasing cheaper goods or services, and devising expenditure plans for significant purchases. A closer examination reveals that our routine decisions adhere to basic financial management principles, intuitively embracing budgeting to achieve tactical and strategic life goals. The same applies to businesses: all financial processes demand structure and streamlining.

In financial management, several key components can be identified and, based on them, all financial tasks can be conditionally categorized into four blocks: personnel management, providing management and external users with decision-making information, asset management, and risk management. Why «conditionally»? Because these blocks are interconnected. Personnel management and motivation form the bedrock of all management processes, while risk management entails integrating control points and procedures into nearly all processes influencing financial management. Providing decision-making information essentially serves as the instrument panel for management, empowering the allocation of an organization’s assets.

People management stands as the linchpin of any collective endeavor, determining both successes and failures. Broadly speaking, even individual resource management can be efficiently structured under the encompassing concept of resource management applicable to group management. The essence of any manager’s role lies in the efficient utilization of resources. In modern business, people are recognized as the primary resource, maximizing added value in most countries. Hence, I accord precedence to personnel management: searching, hiring, motivating, and orchestrating the effective deployment of talent.

Subsequently, specific aspects relevant to financial management are addressed. It’s noteworthy that financial management significantly relies on in-depth knowledge of production (operational) business processes, legal functions and compliance expertise, understanding of the company’s technological infrastructure, familiarity with business marketing channels, and more – all of which impact managerial decision-making. However, for the scope of this discussion, emphasis will be placed on financial management, so I will thoroughly examine the key areas of financial management while others will be mentioned in passing.

Thus, the first financial block within the company management system to be explored is financial and operational reporting for decision-making by both external and internal users. This encompasses tax reporting for government authorities and consolidated reporting per international standards. The latter is essential for internal users (management and shareholders) and external users (tax authorities, potential investors, banks, and other interested parties) alike.

The second block involves asset management in a broad sense, encompassing the management of available internal and external resources, process organization, and business efficiency improvement. Asset management extends to activities such as optimal supplier selection. Furthermore, in recent years, possessing a strong banking history has become a highly valuable asset, particularly for international business operations and ownership of companies in multiple countries. Opening and maintaining bank accounts in the modern, fragmented, and sanction-limited banking landscape demands considerable expertise and sustained investment in relationships.

Lastly among the key financial leadership tasks is risk management: establishing internal controls to enhance business efficiency and mitigate situations where employees abuse their authority, whether intentionally or inadvertently. This includes the classic understanding of the control environment outlined in manuals for international financial reporting standards: corporate-level controls, information system controls (or IT controls), as well as financial controls.

Together, these delineated blocks constitute a complex network of interconnected elements of financial management. Ensuring proper process configuration, facilitating information exchanges, synchronizing participant actions, and implementing timely and adequate automation – these are all hallmarks of competent financial management and serve as essential prerequisites for the development of any business, whether they are commercial or non-commercial ventures.

In practice, the financial function seldom evolves at a pace commensurate with business growth. Typically, management and corresponding process development struggle to keep pace with core production process expansion. This discrepancy is not due to a lack of motivation on the part of financial leaders but rather stems from the residual resource allocation principle. However, this phenomenon extends beyond finances and applies to all service (non-core) functions for businesses. Nonetheless, neglecting the aforementioned aspects, whether deliberately or due to lack of knowledge, underinvestment in infrastructure, process construction and automation, as well as in financial department resources, significantly heightens business risks, often culminating in bankruptcies.