In a previous post, we assessed why the possibility of down investment rounds mean debt funding is now a more appealing option. We also analysed how to maximise your chances of accessing debt facilities.

Naturally, standard-term loans remain one of the most popular forms of debt finance. But the last few years have seen the development of a new range of debt products. These developments are driven by technology and lenders using previously unobtainable data points.

Depending on your sector, business model and maturity, you may be able to access specialist debt products. These give you enhanced flexibility and/or which may be cheaper than standard loans.

Venture debt

Venture debt is a specialist product only accessible to high-growth companies. In the current uncertain economic environment, if you are venture capital-backed, this could be an excellent bridging option before your next equity round when favourable market conditions may return.

It allows you to retain equity while still accessing funding to support growth ambitions. Over the long term, it could be cheaper than selling shares.

Providers are commonly banks specialising in venture lending. In the UK, this includes Kreos Capital and Columbia Lake Partners.

The duration of venture debt loans is relatively short. Around one to three years. Values of loans are often capped at around 30% of the amount raised at the last funding round. For example, a company that has raised £100m could borrow up to £30m.

Given its high-risk nature from the lender’s perspective, venture debt interest rates are relatively high. Ranging from 12%-15%.

Lenders will likely get you to agree to a warrant to protect themselves, giving them the right to acquire a portion of equity at your current valuation. This gives them some upside as it can be exercised if your business increases in value and there is a liquidity event such as an IPO.

Revenue loans

Revenue loans differ from standard loans as the amount you pay back each month is variable. The repayments’ value depends on the agreed percentage of sales revenues in the period, with this rate lasting for the duration of the facility.

Seasonable-based businesses favour revenue loans due to their flexibility. For these companies, a revenue loan will mean higher repayments are due in busier periods and lower repayments in quieter ones.

For example, most e-commerce based businesses will complete the bulk of their sales in the run-up to Christmas, so will have higher repayments during the last quarter.

One of their main benefits is that they help ease cash flow. Providers may require you to pay a fixed fee of around 10%, but if you ask, they’ll often let you add this to the total amount borrowed to access the full finance needed.

The duration of revenue loans isn’t set. It will depend on future sales. The higher your sales, the shorter the arrangement. When considering if a revenue loan is the right debt product for you, put together a repayment schedule with your forecast sales figures to estimate how much it will cost you.

Merchant cash advances

Merchant Cash Advances (MCAs) are a variant of revenue loans only available to bricks and mortar retailers.

Businesses are given card terminals and repay loans based on the value of sales taken through this method. Lenders can access real-time visibility on sales by accessing data directly from the terminals. Which makes administration relatively easy.

The pandemic has led to a shift away from cash to cards. And contactless MCAs are becoming an increasingly attractive debt financing option. Advances can be up to around 150% of monthly card sales.

Flexi loans

Flexi loans are technology-powered overdraft facilities where you only pay interest on the value of funds being drawn upon. These types of loans are capped at around £500,000.

Providers like iwoca and Fleximize allow you to make applications online. Credit decisions rely on data extracted from your accounting software. Successful applications can result in funds being accessed on the same day.

Given their short-term nature, APRs seem steep at around 40%. However, this will be much lower in reality as you should only draw down on limited values for short periods if flexi loans are the right product for you.

They can be helpful to have in place if you are likely to face a short-term cash gap. And providers will often let you top up the value of the facility once borrowed funds have been paid back.

Seek out providers that offer no early repayment fees, as this will drive down the cost of funding.

Invoice financing

Invoice financing lets you access funding for your unpaid invoices. As well as easing cash flow, this form of financing saves significant admin time as staff don’t have to use precious resourcing chasing invoices.

Lenders usually provide up to 90% of the value of invoices upfront, with the balance being paid out when they are settled. Fees are charged at around 3% on the value of invoices.

Some lenders will require you to use them for your entire debtor book. Whereas others will let you pick vendors and invoices on a selective basis. Picking invoices on a selective basis may be more costly on a per-invoice basis. But overall can work out cheaper if you don’t require significant funding.

Invoice financing in the UK is available from well-known banks, including Lloyds and specialist and online lenders, including Close and Kriya.

Access finance soon to beat rate rises

Over the last 18 months there have been several interest rate hikes, with the Bank of England base rate rising to 4% in February (and rising again last week).

To avoid the possibility of financing costs increasing further you may want to lock in your debt financing now to access the best rates, whichever product you pick.

Visit our blog for more articles like this one or subscribe to get them direct to your inbox. Find out more about Soldo here.

Debt finance often isn’t the first choice of finance for growing companies.

A recent data point in Deloitte’s UK CFO Q4 2022 survey showed that bank borrowing and debt finance is the least attractive it’s been since the financial crisis. A large part of this is due to rising interest rates meaning that it is more expensive than at any time since 2009.

However, you shouldn’t write off debt finance as an option too quickly. It’s becoming harder to raise equity rounds at high valuations, and the changing market conditions mean that there is the possibility of raising “down rounds.” This is when the valuation on which you raise is at a lower value than the last equity funding round.

If you cannot raise finance at an increased valuation from the last round, you should consider debt financing. So you aren’t selling shares in your company too cheaply. This will also allow you to keep existing investors on side due to their capital holding its value on paper. And you can return to raise equity finance when the market conditions improve.

To maximise your chances of accessing debt finance, and at a favourable rate, read our tips below.

Fulfil filings at Companies House

Providing up-to-date filings at Companies House will provide lenders with clear statutory information on which to make credit decisions.

Filings should be completed for your annual accounts, confirmation statement, recent shareholder changes and amendments to articles of association.

Warnings on Companies House for late filings will raise potential red flags for lenders and could damage your chance of accessing facilities.

Have up to date management accounts ready

While statutory filed annual accounts are the gold standard due to needing to implement recognised accounting standards, they can be filed up to nine months after year-end.

This means there are many instances where you’ll have up-to-date filed annual accounts at Companies House. But which are viewed as too old to provide meaningful current information for lending decisions.

Therefore you should also have current management accounts ready to provide to lenders. While you may not prepare these formally, cloud accounting software makes it easy to generate instant monthly management accounts that can be exported into a PDF format.

Accuracy of management accounts can also be enhanced by using spend management tools that will be updated with business spend in real-time. Rather than an out-of-pocket approach that manually needs to be updated on accounting software at month end with expense claims.

Provide recent bank statements

Most lenders require bank statements covering the last three months of activity.

Larger businesses are likely to have multiple accounts in different currencies. Downloading statements manually can be time-consuming, and you may mislabel files and send incomplete data.

Use Open Banking connectivity to seamlessly connect and download bank statements in one file per account. This will save time for you and lenders.

Consolidate debt and any outstanding loans

If you already have debt finance document any facilities, including monthly repayments, interest rates and duration.

Consider consolidating outstanding loans. This makes it easier for new lenders to understand your circumstances and get a clearer picture of affordability.

As well as simplifying your finances, consolidating debt can be a cheaper option than servicing several loans.

Create cash flow forecasts

Cash flow forecasts aren’t a pre-requisite to receiving debt finance. But they demonstrate to lenders that you take debt repayments seriously.

Forecasts should consider the value of the loan being sought and show monthly repayments too.

Cloud forecasting tools, such as Futrli, Float or Fathom, will streamline the production and maintenance of cash flow forecasts. And take up a fraction of the time from creating them on spreadsheets.

Monitor your credit score

Your credit score is hugely influential when it comes to accessing debt finance.

In advance of seeking funding monitor your company’s credit score to ensure it is as high as possible. Unfortunately, credit scores aren’t universal, but Experian and Equifax are two of the most widely used bureaus.

Negative elements that could affect your credit score include County Court Judgements (CCJs), late company filings, and not paying your suppliers on time.

These are all solvable issues but should be addressed in advance of debt applications.

Shop the market

Using online brokers is an efficient way to see the fullest view of the market. Funding Options, Capitalise and Swoop Funding, allow you to complete one application that will shop the whole market for you. These tools assess a range of different lenders and funding products.

This is fast and can unearth the cheapest and most relevant form of financing. Ensure you only work with brokers conducting soft credit searches, so your score is unaffected.

In the next post we’ll explore innovative and new forms of debt funding that may be suitable for your business. But which you may not have heard of before.

Visit our blog for more articles like this one or subscribe to get them direct to your inbox. Find out more about Soldo here.

One of the trickiest balancing acts for any finance leader is resource planning. That is, do you have the resources required to meet consumer demand or to effectively complete admin requirements.

It’s about finding a Goldilocks zone in terms of headcount. If the finance team headcount is too high, you’ll be incurring significant overhead without fully utilising staff. And if your staffing is too lean, you’ll struggle to get everything done without overworking staff.

Using outsourcing to fulfil bookkeeping and compliance requirements can be an effective way of overcoming this dilemma. Working with a third party, whether locally or with an offshore provider, allows you to flex resources when needed.

How to cut costs with outsourcing

Business process outsourcing can be an efficient way of cutting costs. By only paying for service delivery as and when needed, you won’t have to worry about staff being underutilised.

It can also be cheaper than hiring additional staff members as you won’t have to pay for additional costs such as office space, computer equipment, benefits and employer taxes.

You can engage with suppliers to deliver jobs either at a set price or on an hourly basis. If work is delivered at an hourly rate, you can also cap fees.

Both options let you accurately budget costs associated with the finance department. With the price per job basis giving you confidence around the certainty of work being delivered on a project basis.

Be more agile

Outsourcing also allows you to scale resources up and down in line with the requirements of your business. For example, you may require more support during annual audits when finance team members are pulled away from business as usual to support auditors.

It’s critical for core team members to have adequate resources for audits. Getting audits filed speedily and on time will be a requirement for existing investors. Failure to do so may make raising further investment rounds or agree debt facilities more challenging.

Business process outsourcing frees up your finance team to focus on the audit. And lets them provide a better level of service to auditors. While also enabling existing everyday data processing requirements to continue unaffected.

Business process outsourcing

Consider outsourcing any finance workflows that aren’t value-adding or strategic. These can be summed up as activities heavily reliant on data processing, including:

• Bookkeeping
• VAT
• Accounts production
• Payroll.

It’s still essential that these are completed in a timely and accurate manner. So finance team members will need to manage assignments and allow sufficient time for reviewing the output of outsourced work. If you are outsourcing VAT, why not check out our previous post on how to review VAT returns.

Strategic work which you should keep in-house includes:

• Forecasting
• Data analysis
• Business partnering.

These require team members to be ingrained in the day-to-day business to have timely oversight of how the company is performing and short- and long-term goals.

This range of tasks required a higher-value skillset than data processing. Team members will need to demonstrate strong communication skills, commerciality and an ability to manipulate and interpret data.

What to cover in outsourcing Service Level Agreements (SLAs)

You might want to outsource certain business functions – but you’re unsure about what to include in a SLA with third party provider. Here’s a quick cheat sheet on what to include.

Scope

SLAs should agree on the full scope of work, including responsibilities and set timelines. Providing more detail will minimise the likelihood of disputes from suppliers.

For example, if you are outsourcing VAT returns, include set recurring deadlines for activities and cover what each party is responsible for.

As a rule of thumb, a timeline for outsourcing VAT returns may require you to submit transactions to the outsourcer two weeks after the period end. Give them a week to complete work, with the output being sent to you for review before they file the approved return.

Security

Ensure SLAs cover security so that confidential company data isn’t leaked or misappropriated.

Alongside the need to protect this for organisational purposes, you may have an additional requirement by the FCA if you are in the financial services sector. You could face fines if adequate precautions are not put in place.

Ensuring outsourced suppliers incorporate GDPR is a good place to start. The gold standard is that they use tools accredited with the highest security measure, such as ISO 27001 and SOC 2.

Apply an iterative approach

To get comfortable with outsourcing, test the waters with relatively simple tasks. Such as weekly bookkeeping, to assess the quality of work from suppliers and become familiar with reviewing their work.

Once you can see outsourcing works for you first hand, you won’t look back.

Visit our blog for more articles like this one or subscribe to get them direct to your inbox. Find out more about Soldo here.

After the topsy-turvy of Kwasi Kwarteng’s Budget, Jeremy Hunt has consistently cut a steady figure as Chancellor. Leading into Budget 2023, a Tory insider told the FT it would be a “Budget for wonks”.

And yet, the Chancellor finally let loose a little bit in today’s speech. His spirits perhaps bolstered by the UK narrowly avoiding an economic recession and the Office of Budget Responsibility (OBR) reporting that it expects inflation to “fall from 10.7% to 2.9% by the end of 2023”.

In his response, the Labour leader Sir Keir Starmer accused Hunt of dressing up “stagnation as stability”. Despite this criticism, it’s clear that the macroeconomic situation has improved.

Brightening (albeit still somewhat gloomy) economic prospects meant the Chancellor was finally able to move beyond just immediate economic firefighting. He announced a series of measures aimed at getting the UK’s 1.1 million labour market vacancies filled.

The headline grabber leading into today was the £4 billion expansion of free childcare for working parents in England. It’s a policy gambit that the government hopes will get more people – specifically mothers – back into work.

Currently, many households are constrained by the exorbitant costs of childcare. For employers, the policy should hopefully relieve what has been a “historically tight” labour market. The government has also said it will loosen restrictions on migrant workers for “specific sectors”. Details are light on what this means, however.

Tax announcements in Budget 2023

Listening to today’s speech, the Chancellor’s big wish is for British businesses to invest in new machinery, premises, and people. The aim, Hunt said, was to turn the UK into a “science and tech superpower”.

To support his goals, he announced a raft of tax measures designed to unshackle British business investment (or so he hopes). At the same time, he resisted calls to back track on increasing the Corporation Tax (CT) rate.

For businesses, the Chancellor announced:

• A new, three year “full expensing” initiative for capital allowances where every penny you invest in IT equipment, plant or machinery can be deducted “in full and immediately” from taxable profits
• New incentives for UK investors and pension funds to commit to early-stage companies
• A new tax credit for small and medium-sized firms that allocate 40% of their expenditure on R&D
• An increase in the CT rate from 19% to 25%
• An end to the “super-deduction” (this offers 130% tax relief on companies’ purchases of equipment).

Cost of living looms large

Despite the Chancellor’s cautiously upbeat speech, cost of living worries was a common thread throughout. Pressure on household finances remains.

The extension of free childcare announcement and maintenance of the energy price guarantee offers some respite but, as our research with Ipsos shows, workers continue to struggle.

As costs rise, current practices like out-of-pocket expenses are increasingly at odds with employees. The Ipsos research shows that employees rely on credit card debt (52%) or borrowing from family and friends (14%) to cover expenses.

There’s much for the Government to do on the cost of living. But the sole responsibility doesn’t lie with Westminster. As our research illustrates, businesses can make a meaningful impact on their employees’ lives, too.

Are out-of-pocket expenses still fit for business? Soldo recently partnered with Ipsos to survey 400 employees across a wide range of industries and company sizes to find out.

Set against the backdrop of the rising cost of living in the UK, our Cost of Business Crisis report delves into the impact out-of-pocket expenses are having on staff’s financial and mental wellbeing.

In this article, we’ll take a look at just some of our key findings to answer these questions:

• What are out-of-pocket expenses?
• What’s wrong with the process?
• Is there an alternative to expense reimbursements?

For full details and analysis into the way the cost of living crisis has upended expense management, get your free copy of our Cost of Business Crisis report.

What are out-of-pocket expenses?

When an employee pays for work-related expenses with their own money on the promise of being reimbursed by their employer, we call these purchases out-of-pocket expenses.

Of course, it’s unlikely they’re fronting the office electricity bill. Think more along the lines of the flights, accommodation, fuel and food an employee might buy while travelling for business.

Our Cost of Business Crisis report found 67% of respondents saying they pay for work-related expenses with their own money at least once a week.

So paying out-of-pocket and waiting for your employer to pay you back (an expense reimbursement) is not an unusual process. The problem, however, is that the process is far from perfect.

What’s wrong with the process?

It’s no secret that we’re in the middle of a cost of living crisis. When people are already struggling to keep up with their personal expenses, paying out-of-pocket for a business purchase is frankly a lot to ask.

61% of our survey respondents reported feeling anxious about paying for work expenses with their own money at least some of the time. And 72% said that doing so has negatively impacted their personal finances.

Some employers might provide ongoing expense reimbursements very quickly. Others may only reimburse employees for all their out-of-pocket expenses at the end of each month. This is of course assuming there aren’t any delays in the process. A missing receipt, for example, or a dispute may drag out the process further.

Even without delays, this kind of expense process is often very manual and admin-heavy. There are lengthy forms to fill in, receipts or other paperwork to keep track of and multiple steps involved with seeking or providing approval. The process often puts people off entirely.

57% of respondents admitted that they don’t claim all of their out-of-pocket expenses due, in large part, to long approval times (35%) as well as the time and effort involved (30%).

So while many people are both worried about and negatively impacted by out-of-pocket expenses, they’ve also lost hope in the process of claiming expense reimbursements. This isn’t just unfair on employees. The cycle of out-of-pocket expenses and expense reimbursements is a major pain point for finance teams and the business as a whole:

• Finance teams become ‘the bad guy’, wasting days chasing missing receipts – or worse, having to withhold reimbursements because of it
• The extra hours spent on an inefficient expense process leaves less time for finance teams to focus on higher value, more fulfilling work
• Businesses only have a partial and out-of-date view of costs with a jumble of company spend and out-of-pocket purchases they can’t easily analyse or control
• All the lost time and inefficiencies faced by employees and finance teams leads to lower employee satisfaction while slowing down overall operational momentum

The predominant method of expense and reimbursement causes pain for both employees and employers. There is a readily existing alternative, however. 

Is there an alternative to expense reimbursements?

We asked 400 people what they’d do if they had free rein to completely change the process of paying for work expenses at their company.

62% of respondents said they’d give every employee a company card and end the need for expense reimbursements entirely.

With Soldo, a change like that is actually very easy.

We see the problem from all sides: employees feeling the financial strain, finance teams weighed down with admin and businesses that need control over spend. That’s why our expense management platform comes with integrated Mastercard® company cards – to make expenses easy and fair for everyone.

Here’s a quick breakdown of how Soldo works:

• A Soldo company card gives employees instant access to company money so they never have to pay out-of-pocket
• Each card is linked with our expense management platform which saves finance teams hours of time and effort, from approvals through to reporting
• The business has complete control over every budget, card limit and spending category with real-time visibility of every transaction (company spend as well as employee expenses)
• We’ve thought of everything including a mobile app employees can use to upload receipts and accounting software integrations for one-click reconciliation

“Fundamentally, we don’t believe our employees should be loaning the business money, so they all have Soldo cards.

It just makes our jobs really easy because there are no expense forms and no chasing receipts. I can’t imagine business without Soldo.”

Gus Ferguson, Salience Co-founder and Soldo customer

This episode of the CFO Playbook features an interview with Justin Lackey, CFO at Asset Panda, an asset tracking and management SaaS platform.

Justin talks with us about the importance of data analysis, maintaining transparency, navigating risk appetite when conducting business during black swan events like the Covid-19 pandemic, and adapting to and remaining motivated in remote work environments.

Become obsessed with revenue

Revenue is the lifeblood of every business. When it comes to finding the balance between being efficient and effective, increasing revenue is the ultimate goal. The light at the end of the tunnel.

From Justin’s perspective, CFOs require a complete understanding of revenue generation is key.

“I like to look at everything as a revenue-generating role, right? What are you doing to impact revenue? Whether it’s a tweak you’re making in our sales process, our marketing process, or insights you’re helping give them, there’s a direct downstream impact on revenue for that.

“Becoming obsessed with that revenue side of the business, I think is important for any young analyst or any CFO.”

Digesting and sharing data analysis

Finance is a numbers game. And as Justin notes, we’re really living in a golden age for data analysis nerds. Technology enables us to get incredibly granular. That’s great — but, of course, not everyone in the business is as clued up on finance.

Great, you’ve got all this info. But does everyone else grasp it, too? “I think a good quality for a CFO or CRO is, can you take complexity and make it digestible.

“That is always the million dollar question of, okay, we have this preexisting analytics set of historical information. How do I put this into an action item and how do I deliver it so anyone can understand it?”

Navigating risk appetite

Quick thinking and action keep you ahead. It’s important to look down the line and make predictions based on what you know. Lead with a hunch, backed by whatever data you have at the time, and be prepared to adjust course when necessary.

“I think haste of pivot is super important. Boils back down to that data collection piece of, how long is too long for a project to kind of run its course.

“You have the opportunity to act much quicker based on leading indicators than you could’ve. It’s not all about waiting until seeing the win rate anymore, waiting until seeing total revenue, right? You can kind of grab some of that upfront data analysis, make some pretty educated guesses, and pivot quickly.”

Adapting to remote work

With remote work, it’s more important than ever to find a balance between being efficient and effective. A proper combination of the two can afford one the ability to succeed in their field, and consequently, their own life.

“There’s a famous kind of mindset model that talks about the different zones that people can find themselves in. And there’s a reactive zone and a proactive zone, along with a waste and a distraction zone, things like that.

We spend a lot of time in that reactive zone today, but we’re not necessarily using time in the proactive zone that can lead to efficiencies within that reactive zone. What am I doing day-to-day that really could be automated that’s taking up a lot of my time, and how do I invest that time back into my personal life.”

You can listen to the full interview with Justin Lackey here. Like what you hear? Subscribe to the podcast!

The cost of living crisis and employee expenses

With the increase in energy bills and other essential living costs in the last year, most people are feeling the effect on their finances, and employees are no exception; more so those being asked to pay expenses out of their own pockets.

In many companies, the expense management process is still manual and time-consuming: employees submit expenses, fill out spreadsheets, and provide receipts at the end of the month for reimbursement. Automating the process can speed up expense reviews, reduce errors, and alleviate the strain on employees’ finances.

Key topics 

• What’s wrong with traditional expense management processes and how they impact employees
• How an automated solution can cut out the extra work
• How Soldo takes the hassle out of expense management

Speakers 

• Fran Badenhorst, UK Content Lead, Soldo
• John Rakowski, Head of Product Marketing, Soldo

In his book For Profit, the law professor William Magnuson sketches a surprising history of the corporation. Throughout history, he shows that corporations were purpose-built to solve societal problems or tackle grand projects.

Corporations built Ancient Rome’s roads and aqueducts, helped the arts flourish during the Renaissance and facilitated the blossoming of the 20th-century middle class.

Things are different now. In many ways better – but, in some ways, not so much. Enterprise is more dynamic and more open to everyone. And the ways companies serve consumers are more diverse and specialised.

But perhaps, as Magnuson’s book illustrates, a more cooperative or social bent to commerce has somewhat diminished. Companies used to have a much more acute appreciation of society (both society at large and the society in miniature that exists in the company’s workforce).

Cuts and worker morale

We only need to look around us to get a barometer reading on worker morale. The UK is gearing up for its largest strike wave in three decades. General morale is dipping (particularly in sectors like care).

Household consumption is set to shrink by 2.3% in 2023. Business investment is set to contract by 3%. Even small creature comforts like Netflix are being eschewed. The streaming giant will shed 700,000 UK users over the next two years, analysts predict.

These are tough economic times. Cuts are a fact of life. Spending needs to be reined in, costs cut. And, perhaps most unfortunately, workers may lose their jobs. It’s easy for these cuts and changes to be adversarial. But that needn’t be inevitable.

Of course, you can’t please everyone when reducing business costs. There are no cost-cutting options available that don’t bring some collateral damage. And the impacts last: A Dutch longitudinal study of employee morale post-cuts, found reduced job satisfaction and less loyalty toward the organisation for at least two years after the cost-cutting event.

Reducing business costs (while minimising damage to morale)

There is no easy option when reducing business costs – but some are better than others. Let’s look at some choices available to company leaders.

Reduce executive compensation:

‘We’re all in this together’ is a common sentiment during an economic downturn. And employees often greet it with suspicion. To paraphrase Animal Farm, it seems that some are more ‘in this’ than others.

That’s why reducing executive compensation (and being open about it) is a powerful tool. By how much? Well, that’s an open question. But certainly enough to signal to employees that management is feeling the same pain. Especially in the case of layoffs.

Reduce expenses:

You need to look at expenses. And not just the costs – but also how you’re managing them. If your expense management system is rudimental and doesn’t allow granular analysis of costs, then investing in a new system is step one.

‘Investing’ doesn’t have to mean a high cost. Many expense management solutions are now in the cloud. Implementation is quick and it’s based on a monthly subscription.

The old saying in business that you have to ‘spend money to make money’ is also true with saving. Sometimes you have to spend money to save it. An expense management solution will make minimising T&E much simpler and also more humane.

When cutting costs, be very wary of items that are high-value but low-cost. Sure, getting in cheaper coffee might save a few pennies – but is that really what’s weighing down the company’s finances? Apply a weighting to these sorts of costs. The harm to morale could outweigh any money saved.

And don’t be afraid to open the floor when it comes to cuts. Get what’s known as functional leaders involved. These are people who aren’t necessarily formal management, but widely respected for their work and influence. Their buy-in when cutting costs is invaluable.

Manage out poor performers:

This should be standard operating procedure, even during easier economic times. Accelerate this process during a downturn. Especially when cuts must be made.

Psychologically, employees will view this as different to workforce cuts. A job loss tied to performance is different to an across-the-board downsizing. It can be a powerful shield for employee morale.

Pushing through the downturn

The downturn is temporary. At some point, it will abate and you can loosen your grip on costs and investment. For now, though, a defensive mindset is what’s needed.

No one is enthusiastic about cuts. But damage to morale can be managed. By making cuts more strategic, you can lower your costs and improve resilience without harming worker (or, indeed, your own) morale.

Visit our blog for more articles like this one or subscribe to get them direct to your inbox. Find out more about Soldo here.

This episode of the CFO Playbook features an interview with Rebecca Kacaba, CEO and Co-Founder of Dealmaker, the leading platform for large scale equity crowdfunding.

Rebecca talks to us about equity crowdfunding as a viable funding pathway for larger and scaling companies, leading and persevering through the global pandemic. And how traditional equity and debt finance mechanisms fail business leaders who don’t fit the pre-defined mould.

Equity crowdfunding as a go-to method for raising capital

To Kacaba, equity crowdfunding is not just an alternative to more traditional equity or debt finance. It’s a reconfiguration of it, too.

“Equity crowdfunding is, fundamentally, a digital message,” she explains. “If you think about that versus the traditional walking into the boardroom and shaking hands. These are heuristics based on appearance and even things like joking around.”

“That is a different process than putting your business’s value prop online and a quick video-based elevator pitch.” In equity crowdfunding, it’s the idea that resonates with potential investors.

Who the founder is (or what they look like) matters less, Kacaba says. To listen to her speak, it’s clear that Kacaba views Dealmaker as a natural haven to people alienated by the normal, perhaps slightly staid machinations of institutional finance.

The stats seem to bear out Kacaba’s point. Female-founded businesses, for instance, have flourished on the platform. Receiving over 30% of the capital raised on Dealmaker (dwarfing the sub 3% of VC capital that goes to female founders.

Culture and employee retention

Company culture can make or break hiring and retention. A lot of people really crave self-learning, growth and innovation in a workplace, and it’s hard to find. Establishing company culture comes from the top, as employees will look up to executive leaders.

“We try to treat our team as well as possible, but ultimately, having a strong culture, we know what we are, we know we’re a culture of high performers. And other high performers wanna be a part of that. And that’s a very unique culture.”

The importance of finance

In many cases, finance can allow for predicting the future in certain markets. While it’s stereotypically portrayed as just number crunching, the modernization of the finance function has aided in massively growing companies.

“I think to me, finance is such a cool function because when you have strong control over the numbers, it can play a really predictive, forward looking role in the organization. In terms of helping filter through acquisition targets and modeling future revenues as part of the capital raising process.

I think traditionally a lot of people think of finance and back-office as just back looking. And to me, the power of finance is in the forward looking aspect of the numbers and what the numbers can tell you about the future.”

The role of a growth company CEO

What is required of a leader at any growth company is the ability to think critically. It’s important to take a step back and realize the extent to which the company’s vision aligns with its pattern of growth. Trust in the supporting team is important as it allows the leader to remain focused on vision at large.

“I had practice zooming into detail and then zooming back out as a partner from a macro perspective. I think that’s really what’s required of you as a growth company CEO. You have to know when to jump in on something and dive down into the weeds. And then you have to know when to pull back up and stay at a high level.”

You can listen to the full interview with Rebecca Kacaba here. Like what you hear? Subscribe to the podcast!

Interest in sustainable investing is exploding. In 2022, 65% of all investment in European exchange-traded funds (the most popular type of investment among retail investors) went into “ESG-compliant” products.

Businesses are under growing pressure to present themselves as ethical, and environmentally and socially responsible.

ESG (Environmental, Social, and Governance) has become one of the most commonly bandied-about terms in business circles. And ESG ratings and data have grown into a $1.3 billion (around £1.08 billion) industry.

But is ESG actually an effective way to evaluate organisations’ impact on the planet? Or is the term close to becoming — if not already — a meaningless buzzword?

What is ESG?

Essentially, ESG is a framework to help with sustainable investing. It measures the overall impact of a particular business on our planet. The assessment is carried out by evaluating performance under three key pillars:

Your effect on the environment (Environmental)

These include considerations such as:

• Your carbon footprint
• How much energy you uses to make your products or deliver your services
• How you source raw materials
• Waste management practices.

Your Impact on the communities you operate in (Social)

• How do you engage with consumers, suppliers, and other stakeholders?
• What are your employment practices like?
• And what kind of approach do you take to product safety and protecting the locals’ quality of life?

How your business is managed (Governance)

• Are there checks and balances in place to ensure management behaves ethically and responsibly?
• Do you have a diverse leadership team?
• Is there a culture of inclusion?
• Do you engage in government lobbying or other political activities?

Sustainable investing: not a new thing

Sustainable investing might seem like a new-fangled invention. But letting ethics drive investment decisions isn’t a new concept.

When the Methodist Church and the Quakers began investing on the stock market in the 19th century, they intentionally avoided companies involved in alcohol production, gambling, and other activities they considered morally questionable.

The idea caught on, and the first ethical investment fund — a mutual fund, called the Pax Fund, set up in protest at the Vietnam War — launched in 1971.

ESG takes things further. It provides, in theory, a set of criteria that lets investors assess how ethical and sustainable any business is.

The idea is that businesses with high ESG scores are bringing about positive change. And, so, are more likely to keep thriving. While those with poor scores are harming the planet, putting their long-term future at risk in the process.

The benefits of ESG and sustainable investing

Mainstream thinking around ESG is that it’s critically important. For two reasons.

First, at a time when people are increasingly worried about climate change and actively seeking out sustainable businesses, ESG offers a set of objective criteria to judge businesses.

There are those businesses striving to improve the planet – and those that, despite billing themselves as sustainable, have questionable credentials. Or, as the ICAEW puts it, ESG is “a mechanism to hold institutions accountable for their operations…”

Second, and more to the point, ESG’s proponents argue it offers compelling financial benefits. Studies suggest that investments with high ESG scores deliver above-market returns. This is typically attributed to the fact that ESG-compliant, sustainable investing is better in the long term.

ESG also makes it possible to identify opportunities and risks that wouldn’t turn up in a traditional financial analysis. Such as the benefits of creating clean, renewable energy, or avoiding the harms of child labour.

Most significantly, ESG is sometimes boiled down to a question of supply and demand. More and more, the argument goes, investors want to put their money into sustainable businesses. So, to remain competitive, investment products need to be sustainable. And ESG offers a way to ensure this is the case.

Beyond the hype: what if Emperor ESG has no clothes?

While, at first glance, it’s hard to disagree with the idea behind ESG, its detractors believe the arguments in its favour are fundamentally flawed.

According to Stuart Kirk, HSBC’s former global head of responsible investments, there are two key problems with ESG in its current form.

First, he says, the financial risks from climate change are being blown out of proportion.

“A common argument,” he says, “is that [climate change is] going to hit GDP in year number, whatever, 2100? They reckon it’s going to lop off 2.5%. Their worst case model lops off 5%.

“What they fail to tell everybody is that between now and 2100 the world is going to be between 500% and 1,000% richer. Lop 5% off that in 2100, who cares? You’ll never notice.”

Second, he says, humans have a track record of adaptation which climate risk models fail to take into account.

He explains:

“Imagine you’re in 1920 or 1930  and somebody said, ‘Stuart, what do you think the effect on growth will be of carbon emissions over the next 100 years?’ And I’d get out my model and go okay, well, there’s a lot of gas guzzling cars, there are a lot of ships, there’s a lot of industry that doesn’t look very good. And we would put together a really, really nasty outlook for today from what we knew.

“We would never have understood deindustrialization. Or the rise of the service economy. We would never understand how machinery is getting more efficient. Likewise, we have no idea what the next 50, 100 years are going to bring.”

The ‘perverse’ incentives of ESG

Kirk’s presentation was roundly condemned for “making light” of the climate crisis and ultimately cost him his job. But even some of his biggest detractors acknowledge that, from a purely financial perspective, he’s talking sense.

PGGM’s head of responsible investment Piet Klop, for instance, observed that: “It’s hard to deny that the ecosystem is going down the tubes [but] within the financial system as we currently know it [Kirk is] probably right…”

Similarly, in an article that ostensibly defends ESG, Peter Krull says bluntly that “many of the ESG funds that retail investors expect to be green are far from that.”

Echoing Kirk, Professor Hans Taparia, of the New York University Stern School of Business, believes the biggest issue with ESG is that it does things backwards.

Instead of scoring businesses on how ethical and environmentally and socially responsible they are, it measures how much carbon emissions, dodgy labour practices, and other ESG factors could harm financial performance.

This, he says, produces perverse results.

“McDonald’s, for instance, was given an upgrade of its ESG rating [in 2021] which cited reduced risks to the company’s bottom line as a result of changes that the company made concerning packaging material and waste.

“But greenhouse gas emissions from the operations and supply chain of McDonald’s, which is one of the world’s largest buyers of beef, grew by 16 percent from 2015 to 2020. Those emissions are a direct cause of climate change, but because [they weren’t seen] as posing a financial risk for McDonald’s, they didn’t negatively affect the rating.”

ESG: right idea, wrong approach?

With scientists issuing increasingly stark warnings about catastrophic climate change and the United Nations observing rising inequality across the globe, it’s clear that the way we do business needs to change. For both ourselves and the generations that will come after us.

From this perspective, ESG is perhaps a step in the right direction. In the sense that it embeds the impacts bad business practices have on society and our planet into our collective consciousness.

As McKinsey’s Sara Bernow notes: “ESG puts the spotlight on sustainability not only in those companies where it is obvious from a value-creation perspective but also where it has been less obvious yet the value-creation potential is still there.

“For example, a company’s ability to reduce its energy consumption is a huge value-creation opportunity.”

Is ESG fit for purpose?

But if intentions are to become action and, in turn, create real, lasting change, the way businesses’ ESG rankings are assessed may need to be rethought.

“One of the tragedies of this whole debate,” says Stuart Kirk, “is that we obsess about mitigation and not enough on adaption financing.

“There are 1000s of opportunities out there. We have a trillion dollar car company that nobody predicted five years ago, including myself, and they’re the sort of opportunities we need to invest in.”

Hans Taparia is even more scathing.

“The current system,” he concludes, “works well for Wall Street. It keeps the raters in business because it ensures that their customers, the investment firms, have lots of stocks with which to construct portfolios.

It enables financial institutions to present themselves as contributing to the well-being of society and the planet. And it allows them to charge higher fees to investors, because ESG funds are seen as different from conventional index funds, in part because they tap into investors’ consciences.

“But this system isn’t good for the world. Just regular capitalism at its slickest: ingenious marketing in the service of profits. The best approach would be to measure the costs to society and the environment that are not directly borne by companies.”

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