There are many situations where an experienced, commercially minded FD can add significant value to an organisation. There are also many scenarios where businesses make costly mistakes by not investing in genuine FD talent. Finance functions need direction and leadership in order to proactively support the business. Not all of these are relevant to every situation but they provide further insight into what investment in a quality FD will produce.
Cash kills - Availability of cash and working capital breathes life into businesses, a lack of either can kill them. Growth can place pressure on cash just as much as failure. The FD should be on top of the cash cycle at all times; producing integrated cash-flow forecasts and insight into pinch points and their causes. They will ensure payments and collections are proactively managed and will be able to secure appropriate funding when required. Being aware of, and prepared for, problems is where a strong FD can stop you hitting the cash buffers and avoid nasty surprises. Cash and working capital are also a key measure/ management tool used by Private Equity.
Growth is good – Not always. Growth needs to be controlled, managed and factored into business decisions. There will always be problems and constraints that affect growth; resource limitations (human, capital equipment, stock etc) contract challenges and sub-contractor problems. As businesses grow, they increase in scale and complexity. This requires investment in more sophisticated systems, controls and procedures. A good FD will know what is needed and develop the team, systems and operating methods accordingly.
Accurate, value added Management info is essential – Knowing how a business has performed historically is important but dated or incomplete management accounts add little value. Forecasting and budgeting (with sensitivity and “what if” scenario planning) are much more powerful tools. Many businesses have lots of data but no worthwhile insight or added value analysis. A good FD will provide meaningful MI and KPI’s that track and inform on performance and analyse results by customer/ sector/ service etc, thereby understanding what really drives the profitability of the business.
Challenge assumptions – Established businesses with experienced leadership can assume they are doing things well; without objective challenge, they can get stuck in a rut, even if they are growing. A good FD will act as a catalyst for challenge and discussion; lifting stones, digging around operational and commercial inefficiencies. They will analyse overheads, costs, trends, profitability in order to provide support to the Board’s decision-making process. Just like the other members of the senior management team the FD should be focussed on eradicating excess, cutting losses, maximising returns, making money and creating shareholder value.
Capital events – Raising external finance or attracting investment requires a range of skills; whether it is to support growth (appraising alternative financing methods) or to release shareholder value (via debt or equity) the business must have an FD and finance function capable of withstanding rigorous due diligence and producing well researched, modelled, tested business plans and long range forecasts. The FD will support the Exec’s vision, underpin the process and provide professional, enhanced information to interested parties. External stakeholders bring significant demands and increased corporate governance. A good FD will produce outstanding information and analysis together with robust controls and effective risk management; thereby instilling investors and lenders with confidence and directly affecting enterprise value your potential personal return.