Stuart Bilbrough says CFOs need to focus on supplying insightful and decision-orientated information that is forward-looking

This is first of a three part series for senior financial managers looking at transforming the company financial function into an effective leadership component of their enterprise.

By Stuart Bilbrough*

The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria and date back more than 7,000 years.

The people of that time relied on primitive accounting methods to record the growth of crops and herds.

When medieval Europe moved to a monetary economy in the 13th century, merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans.

One important breakthrough took place around that time: the introduction of double-entry bookkeeping.

Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (early Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. Although Luca Pacioli did not invent double-entry bookkeeping, his 27-page exposition on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today.

Accountancy itself was not recognised as a profession until 1854. This took place in Scotland when The Institute of Accountants in Glasgow petitioned Queen Victoria for a Royal Charter giving legitimacy to a profession that was growing quickly. The Edinburgh Society of Accountants adopted the name "Chartered Accountant" for members.

Leap forward 150 years and abacus and manual ledgers have long gone and given way to increasingly sophisticated IT solutions that allow greater visibility of an organisations financial performance.

How an organisation is able to utilise this information to add value is where our Finance teams have needed to step up.

The expectation on our CFO’s and their team’s has been to move beyond core transactional accounting and partner the business and add value.

Same ol' story

I attended a breakfast in Auckland back in March 2011 hosted by Hudson Accounting and Finance who presented their report, “The Changing Face of Accounting and Finance.” Those who attended were predominately Heads of Finance of Auckland corporates.  (I believe they did the same in all of their Australasian offices.)

It was an interesting session and with a lot of discussion about the report’s findings and the challenges these Heads of Finance had with developing their teams to support them and the business.

To develop my own Finance team and their understanding of value and having recently started the research for my book, Bean Soup – Beyond Bean Counting, I’d started pulling together a number of articles and reports like the Hudson one. One of the older reports dated back to 1998 with the Institute of Chartered Accountants of Australia’s “CFO of the Future” series. 13 years on and it seemed the challenge remained.

If you search the Internet you will find a lot of references to how a CFO should be stepping up. The ICAA report mentioned above had three further iterations with “The New CFO of the Future – Finance Functions in the 21st Century – 2001,” “The CFO of the Future – Leading through Influence and Integrity – 2004,” and “CFO of the Future – The evolving role of the CFO – 2007.” There is also the ‘must have’ book for all CFOs, the late Jeremy Hope’s book, “Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add Greater Value,” Harvard Business School Press, Boston, 2006.

Now in 2013 does the issue of CFO’s and their Finance team’s adding sufficient value remain?

My view is that the majority of New Zealand CFO’s know they need to be strategic and add more value to the business they support, if they’re not already. Hudson’s report was interesting but did seem like the same ol’ story that every couple of years raises its head and shouts, “Hey, bean counter! You adding value yet?”

No longer to be seen as staid and boring bean counters that are out of touch with the business they supposedly support, CFOs have needed to become business partners, valued contributors and trusted financial advisors. Getting their whole Finance team to step up has been the challenge.

Really, what is Value ?

Here is a general definition of what adding value is from a Finance team’s perspective:

1. Adding value is being able to supply insightful and decision-orientated information to the key decision makers of the business that the Finance function supports.

2. It is also providing forward-looking information that the key decision makers of the business needs. Proactive decision support is a key part of providing value and ensures risks are minimised, opportunities seized, costs managed and strategies realised.

The above definition includes a couple of terms that I’ll explain further and are key to value:

1. Decision-orientated Information
This is information that is useful and assists the receiver in understanding and growing their business unit or department. They gain knowledge that they can use and do not need to interpret themselves – as opposed to providing ‘just the numbers.’

2. Proactive Decision Support
Finance needs to provide a proactive flow of financial performance information and insights to their stakeholders without necessarily being asked for it. Being reactive is when it needs to be asked for and that is not a good sign for effective business partnering or decision support.

3. Key Decision-makers
The key decision-makers are those people within an organisation whose decisions make the most significant impact on its direction. Those that make the most significant decisions generally set the strategy of the organisation. Lesser decision-makers make the strategy happen. The Board of Directors and CEO are key decision-makers, as are the heads of department. Who is “key” to decision-making will vary between organisations.

The accounting profession has come a long way since ancient Babylon yet in the last few decades it has gone through a lot of change with expectations to add value increasing significantly.

But there remains the need to continue the day to day transactional processes and ever increasing compliance, thanks to the likes of Enron and more recently the failure of a large number of New Zealand and international financial institutions, which competes with the time available to provide that value.

The next article will look at the challenges of managing the day to day accounting and finance functions while developing and implementing strategies that demonstrate that value and Getting the Balance Right.

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Stuart Bilbrough is the author of the book, Bean Soup – Beyond Bean Counting. You can read a review of the book here. You can buy it here.