Stuart Bilbrough shows how Finance can be considered a business partner, a trusted advisor and a value-adding contributor to any enterprise

Targeted towards smaller to medium sized organisations, the previous article looked at the expectation on our CFO’s and their Finance team to move beyond core transactional accounting and partner the business and add value.

This included a little bit of history and the fact that in the last couple of decade’s expectations to add value have increased significantly.

We defined adding value as being able to supply insightful and decision-orientated information to the business that the Finance function supports.

This month looks at the challenges of managing the day to day accounting and finance functions while developing and implementing strategies that move a Finance team beyond financial control and add value.

It is all well and good to add value but the day to day transactional processes and compliance restricts the time available to provide that value.

It is therefore about getting the right ‘balance’ in your finance team, between day to day transactional processes and compliance and using finance as a key business partner.

Ensure the yard is tidy – The 3 C’s

When looking at how to add value it is important to first ensure the Finance function is operating in an efficient and accurate manner before embarking on moving towards becoming an effective business partner and adding value.

In mid-2009 I took up a newly formed role in Bahrain as Group Head of Finance for a local company. The company had a new head office function and three operating companies based in Kuwait, Bahrain and the UK. Each company had its own IT system, chart of accounts and various forms of internal control. Head office had just been set up and my initial task was to consolidate and report to the new owners. There had never been a consolidation before. Nightmare.

While planning to improve the Finance function the 3 C’s were invented.

This stands for consistency, control, contributor. They represent the vision for a Finance team – that is, “To be considered a business partner, a trusted advisor and a value-adding contributor to the business.” Before this can be achieved Finance needs to have a foundation of tight control and consistent application.

The first goal of Finance is to ensure there is consistency in charts of accounts, general ledger systems, common processes and common policies and procedures.

IBM wrote a report called "Balancing Risk and Performance with an Integrated Finance Organisation". It lists the following as the most basic need for any Finance function:

1.       Enterprise wide common definition

2.       Standard chart of accounts

3.       Common processes

4.       Globally mandated standards

Lack consistency and simplicity and the cogs of Finance month end machine will encounter poor business process and unacceptably slow reporting to the end users. Nirvana for lean accounting is less than 2 working days.  4 is good and 5 average. If the end users are waiting longer than 5 days then there is a problem.

The second goal of Finance is to ensure there is a strong control environment so that financial information is complete and accurate.

It goes without saying that nothing spoils the credibility of financial information more than material errors especially when they’re most likely, and most embarrassingly, picked up at a senior management or Board meeting. Mistakes are distracting when trying to understand the underlying performance of the organisation. There needs to be a strong control environment.

The third goal of Finance is be a value-adding contributor to the business they support.

For most Finance team’s in New Zealand it is most likely that controls and consistency are fine. The step up to being a contributor to business value may be the struggle.

To contribute is to add value. Some examples include:

1.       Insightful month end analysis with authoritative commentary

2.       Proactive suggestions like identifying suboptimal spending and making recommendations on how to improve

3.       Benchmarking best practice where there are multiple business units, for example hotel chain, car dealerships, hospitals

4.       Efficient and up to date rolling forecasts and cash management that is forward looking, and

5.       Trusted Finance team input into business development – products, acquisition etc.

Expectations of finance

It is also worth asking whether the non-Finance business departments like Marketing, Business Development and Operations really know what they should be expecting from the CFO and the Finance team. As a small to medium sized business grows so will its needs.

Those reading this article are likely to understanding the difference between a CFO and a Financial Controller but this is not always the case for the key decision makers. The distinction is sometimes misunderstood.

A pivotal point arises as a company grows and there becomes a need to engage Finance more. This happens when a business reaches a point where it needs to have skilled Finance professionals, not least a CFO,  to help it continue to grow and realise its strategic objectives rather than be buried in the transactional processes of the business.

This is not necessarily a simple change. Even if the existing team wants to step up to more financial decision support and provider of value and its associated new responsibilities, they may find it difficult as they try to balance their old duties in order to take up the new ones.

They also need to gain credibility within an organisation (Board, MD/CEO and senior managers) that may still see this person as bean counters rather than as their new trusted advisors.

Understanding balance

So I hear you say, “That all sounds well and good but we’re already stretched for time doing the day to day!”

Many SME Finance functions struggle to move beyond the day to day as there will appear limited time available to do anything beyond the transactional business processes and the increasing compliance. For all organisations there will be a balance required between transactional processes, compliance and the need to provide decision support.

It is common to see the large consultancies show the balance required as three competing demands.

That is 1) transactional, 2) compliance and 3) business insight (or decision support).

My view is there are four. The fourth captures treasury related demands. I’ve added cash flow to the figure below but this may be different for some organisations where interest rates and/or foreign exchange may be more important from a treasury perspective. It is the ‘cash is king’ quadrant that should never be overlooked.

To assist in getting balance consider outsourcing expert advice like tax and IT as the investment in an FTE may not be warranted for a smaller Finance function.

Therefore:

1.       An organisations Finance functions need to provide a balance between transactional process and providing decision support. The level will be dependent on the business size and needs.

2.       Transactional focused Finance functions spend most of their time on financial accounting, compliance and the business-critical transactional processes like core accounting, accounts receivable, payable and payroll.

3.       A well-balanced Finance function will also provide decision support that adds value to the business. It should look to provide internal consultancy.

4.       The right skill in the right places is the key to get the balance right in a Finance function. Being a team effort the skills for adding value should sit with all part so of the team – core account ting, accounts payable, accounts receivable, payroll etc.

The next article will look to answer the questions, "CFO's are expected to be strategic and add value to the business they support. But what if the Finance team that supports them does not have a value adding skill set?" This requires identifying and Closing the Skills Gap; how the gaps can be closed through training.