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Six elements that make an excellent finance function

Overview from PeakAs a business advisor, I get to see a lot of different businesses and their finance functions. At one end of the spectrum, the finance function just does the basics i.e processing invoices, managing cash and preparing the core reports. At the other end of the spectrum, the finance function is a key strategic partner to the senior management – whether that be an owner-manager or a full management team. And between those two extremes, there can be a range of options.

In this article, I will set out what I consider to be the key elements that make up an excellent finance function. No matter how the finance function is structured, it is essential that the management team have access to resources to help them understand, interpret and communicate the relevant data needed to support them in keeping the business on track.

In my experience, there are 6 key elements that come together to create an excellent finance function.

The elements of finance function

  1. A foundation made up of the core finance systems
  2. Insightful data that can be analysed as needed
  3. An excellent understanding of the business
  4. Outstanding Influencing Skills
  5. A supportive attitude
  6. Responding Resourcefully

1. The Foundation – Core Systems

Firstly, the basics must be in place and must work unnoticed. There will be appropriate systems that process the transactions – sales invoices, purchase invoices, receipts and payments – smoothly and efficiently. Key controls must operate to secure the assets of the business. The basic reports must be readily available within short timeframes. Essentially, we are looking at a lean operation – delivering what the customers of the function need with minimal intervention.

The one thing that can be guaranteed to cause the users of financial information to lose confidence is if the basic information is not reliable.

Pillar 1 – Insightful data designed to deliver the required information

Next, consideration should be given to the type of information and analysis that will be useful. The systems should be designed to collect relevant data and be able to report easily on the data. Management should have considered what type of analysis will be required and the finance systems should be designed to capture that key information when the core transactions are being created so that the reports are available with minimal extra manipulation.

For example, if a distribution company has a goal of maintaining its sales to multiples while significantly growing its sales to independents, I would expect to be able to be able to quickly pull reports that show how sales are split between multiples and independents. To do that, each customer will be categorised and then finance can easily run a report showing sales by customer category.

Pillar 2 – Understanding the business

An excellent CFO will have a very good understanding of the business and will be always aware of what is happening. To be able to evaluate how events will impact on the profitability and on cash flow, the CFO will intuitively understand the relationships within the business.

For example, if sales in the business are switching from high labour products to low labour products, the CFO will have a sense of the impact of this and this would likely trigger an analysis of the specific impact on headcount enabling the business to respond proactively.

To develop this awareness, the CFO will spend time walking around the business understanding what happens within the business and talking to key people whether that be operators or management. This CFO will have good relationships with the other managers and will keep himself or herself informed of what is going on in the business. I would expect the CFO to run projections a several times a year and then to compare the projections with the outcomes. In this way the CFO will be testing and developing his/her understanding of the business.

Pillar 3 – Outstanding Influence Skills in relation to finance function

The third pillar for an excellent finance function is to be able to influence key people. These key people can be management colleagues, direct reports, funders, customers or suppliers. To be a key influencer you must know what is important to the audience and you must be able to communicate simply and clearly.

Pillar 4 – A Supportive Attitude to finance function

A great CFO will understand that Finance is a support function and that its role is to help operations and the other departments to deliver the product or service. Because everyone will not have financial acumen, the CFO will be alert for opportunities to help the other functions and to use finance constructively for the benefit of the business.

It is also important to be able to nurture that attitude throughout the finance staff. The CFO can’t do everything and needs to have a like-minded team around him or her so that the CFO can delegate well while focusing on what’s important. This is done by hiring well, by managing well and by being an excellent role model for how an excellent finance professional operates.

The Roof – Responding Resourcefully to finance function

When a finance function has the basics right, curates key information, understands the business, operates supportively and is a key influencer, the function can then respond resourcefully for the business by evaluating the events that are happening so that opportunities can be grasped and problems can be anticipated.

It’s probably true to say that for a really great CFO, technical ability is less important than the CFO’s ability to influence strategic discussions with useful analysis of timely, relevant and accurate data. This ability comes from understanding how the business works, understanding what’s important to the business and to the management colleagues and then being able to use that understanding to make a difference to how the business addresses the key issues that it faces.

Conclusion

Having read this article, what are the elements you need to focus on in order to improve your finance function? Why not rate each element as it is in your organisation. Then prioritise the elements you need to work on, preparing a one-page plan with attachments around specific action plans if required.

If you need help developing your one page action plan, feel free to contact me.

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Making your accounts work for you.

Are your accounts giving you information that helps you manage your business? Most accounts don’t. You should make your accounts work for you.

When I go into a new client, one of the first things I do is to review the existing accounts.

I am looking to see if they could get more information – additional analysis – from their accounts.

The Sales account is the first account I see. Most accounting systems have only one line for Sales. Yet, it is helpful for most businesses to analyse their Sales in more detail.

You can analyse by the type of work, the nature of the assignment, the type of customer, the geographical region or any other way that gives useful information.

For example a business consultant might have once off consultancy assignments, ongoing retainer assignments, training etc. I mentioned this to a client recently who has launched an initiative to win more retainer business. Analysing his sales in this way, will make it much easier to see if the initiative is achieving the results he wants.

An engineering business might work for industry or for building contractors or for farmers. When I worked for an engineering company some years ago, they realised that they were making a lot less profit on their farming customers. The accounts analysis prompted further investigation and they ended up pulling back from that sector with the result that they achieved better profits with lower sales.

A medical practice might have GMS, private patients, occupational health contracts or public body contracts.

Breaking down your sales can help you manage margins. It can help you understand if your marketing is working. It can show you which parts of your business are performing best for you.

Each business is different and each business owner should sit down and ask what information would be useful to him/her. And remember , this analysis can be applied to more than just sales. Any Cost of Sales or Overhead account has the potential to be analysed further. If you find it useful to analyse your sales one way, you will probably find it useful to analyse all of your costs the same way.

Ask yourself if any costs are giving you cause for concern. What additional information would help understand those costs better? Go into your accounts and set up accounts that will help you with this analysis.

Your accounts will still show the same overall result. You will be just making the numbers work for you instead of you working for the numbers.

Some of the biggest improvements I have helped make in businesses have come from using this type of analysis to understand what is happening in the business.

I have been able to show that a business is losing money to one set of customers and subsidising that loss from a different set of customers. The information was there but the system was just not set up to deliver it.

So have another look at your accounts, do they work for you?. Is there some other way of analysing the information that would be helpful to you? Go ahead, then, and make the changes.

If you have any questions about this post, feel free to send me an email to jim@accountsplus.ie.

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Are you missing out on the benefits of budgeting

It’s the start of a new year and larger companies will have their budgets done, or almost done. Yet, in most owner-managed businesses there are no budgets or forecasts. Ask them why and they’ll give you all sorts of reasons. They haven’t got time. The current climate is so uncertain its nearly impossible to get it right. They haven’t got all the information they need yet. None of these reasons are valid. There are important benefits of budgeting.

If something is important and worthwhile, you make the time for it. If you think you haven’t got the time, that means it’s either unimportant or not worth the effort. Here is why an interesting reason you should consider budgeting serious.

In uncertain times, it even more important to understand your business and to have a reasonable appreciation of how it will perform in good, medium or poor conditions. You should be taking actions that will make your business better able to understand the uncertainty, rather than waiting impotently.

If you haven’t got all the information, then you need to identity the key information and get it. The only way to do that is to starting your budgeting/planning process.

A budget is not about the end document. Yes, thats important. But what’s more important, and more beneficial, is the process you go through to prepare a budget.

You need to understand what the business is selling and what resources are used up making those sales.

You need to know what these resources will cost you in the coming year.

Plus, you need to understand what overheads you have and what they are going to cost in the coming year.

You need to be clear on what assumptions you are making and which of those the most critical.

You need to understand your payment terms – both incoming and outgoing – and what effect these have on your cashflows.

Overall, the earlier the warning you have of any problems, the better positioned you are. A good budget or business plan should flag up any issues you need to be paying attention to.

The process of doing your business plan should be looked at as part of your learning process.

You set out your budget or plan that tells you where you expect to be at various points in the year. As you go through the year you check to see where you are and how does that compare to where you thought you’d be.

If the differences are significant, you need to investigate and understand where you got it wrong. Out of this, your understanding of your business will grow and your ability to predict will improve.

Bottom line, there are more benefits of budgeting or planning.

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Getting Better information from Computerised Accounts

I remember once attending an Insolvency Update. One of the speakers, who regularly works on examinerships, commented on the lack of good accounting information in most of the companies that go into examinership. This really struck a chord with me. In most of the improvement projects I have worked on, the accounting information was either poor or non-existent. What I find difficult to accept is that, while most companies now use some form of computerised accounts software, very few are getting management accounts. Even where businesses are getting reports from the system, the reports will be either out of date or unreliable.

There’s nothing worse than picking up a report, asking the owner about it and hearing “Ah, sure. That’s not right”. And I’m thinking, “well, if you know something’s wrong, then why haven’t you fixed it?” They’ve done 70-80% of the work needed to have good accounts but they haven’t finished off the 20-30%. So the information they have is more than likely misleading,

It would only take a few things to make huge improvements in the quality of the information using computerised accounts.

  1. Review the setup of the accounts and ask are they designed to give you the management information that you need
  2. Check are the opening balances correct. You will probably need help from your accountant here but I think they should be adjusting the opening balances for you anyway.
  3. Sanity check the information that has been input. Prepare bank reconciliations to prove that your bank account is reliable. Review your debtors account and make any corrections necessary for discounts, bad debts etc. Do the same for your creditors – reviewing for discounts and write-offs etc.
  4. Finally, print off a Profit and Loss and Balance. Go through the Balance Sheet first. Is every asset listed correctly? Do the liabilities look correct? If your balance sheet is reliable, then the net profit to date must be reliable. When looking at the Profit and Loss, I like having a drill down feature. When someone says “whats in telephone or whatever”, you can just drill down on the account to see what transaction make up the figure for the telephone.
  5. If you do all of that, your accounts will be reasonably reliable and good enough to work with.

Here is a blog that can help you improve productivity using smartphone apps.

If you have any comments on this article or if there are any areas you would like to address, please do let me know.

Best Wishes

Jim

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