What to Expect from a First-Class Finance Function

 In Accounting, Optimizing Processes

There’s much more to the Finance Function than ‘maintaining a set of books’. In this article, we look at ways the Finance Function should positively (and strategically) impact your business and help management make the best business decisions. How will YOUR Finance Team stack up?

Making the best business decisions in 2021 will require an understanding of your customers, the market, your team, the economy and a range of other factors. Nothing new there. But the role of the FINANCE FUNCTION will be especially critical for most businesses, whether the goal is to grow or simply to survive.

What is the Finance Function? Simply put, it’s the combination of people, processes and tools (technology) which impact anything to do with finance, whether strategic or day-to-day.

What should we expect from a first-class Finance Function in the year ahead? Here are ten ideas to consider.

1. Focus on Profitability, not just Cost-Cutting

Ruthless cost-cutting may be essential sometimes but it also risks harming the future agility of the business. A mature Finance Function will make recommendations to get the balance right.

Example: A mid-size consulting firm has invested to improve its billing processes. Once implemented, there will be considerable cost savings since invoices are currently generated manually. After extensive analysis, the Finance Function recommended continued investment in the billing system implementation satisfied that the returns would be realised soon and the business could afford the cash outlay.

2. Identify Strategic Opportunities

Your Finance Function has a critical role to play in the conventional operations of your business but what about unique (inorganic) opportunities arising from a disrupted business environment? Are there distressed businesses selling assets at discounted rates? Can new partnerships be forged as the landscape changes? Quantifying the risk and upside of these opportunities is the work of a successful Finance Function.

Example: An owner and operator of Aged Care facilities is holding significant cash reserves. Noticing that contractors working on their building projects were financially compromised and unable to complete their jobs, they started lending funds to these contractors on attractive terms. The Finance Function played a crucial role in evaluating and reducing the risk associated with this new business activity.

3. (Re-)Evaluate all Projects Underway

Many businesses start projects which may make sense in a prior business environment but will no longer deliver the value that was expected. These projects can linger on … because culling them can involve some ‘hard’ decisions and backtracking. An effective Finance Function will delineate between mission-critical and discretionary projects to drive the best business outcomes.

Example: A school for tradespeople started to investigate opening a new campus to be closer to corporate customers. With a shift in investment to online learning, the Finance Function was instrumental in the decision to abandon this project (after considerable investment) and redeploy resources into online education.

4. Emphasise Liquidity

Simply put, a business with cash is in a relatively strong position. A potent Finance Function will, for instance, identify assets that can be turned into cash, consider factoring, improve collection processes, reduce costs, renegotiate payment terms, improve inventory management and revisit tax payments.

Example: A construction company with multiple projects underway set up a “Cash Control Tower” to improve liquidity. Within 30 days, procurement processes were revised resulting in dramatic short-term savings. This helped to fund labor costs and kept projects running.

5. Customer is King!

The Finance Function should be fully acquainted with your customer and their needs ESPECIALLY in changing business conditions (good or bad). This enables intelligent recommendations to retain customers or acquire new customers.

Example: The Finance Function in a home improvements business noticed increased activity from customers undertaking kitchen renovations. They recommended additional promotions and sales activity to drive revenue in this niche area.

6. Strengthen the Balance Sheet

Your Finance Function should have laser-like focus on how improved inventory management, accounts receivable and accounts payable affects your business.

Example: A consulting business had poor visibility into aged receivables because this had never been a business priority. The Finance Function developed reports to highlight slow-paying clients and renegotiated payment terms with others resulting in an injection of cash into the business and reduced Accounts Receivable.

7. Support Leadership

Business leaders have the challenging job of communicating effectively with their teams. That means issuing a clear, coherent message whether the news is good or bad. The Finance Function provides important input into this message and helps leaders build credibility.

Example: A hospitality business was forced to lay off some employees and the team was – understandably – concerned about job security. The leadership team saw a clear pathway to recovery and wanted to communicate this in a positive but credible way. The Finance Function played a critical role in supporting the position of management with data and this helped to retain key personnel.

8. Be the Guardian of Compliance and Governance

Extraordinary business conditions require a different approach to running the business. Speed is of the essence but departing from the usual ‘rules’ can put the business at risk. A successful Finance Function will support any change in the best interests of the business PROVIDED THAT associated risks are well understood and can be managed.

Example: A service provider was short of cash and the business was at risk. An equity investor expressed interest in the business but on terms that some existing shareholders would view as unfavorable. The Finance Function played an important role in understanding the interests of all parties, ensuring business continuity and proposing palatable terms for the investment while reducing the risk of any future claims against the board or management

9. Use Data to Drive Decisions

The Finance Function is also a repository of critical data that should be used for analysis, faster decision-making, risk assessment, financial modeling and forecasting.

Example: An online retailer achieved considerable customer growth through investment in online promotional campaigns. When the growth rate started to slow, there were many opinions as to which customers to target, what offers to promote, how to price products, etc. The Finance Function undertook an analysis of the Return on Investment from marketing and proposed a 25% reduction in spending. Their recommendations, supported by data, persuaded the board on what to do next.

10. Encourage Decisiveness

Boldness is important in times of uncertainty. A ‘wait-and-see’ approach is seldom appropriate and your Finance Function should support bold decision-making.

Example: A retailer needed to close stores in mid-2020 and the finance team thoroughly analysed the short and long-term consequences of various options. This helped management quickly arrive at decisions and then execute a plan which ensured the continuity of the business. The retailer learned to operate more frugally and has maintained this approach even as conditions have eased.

How will your Finance Function perform in 2021? If you’d like to strengthen this critical part of your business and enhance your decision-making, please get in touch.

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