Published: Aug 19, 2022
Focus:
Insights
Perhaps surprisingly this is a common question amongst small business owners and CEOs and is often accompanied by caveats such as "it’s such a simple business," "I have an accountant already" or even "the finances look after themselves."
Understandably, the appointment of an FD isn’t always a priority for businesses when they start up – it’s a long term, often expensive, commitment at a time when budgets are limited. Therefore, business leaders will often cover numerous roles including finance, marketing and operations, perhaps with outsourced accountants and/or part-time FDs filling some of the voids around book-keeping, tax and filing of accounts. However, during an investment process, and afterwards as part of the value creation strategy, a solid FD will add so much more to a business than simply bringing those basic finance functions in house.
The role of a Finance Director
Typically, an FD would be expected to:
- Produce monthly detailed management accounts and reports clearly setting out and measuring financial performance over a period of time
- Continually track a range of specific key performance indicators (KPIs) in addition to financial results
- Compare current performance with historical results as well as against budgeted and forecasted expectations
- Interpret financial and operational results in a manner relevant to the business strategy, and suggest appropriate financial, operational and strategic actions based on this information
- Lead on banking and investor relationships, if relevant, including supplying and communicating information to lenders and investors and ensuring the business uses any facilities in the most efficient way
- Oversee tax and audit functions to ensure the business is fully compliant
- Oversee cashflow and working capital management, including debtor and creditor functions
- Negotiate and manage certain contracts to minimise costs and maximise value to the business
Whilst that list isn’t exhaustive, a good FD performing these tasks to a high standard can add significant value to the business, creating cost savings, optimising its cash flow, and enabling informed debate around the Board table when it comes to setting strategy. Generally, we find that experienced, high performing FDs deliver a higher quality of information, which in turn improves decision making within the business and supports the wider management team in delivering on the goals they have set. This includes reducing the burden on CEOs by taking responsibility for certain key decisions such as working capital pressures, liquidity and free cash flow, as well as being a source of support when it comes to setting and evaluating wider strategic aims. A commercially minded FD will contribute to wider business strategy outside of the finance function; they will be continually monitoring and interpreting company information in order to identify areas for improvement and recommend strategic and financial decisions that drive value creation.
In environments where businesses have received debt or equity investment, the role of regular reporting of information to stakeholders, as well as working capital and cashflow management, becomes increasingly important. Quality management information, cash flow forecasts and longer-term projections build credibility and trust and strengthen relationships around the Board table.
Why are Financial Directors so important to Private Equity investors?
The principle focus of Private Equity investors is to support the management and business in driving growth and maximising value.
A fundamental aspect of this is monitoring and assessing financial and operational data, as well as understanding what it says about the company's performance. As such, the FD plays a pivotal role in articulating relevant and regular information to investors, as well as overseeing the management of cash and investment.
Private Equity investors, such as Maven will also be focussed on the best way to invest for future growth in the business and the FD will be key in helping to appraise these opportunities, whether that be a potential acquisition, making staff hires or investing in new technology. An FD will also play a critical role in exit readiness, from reporting to regulating, compliance to customer contracts, making sure the business will stand up to a purchaser’s diligence, thereby maximising value realisation through an exit event.
Summary
An experienced FD should add value to a business and management team, beyond providing basic financial expertise, and their ability and experience will often be pivotal to a company achieving their growth forecasts. Although management accountants or Financial Controllers (FCs) may make most sense in the very early years, it is important that business leaders understand the value of appointing an experienced FD and think carefully about when they can afford to make that step change in their team. The right FD, with a mix of financial and commercial strengths, will help achieve revenue growth, deliver transformational projects, and strengthen relationships with your financial stakeholders.
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