Published: Oct 01, 2019
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". Adam Bunch, Investment Manager in Maven’s London office, discusses why the role of Finance Director (FD) is one of the most pivotal within a business and why an effective FD can add significant value.
Understandably, the position of FD isn’t always a priority for start-up/early-stage businesses, as it can be expensive and a long-term commitment when budgets are limited. This is why business leaders will often assume numerous roles including finance, marketing and operations. Outsourced accountants and/or part-time FDs can often fill this void until the business has scaled enough to justify employing someone full time.
The role of an FD:
Here is a list of the key tasks and responsibilities an FD would typically undertake:
- Produce monthly detailed management accounts and reports clearly setting out and measuring financial performance over a period of time
- Continually track a wide 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
- 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
- Overseeing 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. They can create cost savings, maximise cash and deliver other value efficiencies. In addition, the analysis and evaluation of financial information can significantly improve business decision making and help the wider management team.
An FD can also limit the leadership burden on CEOs (and other members of the team), by taking responsibility for making certain key decisions such as working capital pressures, liquidity and free cash flow.
In environments where businesses have received debt or equity investment, the role of regular reporting of information to investors, as well as working capital and cashflow management, becomes increasingly important.
Many businesses will also look to hire more commercially minded FDs to contribute to wider business strategy outside of the finance function, who are able to offer a valuable perspective by analysing and challenging strategy from a balanced commercial and financial perspective.
What’s the difference between a Financial Director and Financial Controller?
It is not unusual for a business to hire a management accountant or financial controller (FC) instead of an FD, or even to label one as an FD who aims to fulfil the same duties for less remuneration.
However, there are a number of key differences. FDs add more rigorous reporting and an extra layer of commercial interpretation. A management accountant might be expected to focus on reporting and regulatory responsibilities, mostly aligned around articulating current and historical performance i.e. producing monthly management accounts and overseeing tax and audit responsibilities. An FD, in contrast, should be an effective business partner to the organisation as opposed to just managing the finance function, and will be continually monitoring and interpreting the information in order to recommend strategic and financial decisions to drive value creation.
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 Capital Partners, will also be very 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 an acquisition, making staff hires or investing in new technology.
An experienced FD should add value to a business and management team, and their ability and experience will often be pivotal in achieving growth. In the early stages of the business growth life cycle, management accountants, FCs or part-time FDs may suffice, however it is important that businesses understand the value of appointing an experienced FD and understand when they can afford to take that leap. The right FD, with a mix of financial and commercial strengths, will help achieve revenue growth, deliver transformational projects and implement new systems which drive operational improvements.