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There are many functions that are highly important to creating and running a successful business. From growth oriented functions such as Marketing and Sales to Operational functions such as Production and Supply chain, every area of the business can play a crucial part in the overall success of the business at various points in its life cycle. Few areas, however, are as crucial to the success of EVERY business as Finance. In this article, we will delve into the role that finance plays in the organization and then discuss how businesses of all sizes can and should employ sound financial strategy using resources available in the marketplace.
Finance is the lifeblood that enables organizations to thrive and grow. Regardless of industry or size, every company needs to expertly manage its financial health to achieve strategic goals, whether to fuel growth or to protect itself from risk. Finance translates the operations of a company into the universal language of business – numbers – thus facilitating data-driven decisions throughout the company, from the C-suite through the rest of the organization.
Why Finance Matters
Finance keeps business on track to accomplish its plan
At its very core, finance is the art of putting a quantitative plan behind the vision and mission of the company. It assigns dollar values to the goals and aspirations of the organization to create budgets, forecasts, and metrics that can be benchmarks of the company’s performance against its objectives. It tracks macro performance against plans to calibrate an organization’s course toward meeting growth, profitability, and other targets.
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Finance helps to identify and mitigate risks
By assessing risks through analysis and modeling, the finance team helps identify potential issues – like cash flow shortfalls, funding gaps, or compliance oversights – finance mitigates risks that could severely impact operations if left unaddressed. In larger public companies, this risk-mitigation activity takes on a legally-required framework (such as Sarbanes-Oxley compliance), however it is arguably even more important to identify risks to smaller, growing companies where the stakes are highest for the business leaders involved.
Risk mitigation should also include ensuring that the company is adequately insured against the risk of loss to the extent possible. Finance professionals routinely work with insurers to understand the types of policies available and maximize the cost/benefit relationship to get the “right” amount of insurance in place for the risk tolerance of the business management, negotiating with the agents and insurance companies to ensure the lowest effective costs.
Finance supports Operations with analysis and reporting
The basis for good decision-making is accurate and timely data. Firstly, the finance department ensures that the books are kept current and accurately using Generally Accepted Accounting Principles (GAAP), and that the accounting for each monthly period is accomplished and finalized (or closed) in a timely manner. The financial reports available once the books are closed are highly useful and should be reviewed by the appropriate functional management of the business.
Using the financial information accumulated through the accounting system as well as operations metrics, the finance department works cross-functionally to empower leaders with reporting and analytics that contextualize data into actionable insights. For example, product line revenue trends might shape expansion decisions in Marketing while various aging schedule analysis could drive process improvements in Operations. Finance gives business meaning to contextualize and quantify the raw numbers.
The ultimate effect of having good information is making better-informed and therefore more strategic decisions. By correlating the decision-making processes of the company with the expected impacts and results, the company can both set the expectation of outcome with regard to the decision and then measure the performance of the outcome as well. For example, if a strategic investment decision is made and capital is allocated to the investment, the accounting systems should be engaged to determine and report on the effectiveness of the investment – did it result in the additional sales or productivity that was intended? Such information is useful not only to determine the effectiveness of the investment itself, but also to determine the company’s operational ability to forecast performance on future investments as well.
Finance helps to actively manage the business
Critical operational finance duties include managing cash flows, working capital, liquidity, and financing. By forecasting future capital requirements and the impact of business operations, the finance department then works to secure necessary funding to fuel growth without jeopardizing the company’s mission. The finance department may be charged with the safeguarding of assets such as loss prevention of inventory or managing audit functions.
Finally, the Finance function serves as the “face” of the organization when interacting with key external stakeholders – from investors and lenders to regulators, vendors, and customers. By maintaining and managing the external relationships and acting as liaison when numbers are involved, the finance department lends credibility to the organization and helps to relay the company’s story or position in ways that the target audience can understand and interpret. This activity makes the relationship between the company and these stakeholders much more effective and efficient, ensuring less friction and better results for both parties.
Finance as the Language of Business
Like a translator, Finance interprets the numbers that drive business worldwide, similar to how a linguist translates between different languages and cultures. The cadence of enterprises – traced through financial statements, reports, metrics, and models – provides meaning and context when fluently translated by finance experts.
For example, the accounting department handles financial recordkeeping and reporting. Yet finance leaders consume this data and provide guidance based on insights the numbers reveal about company performance and position. Revenue growth trends might shape expansion decisions, cash conversion cycle analysis could highlight working capital inefficiencies, and return on specific capital investments clarifies where to allocate resources.
Finance gives voice to the numbers – translating indicators, modeling scenarios, and contextualizing data into recommendations leadership teams leverage to make smarter strategic and operational decisions.
Roles Within the Organization
A properly functioning large-company finance department is a machine made up of many specialized parts. At the head of the finance organization is the Chief Financial Officer (CFO), who sets the overall financial strategy and has oversight across all areas. The CFO is a crucial part of the C-Suite, which in addition to the CEO might include any number of CXOs to represent the other functions most highly valued within the company. As it implies, the C-Suite is the highest level of leadership within the company and manages the company’s strategic direction and overall operations.
Larger corporations have extensive teams under the CFO, while smaller companies may consolidate roles or assign finance tasks as secondary functions. However, critical activities like recordkeeping, reporting, planning, and maintaining the control environment still need to take place at any company, regardless of their growth stage.
The central functions of the Finance organization are endless, but can be divided into 3 main groups:
Accounting
The accounting group keeps the books, records transactions, closes the books on a periodic basis, and ensures the accuracy and auditability of the financial information. There are several key personnel and components of a properly functioning accounting department:
- The Controller is an operationally-focused manager of the accounting functions normally focused on accounting, reconciliations, compliance and production of financial reports. Their primary function is to make sure the books are closed accurately and timely and to ensure that applicable accounting standards (GAAP) are implemented in the accounting system. They manage the accounting team, which may be made up of Accounting Managers, Accountants, and other departments such as Accounts Payable and Accounts Receivable, Credit and Collections, Inventory Accounting, and any number of other configurations.
- Accounts Payable, Accounts Receivable, and other teams handling transaction volume are the base of the accounting pyramid, ensuring that each transaction is recorded in accordance with proper accounting and company policy.
- Some accounting groups have a special department for external Financial Reporting, which can be complicated and detailed as companies get larger. As the shareholder group grows and becomes more sophisticated, it is crucial that the financial reporting function give appropriate and exact information to telegraph the company’s results and future expectations. Public companies have added reporting and compliance requirements for their external facing statements dictated by the SEC, such as issuance of 10Ks and 10Qs.
Financial Planning & Analysis (FP&A)
- The primary functions of the FP&A group is to prepare budgets or forecasts and to analyze and report on company performance. These functions are accomplished by working with the operational functions within the company on the annual budget and goal-setting process which may include updated forecasts throughout the year to update the budget expectations for stakeholders and management.
- The FP&A Group also provides insights to guide tactical decisions. Through analyzing operational reporting and isolating the appropriate Key Performance Indicators (KPIs), they can help to establish parameters for operational effectiveness, evaluate alternatives for the allocation of capital or resources, and determine the expected impact of decisions on the financials of the company.
Operational Finance
There are as many configurations of Finance Departments as there are companies, there are a few areas of specialization that the finance department usually handles and perhaps maintains a separate group for:
- Treasury – manages banking relationships and efficient cash flow.
- Tax – may handle federal, state and local taxes, sales and use tax, tax planning etc.
- Internal Audit – manage control environment and compliance activities, interface with external auditors if applicable.
- Risk Management – identify and mitigate risks, manage insurance functions, safety, oversight..
While all of these “departments” may not be required in every organization, especially considering the size and expense, the functions are all important and must be performed in order to keep the company safe and running smoothly.
Finance Roles Across Company Sizes
Larger businesses usually have very structured and specialized finance teams as described above. They have the budget and resources to maintain the expense structure, and ultimately the duty to their stakeholders to manage finance in a very structured way.
Smaller firms don’t have the resources or full-time needs of large companies, therefore most of the professionals in small companies “wear many hats”. At the beginning, an entrepreneur may actually try to cover all of the functions themselves, which introduces risk unless the entrepreneur has experience as a CFO or finance leader. Later in the growth cycle, they may have generalists covering a wider range of cross-functional duties – for example, a bookkeeper being hired to perform all finance functions, which also introduces the risk of making strategic decisions without the requisite experience.
As small businesses scale, finance responsibilities are often assigned haphazardly based on immediate needs rather than strategy. Operational growth can quickly outpace the finance organization if gaps in financial strategy and staffing are not methodically assessed and addressed.
The Rise of the Fractional CFO
A growing trend that provides financial strategy guidance for lean, scaling organizations is the concept of a “fractional” CFO. These on-demand finance executives allow startups and mid-sized companies to tap into big-business expertise without bearing the full expense of a salaried CFO.
Fractional CFOs come in a few models including
- Part-Time: This is usually an experienced CFO but on a part-time basis, perhaps an employee of your company or contractor who allocates a subset of hours to your company. Cost is normally directly related to the hours worked.
- Consulting: Contracted on a project or hourly basis. These professionals are normally hired for a specific purpose, which may be limited or ongoing. Cost may be set for each deliverable or based on hours.
- Subscription: Provides ongoing CFO services for a flat monthly fee or retainer. The subscription model could have some mix of hourly services which may be performed in-office or virtual depending on the engagement. The model is not specifically based on hours, but more on having “access” to a dedicated CFO for a fixed monthly amount.
- Virtual: Virtual services may be priced on Consulting or Subscription models, but delivers more standardized services fully remote or online.
Regardless of the “type” of firm that matches your business needs, the major benefit of a fractional CFO provides to your organization is the strategic financial leadership that levels up decision-making, planning, modeling, capital raising, and all of the other functions that large-company CFOs offer to business. A fractional CFO quarterbacks high-level functions and administrative teams to create accelerated growth and success.
A common mistake made by many growing companies is to seek strategic financial support from a bookkeeper or tax professional. These individuals have specific skill sets, but don’t usually have the executive or operational experience to give strategic C-level support. Another common mistake is to “go it alone”, making decisions by intuition or gut, perhaps attempting to “be their own CFO”. With the rise of the Fractional CFO, however, businesses have better availability to the strategic services that will make them much more successful over time. As operational complexity scales over time, founders can leverage fractional talents to augment internal capabilities in a customized way. The variety of fraction CFO models allows for matching specialized expertise and bandwidth to current business needs.
Final Thoughts
Mature corporations have extensive finance teams which help the companies to make sound business decisions, mitigate risks, support operations, and maintain compliance. However, companies of all sizes have the same needs, even if they don’t have the budget. From startups to emerging growth companies, every business needs a competent financial leader. Though the finance function morphs over the growth curve of every company, putting the right baseline people, processes, and reporting in place early allows for accelerated growth velocity.
Every organization runs on numbers – the universal language of business that finance teams interpret and translate into meaningful insights and strategic guidance that company leadership relies on. That makes finance the navigator for enterprises of all sizes pursuing growth and competitive edge.
Author’s Bio : John Hannum is the founder of PPS Solutions, a firm that provides fractional CFO services and tailored financial guidance to small and medium businesses. With extensive corporate finance experience, John brings strategic and operational expertise typically only accessible to large corporations. He empowers entrepreneurs and business leaders to make informed decisions, secure favorable financial terms, and drive business growth.
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