I want to introduce you to the concept of Part Time Finance Directors for small and medium sized businesses as a great way to bring top class financial control and management to an ambitious, growing company.
Before I go into the benefits of working with a part time finance director (FD), I need to explain the common problems which could well include many things that you have never considered before.
The Finance Performance Problem
When I talk to a business about improving their performance and ask how they are currently performing, I am delighted when the owner talks knowledgeably about performance levels and trends and then reaches into the desk draw to show me their latest set of accounts which focus on key numbers and performance drivers.
It means that both the business and I know the extent of the issues and problems, some of the underlying causes can be identified from the financial review and we have a method to track the results of the improvement actions as they come into effect.
Unfortunately it doesn't happen very often.
The Common Situations
Instead I either have:
- Situation A - the business has inadequate performance measurements in place on a daily, weekly, monthly or quarterly basis. Management is by the seat of the pants and based on "how things feel".
- Situation B - the business has a few daily and weekly performance measures and pays its firm of practising accountants to prepare monthly or quarterly accounts. Often this happens because the company has large bank borrowings and the bank have insisted as a condition of the overdraft or loan
This business is therefore committing substantial resources to monitoring its performance and on the surface, it looks good until I start looking in detail.
Then I discover that there is no link between the weekly and the monthly information and the owner doesn't know why.
I look at the accounts prepared by the firm of accountants and the format is usually a cut down version of the annual accounts. Plenty of detail on the easy-to-account-for overheads but little information on the critical areas of sales, margins, customer performance or cash.
I then ask about performance management. How are the accounts reviewed? How do they create change and improvement in the business? How does the business plan for the future? The answers are often disappointing.
The End Result - Little Or No Financial Control
You can see why I believe in the role of the part time finance director because it helps to provide the information and advice needed to manage for profit.
The basic model of financial control says that you:
- Plan your future performance by identifying the actions needed to move you forward to where you want to be.
- You take the planned actions.
- You monitor performance your performance
- If the results are in line or better than expected you continue implementing the actions because you have clear evidence that the business is on track.
- If the results are behind expectations, you go back and review the actions. Have they been implemented and if so was the quality of implementation to the expected standard? If not why not and what can be done to move the actions forward?
- You take the required corrective actions and monitor performance again.
This tried and tested method of improving performance is copied in other business improvement areas - for example in the Total Quality movement Edward Deming's PDCA formula, plan, do, check, act has the same performance feedback loop.
Unfortunately this financial control system is missing from many micro and small businesses although it is standard in big business and smaller subsidiaries of big groups.
The cost is that performance is not managed, problems are not identified and corrected early and unexpected profitable opportunities are missed because no one was looking for them.
Why Is Financial Control Missing From Small Businesses?
I have identified the following reasons:
- You never miss what you've never had.
Many small business owners have only experienced small businesses or if they have come from bigger businesses it is often from lower or middle management positions which have not benefited from the full involvement in the financial control system. They don't have experience of working with a finance director.
- Inappropriate assessment of costs and benefits
This is connected with point one but I find that businesses will recruit their own qualified accountant when they have reached about fifty to seventy five employees.
At that stage the transaction processing requirements are high and a number of accounts clerks are employed, the business feels like a big business and the bills from the professional accountants are high. With recruiting a finance director or controller, finance issues take up too much of the owners' time.
But before that size, the costs of recruiting an expensive "overhead" are too high.
Certainly the costs are high for someone good but what the small business doesn't see is the improved performance that comes from having reliable, regular performance measurements and a finance input into the decision making of the company.
- The accountants
Small businesses often look for a lead from their accountants but too often the service is reactive and historically based rather than proactive and forward looking.
Some claim to offer a virtual finance director or part time finance director service but in my experience, the service involves producing inadequate management accounts with little or no explanation of the numbers and the consequences of taking action or not taking action.
The Solution: Specialist Part Time Finance Directors
There are an increasing number of experienced qualified accountants who have been Finance Directors in large and smaller businesses who work with a small portfolio of SME clients to introduce effective financial control systems and to provide a finance input into the critical decisions.
These professional Finance Directors often have many years of experience and their involvement with clients can range from two days per week for bigger companies down to a couple of half days per month for smaller businesses with a good bookkeeper.
Since the time involvement can vary significantly, so can the costs but in general I have found that these part time Finance Directors are determined to succeed and will see a problem and fix it (subject to your approval).
Some of these experienced finance executives call themselves part time finance directors, part time FDs, virtual finance directors or flexible finance directors.
The name is not as important as the function - to bride the gap from when your business has grown beyond the level where it is easy for the owner to know exactly what is happening and to control performance to where the business can afford to recruit its own full time, top-notch finance director.
I believe in this concept and on my website I have a register to promote part time Finance Directors in the UK.
I have worked in this area myself and it provides a logical extension to a business coaching program although it is not an area I actively promote for my own services.
The Benefits of A Part Time Finance Director
- More insight into performance so that it can be improved.
An experienced part time finance director will quickly identify the key drivers of your profit and cash cycles and introduce monitoring so that you can quickly see what is happening.
- More focus on improving the future performance of the business, both in terms of margin generation and cost control.
You and your management team will be encouraged by the part time FD to look forward, identify actions and make things happen.
- Improved cash flow.
One of the first areas your part time Finance Director will focus on is your cash cycle and reducing working capital in the form of lower stocks and debtors. Some will also be expert in negotiating extended payment terms from your suppliers although I find that you may have to sacrifice more than you gain.
- An independent but knowledgeable view of your business which sees and highlights issues you miss because you are too close.
Your part time finance director will know your business very well but the regular involvement in other businesses keeps their independent and objective view.
- By taking over the management of the finance department and being the first point of call, your part time finance director can save you time.
- Increased credibility with third parties.
Having a part time Finance Director will certainly help your relationship with your bank and any other providers of finance who are nervous when key financial controls are not in place. It will also add weight to any important negotiations with customers and suppliers who know that an expert financial eye will be cast over their proposals.
- It strengthens your negotiations.
As the business owner, customers and suppliers can put pressure on you to make concessions quickly but that can be counter-balanced by referring to "approval from the board" or your finance director. It just slows negotiations down when you need to.
- A stronger basis for making decisions.
Having someone like a part time FD to crunch the numbers under different scenarios allows you to see the potential range of impacts from different decisions much more clearly.
Situations Where A Part Time Finance Director Has Most Impact
If your business is:
- Very small;
- Stable; and
there is little for you to gain from having a part time finance director. You do not have issues with controlling the performance of many other people, it is easy to see and understand what is happening and because it is stable last month, this month and in three months time, performance is likely to be very similar.
When you start varying those four criteria, your need for effective financial control that comes from having a part time finance director and the benefits that person can bring will increase.
As the business gets bigger, you rely more on the actions and decisions of other people. You can't micro-manage them but you need the control systems in place to make sure that performance is up-to-standard so that you can reward excellence and take corrective action where there are problems.
As your business becomes more complicated, simple performance measures no longer provide a meaningful indication of performance.
As your business either grows or contracts through your strategy or with the economy, with the annual seasonal cycle or with the general industry, new issues have to be considered and dealt with.
Last month's or last year's performance is no longer a guide to how your business will perform in three months time. It is far better to make proactive changes in response to predictable events than to react in a hurry.
The lower your business profitability, the less cushion you have to allow poor performance to occur without it threatening the future viability of the business. If the business is losing money, it becomes increasingly important that strong financial control and planning is in place to guide your business back into prosperity.
Increasing Need For Part Time Finance Directors In Tough Times
Fifteen years of economic growth have created a benign competitive environment where it has been relatively easy to make money. It looks as if that is about to change.
This makes it essential that you know how your business is performing in cash and profit terms and that you have a plan of future actions.
It also means that tough decisions will need to be made by many businesses and that requires the right decision support so that you make these decisions from the best informed position.
I expect to see a rapid rise in the demand for experienced part time finance directors although I also predict more experienced accountants entering the market.