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Role of Finance Director in Growing Organization

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Article Published in "Pakistan Accountant"

The Chief Financial Officer (CFO) or Chief Finance and Operating Officer (CFOO) is a corporate officer primarily responsible for managing the  financial risks of the corporation. This officer is also responsible for financial planning, record-keeping and  financial reporting to higher management. In some sectors the CFO is also responsible for analysis of data. The title is equivalent to Finance Director, a common title started in the United Kingdom and used until recently it is  widely used in Pakistan. 

The CFO typically reports to the Chief Executive Officer (CEO) and to the Board of Directors and may additionally sit on the board, at times in the capacity of Company Secretary as well.In Pakistan most of the businesses are managed by the people who usually own them.  New businesses are commenced by entrepreneurs who, through some combination of wisdom and luck, create and implement a successful business strategy. The business expands and profits grow and this comes to need to hire professional managers.  So people are recruited and promoted to manage it. 

"We never know we need a finance director until we don’t have one."

When I was twenty one, I decided to become an accountant. That’s about the least entrepreneurial thing any human being could choose to do. Because accountants are famously not entrepreneurial, and most people argue that the last thing you want in an accountant is the sort of qualities you might praise in an entrepreneur. However, growing business will not grow far or fast without a decent finance director to cope with the growing bureaucracy and to prevent things getting out of control.  In a young business the role of finance management is about much more than finance – it’s about people more than profit. The role of finance director in growing business in particular is about the functioning of the top management team, and the distribution of power. 

The Finance Director – Why and When?

In today’s increasingly challenging and volatile macro world, the role of the CFO has evolved significantly. Traditionally being viewed as a financial gatekeeper, the role of the CFO has expanded and evolved to a strategic partner and advisor to the CEO. In fact, in a report released by McKinsey, 88 percent of 164 CFOs surveyed reported that CEOs expect them to be more active participants in shaping the strategy of their organizations. Half of them also indicated that CEOs counted on them to challenge the company’s strategy.

"An entrepreneur needs to recruit someone with fundamentally different skills and outlook from himself"

The uneven pace of recovery worldwide has made it more challenging for many companies. CFOs are increasingly playing a more critical role in shaping their company’s strategies today, especially in light of the highly uncertain macroeconomic environments, where managing financial volatilities is becoming a centerpiece for many company’s strategies, based on a survey held by Clariden Global. 

The duties of a modern CFO now straddle the traditional areas of financial stewardship and the more progressive areas of strategic and business leadership with direct responsibility and oversight of operations (which often includes procurement) expanding exponentially. This significant role-based transformation, which is well underway, is best-evidenced by the “CEO-in-Waiting” status that many CFOs now hold. Additionally, many CFOs have made the realization that an operating environment that values cash, profit margins, and risk mitigation is one that plays to the primary skills and capabilities of a procurement organization, and become increasingly involved (directly via oversight or indirectly through improved collaboration) with the procurement function according to a recent research report that looks at the CFO’s relationship with procurement.

This is one of the most critical decisions for the young business because it has a crucial impact on the future direction of the business. Here the main focus is to have a business that is set up to run itself with appropriate 
checks and balances. Many entrepreneurs find that as the business matures growth is as much about giving up controls as about putting controls in. This can be achieved through delegation and management. However, what is delegated and to whom? This really has a significant impact on the direction of the business. 

Some recruit sales and marketing expertise in a conviction that building the top line is the most significant challenge. Further, they are of the opinion that accountants will add to cost not to profit. However, on the other hand, some look to the finance director as the key first recruit to the top team as they want to leave the financial levers of the business in the hands of someone who is really capable of managing it. The right time for the first finance director is of course impossible to define, but is sooner rather than later. A business that wants to be taken seriously by the investors must have an effective finance director influencing business strategy and exerting management control. 

The Finance Director – Who?

It is really difficult to recruit first finance director. Before we recruit our first finance director we have to find the current one. Too often the book-keeper is called finance director, but not given the pay rise – always a good sign that they are FD in title but not role. Good FDs cost money. What sort of individual should the growing business be looking for? We want someone who knows how sizeable businesses are run, because this is what we are trying to build. When entrepreneurs are interviewing potential finance managers they ask candidates what they think their most important task will be. The answer they are looking for is something about the need to recruit their own successors. Most Finance Directors of large companies have finance qualifications such as an MBA (from a prestigious University) or come from an accounting background for example Certified Chartered Accountant. A finance department would usually contain some accountants with  Chartered Accountant or equivalent status. The  Sarbanes-Oxley Act of 2002, enacted in the aftermath of several major U.S. accounting scandals, requires at least one member of a  public company’s audit committee to be a financial expert.

The growing business needs someone who will influence the strategy and management of the business. This implies someone who can stand up to the founders, tell A finance director has to understand what entrepreneurship is about?the story told by the figures with conviction, and provide an intellectual and commercial rigor to corporate decision-taking. It is possible to imagine a finance director without a professional accounting qualification, but only just. The role requires technical know-how in accounting and taxes, systems and controls, financial and human resource management, law and regulation. At the very least a finance director should add significantly to the technical capability of the senior team. If this is delegation, therefore, it is ‘added-valued delegation’. If the new director is not better than the team, he won’t change it. A qualified chartered or certified accountant is more likely to have the know-how than most, and the certificate helps reinforce credibility. 

The Finance Director – How much?

Finding the right candidate is a serious challenge – working out how to pay him can be even worse. A worthwhile finance director is expensive in the sense that he might be our highest-paid employee. One successful entrepreneur observes that ‘a good finance director is a business angel who brings something worth much more than money.’ However, many other still argue that they can’t afford one.

"A good finance director is expensive – but he will pay for himself within a reasonable time frame."

Staff is encouraged to focus on those aspects of their roles which will increase their income at the expense of those that do not. For a role like finance director, it can be difficult coming up with performance targets those are personal. The tidiest way of connecting a finance director’s remuneration to the performance of the business is to give him shares. Certainly this can be a good step towards aligning the interest of the director with the interest of the business.  Using equity as an incentive should not be confused with using cash. Cash is inherently short term. Equity rewards the long term. On the other hand, if we don’t think this is a good idea, and there is some exceptionally tax-efficient mechanism around, particularly for the smaller, private business. Remember, however, not to let tax complicate the picture. Tax is a cart, not the horse. Work out what we want to achieve, and then work out the most tax effective way of delivering it. 

The Finance Director – and the rest of the Management Team

The most important challenge when defining the role for any finance director in a young, entrepreneurial business is to define how the role relates to other members of the management team. Joining a team that has been running for a time and is thus already established is different from being there from the beginning. If a team starts with a proper finance director in place from the beginning three’s a chance that things will be set up on professional footing. However, joining an established team is a different and difficult experience for any finance director because he is thus both parts of the team and apart from it, working with the others but also for them and supervising them.

Striking up the right relationship with the boss is critical - many finance directors in growing business get off to the wrong start because they fail to understand the nature of the beast they are dealing with. The finance director must also lead and manage the authority’s finance function and ensure that it is adequately resourced and fulfills the needs of internal customers. In particular, the finance director is responsible for ensuring that there are high standards of performance throughout the finance function whether it is provided directly, in a devolved environment or on an outsourced or partnership basis. A key aspect of this responsibility is ensuring that finance staff – whether or not they are managed directly by the finance director – are trained for their tasks and that their roles, duties and accountabilities are clear.

Entrepreneurs are increasingly well researched but the knowledge gained has yet to filter into common business thinking. There might be conflict of interest between shareholders and directors. However, a finance director’s first responsibility is to act in the interest of the company not in the interest of the entrepreneurs because he is the one who can establish credibility on the small things (expenses etc.) as well as big ones (corporate finance etc.)

It is important for the finance director to understand an entrepreneur’s attitude to risk. Entrepreneurs are more likely see themselves as calculated risk takers than gamblers. This may come as a surprise to the public 
and also to the average finance director.  Further, a disciplined approach to management meetings should be implemented sooner rather than later.

Roles and Responsibilities of a Finance Director

 To be able to fulfill their statutory and public interest duties and to ensure that financial arrangements remain robust and effective finance directors must make a positive and effective contribution to an authority in five key areas. In effect these represent five discrete though related roles as shown in the diagram below.

 Each of these five roles is critical to the achievement of the finance director’s statutory responsibilities and these needs to be recognized in an authority’s organizational structure and arrangements. The finance director should alert the authority to any areas in which arrangements adopted by the organization may militate against the discharge of his or her statutory responsibilities.

   Regardless of an authority’s structure, it should be remembered that, whilst there can be considerable delegation of authority for financial matters, there can be no delegation of the ultimate responsibility – that rests at all times with the finance director.

The Finance Director – and the Financial Management

To do the job required of financial management, the finance director has to understand the business, its model and commercial drivers – as well as technicalities of financial reporting. Understanding the business is much about capacity and attitude of mind as capability. The finance director has to show that he understands the business. He has to talk cash and then he has to begin to establish numbers that show the key business drivers. 

He can add immediate value by passing his own personal analysis of the business to the founders whose success is a secret even to them. A good finance director can influence management policy in all three of these areas;

   Ensuring that people management is disciplined and objective.
   Ensuring that overheads are kept in control and 
  Ensuring the business gets the best from its suppliers and particularly that its leverage increases as the business grows In addition to looking internally at the business’s cash generating cash capabilities and changing the dynamics of the cash cycle itself, the finance director will of course find himself in the front line when seeking external financing in the form of debt or equity investment. 

"The finance director’s role starts and finished with business problems. In the middle there is a bit cash and tax, but the business is where it starts and finishes."

Last but not the least, a good finance director has an important role in setting the right tone for a good control environment, ensuring that good apples don’t turn into bad ones. Effective corporate management enables authorities to pursue policy and service objectives within the law and in a properly controlled manner. Although councilors have ultimate responsibility for agreeing priorities and policy objectives, it is the corporate management team at officer level that is responsible for policy implementation, for leading and managing staff and for ensuring that there is an effective approach to performance management.

Regardless of the organizational and political structure it is important to distinguish between councilors’ responsibility for leading the authority, representing citizens and establishing policies and officers’ responsibility for day to day managerial and operational decisions relating to the implementation of those policies. 

This handy and up to date information cuts through any confusion around the finance director’s role in a young business. It explains clearly and concisely the opportunities and pitfalls – and how the finance director’s role can be about much more than finance, focusing on people even more than profit.
About the Writer:

Mr. Mubeshir Ali Kazmi, ACA is working as Chief Financial Officer in a manufacturing concern and visiting faculty member in one of the leading institutes of accounting education - PAC, Lahore. He is available at 

posted @ 10:35 AM, , links to this post

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