The Entrepreneur's FD: Time bandits

23 Feb 2011 | Matthew Howes

Barry Cryer tells a story about a finance director walking down the street. The FD is approached by a homeless man. "Excuse me, mate" says the man, "Can you spare me a few quid? I haven't eaten for two weeks."

"I see," says the FD. "And how does that compare with the same period last year?"

Of course, no FD would be that heartless but the joke hides a deeper truth – that most of us think in fixed periods of time, mainly years and months. We end up measuring financial performance by the distinctly non-financial yardstick of how long it takes the Earth to revolve around the sun. That's how we measure our time, but is it the best way to plan a business?

There has been some movement away from the annual forecasting and planning cycle. I work with several businesses that use rolling forecasts and according to CIMA, some 20 percent do too. But what do the other 80 percent do? Fixed annual forecasts, presumably.

The idea of a fixed annual forecast includes the assumption that a year is the ideal planning period, that we can get a good fix on revenue, costs and profits over that period and that we can reasonably predict how external economic, political and social factors will turn out.

Just give it a bit more thought and you come to the question: why is a year the ideal planning period? What if we consider a five-quarter forward-planning period instead? That gets us away from what I call the January factor, by which I mean that a forecast is prepared and January (or Q1) shows a marked change from the end of the previous year. Revenue shoots up; costs are magically under control. In reality, though, most businesses experience much less change between December and January than at any other time of the year; staff, directors, customers and suppliers are all off for Christmas.

Yet this goes on happening. Perhaps businesses, like people, make new year's resolutions and perhaps they break them in the same way. But a business is a continuous process. The last quarter of one year flows into the first quarter of the next. Businesses don't stop and start with a jolt and unless we make changes, they will stay the same. But our planning process often suggests otherwise.

If we choose a different planning period, we automatically start to look at the business in a different way. The selected forecasting period need not be longer than a year; we might wish a six or nine-month period if we feel it reflects the nature of the business. A restaurant might have a very different planning cycle from an oilrig builder. But the selection of an appropriate planning period is really important.

Which brings me to the next part of the change in the planning process. If we break away from the notion of the annual planning cycle, we can then move to rolling forecasts. Businesses spend time and resources preparing annual forecasts that run from January to December. At the start of the year they look forward to the next 12 months of activity, but as the year progresses the horizon shrinks. Rolling forecasts enable the business to keep looking up and thinking about the future, rather than focusing inward on a set of assumptions that are all too quickly outdated.

Underpinning this idea is that in uncertain times, the forecasting and planning process needs to be nimble enough to predict and react to changes in the business environment. A rolling, non-annual-based forecasting process enables that. The non-annual part acknowledges that a business is a continuous process and the rolling part keeps it focused on change and development.

That is not to suggest that a business should be purely reactive or incapable of setting long-term strategic objectives. Rather, such a mechanism is the best way of reaching those objectives. 

And don't get me started on why the tax year starts on 6 April...

Matthew Howes is a principal in the London region of the FD Centre. http://www.thefdcentre.co.uk

Deputy Editor's Blog: A flaw in the law?

21 Feb 2011 | Richard Crump

On 15 February 2011, Cotswold Geotechnical had the unwelcome distinction of becoming the first company to be convicted of corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007.

The engineering company was fined £385,000 - payable over a 10-year period - for the death of an employee in 2008 when a trench in which he was checking soil quality collapsed.

The fine, which was three times higher than Cotswold Geotech's annual turnover, could result in the company being forced into liquidation and proves that the courts will treat corporate manslaughter more severely than if death had resulted under the old health and safety offence.

"Clearly judges will not shy away from imposing so high a fine as to put an organisation out of business," said Michael Slade, managing director of Bibby Consulting & Support.

One of the main planks to the conviction was that the employee's death was linked directly to how the company's activities were managed by its senior management - activities that were described by the police as "out-dated working methods" which were conducted with a "cavalier attitude" to health and safety.

Yet, strangely, no individual employer or director was held to account and the only sanction has been a fine, which you could argue does not reflect the seriousness of the crime of taking a life.

Health and safety campaigners, such as the Hazards Campaign, have claimed that the Cotswold Geotech case has shown that a "fundamental flaw" with the new corporate manslaughter legislation is that it holds the company responsible, not the individual directors who make the decisions which lead to these disasters, and therefore no-one can be jailed.

In the case of Cotswold Geotech, the Judge commented that its principal director was, in effect, the company. According to Slade, this leaves other questions unanswered - namely in a larger organisation, which employees rank as "senior management"? And where is the boundary beyond which the breach of duty care becomes "gross"? In the Cotswold case these questions answered themselves.

We're going to have to wait for a larger organisation to be prosecuted for the offence to get any worthwhile answers.

Business Matters: Market structures and incentivising investors

17 Feb 2011 | Tim Ward

Voltaire once wrote, "We cannot wish for that we know not."

This came to mind last week as we completed our submission to the European Commission on the Markets in Financial Instruments Directive (MiFID) consultation. The Commission has been asking for views on a vast range of market structure and operation issues. It amounts to 148 questions.

Two questions asked whether there was demand for ‘specialised SME markets' across Europe and if so how should the Commission go about creating them and what criteria should be used to distinguish the markets. There was little accompanying detail to the proposal, so it's very much wait-and-see. Regardless, we have enthusiastically supported the concept of a specialised SME market and at the same time cautioned the Commission to form an expert working group to explore various approaches rather than rush through a hasty, ineffective offering.

While tinkering with market structures may provide small and mid-caps a more hospitable environment to raise money, a market is nothing without its investors to provide the liquidity. At the same time as the MiFID review, we have recently submitted our Budget representations to the chancellor George Osborne, focusing on providing incentives to help drive private sector recovery and growth. Our proposals include capital gains tax reform for Entrepreneurs' Relief, extending venture capital schemes (including the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)) and eliminating Stamp Duty on shares of companies quoted on exchange regulated markets and allowing those companies' shares to be placed in ISAs too. Ever mindful that we all wish for tax breaks for our areas of interest and given the public sector cuts, we have tried, harder than ever, to put forward proposals which are accompanied by suggestions on how to pay for them.

So although we cannot wish for that we know not, we can know what we wish for. In both our MiFID response and our Budget representations, we see the small and mid-cap quoted sector as being the catalyst for growth and job creation. Creating specialised markets across Europe and directing tax incentives towards this key community would be progress of a new order.

Tim Ward is chief executive of the Quoted Companies Alliance, the membership organisation of the small and mid-cap quoted sector. His past roles have included head of issuer services and head of marketing at the London Stock Exchange and finance director at FTSE, the index company.

Editor's Blog: Youth clubs and the ONS's vision for a better economy

04 Feb 2011 | Melanie Stern

Forgive me a Daily Mail moment: if it was April 1 I would guffaw, hit delete immediately and forget about it. A press release that dropped into my inbox today from the Office for National Statistics delivered some frighteningly underwhelming information about what constitutes wellbeing - which, as we've written about recently in the magazine, David Cameron has asked ONS to compile an index to measure the state of the UK instead of focusing on stats like our GDP. So what's the secret to a happy, healthy life for British people?

"A sense of community along with family relationships are the things that matters most to people's well-being," says the ONS, having gathered this kernel of the human condition from a series of nationwide focus groups and community events.

You don't say!

And it gets better. "At a mother and toddler group in Swindon, people felt that a sense of community and education was vital to their wellbeing," the ONS reports, "whereas in Aberdare, South Wales at a gathering for the National Old Age People Association, quality of life rated highly along with investment in our environment."

So if I ever consider moving to Swindon, the secret to enjoying life there is to volunteer for Meals on Wheels and get a degree, while if I find myself retiring in Aberdare I should buy myself a nearby plot of that nice Forestry Commission land that the government is trying to sell and build my bungalow on that. What a lovely life. I'd definitely be happy with my lot if that was my lot. I'd be a model ConDem voter.

In short, if you want to be content, join Dave's Big Society and see the good in the government's big idea to sell off our precious green spaces.

Eureka!

And what's this? Old people in Newport who've had heart attacks tell the ONS that they want society to provide more youth clubs as a route to more life opportunities?

Of course they do: anything to keep them off the streets. I recall that as a kid my local youth club, stationed in the Royal Military Academy where I also did Judo classes, was a hellhole that no child as weak and lily-livered as me would have survived five seconds in. Haven't many of the UK's youth clubs closed in recent years? And more are under threat due to the pressure on councils to make huge budget cuts - but we've been happy to issue ASBOs by the thousand rather than invest in what the silver foxes now say is the right way to go. 

I don't see the government fronting the cash to revive youth clubs when they've the small matter of the national deficit to address - unless Tesco or some other Too Big To Fail corporate is going to be convinced to sponsor it: and I'm not convinced that there are enough people willing to volunteer to run Byker Groves up and down the country, Big Society-style.

It's nice to have a way to tell the government that we'd be more well if it gave us the three-day week so we can spend time cycling with our kids through Forestry Commission land, instead of working three people's jobs. But what is the government going to do with all this feedback that is In The National Interest?

And how does it help the economic recovery?

Read our article on the government's idea for a wellbeing index here

In The National Interest: Bizarre trends causing concern to professional FDs

01 Feb 2011 | Stephen Fitzgerald

Readers of this column may notice that I have been a little quiet over the past few weeks. I am afraid that the need to strip £18m out of a net revenue budget of £186m for my organisation has been the focus of my attention. This is largely driven by the government's recent spending cuts announcement and, in partnership with the organisation's management board, I have been beavering away to ensure this is delivered in the most painless way possible, whilst still balancing the budget.

However, as I sit here late at night I have just taken a very bizarre call from one of my finance director colleagues in the public sector. He was concerned about being removed from the board of his organisation. This seems to me rather counter-intuitive in the current financial environment, but I am hearing of a number of organisations going down this road.

It does seem to me that in a time of extreme financial constraint, properly qualified finance directors should be the key to delivering proper government and strategic remodelling of organisations to achieve the very challenging financial targets that we have in the public sector at present.

In the local authority sector there is a requirement to set balanced budgets and the finance director is legally required to ensure this happens. The role is not simply about proper accounting, but an integral part of the key decision-making process of the local authority.

Additionally, the government appears to be going down the road of extending this role to other areas of responsibility. For instance, some FDs now need to certify on matters of IT security and also verify the financing of private finance initiative schemes.

While professional qualifications are not everything, I do believe that budget processes in the public sector, which ultimately drive the spending of valuable tax payers' money, do need to be managed by appropriately qualified professionals. Normally, in the public sector this means either an accountant or a professional with a business studies degree.

In the struggle that we are facing both to remodel public sector organisations and use tax payer's money to its best effect, having the FD at the very centre of board level activity working in partnership with the chief executive and other key board members is the model that a public sector organisation should be looking for.

Politics will ultimately determine the road we go down in terms of managing the spending deficit, but if politicians from whatever political party wish to see this issue addressed in a professional fashion across public sector organisations, I believe valuing the finance director's role at the board level of the organisation is essential.

Is there anything that anyone out there would like to argue with that one?

Stephen Fitzgerald is FD for Hounslow Borough Council

Editor's Blog: Why FDs could use Max Clifford's services

28 Jan 2011 | Melanie Stern

It can get tiring telling the same story over and over. Which is sometimes what, as editor of a magazine for finance directors, I have to do when I meet those in other executive disciplines or middle managers: I frequently have to sit patiently through that person's clichéd view of the modern FD, and then try to dispel the idea that they're a bunch of grey-faced abacus-botherers whose DNA is sadly bereft of any of the genes that grant someone a personality or a sense of humour. It seems that, though the FD world moved on from the pinstriped beancounter look some years ago – some say decades ago – those working around them, for them or even with them have not been told.

In recent months, I've crossed the paths of divisional managing directors and senior sales managers who, when I tell them what I do for a living, first give me an awkward chuckle, and then proceed to say something along the lines of, "oh, you mean the ones who make the fun stop", "God, that sounds boring, I mean, aren't FDs a boring lot?" and  "that's...interesting?" – coupled with a glance that is both bewildered and a bit sorry for me to be writing about FDs. I take umbrage (though quietly). It's really an extension of the Holy Grail of clichés – that accountants are boring. It then follows that the most senior accountant in a business would be the most boring, right?

Even among other staff in the company that publishes Financial Director, I regularly come across people who still think FDs are cut in the shape of Nosferatu's shadow and dress like Mr Bean: FDs are boring, their job is boring, and they've got nothing to do with me or my job, thank you very much. I've gone on something of an educational offensive in some cases, putting across a passionate defense of FDs and the fact that they're actually as human as the rest of us, that they don't sit in a darkened room cuddling their calculator while the real managers run the business and make the money, and that a conversation with an FD is as interesting as a conversation with anyone else. They're not aliens. In three years on this magazine, I've come across maybe one or two FDs whose conversation made cleaning the toilet seem like a good idea, but that's a good success rate in any social circle.

I'm wondering if FDs are getting that message across themselves and whether, if they aren't, they need to. Our parents tell us when we're kids that it doesn't matter what anyone thinks of us, but in adult life – and intensely so in a complicated, frequently political working life – it can make or break you, and deeply affect your success. Isn't that what being passed over for a job is usually about?

The finance job relies more and more on sound relationship skills, from the CEO down through a business as well as with all stakeholders, so should FDs worry about their image and their prospects when anyone from a divisional MD to a junior administrator makes presumptions about what you do and who you are? Is there a case for a Max Clifford or an Alastair Campbell to step in? If perception is indeed nine tenths of reality, then – considering what other people in the business world quite casually say to me about their perception of the FD – I think there might be.

There are already places for FDs to get things like presentation training so your investor presentations don't bomb and kill your credibility. But is there anyone out there who can train FDs in the subtle art of convincing non-financial people that they're not the ashen-faced abacus mafia? As an FD, do you know what others around you think of the FD job and of you – and how that might be affecting your future trajectory?

If you can get into that, you'd be doing me a real favour helping me to convince people that finance directors are not only vital, but also have vitality. They're more brilliant than boring. I see and hear it every time I speak with an FD, but that's because I'm on the lookout for it. Maybe others outside the FD world need help with that.

The Entrepreneur's FD: The joy of Excel

26 Jan 2011 | Mike Cosby

First, let me confess to being a bit of an anorak when it comes to spreadsheets. I started with Lotus 123 in 1985 on the IBM PC with the twin floppy drives. Then, after a brief flirtation with Multiplan, I started working through the various versions of MS Excel. It took a while to be convinced of the merits of the 2007 release, but now I find myself looking forward to getting my next laptop with Excel 2010 installed.

Of course, the reasons we use Excel are quite simple. It provides us with a framework for performing calculations and preparing analyses that is completely customisable. It even allows us to express - dare I say it - some degree of creativity in our daily lives.

Some of you may follow the excellent pointers and opinions on Excel offered by the ICAEW's Simon Hurst on its IT Faculty blog. There is a lot of discussion at the moment about the risks associated with companies' reliance on the output from spreadsheets. A glance at the 'horror stories' section of the EuSpRiG (the European Spreadsheet Risks Interest Group) can cause an FD to sleep less soundly at night.

I would like to offer a slightly different view of the limitations of Excel. I like to group these under the headings of capacity, reliability and transferability.

Capacity is when your spreadsheet runs out of steam. You have decided to do the entire budget on a single Excel file - sales by product/customer, purchasing/manufacturing and so on. A glance in My Documents confirms that the file size has ballooned to 27mb, takes seven minutes to run an F9 recalculation and, even zipped down, exceeds the email attachment limit on the mail server. Perhaps we are trying to get Excel to do something it just is not designed to do. Because Excel is so simple and intuitive to use, we want it to mirror, even sometimes replace, the accounting system, often because the accounting system itself is far from simple and intuitive to use.

What about reliability? Let's say the following year you have learned from your mistakes. You will produce the budget using a number of linked spreadsheets - sales in one file, production in another. It's all going ok until the night before the budget presentation, when you open the top-level file only to discover that every cell returns the value #REF. Somewhere along the line you have lost the links to the calculation files and it has all gone horribly wrong. Of course, there are ways of mitigating these risks by building in some simple controls and by adhering to a few basic rules of spreadsheet design. It's the user who makes the mistakes - Excel itself works perfectly well.

And what of transferability? Some time ago I took over as FD at a company that manufactures central heating equipment. The previous incumbent had kindly done an exhaustive handover that included a run-through of all his management accounting spreadsheets. I could see what he had done but I knew I could do it better, so I spent many hours redesigning my predecessor's files from scratch. The result was a slight improvement in the quality of the numbers and in the presentation. Mainly, however, I felt comfortable that if something went wrong with one of the spreadsheets I'd know how to fix it.

The fact is that nobody is comfortable picking up someone else's spreadsheets, which set me thinking. How much time is spent on this activity each year? Let's assume there are 35,000 businesses with more than 50 employees in the UK. Assume that each of these has an FD or FC and that they have an average tenure of five years in the job. Assume also that it takes two weeks for the new job-holder to rework all the reporting and budgeting spreadsheets at, say, an average of £40 an hour.

On this basis, the annual cost of all this activity in this country alone is not far short of £30m. The assumptions can be questioned, but the fact is there is a very real hidden cost here.

I am not sure there is a solution to these issues. Companies can look at using secure and documented database applications where possible, but Excel will always have its place in every business.

Perhaps the key is for users - many of whom I could class as anoraks judging by how reliant they are on Excel, something which Financial Director wrote about recently - is simply to be aware of the risks and try to practice "safe spreadsheeting".

Mike Cosby is a principal at the FD Centre. He is a qualified accountant who spent time in internal audit in Europe and Asia, and later was managing director of a manufacturing business in Ghana working on behalf of Heinz. 

Follow our blogs from the FD Centre at our Extraordinary Items blog on the last week of each month

Business Matters: Pumping up liquidity for quoted companies – AIM shares in ISAs?

20 Jan 2011 | Tim Ward

Over the past few months, the Quoted Companies Alliance has been beefing up our campaign to allow Alternative Investment Market (AIM) shares to be included into Individual Savings Accounts (ISAs) as part of our continued effort to improve the liquidity and marketability of AIM company shares.

The profile of this issue has been raised significantly over the last few weeks. Lord Lee of Trafford posed a question in the House of Lords on 20 December querying why AIM shares could not be included in ISAs and also a recent article by David Blackwell on this subject - both of which mentioned our efforts along with the London Stock Exchange and other industry bodies.

On 10 January 2011, the Financial Times published my letter on allowing AIM shares in ISAs in response to all this, where I pointed out the inconsistencies inherent in AIM shares' exclusion from this key tax-exempt savings product. For example, shares traded on Recognised Stock Exchanges are allowed to be included in ISAs, which includes the Athens stock exchange (including the derivatives market), on the Korea stock exchange, on the Gem market in Ireland and on the alternative market in Cyprus. Yet, those traded on AIM, the UK's predominant growth market, can't.

We highlight that the overarching issue is to improve liquidity and trading in the sector that has the best opportunity to grow and create jobs, small and mid-cap quoted companies, and including AIM shares in ISAs is one way to help effect this.

Mark Hoban MP, financial secretary to HM Treasury, has recently expressed his view against this proposal in a speech at the Tax Incentivised Savings Association (TISA) conference and also in responding to a question in the Commons from James Wharton MP. His view is that allowing exchange regulated shares into ISAs may damage the brand as these companies are 'riskier'. Riskier than every share in Korea, from a UK investor's point of view?

We will plan to include this proposal in our Budget representations to the chancellor and we urge you to write to Mark Hoban to the Treasury, to show your support.

Tim Ward is chief executive of the Quoted Companies Alliance, the membership organisation of the small and mid-cap quoted sector. His past roles have included head of issuer services and head of marketing at the London Stock Exchange and finance director at FTSE, the index company.