FDs and the struggle to maintain financial discipline

They say a little suffering is good for the soul. If a report published by the Association of Chartered Certified Accountants in July 2009 is to be believed, it’s also good for the finance function. In its survey, 83% of respondents believed the chief financial officer’s role was more important than a year ago and 70% agreed that the finance function now gets more boardroom backing. This was reflected in Financial Director’s most recent web seminar, How to maintain Discipline in a downturn, in association with Oracle.

“People were much more receptive to our calls for efficiencies and reduced costs, because it became part of the strategy of the business,” Toby Cotton, FD of security consultancy The Risk Advisory Group and a member of our web seminar panel, told viewers. “The last thing you want to do is to end up in a crisis and finding ways to avoid one was in everyone’s best interests.”

Pay attention
Cotton isn’t alone. According to Rodger Hill, head of financial management advisory at KPMG, management teams have been forced to re-acquaint themselves with finance fundamentals and pay extra attention to the FD.

“Prior to the recession, people were very focused on managing profitability,” he said.

“Then there was this major change to focus on cash. Suddenly, people need to understand loan agreements, see where the covenants are and start asking whether they’re going to breach them. That’s given a lot of power to the CFO.”

Panellist Jim Weight was CFO at Westminster Healthcare and HIT Entertainment and now works with EPIC Private Equity looking for turnaround situations, where a vice-like command of the finances is, as he says, Job One. But he argued that the recession has forced FDs to look at more than just cash disciplines.

“A real understanding of the commercial aspects of the business is important, too,” he said. “Without that you can’t really achieve the third attribute we look for – an ability to forecast. If you go to the bank and say, ‘I’m going to have a cash problem in 18 months’ time’, usually the reply is that you can have as much money as you like. If you’re that on top of your business, you’re a much lower risk.”

For panellist Nigel Youell, director of marketing for performance management applications at Oracle, the key is being able to render a complex business ecosystem in a way that is simple enough to prompt rapid decisions. So, although the supply chain is convoluted, for example, or the cash forecast complicated by loan covenants, the FD’s skill is in offering simple choices to colleagues.

“FDs use engineering techniques to run through the variables thousands of times. That gives you a likelihood for any one result and gives you a much better understanding of where you’re likely to end up. But it also looks backwards to tell you which are the most critical variables,” he said – or, as Cotton put it, to identify the key performance indicators (KPIs) that will drive smart decision making. “Because they’re simple metrics, you can remember what the benchmark is,” he said. “A lot of questions then flow from that.”

Better yet, clear KPIs and robust forecasting mean you can spot problems in advance.

In addition to accurate reporting and forecasting, you have to step up your influencing skills. “You’ve got to articulate your opinion clearly and be unwavering until proven otherwise,” said Weight. “You need to assert yourself as an additional pressure on people in a way they weren’t used to in the boom.”

But what happens when the economy gets going again? Will the cash disciplines be lost as the CEO’s gaze turns from your KPIs to growing the topline?

The danger is very real – as the early 1990s downturn showed. “You get a lot of bankruptcies after the recession,” said Weight. “Businesses say, ‘phew that’s the end of worrying about cash’. But growth needs working capital – so they fall over three months later.”

This time round, however, there’s cause for optimism. “I would hope boards in general will now have a much better focus on economic value-add,” said Hill. “I’m expecting a better understanding of the risk around any given project – and that the cash impact is talked about a lot.”

But that doesn’t mean the upturn will be plain sailing: “We’ll add more pressure on the FD, too,” said Weight, “and unless you have nimble and well-structured data sets and systems it’s going to become more difficult to stay on top of everything.”

“It’s all very well having the information in the finance department,” Oracle’s Youell said.

“But how do you drive that into the business? What we’re seeing is this concept of enterprise performance management, which is an end-to-end system for managing the business.”

So while smart, joined-up systems can help finance maintain its cross-organisational role as business picks up, it’s down to FDs to wield their influence to good effect. “High-performance finance functions are ones able to influence business decisions,” said Hill.

“You get that influence by being a trusted business partner, able to turn up at the right time with the right information that helps the business leaders make the right decision.”

“The connection between the high-falutin part of the strategy and the nitty-gritty of what the FD does day-to-day is key,” concluded Weight. “When businesses lose their way, very often it’s a failure of that bit in the middle between what you do and where you’re going. It’s one of the most difficult things to do in business.

“But if you get it right, your operations will follow your strategy and you’ll be very successful.”

Richard Young is a financial journalist and chaired this Financial Director web seminar