ACCOUNTING: Memo from the CEO: the finance function isn't adding much value

Talk to FDs these days and ask them how they spend their time, and the first answer is very rarely ‘doing the books’ or ‘producing the management accounts’. Yet, while it is apparent to finance directors and the finance function that they have substantially altered the nature of the work they undertake – and that accounting is no longer their only talent – it is more difficult to obtain an objective view of how this progress is viewed elsewhere in the organisation.

However, recent research* has attempted to quantify what the chief executive officer thinks of the finance function. And perhaps it is inevitable the results show that the finance function is not quite so highly regarded by outsiders as it is by those who work in it.

Colin Kunz of Henley Management College asked both the CEOs and FDs of 200 UK businesses of all sizes the question: ‘Does your finance function add value?’ Respondents then scored the value added from very low (one) to high (five). Unsurprisingly, nearly 70% of finance directors put their department in one of the top two categories. Also, while no finance managers marked themselves in the bottom category, only around 5% put themselves in the next highest box (number two).

However, the results from the CEOs were disappointing. Of the non-finance respondents, 63% marked their finance department in the middle and below average categories for adding value, which worked out at almost twice the number of FDs who marked themselves so modestly. Only one in ten CEOs gave their finance function top marks.

The explanation of this difference in opinion seems to be the old bugbear that non-finance managers believe finance does not understand the business within which it operates. Or, as Colin Kunz put it: ‘So, whilst it may not be necessary to undertake a chemistry or biology degree when working for a pharmaceutical company, the survey findings suggest FDs would gain a lot from looking at the value chain of the business.’

The truth is that there is still a significant disparity between what FDs think they and their colleagues do for their business and what the top person reckons. It seems most companies still consider finance largely as a control function that provides day-to-day security over assets and performs routine transaction processing.

One possible reason for the isolation of the finance function is the way in which its senior members are recruited. The research found that in a majority of companies, most finance positions were sourced externally. This, it could be argued, is a reasonable process given the nature of the skills and the accountancy training required. However, the survey found that even for junior positions, the finance department went outside first to look for staff. Such patterns of movement are likely to leave the finance department perceived by the rest of the company as strange and isolated.

Another explanation of the poor performance could be that as the finance function has been broken up and dispersed throughout the organisation its profile has sunk. Astonishingly, the research found that in some companies the CEO did not believe that the finance department played any role in investment decisions. But this non-show in a key area could be explained by the fact that in many large companies there are dedicated support and analysis departments and dedicated investment appraisal functions.

All this research leaves one over-riding question. What can the FD do to make the CEO value the finance function more highly? At the risk of sounding complacent, it is reasonable to argue that the answer is not to suggest that the finance function should try harder and add more value.

Of course, there are some backward finance departments around, but these must be far fewer than CEOs think. Like most other areas of business, finance has been subject to constant change over the past few years, and most finance teams have responded to the exhortations to add value. Doubtless, they could improve the techniques they use and add more value, but for many, any improvement will be marginal. So the central problem is one of perception. As Chris Jackson, head of the finance and management faculty at the ICAEW, says: ‘FDs need to do a better selling job.’

Of all the skills FDs can lay claim to, communication and presentation aren’t their strongest. So maybe FDs need to sit down and recap on the progress their departments have made and evaluate how those advances have helped the commercial fortunes of their organisations – and then they need to ensure that their CEOs know about what they’ve done. This is not to suggest that FDs should exaggerate their achievements. It’s just that, in this case, it’s a fair bet that the reality is an improvement on the perception.

Peter Williams is a chartered accountant and freelance journalist.

* So what does your CEO really think of the finance function? is published by the ICAEW’s faculty of finance and management, and is based on research by Colin Kunz of Henley Management College.

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