Hostage to fortune: FD predictions for 2014

What have been the biggest challenges for your business over the past year, and what role did finance play in addressing them?

David Bauernfeind, CFO, Xchanging (DB): Our business is in the middle of a major transformation. We are moving away from the founding business model to one which is much better attuned to our markets, and which also de-risks the business. Achieving this while managing the demands and pressures of being a listed company can be quite challenging.
The finance function has been at the heart of this transformation process in a number of ways. Firstly, we need to keep our shareholders happy. Decisions you might take as a private company may not be acceptable as a public company where more linear progress is expected. Secondly, part of the transformation has revolved around moving away from a silo structure to a single business, with all the implications that has for rationalisation of central functions including finance. Thirdly, by driving change through the finance function in this way, we are improving our management information systems, giving managers better insight into the business, in turn enabling them to make better decisions as they pursue our transformation programme.

Peter Campbell, CFO, Mimecast (PC): For a fast-growing company like us, our biggest challenge has been scaling and growing the business internationally. Finance is the anchor that calibrates the availability of capital against our projected rate of growth to determine speed. Once we set the speed and course, we guide the ship on its journey to achieving that growth and ensure we get where we need to be.

Jessica Slack, FD, St Aubyn Estates (JS): I’m answering this from the fortunate position of having our best ever summer season, with record numbers of visitors to St Michael’s Mount. The challenge is in understanding why, in order to repeat the success. Looking at tourism in general, there are always factors beyond our control – weather, exchange rates – as well as behavioural trends (eg many more last-minute bookings) and we need to be able to understand how our visitor profile is changing and respond to it accordingly.

John Gill, FD, HSS Hire (JG): We secured new private equity investment at the end of last year, so finance played an important part in articulating and demonstrating the plans of the business, as you’d expect – bringing new owners up to speed with our reporting and implementing the governance processes of the business.
We subsequently completed a number of complementing, bolt-on acquisitions to accelerate growth. Naturally, finance has a huge role to play in the primary identification of acquisition targets, building of the investment case, managing the due diligence of the acquisition process through to the funding and completion and then supporting the post-completion integration of back-office processes. Essentially, a big role across lots of parts of the finance function.
My team’s role is also critical to the ongoing identification of where we best invest our capital. Key investments made in 2013 include a purpose-built training academy for all customer-facing colleagues and new local branches to grow our national network.

Divinia Knowles, CFO/COO, Mind Candy (DK): Firstly, we’ve transitioned to a new business model, from the old model of web-gaming with MoshiMonsters.com to mobile, tablet and gaming. With that comes a massive shift in our business model. What revenues will we make, pricing, dealing with micro-transactions and that impact on children? Cashflow will be different … it’s a massive shift. Finance has been at the forefront of making sure we’re being really careful of what the new business model looks like, and how they’ll merge. All of it is an educated guess – but forecasting is. All you can do is you can hone forecasts to make it more predictable, ‘more right’, as you get more data.
Secondly, we’ve created a lot of new revenue streams – complexity has gone up. We have games, entertainment, publishing, movies … finance has been key to dealing with those, and ensuring that our sources of data are organised in the right way. We haven’t upped the finance team numbers too much, but are improving the way data comes thorough into our systems and spreadsheets. We put in an ERP system and did some work on business intelligence so the reports we need are automated, and available at the right time and place.

Will you pursue more expansionary or defensive strategies in the year ahead, and what will those strategies be?

DB: Given the answer above, it will be no surprise that we are in a more expansionary phase. Also, the UK and US economies seem to be pulling out of recession, and our particular markets are growing. So this creates a positive context in which to plan.

JS: Definitely expansionary – we’ve just started a multimillion-pound refurbishment of our hotel (the Godolphin Arms in Marazion), and we’re targeting more overseas and group visitors for St Michael’s Mount. Internally, our training spend is increasing. It’s an exciting place to be.

PC: We will continue to grow and expand our customer, market and product offering. We currently have more than 8,400 customers and are continuing to grow. We will remain focused on our customers to ensure we nurture and build those relationships. We will continue our new product development to provide these customers with additional solutions to the problems they are trying to solve. We will also simultaneously build our market share in our core markets and evaluate the timing of expansion into new ones.

JG: We are inclined towards expansionary; HSS is growing strongly and continuing to invest, so our task is to ensure we focus that investment in the right areas by building and developing models that accurately assess our customer returns, group profitability and capital returns. Developing the financial models that support our investment and growth is absolutely central to supporting the core business. We will be focused on delivering sustained growth through a combination of organic and targeted acquisitive growth – while ensuring we maintain our strong level of financial control and governance.

DK: We’re definitely using the transition as an expansionary play. Moshi Monsters has only ever been in English; we’re getting it onto mobile and tablets to easily localise it … and developing new IP onto those platforms as well. We think our Moshi Mobile games will resonate with the US audience as well – it’s been quite a slow-burning territory for us, but we hope that will be a catalyst for us.

What actions should the government undertake to improve the business environment for UK corporates?

DB: The government has acted to reduce UK corporation tax, which is welcome. I would like to see more ‘joined-up government’ action on regulation. Reducing the burden on business arising from all government departments would help to provide a level playing field for the UK against our competitors and hence improve the economy.

JS: From a small business perspective, consistency in policies such as the annual investment allowance would make a huge difference. We’ve had three separate rates in one year (with complex transition rules) which makes medium-term planning of capital spend very difficult. Set an allowance and stick to it.
I’d like to see more signs that government policies are tested on small businesses before being enacted – for example, both RTI and auto-enrolment seem to have been designed on the assumption of a steady workforce whose members earn the same amount each period. As we start implementing auto-enrolment, it seems clear that the people drafting the legislation haven’t considered the complications that irregular patterns of work bring.

PC: For a service business like ours, most of our costs are people-related. So I personally find PAYE taxes and benefits in kind quite onerous. For example, travel costs for an employee base that lives outside London, team building and entertainment – these things double in cost due to the tax burden applied. In a competitive environment for skilled labour, this can be quite expensive. In the past seven years, we have created more than 500 jobs. Relaxing these kinds of payments would mean we could afford to create more.

JG: Two simple things come to mind: Firstly, the government should seek to deliver the macro policies that will deliver sustained growth in the economy. Secondly, the government should take further steps to encourage the ability of business to take on new employees – whether that’s through apprenticeship schemes (something HSS is very committed to) or other means – in order that economic growth can generate employment growth for the future.

DK: There’s still an educational issue. I feel passionate about that, as I’m in a kids’ company. Improving education so that kids can take advantage of the digital opportunities out there, so they can go into cutting-edge businesses without a massive learning curve. This government has been better than the last in understanding the impact digital business will have on the economy.
I’m also passionate about the government making sure entrepreneurs have tax reliefs – but it should be broadened to those within these entrepreneurial organisations, the key talent. No start-up is just one person; there’s a whole team of people making it possible. It would be another way to attract experienced people.

Is the furore over corporate tax avoidance likely to fade in 2014?

DB: Unlikely. We are a very long way from being out of economic difficulties, and while this backdrop remains, the government will keep up the pressure on tax avoidance.

JS: No, not while we’re still in recession and feeling the impact of less take-home pay and spending cuts. Having said that, most of it does just seem like noise. Some members of the Public Accounts Committee get to shout at some City suits and feel better about themselves, but nothing really seems to be changing – either in the way tax legislation is drawn up or in the profits of the companies doing the avoidance.

PC: The public irritation we have seen here, particularly directed at large multi-nationals, will remain but other issues will occupy our minds too. The UK is a good place to grow a business. Tax rates here compare favourably with our other markets – South Africa, Australia and the US. The UK remains core to our business even as we grow significantly internationally.

JG: Yes, I think it will but the government has an ongoing duty to ensure the right corporate tax framework is in place so that businesses can invest with confidence and certainty against a known tax landscape.

DK: The conversations about this will only go away when the powers that be have a suitable response to it, but that’s not a bad thing. Things need to be in place so that the countries they operate in feel like they’re being awarded the right taxes and some contribution to their societies – until that happens, it won’t go away.

Do you have any advice for other finance directors for the coming year?

DB: Be wary of advice from other FDs – trust your own knowledge and instincts.

JS: Do a management information audit. Is the information being produced actually being used to govern the business and inform decisions? It may have been right five years ago, but is it right now? Are your recipients hungry for your reports each week or month or quarter? And if you stopped producing a particular report, would the business then fall apart?

PC: Speed and supply lines. Information gets old quickly. If you are reacting to data about what you saw a month ago, you are in trouble. Make sure you establish a team and finance environment that excels in tracking and interpreting information in real time. Finance teams are generally small and they possess unique skills.
You have the ability to see the business from the outside in. Identify the levers that move the business and get information on them to the teams that need them fast. Measure, gauge and adjust quickly and then feed that information back.
Finally, make sure you have more cash than you think you need and about three times as much as your chief executive thinks you need.

JG: As finance people, our job should ultimately focus on our customers, both internal and external. We have to make sure that we deliver the right products and services at the right prices to our external customers while providing our internal customers with continued service improvements, all against a background of maintaining strong controls on investment control, cost control and so on.

DK: Every time I hear about organisations where finance is some weird back-office function, it makes me feel sad. I’ve built a finance team where I champion them to the business. They provide so much value – making us more commercially savvy, making our decisions better.
Part of an FD’s role is to promote the importance of the finance organisation – and make those in finance realise that they’re an influencing function, a decision-making function. They also need to promote themselves. I feel privileged to have built a finance function from the ground up.