Ask a non-accountant what the finance function does and the chances are that you will get a variety of answers. The problem is not necessarily one of misconception; more recently the term reflects the evolution of the role of accountants in business, which, in simplistic terms, has moved from bookkeeper to strategic business adviser.
The Association of Chartered Certified Accountants (ACCA) has tracked the evolution of the finance function for many years, and in particular the role of the function in small- and medium-sized entities (SMEs). Our Accountants for Small Business report and campaign of 2013, for example, showed how the SME finance function typically develops through four relatively distinct phases. This begins from pre start-up and planning, moving toward building financial and management controls, onward to enabling standardization and monitoring of business processes, and culminating in the final stage of finance function development in SMEs. The final stage addresses the need for responsive growth by enabling businesses to access finance, assess the case for new products and services, monitor their supply chains, and manage their headcount. It is this process that enables business growth and our own research has shown that the financial capabilities of SMEs are not just a consequence of growth, but very much one of its causes.
Our latest report, Ready for Growth? A Checklist for CFOs of High-potential Companies, shows that SMEs are mirroring larger businesses in recognizing that financial professionals can and should play a far broader, often strategic role in their business. This is never more crucial than when a business is experiencing rapid growth and expansion, but it is the nature of fast-growing businesses that careful planning is often sacrificed as events and opportunities take over. We have looked closely into the role of the finance function in eight fast-growing companies around the world, and in particular at how the function adapts itself as the business expands (for the purposes of the report and research, “high growth” is defined as more than 70% growth over three consecutive years).
The ACCA has consistently argued that effective financial management is a crucial element of a growing business, but that it should go beyond monitoring events to helping the business make informed decisions and assess new opportunities (see Building Your Financial Capabilities: A Guide for Growing Businesses). In most of the businesses studied for Ready for Growth?, the finance function began life under the remit of the owner or founder when the business was set up, with professional finance staff only taking over once the business had reached a steady stage of growth. In each case the finance function is highly dynamic, becoming steadily more sophisticated and moving toward a strategic role as the business develops, diversifies, and expands.
The form that this evolution takes, though, varies significantly. In some cases the change was organic and reactive, with new responsibilities being added to the finance function as high growth took hold. In others the evolution was carefully planned in anticipation of growth. But, all case studies “demonstrate a clear symbiosis between business growth and the evolution of the finance function,” with the remit of the function “almost always [extending] beyond operational tasks and processes during—and especially after—periods of high growth.”
In practice, this means that in some cases a period of high growth prompted the company to hire a CFO, which in turn moved the function on from an administrative process to business partner. But in a small number of cases, the high growth itself was directly propelled by strategic analysis carried out by the finance function, such as cash flow estimates, return on capital investment and probable consumer volume. And this clearly shows the potential with one participant in the study describing this transformation in terms of an accountant moving on from “bean counter to bean grower.”
So what can be learned from our case studies? The report looked at how each of the case study companies managed high growth and mitigated the risks that inevitably come with rapid expansion. A number of common points emerged, including:
- The importance of monitoring growth and developing robust controls to make sure that growth does not spiral beyond its capacity;
- The need to make timely investment in new talent to meet the challenges of new markets and business streams;
- The importance of harnessing the capacity of the finance function not only to manage cash flows, but to analyze and plan future trends to maintain growth;
- The need to maintain a comprehensive, bird’s-eye view of how the finance function reaches into operations and informs strategy; and
- Making sure that the financial information provided to the organization is relevant and useful, and that those that will use it understand how to read it and apply it.
Our case studies show that the best finance functions act as the co-driver of a fast-growing company—navigating the best route, providing reliable and digestible information on speed and direction of travel, and applying the brakes in time if it looks as though the company might be overstretching itself. It is an essential role, but one very much based on teamwork—the finance function needs to work in tandem with other business development departments or, even better, become integrated with them in planning and preparing for new growth.
