I haven’t written in this series for a while. So, for new readers, I’ll just briefly reiterate the premise of The Purpose-Driven CFO.
What I set out to do was to investigate what difference it makes going back to first principles with the things we do in Finance, and asking “why?” I know from experience that understanding why we do things can increase our motivation in doing them. Once you can see the end goal, and see the benefits of that goal, any tedious, mundane, difficult or complex steps towards it become less burdensome. And often asking “why” reveals implications that will change the way we do things. That has certainly been the case with all the other areas I’ve looked at from this angle.
You can find links to the previous articles at the end.
What I’m considering today is what I’m calling the “boring bits”. Sorry if anyone finds that offensive. I don’t really think they’re boring. I just perceive that a lot of Finance people and CFOs treat them like they’re a boring pain in the butt.
The things I’m thinking of are things like Accounts Payable, Credit Control, Financial Accounting and Financial Reporting (as in statutory/regulatory reporting and technical IFRS accounting).
Let’s be honest. People working in those areas can feel a little neglected by the CFO, whose attention is normally on more strategic, business-facing and investor-facing, matters. They’re the ones people think of when they see Finance as being full of mere number-crunchers. And so, they’re the ones who sometimes consider their jobs as being a bit dull.
What are we really here for?
My conclusion, in this article, is that if we think hard enough we will be able to see that each of these boring functions adds more value than we think.
When I say, “think hard enough”, I mean that when we ask ourselves why we’re doing them we should really push, and ask what benefit the business gets out of us doing them.
For example, we may say that the purpose of Accounts Payable is to make sure supplier invoices are recorded accurately and paid on time. But is that all? Is there a way of doing AP (or P2P more generally) that benefits the business?
And, for example, we may say that the purpose of Financial Reporting is to file accounts in compliance with laws and regulations. But is that all? What benefits does the business get from that compliance? And can those benefits be enhanced by delivering the same output in a different way?
An unusual distinction
The way I’m going to look at this is to follow how a Finance team forms, grows and develops, as a business grows.
My starting point is to make a distinction that we don’t normally make, because we don’t normally have to because of the size of the Finance teams we’re used to. That distinction is that a Finance function is not the same as a Finance team. Stay with me!
A Finance team is a team or department of people who report directly to a Head of Finance, Finance Director or CFO.
A Finance function is the set of activities that are performed in the business relating to the finances and the performance of the business.
In the beginning, there was no Finance team
When most businesses start, they don’t have a Finance team. There is the business owner and maybe a few others. Take myself as an example. Supercharged Finance is my business. But I don’t have a Finance team.
But that doesn’t mean there is no Finance function. I still do Finance activities. I raise all my invoices, I reconcile bank statements, I use an accounting system, I prepare my monthly accounts, I pay my suppliers, etc; and most importantly I’m managing the performance of the business – strategy, planning, forecasting, KPIs, resource allocation, cashflow forecasting, and so on.
The first thing a business owner probably does is to outsource the annual Financial Reporting and tax returns. That’s what I’ve done. I keep being told that that’s ironic, because I’m a qualified accountant! But, the reason I’ve done that is the same reason every other small business owner does it – because it saves me time and gives me confidence that it will be done correctly. I want to spend my time doing other things, rather than keep up to speed with IFRS, company law and corporate tax requirements. And the accounting firm has processes and systems that make it easy for them to churn a set of accounts and tax comps out. It wouldn’t be cost effective for me to set those up just for me.
So, they save me time, meaning I can do more product development, marketing and sales.
And their output is better quality than a DIY job (even from a qualified chartered accountant), which means that the tax office views it with less scepticism, and so do the banks (if I were to get a loan) and suppliers giving me credit.
And finally, they lower my risk – being experts, they will help to steer me away from accidental non-compliance, and give me good advice to help me avoid overpaying tax and make the most of my money.
And then it grows
As the business grows, the next things to employ someone to do (or to outsource) are the bookkeeping, the payroll, the management accounts and cashflow forecasts.
The same principle applies. There comes a point where these things either become too complex or too time consuming for a non-expert to do, and the business owner and others in the business need to be spending their time getting customers and serving customers.
When the business gets large enough to employ someone to fulfil a Finance Director or Head of Finance role, whether full time or part time, that’s the point at which the Finance function starts to become a Finance team.
And from that point onwards, the Finance Director grows the performance management side of the Finance function, whilst taking charge of transaction management and financial resource (i.e. cash) management.
Which bits add value?
There is a tendency to talk in terms of the performance management side of the Finance function, the bit the FD brings along, the performance reporting and FP&A side of things, being “value-add” services. Whereas, the other bits are “non-value-add”. Those are just number crunching, bean counting, transaction processing, control checking, historic reporting, etc.
But I think that’s a bad way of looking at it.
Here’s another way of looking at it: Every activity or asset in the business should “add value”, in that it should enable the business to make more profit. If it doesn’t, then the business should get rid of it, because all it’s doing is reducing profit. The implication is that the business would be making more money without it.
And then you realise – these “non-value-add”, boring, jobs, need to be done. And they need to be done well. Otherwise the business can’t function properly, and won’t survive. Business survival is pretty big value in my view!
It’s not a question of whether, but how, we add value
So, it’s not really a question of whether certain things add value (and I’d include other overheads in this category too – HR, IT, Property). It’s a question of how they add value. Where does their value to the business come from? If we understand that, then we’ll know what we have to do to help the business perform even better (which is the raison d’etre of Finance).
So, let’s restate and generalise what we found earlier. We have people doing the bookkeeping, paying the suppliers, collecting debt, producing accounts, running the payroll – all the “boring bits” in order to (and this is the value they add):
- Save time for those doing the marketing, the sales, the production and operations, the customer service.
- Protect, maintain, and improve, the credibility and reputation of the business with its stakeholders (suppliers, banks, shareholders, employees, etc), which (amongst other things) improves its ability to obtain resources (physical and financial) cost effectively, raise investment funds economically, and get better access to skilled people.
- Lower the risk of error, fraud, regulatory non-compliance, and consequent loss, by effective use of skills and knowledge.
Ever seen that as a purpose statement for AP or Credit Control? No? That’s the value of a purpose-driven approach.
Assessing the implications
Assuming you agree with the conclusions above, what does that mean for the way that we do the work in the “boring bits”?
I’ll leave it mainly for you to think through. But here are a few ideas and teasers:
- If we’re in AP, and we’re trying to take the burden of invoice processing away from business owners and others, is there any way we can make it easier and less time consuming for them to purchase things and approve invoices for payment? Why do we sometimes insist on invoice coding being done by business managers?
- If we’re automating a process like AP, do we put any thought to retaining the skills and knowledge that stops the fraud, the duplicate payments, the VAT errors – things that maintain the reputation of the business and avoid losses?
- If we’re doing year-end financial reporting, do we see how we can make things clearer for skakeholders? Can we do this with even more professionalism to enhance the credibility of the business?
- For such “mundane” job, what do we put emphasis on? Speed and efficiency? Or quality and control?
- In customer/client invoicing, how much have you thought about what your invoices say about your business? Professional? Amateur? Shoddy? Are your invoices so late that it gives the impression you don’t care about the cash coming in quickly?
- In credit control, do you think about the way you can affect future business opportunities by the way you treat customers? Having facts right, treating customers fairly and politely? How about passing on interesting information to sales and marketing people in your business if you hear something that hints at opportunities? How about passing on feedback about pricing and products?
Previous Parts in the Purpose-Driven CFO Series
For those who want to look back on other parts of my Purpose-Driven CFO series, here are the links: