Entrepreneurs should make a concerted effort to develop an informed perspective of finance and its essential function within their businesses.
Similarly, founders should look for talented individuals with backgrounds in finance to either help them as advisors, or join them as Chief Financial Officers to manage their start-ups accounts and help ensure the general financial well-being of their business.
The role of the Chief Financial Officer is to ensure the operative viability of a company from a financial stand point. Their objective is to ensure the economic success of the company in the short and long term.
Finance is the least localized of a company functions in so far as it touches every aspect of the business from salaries to marketing. However, finance happens to be the most standardized as economic records and statements must conform to universal standards.
The universal standards include G.A.A.P, standing for Generally Accepted Accounting Principles, and I.F.R.S which stands for International Financial Regulatory Standards. Each standard represents different ways of recording financial events that occur in the day to day operations of your business.
More will be explained on the differences between each accounting methodology in a future post dedicated to Accounting methodologies.
Functions of Finance
The role of Finance within a company can be divided into 2 umbrellas.
The first umbrella of Finance is focused on managing the internal mechanisms that support the continued viability of a business from a financial perspective.
The second umbrella of Finance focuses on the external role finance plays in representing a company vis-a-vis its' industry, market, and regulatory environment.
More on the second umbrella of Finance is covered in Finance - Treasury.
Here, we focus on the first umbrella of Finance and the internal duties financial leaders must manage within a business, of which there are 6.
Function 1 - Control & Measurement
Represents the area of finance that requires the most investment of time and resources. The position of CFO requires thinking about their business in two ways; the day-to-day, and the broad strategy. CFOs are typically accountants by background, though it is not essential. All in all, finance is black & white, and controlling the company finances requires sustained integrity from those who are responsible for the oversight.
Financial managers should emphasize and work to building positive equity; the difference between the value of assets and the costs of liabilities owned by the company. And, were ever possible they should try to create free equity; assets that have no costs or liabilities.
Critical Purpose of Control & Measurement:
A. The aim of your CFO is to mirror the economic reality of the business as accurately as possible.
B. Finances must be both centralized (organized in one ledger) and segmented (divided by function) corresponding to the company’s operational structure. Typically company’s keep between 3 to 6 books detailing the chart of accounts.
Function 2 - Business Information
The CFO is responsible for determining the measurements and the financial metrics of what success and failure represent in economic terms for your business. Conducting periodic financial analysis produces data that allows your management to understand how to effectively manage and operate the company from a financial standpoint.
Outside consultants can be effective tools to help determine pricing and other relevant business information your managers cannot easily discern. For early stage business, consultants are not particularly impactful in areas beyond pricing analyses.
Relevant topics for a CFO to analyze: (Purview of Accounting)
- Interest Expenses (yes)
- Amount Customers Spend
- Number of Customers
- Customer Segments
- Areas of Potential Growth
- Average Account Balance (yes)
- Typical Repayment Rate (yes)
Function 3 - Efficiency
With total control over the financial data of your company, an important responsibility of the CFO is to help the executive management team maximize the operational efficiency of the company.
To accomplish this, CFOs should avoid the following 2 pitfalls:
A. Being too tough on the other business functions, departments or divisions of your company. When a CFO attempts to save too much and cut expenses too deep, it can hurt business strategy, growth and the moral of your valued employees.
B. If cuts to your budgets are required, it is important to cut resources across all of the company functions and divisions, and not any particular segment. Singling out a specific function, group or team can send the wrong message and have very negative effects to the moral of the company.
Function 4 - Resource Allocation
A CFO must understand how the company fits into the greater global marketplace. Typically, CFOs should not be part of the interest group (equity share holders) within a company because they need to maintain a unique and objective perspective of the business. This degree of separation can be essential for maintaining the mandate of a CFO.
Function 5 - Marketing
As companies grow, CFOs become responsible for telling the company story, particularly the financial story or economic history to Wall Street and the stock market. This becomes even more the case should the business become or aspire to be a publicly traded company.
Function 6 - Partner of the CEO
Lastly, CFOs must understand the business strategy as well as the goals and values of the organization. For any company to succeed over the long-term, it is critical that the CFO maintain a very close and open relationship with the CEO and other executive leaders.
Ultimately a great chief financial officer must be comfortable wearing several different hats.
They must be masters of their domain, well versed with the regulatory environment, cooperative with their follow executive colleagues, and have a good understanding of how to represent the company to outside parties.
Start-ups in particular should not underestimate the value of a good CFO, and should the economic resources available to them prohibit hiring a CFO full-time, they should look to partner with a talented person who is willing to offer part-time guidance and oversight of the company finances.
Lastly, it is important for founders and executive leaders to include their CFO in all significant decision making processes.
CFOs can sometimes be perceived as an internal forces that, by the default nature of their responsibilities, work against the creative and resource-spending departments of the business. But, this perspective is short-sighted.
A great CFO understands that a company must spend money to make money. They can be effective forces to help colleagues find creative ways to reduce expenditures, all while producing the same economy benefits.
The more you involve your CFO (as any other c-level leader) in the decision making processes of your organization, the more likely company leaders will benefit from the diverse perspectives at their disposal and make savvy, impactful business decisions for the company.
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