Designing a Reliable, Cost Effective Finance Department

By Asif Ahmed, author of The Finance Playbook for Entrepreneurs

In the field of finance, processes and governance there are no rewards for youth, youthful thinking or under-cooked knowledge. Is your finance structure, documentation, team and systems optimised for the journey on which you are embarking, and are you the right person to be making that assessment?

Here are some of the considerations when designing a reliable, cost effective and efficient finance department.

Structure

Deciding your legal structure is an important decision for many reasons but it especially relevant to the design of your finance department.

Take a step back and consider how much thought has been put into the structure of your business against the backdrop of where you plan on being five, ten or twenty years from now. Without wanting to dwell on the basics, you will be aware of the available options, ranging from self-employed, limited company (Ltd), limited liability partnership (LLP) and so on.

This is likely to have been decided following a conversation with the company accountant. The deciding factors tend to circle around topics such as: nature of business, growth plans, hiring plans, and taxation. However, businesses evolve, pivot and grow and the rules of engagement are constantly changing. In many cases, the final decision cannot be arrived at after following a simple decision tree to a particular answer.

For example, in certain cases it might make no sense from an income and cost perspective to be a limited company, but the nature of the business alone warrants adequate legal protection. For example, in a food business you probably wouldn’t want to be personally accountable (as a self-employed person) in case someone were to have a nasty reaction to your food.

On the other end of the spectrum, it may make sense for a certain venture to operate via a limited company but as there are multiple partners an LLP would ultimately provide better governance, eg a consultancy or professional services firm – you want the flexibility to be able to add and remove partners with ease, while each partner is legally protected from the actions of the others.

As a result, it is truly in the entrepreneur’s interest to be educated in business structures so that proactive decisions can be taken if the legacy structure has or will become outdated. If your company is initiating a revenue stream that carries a different VAT rate to regular revenue, experiencing changes to its risk profile, purchasing a business property, now selling overseas, establishing multiple sub-brands/product lines, seeking to sell equity to outside investors or considering taking on debt finance then that should trigger a company review.

Naturally, no adviser is close enough to the business to be able to foresee some of these events unless you develop a culture of including them in every decision. Often, entrepreneurs may proceed on any one of the above without realising the structure of the business may benefit from being evolved to accommodate such decisions. The chief of a high-growth start-up is only going to be wise to these requirements if they have spent the time studying the nuances. In the absence of this education, you rely heavily on an open channel of communication with your accountant.

Documentation

Throughout the life of any company, there will be important documents that will remain relevant at every stage. Typically, these are a combination of registrations and confirmatory notices issued by HMRC and/or Companies House. You are likely to need any or all of these documents for the following purposes:

Opening a bank account
Opening a credit account with a supplier
Passing anti-money laundering requirements for counterparties
Legal due diligence undertaken by a potential investor or acquirer
Registering for HMRC online services

These documents may include:

Company incorporation documents (incorporation certificate, memorandum of understanding, article of association, register of directors, register of members/shareholders)
Company corporation tax certificate (CT41G)
Company VAT certification
Company PAYE/accounts reference number
Directors’ identification documents – typically a passport

Create a dedicated folder both physically and on the company server where this can be accessed at all times. This will form an integral part of what we refer to as the Finance Bible.

You will find that members of the marketing department require these documents as often as the finance and management team. Some of the documents will date back to when the company was first set up and it’s not fun for anybody to have to ask the CEO to trawl through an old Hotmail inbox to find the original documents. Putting together a structured system of all of the above documents is a hallmark of a com- pany that is preparing to ‘grow up’ and mature into a resilient business. It may seem like an hour’s work to put this together but the circumstances under which these documents are requested often lead to delays if the company is unable to produce them instantly. It also provides an immediate insight into the credibility of a company’s processes, discipline and maturity.

Team

For any high-growth start-up, hiring will be one of your earliest and most consistent challenges. Every hire must be a good fit personally, financially and culturally. As part of the growing up process, one of the fundamental requirements of a successful implementation is having team members in key positions who have charted this course before and are therefore more experienced than you.

Growing up here means letting go. Accepting that once you have made a decision to hire senior specialists in their field, you (as CEO/founder) will no longer have day-to-day management of that particular function. If you are not 100% comfortable with this, you have not found the right candidate.

A key hire at this stage is someone to lead the finance team. The head of finance, CFO or finance director will be tasked with oversight of anything involving numbers. They are likely to be a superhero and scapegoat in equal measure, depending on the day. Critically, the individual hired in this role should have exponentially more knowledge about finance and accounting than the CEO. This means that the more finance orientated the CEO is, the deeper the CFO’s technical and commercial ability should be.

Note that your dream management team is a set of complimentary skillsets, not sub-divisions of tasks the CEO doesn’t have time to do. This is a key distinction often lost on many management teams.

In a fast-growing company, the CFO should be equipped to take responsibility for the journey ahead. While the rest of the company will be focused on growth at all costs, the finance team’s primary role is to keep up and support while ensuring the business is compliant, organised and efficient. This unique vantage point means the right character will need to continuously balance the needs of the company commercially while sufficiently satisfying the needs of all the key stakeholders. This is a difficult role and can often cause a divide between the CFO and their colleagues.

This friction is necessary. Embrace it.

Finding one stellar CFO is better than hiring multiple inexperienced juniors in their place. A quality leader will be familiar with quick-win efficiencies, systems and short cuts that no amount of extra hands could replicate.

At a board meeting, it is far more powerful to say: ‘Rachel, our financial controller, assisted our CTO with the roll out of the tech plan, so you can see we have aligned the last three months’ spend with our cashflow KPIs,’ than to say: ‘Unfortunately, we have overspent on tech over the course of the last three months, but we are actively working to ensure this does not happen moving forwards.’

Growing up is rooted in effective capital and human resource allocation. This is also one of the primary reasons why the CFO should be tasked with designing training and development for fellow executive management members. It is important that each department is driven and reported against a stakeholder within the finance team. Not only does this promote a culture of data-driven strategy, it also ensures there is a unified approach to growth within the company.

Training

In an ever-evolving global landscape, small businesses run the risk of becoming insular and cut off from channels of knowledge. It is therefore incumbent upon the management team to ensure there is a mechanism by which staff, particularly in finance, are continuously training. For many qualified professionals, this will be a prerequisite of their institutes but for the wider company there is no such obligation, and an initiative must be designed.

There will be industry-specific training that certain regulated companies will need to prioritise but as a rule all finance departments as well as other key management personnel should be continuously updated on the following matters:

Anti-money laundering laws
Health and safety
General Data Protection Regulation (GDPR)
Ethics for business
Unconscious bias, racism, diversity and inclusion

The above topics are relevant to all business leaders and a truly progressive company will ensure all staff members are collectively benefitting from and assessed against these standards.

In summary? Evolving into a mature, grown up company is not an entitlement, nor does it automatically happen through the passage of time – you must earn it. Its journey must be embraced by the entire organisation but particularly the most senior officials. Everyone must commit to the same vision but recognise this comes from everyone doing their own job well. The finance leadership should regularly be at odds with colleagues from around the business if they are doing their job properly. Ensure the finance leadership plays a central role within and around the business for better outcomes, design a training programme for the wider organisation to understand the things that matter to the finance function and recognise you might not be the right person to lead the company through every stage of its growth.

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