The point of finance...

A conversation with Peter Charles

Everyone just accepts the presence of a Finance Department in any and every type of organisation but not everyone agrees on exactly what the department should be doing – and that includes the people who work in it. Peter Williams, award winning financial journalist in conversation with Peter Charles.


Listen now:


Hi, I'm Peter Williams, financial journalist.

Hi, I'm Peter Charles.

PETER W: Peter, there's been a lot of talk about trying to restructure finance departments. We've looked at shared service centres, we seen all sorts of different organisations. Why are you bringing up this topic now of what is the point of finance department?

PETER C: The real point of the finance function, the real key issue for the finance function is to make sure that it provides financial information for other people to take decisions. Occasionally the finance director joins in with those decisions, but in essence the primary purpose is to know the financial impact of things that have happened in the past.

PETER W: But don't people know that? Don't people understand that? I mean not only finance professionals, but people in the rest of the company as well?

PETER C: I guess what happens is that a lot of businesses that are big businesses today grew out of small businesses, and the way that a finance function can be structured to make sure that it gathers up the information that it needs. Let me just take you for a moment through the structure that I use, and then we can compare that to the way that things are done in small businesses that have grown up. The key issue is to understand first of all what decisions this business is likely to take. Now, that seems like an easy question, but actually you've got to think quite a long way ahead in order to say what information do I need to have now and do I need to have been gathering this year and last year and the year before so that in one or two years time you've got a set of data that the organisation can use for the decisions that it wants to take. So if we understand that's what we've got to do. We've got to judge every piece of information gathering, particularly financial information gathering against the likely decisions we want to take.

PETER W: How does that work out in practice for the CEO or the CFO today trying to organise their finance function?

PETER C: I think if we're looking at a CEO or a CFO who's been working with a finance function that has grown up out of a smaller business, what they're going to find is that they're going to find that transaction processing is treated as a non value added activity, they try and squeeze down the number of clerks who are doing it, and therefore they get poor quality data flowing in up the process. What they need to do is, they need to think for themselves. If you are the CFO, then you should be experiencing these things, and you might be able to lead the CEO into understanding that it's actually not good enough to say whenever I've asked the question, I get the answer, what they have to do is that they have to think through the strategy of the business, and as a result understand what is the full range of decisions that we might wish to take in the future and how much am I prepared to spend on having that amount of information available. Having done that then you can work back and apply the kind of structures that we're talking about. If you don't do that, you end up with a set of ways of working which would be appropriate for a cottage industry, being applied to quite a big business, and therefore you end up with a certain amount of redundancy, you end up with expensive accounts instead of relatively inexpensive clerks, and you end up with a lot of people doing quite a lot of work which is lower than their capability, or lower than their training, and therefore you get a bit of frustration, a bit of boredom creeping in.

PETER W: OK, so what should the CFO be doing now? Is it a burning issue they've got to get on with today, or is it something they can at look over a slightly longer time horizon?

PETER C: I think in the main for most companies, it is something that the CFO can look at over a longer time horizon. It's something that can be planned, it can be thought about, and it can be a useful opportunity if they happen to have the luxury of a little bit of time to think about things in the current environment, then they can start to restructure the finance function so that in the future they can put more pressure on it. If there is a big cost cutting exercise coming that new structure can allow you to put it under more pressure. So, I've got one client at the moment who the CFO just had this feeling that there was really serious cost pressure going to be coming from group. This is a big company in the UK, and group is outside of the UK. So we started on restructuring the finance function along the lines that we have just been discussing a year ago. Now, when the serious cost pressure has kicked in, he's got an answer for it, and we've got a clear, concise plan that can be executed. The rest of the organisation that didn't have a clear and concise plan actually is just being squeezed, and what we're going to find from this plan is that we get better quality at lower prices or at lower cost, whereas the other departments are really slightly running to catch up.

PETER W: OK, a final thought. We are in an economic downturn, it's terribly difficult at the moment, are you saying this is important, this is an absolute thing that should be at the top of the CFO's to do list?

PETER C: I think it shouldn't be at the top of the CFO's to do list. I think if we think about what must the CFO be looking at in this kind of situation? First of all they need to be bolstering their balance sheet, they need to be making sure they've got plenty of cash, liquid assets and room in the balance sheet to take into account shocks. Secondly, they should be in the nicest possible way being nice as they possibly can to their bank, because here is a moment when you don't want to be nasty to your bank manager, because you are going to borrow money you need to be right on top of it, and you need to have your numbers right. But the other thing the CFO is responsible for is keeping the cost of the finance function down. Allowing the finance function to grow up into a giant cottage industry actually isn't the way to keep the costs down. And if you restructure it now, and you take the time to do it and you don't do it in a tearing hurry, when you do need to push for more performance out of your finance function, it'll be structured in such a way that you can push that performance out of it , either in terms of lower costs now, or in terms of M&A activity when eventually there is an economic upturn, and you might be the one with the strong balance sheet. You might be able to use your finance function, your strong finance function, which is well organised, as part of the overall integration of target companies into your business.

PETER W: OK, Peter, on that relatively optimistic note, thank you very much indeed.

PETER C: Thank you.