What Should a Good Finance Director Be Looking At Apart From the Numbers?

When people think about the role of a Finance Director, they often think mainly about the numbers.

Profit and loss.

Cash flow.

Budgets.

Forecasts.

Management accounts.

All of those are important.

But in my experience, a good Finance Director should be looking beyond the numbers as well.

When I worked as a Finance Director in larger businesses, there were three areas I would always focus on:

Systems

Controls

Risks

Because even if the financial results look good today, weaknesses in any of those three areas can create serious problems later.

1. Are Your Systems Good Enough for the Size of the Business?

The first area is systems.

A business can outgrow its systems without really noticing.

When a company is small, basic accounting software may be perfectly adequate.

As the business grows, however, management may need much more detailed information.

The question becomes:

Are your systems still capable of giving you the information you need to run the business properly?

That does not necessarily mean the accounting software itself is poor.

It may simply mean the business has become more complex.

When Basic Accounting Software Is No Longer Enough

Packages such as Xero, QuickBooks or Sage can be perfectly suitable for many businesses.

But as businesses grow, they may need additional systems or more sophisticated reporting.

For example, when I worked as Finance Director of a construction company, accurate work in progress information was absolutely critical.

Construction companies often run long-term projects, and management needs to understand:

• Costs incurred to date
• Estimated costs to complete
• Contract values
• Variations
• Expected margins
• Work in progress

If the systems cannot produce reliable information in those areas, then management accounts may not reflect what is really happening in the business.

The same principle applies in other sectors.

A hospitality business may need an integrated stock-control system.

A retailer may need detailed stock and point-of-sale information.

A professional services business may need time-recording and utilisation data.

The system should fit the needs of the business.

Good Systems Should Help You Manage the Business

A Finance Director should therefore be asking:

• Are we getting the information we need?
• Is it accurate?
• Is it timely?
• Are we relying too heavily on spreadsheets?
• Are different systems properly integrated?
• Is there too much manual processing?
• Can management actually use the information being produced?

The objective is not simply to produce accounts.

It is to produce information that helps management make better decisions.

2. Are Your Financial Controls Strong Enough?

The second area is controls.

Controls are the processes a business puts in place to safeguard its assets, reduce errors and help prevent or detect fraud.

As a business grows, this becomes increasingly important.

In a very small company, one person may do almost everything.

That becomes much more dangerous as the business gets larger and transaction volumes increase.

Segregation of Duties

One of the most important controls is segregation of duties.

In simple terms, one person should not control every stage of a financial transaction.

For example, ideally the same person should not be able to:

• Enter a supplier invoice
• Approve the invoice
• Change the supplier’s bank details
• Authorise the payment
• Make the payment

If one person can do all of those things without independent review, the business has a significant weakness.

Segregation of duties reduces the opportunity for both error and fraud.

Other Important Financial Controls

There are many other controls a growing business should consider.

These might include:

• Bank reconciliations
• Approval limits
• Purchase-order systems
• Dual authorisation of payments
• Review of supplier bank-detail changes
• Regular debtor reviews
• Stock controls
• Expense approval procedures
• User access controls
• Management review of unusual transactions

The exact controls will depend on the business.

The important point is that controls should develop as the business grows.

A process that was perfectly acceptable when the company had five employees may not be appropriate when it has fifty.

Controls Protect More Than Just Cash

People often think financial controls are only about preventing someone stealing money.

They are much broader than that.

Controls also help prevent:

• Duplicate payments
• Incorrect VAT treatment
• Missing invoices
• Incorrect payroll payments
• Unauthorised expenditure
• Inaccurate stock records
• Poor credit control

Good controls create more reliable financial information.

And reliable financial information is essential if management is going to make good decisions.

3. What Are the Main Risks Facing the Business?

The third area is risk.

A Finance Director should constantly be thinking about what could go wrong.

That does not mean being negative.

It means understanding the major risks to the business and deciding whether anything can be done to reduce them.

Risks can be divided into a number of categories.

Financial Risk

One example is foreign exchange risk.

Suppose your business buys or sells in foreign currencies.

You may agree a profitable contract today, but by the time the customer pays you, the exchange rate may have moved significantly.

That movement could reduce or even wipe out your expected margin.

A Finance Director should understand that exposure.

In some cases, it may be appropriate to hedge the foreign currency risk.

The point is not that every business should hedge every foreign currency transaction.

The point is that management should understand the risk and make a conscious decision about how to deal with it.

Operational Risk

Operational risks are different.

For example:

What happens if a key supplier suddenly cannot supply you?

Could you continue operating?

Do you have alternative suppliers?

Would production stop?

Would customers be affected?

Would you lose revenue?

If a business depends heavily on one supplier, that is a risk that management should understand.

The same principle applies to other dependencies.

What happens if a key employee leaves?

What happens if an important system fails?

What happens if your premises become unavailable?

What happens if a major customer stops buying from you?

These are all risks that management should at least consider.

Risk Management Does Not Mean Eliminating Every Risk

Businesses cannot eliminate every risk.

And trying to do so would probably make it impossible to operate.

Risk management is about identifying the important risks, understanding their potential impact and deciding how they should be managed.

Some risks can be reduced.

Some can be insured.

Some can be hedged.

Some can be diversified.

And some risks simply have to be accepted.

The important thing is that they are understood.

Systems, Controls and Risks Are Connected

These three areas are not separate.

They often overlap.

A weak system can create control problems.

Weak controls can increase the risk of fraud or error.

Poor risk management can expose weaknesses in the business that the financial reports do not immediately show.

For example, a company may currently be profitable.

But if it relies on one supplier, one customer and one employee who understands the accounting system, there may be significant risks beneath the surface.

A Finance Director should be looking for those weaknesses before they become serious problems.

When Should Business Owners Start Thinking About This?

You do not necessarily need a full-time Finance Director to start thinking like one.

As a business grows, management should increasingly ask questions such as:

• Are our systems still suitable?
• Can we trust the information they produce?
• Are our assets properly protected?
• Are financial duties appropriately separated?
• Where could fraud or errors occur?
• What are the biggest risks facing the company?
• What would happen if one of those risks materialised?

These are important questions even for businesses that are not yet large enough to employ a full-time Finance Director.

The Bottom Line

A good Finance Director should do much more than review the P&L and balance sheet.

Of course the numbers matter.

But the role should also involve looking at the infrastructure behind those numbers and the risks facing the business.

For me, the three key areas are:

Systems – are they capable of supporting the business and producing the information management needs?

Controls – are they strong enough to protect the business and prevent or detect errors and fraud?

Risks – does management understand the major financial and operational threats facing the company?

As businesses grow, these areas become increasingly important.

Because sometimes the biggest threats to a business are not immediately visible in the monthly accounts.

Good financial management is not just about knowing what has happened. It is also about making sure the business is properly controlled and prepared for what could happen next.