How does finance add value to a business?


How does finance add value to a business? By providing learned insight to the numbers to bring them alive and help the business make better decisions.

Anders Liu-Lindberg from the Business Partnering Institute suggests 4 ways to drive insights and add value from analytics:

  1. Build wisdom by adding valuable business, economic, and market context to dry data
  2. See the future and share early indications of new challenges as deviations from existing data trends
  3. Spread the net and show decision-makers what we do in Finance, bringing nuanced insights to the table, and telling a compelling story
  4. Read the room and listen to the concerns and questions of decision-makers to pick the right insights for the right moment

Easier said than done, but if successful not only will the business benefit from the insights, but gain value from moving finance from a cost centre to a profit enhancing function.

6 Ways to avoid black holes in your Balance Sheet!

I have recently been reminded of a role I had where my predecessor was asked to leave for allowing a financial black hole to develop in the Balance Sheet. Indeed, the reason for a failure at Patisserie Valerie was a focus on the Income Statement which allowed a black hole to develop on the Balance Sheet.

When the primary focus of management is the Income Statement, it is often the case that reconciling the Balance Sheet accounts becomes secondary. My argument is that you cannot rely on accuracy of the Income Statement if you haven’t reconciled the Balance Sheet accounts first.

An example of this is where goods are booked into stock, but what happens if the invoice has not been received at the period end? The key to this is providing an accrual for the amount (“Goods Received Not Invoiced” or “GRNI”). But the only way you can do this is with good systems and knowledge within the accounts team of how it works. This latter point is often where the problem lies, and was the reason my predecessor (who was a qualified accountant!) was asked to leave.

Here is my list of the 6 ways to avoid creating a black hole:
1. Reconcile your bank balances to statements, every period end.
2. Ensure that stock is valued at the lower of cost or net realisable value. In other words, it should be valued at cost unless you expect to receive less for it, then value it lower.
3. Provide for any expense that you have incurred but not charged the period. EG GRNI, fixed asset impairment, obsolete stock, bad debts, sales commissions/bonuses to name a few.
4. Seek third party verification to balance sheet accounts where possible. EG PAYE due to HMRC records, Inter-company balances to the other company, Trade debtors to post-dated remittances/customer verification, accruals to documentation etc
5. Ensure that only true fixed asset costs are capitalised. If costs are later found to be capitalised in error, they will then have to be charged to the income statement.
6. Look for “dangling debits” in the Balance Sheet. These are amounts just lingering on the Balance Sheet in the hope that they won’t be charged to the Income Statement! I have seen many examples over the years, EG Costs incurred that you hope will be covered by suppliers/refunded by customers, cost incurred that you don’t know where they should go in the income statement, suspense accounts, negative balances in trade creditors etc

In summary, the key is ensuring the debits on the Balance Sheet (assets) are legitimate and not overstated and that credits (liabilities) are not understated. Sounds easy! But as systems get more complex and reporting deadlines become tighter, the risk of creating a black hole is increasing.


Portfolio Finance Director: So what is it that you do?!

My answer to this question is often “Allow businesses to take control of their finances to lever commercial gains”, but what does this really mean?

To help explain I have put together a graphic.

When a business starts out, all it needs is a bookkeeper to make sure all the basics are being done, for instance reconciling the bank account, sales invoicing, paying suppliers, do the VAT etc. For me this comes under the banner of compliance, it is sometimes done by an external accountant.

As the business grows, better information is required to help manage the business. For instance, management accounts, budgets, targets and Key Performance Indicators (KPI’s) etc. These allow the business to make better decisions about the actions to take, say if sales drop, suppliers are not being paid or if operational efficiencies are worsening etc

These types of activities are typically carried out by a Financial Controller (FC). Using an external accountant to provide this service is often expensive, and being external they are perhaps not so in-tuned with the needs of the business.

Then as the business grows further often the Managing Director needs support of someone to help formulate strategic plans, pull together business cases and forecasts for investors or push through operational plans. This type of role is normally carried out by a Finance Director (FD).

At Finance Interim our sweet spot is around FC/FD tasks, using the accounting system to lever commercial gains in other areas of the business. It has to be said that although I have distinguished the above roles, the lines that separate them (and other tasks in the business…) are often blurred. For instance, a good FC can act as FD and sometimes an FD can carry out bookkeeping!

How internal control can help reduce fraud risk in SME’s

In January Patisserie Valerie crashed into administration following an investigation into alleged long-term fraud in its accounts. With their accountant saying audits ‘do not look for fraud’, this is a good time to reflect on the strength of internal control in your business and whether your systems would deter, prevent or detect a fraud.

What are Internal controls?
Internal controls are a set of policies and procedures put in place to ensure accounting systems are reliable, fraud risk is minimised and business assets are safeguarded. Without accurate accounting records, managers cannot make fully informed financial decisions and the business can be exposed to fraud. It is a sobering thought that accountants KPMG found that 60% of fraud is committed because a business had weak internal controls.

It can often be the case that in a fast moving business, the policies and procedures are relegated down the list of issues to address because frankly there are more important things to do! However, I would argue that SME’s need to take internal control more seriously, because their losses are less easy to absorb than in a larger business. Furthermore, they are unlikely to have an internal audit function and may not have the benefit of an annual external audit to assess controls.

Accepting SME’s have limited resources, this guide points to the key controls that businesses need to make sure are in place. These can be split into 7 categories:

1. Physical security of assets
2. Standardised procedures
3. Segregation of duties
4. Approval limits/Delegation of authority
5. Double entry bookkeeping
6. Checks and balances
7. Human Resource controls

Physical security of assets
This not only includes CCTV, safes, locks and entry passes, but also data backups. Regular physical audits should be carried out on cash, stock, materials, equipment and tools to check the business actually has these assets and they are recorded correctly in the accounts. Password access to different parts of an accounting system can safeguard information and access logs can keep a record of who accessed what and when.

Standardised procedures
Standardising procedures hugely reduces the risk of control breakdown. Procedures should be designed with control in mind and any divergence from the standard means control is weakened. Procedures should be audited at least annually to check that it is still best practice and is still operating correctly. They should work very much like quality standards.

Segregation of duties
Segregation of duties involves splitting responsibility between staff so no one person carries out all elements of a transaction. For example, no one person should be able to order and pay for goods or add a fictitious employee to the payroll and then pay them. For small businesses with only one or two accounting employees, control can be achieved by adding manager approval.

Approval limits/Delegation of authority
A requirement for specific managers to authorise certain types or values of transactions can add a layer of control to ensure transactions are seen and approved. Putting a delegation of authority in place gives limits to this authority. For example, an individual can generate purchase orders of up to £500 but requires a manager’s signature up to £5,000 and owner for anything higher.

Double entry bookkeeping
Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Most systems such as Sage, Xero or SAP will not allow you to post one sided entries, but using a package such as Excel gives poor control. Running a trial balance regularly confirms the system balances and this should be used to prepare MI at least monthly. Actuals should be compared to forecast and authorised by a manager at least monthly.

Checks and balances
Regular accounting reconciliations can ensure that balances in your accounting system match up with balances in accounts held by other entities, such as banks, group companies, HMRC, suppliers and customers. These checks should be carried out at least monthly and in the case of bank reconciliations as frequent as daily. Reconciliations should be checked and authorised by a manager.

Human Resource controls
Having the right staff is critical to control and checks should be made accordingly. Examples include qualifications verification, references and criminal record checks on new recruits. During periodic assessment and appraisals, staff should be assessed for competence and training needs. Staff should be obliged to take holidays and businesses should have a whistleblowing procedure.

Final take away
Remember that the owner’s overall attitude to the importance of internal controls creates the control culture for that business. Setting the right tone ensures that control is taken seriously by employees.

Internal control is a complex area and I have tried to summarise the main areas in this article. If you feel your internal control could be improved then why not get in touch where we can carry out a full review and provide practical recommendations relevant to your business.

Can a SWOT analysis be used to evaluate a finance function?

What is a SWOT analysis?
SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is an appreciation of a business’s greatest strengths, weaknesses, opportunities, and threats.

Businesses can prepare one as a part of their strategic plan or even to assess an individual product, project or a department.

Once the SWOT results have been identified and prioritised, they can be used to develop short-term and long-term strategies. The key to this exercise is in using the results to maximize the positive influences on the business and minimize the negative ones. The strategies developed should regularly monitored against actual performance.

How can the technique be developed for a finance function?
I give a brief example of a SWOT analysis for a fictional business here:

Team – experienced team who know the systems and staff well.
Cashflow – business is cash rich and able to obtain volume discounts and pay on time.
Monthly and quarterly reporting is being met – VAT, Intrastat, Payroll, Pensions etc

No budgets in place for budget holders and costs are escalating.
Poor monthly management information (MI), resulting in poor decision making.

No qualified member of the finance team resulting in a reliance on external accountants.

Developing better MI will reveal opportunities to improve profits and decision making.
Implementing budgets would improve cost control (and engagement) by giving targets to budget holders.
Bringing in an external finance interim would improve quality and timeliness of reporting.

HMRC chasing prior year accounts, could be fined and open to costly investigation.
Having no MI and budget is a breach of lender covenants and could result in Legal action.
With no budgetary control, costs are rising.

What potential strategies could come out of this?
Using strengths to realise opportunities –
Staff who know the business work with budget holders to improve cost control. But this would require budgets to be put in place.
Using strengths to mitigate threats –
Use cash strength to pay external Accountants a one-off fee to prepare historic accounts. But this is often an expensive and poor solution for monthly MI.
Using opportunities to reduce weaknesses –
Use cash resources to employ a qualified finance interim to develop MI to better understand how the business is performing and improve decision making.
Minimising weaknesses to mitigate threats –
Develop MI and budgets to avoid action by lenders over breached covenants.

Although a SWOT analysis can be carried out internally, an external experienced Finance Interim can help you assess the business from an external perspective bringing their knowledge of opportunities and threats perhaps not foreseen internally.
Once the pathway has been identified and agreed, they can help this be achieved whether this be through rolling up their sleeves and doing the work, developing reports, training or recruiting staff.
As expectations will be set out in the pathway, you will be able to monitor progress towards the strategies and be in control at all times.