Creating a strong finance team

The term Goju-no-to may not be familiar to many UK accountants, but ask anyone in Japan what it means and they will instantly understand the reference.

Goju-no-to refers to the traditional ‘five-layered tower’ architecture – most commonly seen in older temples – that has for centuries helped protect the country’s structures from the worst effects of natural disasters.

Buildings are designed and constructed to be beautiful and useful, but also with the recognition that one day they will be shaken by strong outside forces. Beauty, utility and resilience, all in one package.

It’s likely all businesses will face tremors, be they external economic ones, or something closer to home. When the ground does begin to shake, we all know that business owners will turn to the finance team to design a strong and resilient business. But rather than five layers, what are the six pillars of a resilient finance team?

1. Look ahead 

The first pillar has to be the right mindset, says David Blair.

Having worked as a finance director with growing businesses of various types, Blair knows a forward-thinking, proactive finance team is the best way to add strength.

“It means having the mindset of going out and engaging, in particular with the business owner,” Blair says. “That means getting involved with the topics that are really driving the business – what’s keeping the business owner awake, what the uncertainties are – because every business has them,” he says.

“If the accountant is just being reactive to everything that’s thrown at them, their opportunity to add value is far more limited than if they go out on the front foot and become a key part of the business.” 

2. Hammer the forecast 

In practice, the foundation of a forward-thinking finance team is the cashflow forecast. After all, as a wise sage once said, you don’t go out of business because you stop making profit; it’s when you run out of cash.

So understanding cashflow is as vital to a business as a doctor assessing the vital signs in a patient.  

“If you get into trouble one of the first things the bank will ask for is a cashflow forecast,” says David Tilston, an experienced FD and veteran non-executive director.

“The bank will want to know how long they’ve got to sort things out.

“So if you’ve got a forecast that is well established and gives reasonable visibility of what’s happening in the business, then it will give the bank a sense of how they can best help to sort things out. If you turn round and say sorry, we don’t have one, then straight away you’re going to get a kneejerk reaction – the bank will think they can’t rely on anything.”

The principle benefit of producing and maintaining a rolling 13-week cashflow forecast, Tilston explains, is that it gives you a decent view of how cash is likely to flow, and one of the key ways of keeping track is through previous forecasts.

“It’ll always be wrong but if it is broadly in the same territory, it shows you’re on the right track. However, if the lines on the graph start to diverge, it tells you one of two things: either your forecast isn’t up to scratch, or things are beginning to deteriorate in a way that’s impacting cash – and that’s a warning you might be heading for trouble.”

3. Think creatively 

Although creativity isn’t necessarily the first word people associate with accountants, Sophie Wright argues a good finance manager shouldn’t be shy in thinking up of a range of solutions that go beyond business as usual.

Wright is a portfolio FD who works with a whole range of small and growing businesses. As such she often becomes engaged with clients as they enter their first phase of significant growth.

“There’s a lot of value in thinking creatively: I’ve got an ad agency client and they say ‘our goal is to increase sales of X by this, by Christmas’; so they get paid for the work done, but they can also align their goals with their clients.

“Let’s say ‘how about in the quote here’s an extra £10k bonus on top, so if our ad is so good that it helps you to smash your sales, let’s share the bonus?’ So then that’s an incentive for everyone.”

Despite some traditional views to the contrary, Wright argues that designing contracts in a more creative way, to mitigate risk and maximise potential upside, should absolutely be the preserve of the finance team.

“You’ve got a role to play here because you understand how the business works so you should know how to spot risk and mitigate it.”

4. Known unknowns 

Every good finance team knows they’re on the front line of managing risk. But doing that effectively is impossible if you can’t accurately measure and understand the business’s key risks. So, says Blair, get on the front foot.

“It’s important for the accountant, when they’re talking to the business owner, to identify a risk but then to say, ‘Right. How likely is it to happen? Is it imminent or is it never going to happen?’ and you can list that 1 to 5, for example, and then you can say ‘right, if it does happen then what are the consequences going to be? Is it something that’s a little bit of a problem or will it kill the company?’.

“If you scale each of those by one to five, you can end up with a five by five matrix and then depending upon how far you go down either axis, you can get a view of how big that risk is (low, medium or high) and then you can decide how you manage it. If it’s a huge risk, do you monitor it every day? If it’s a low risk, you don’t need to worry. If these things are talked about and they’re set in a context then a lot of the scariness goes away.”

5. Keep a steady eye on cost control 

Wright has also seen the downsides to growth.

“There’s always a danger when people win new business – they like to go shopping for new people, or they think it’s time they got new furniture for the reception because the customers are going to come through and it’s part of the ‘customer journey’, and suddenly you’ve just spent your margin that you made.”

“Focus on cost control [or] those funds that were intended to be used to grow revenue are just overheads; suddenly there are all these new fixed costs you’ve got that are not being supported by sales, so they’re going to run out – and when they do, it’s over.”

6. Micro-manage working capital 

When it comes to finance, a Plan B is critical, especially if the uncertainty over Brexit continues – even if a deal is struck. And there are a range of options available beyond simple bank lending that can provide a strong buffer should times get tight.

“Often people don’t look at things like their working capital options especially if they’re selling a product,” says Wright.

“For manufacturers especially, who face many upfront costs, that’s all cash out of your business and then by the time it’s made, shipped and sold and invoiced, then they’ll pay another month after that. There’s some real gaps and it could hinder you.”

The range of working capital solutions is vast, from trade finance to asset-based lending and factoring.

“Take trade finance: if you show the finance company or bank a purchase order from a factory, they will pay the factory directly; and then you might attach that with an invoice discounter, so that when you invoice, that pays off the trade finance to pay for the production and then you’ve got 60 days to get the money in for the next loan. There’s lot of ways to approach this and keep the business strong.”

It is also worth remembering another Japanese adage, which talks about ‘bending adversity’ – turning tough times to your advantage. As the savvy accountant knows, strength comes in all forms, but the strongest houses are those built with care and an eye on the coming storm.

Christian Doherty is a freelance journalist