For a portfolio company to reach a successful exit, it is vital that the finance function is firing on all cylinders, fully supporting on best-in-class governance and reporting. Most importantly, the finance function must be able to monitor and influence strategic metrics so that the company is hitting the milestones needed to make the targeted exit a reality.
From my days as a VC/PE investor, we never invested if we had not already the vision of what the company needed look like at exit. We also had a list of potential future buyers prepared even before investing. We considered that while we were investing in the company in its current form, “AS IS” (to use process analysis parlance), our job was to enable it to reach the “TO BE” form to allow the best exit. Finance is the team that measures progress using various metrics. These metrics include the obvious strategic ones - revenue, margin, overheads, but also will include Balanced Scorecard measurements in each cost/profit center which link very closely to strategy (e.g. new-users, churn, customer complaints, etc.) Progress and success measurements on each strategic project will also be reported.
From my days as a VC/PE investor, we never invested if we had not already the vision of what the company needed look like at exit. We also had a list of potential future buyers prepared even before investing. We considered that while we were investing in the company in its current form, “AS IS” (to use process analysis parlance), our job was to enable it to reach the “TO BE” form to allow the best exit. Finance is the team that measures progress using various metrics. These metrics include the obvious strategic ones - revenue, margin, overheads, but also will include Balanced Scorecard measurements in each cost/profit center which link very closely to strategy (e.g. new-users, churn, customer complaints, etc.) Progress and success measurements on each strategic project will also be reported.
Often the finance teams in young growth companies are too busy surviving from one month end close to the next to allow them to do the value-add business analysis – especially when you cannot afford many analysts and also the data they need comes largely from the same month end close data! I looked before at defining examples of these KPIs and now I look at how to buy the time for the finance function to deliver quality analysis whilst at the same time improving its performance to the rest of the firm.
What defines a finance function performing badly? I believe it is the presence of any of the following symptoms:
a) Debtor accounts that contain a large amount of future bad debts.
b) Suppliers who are behind on payments schedules which will cause bad future payment terms.
c) Inventory which is inaccurate and thus risking a write-down.
d) Fixed asset inaccuracies – again risking a write-down.
What defines a finance function performing badly? I believe it is the presence of any of the following symptoms:
- Month end close with full management accounts and variance analysis delivered greater than Working Day 5 of the following month.
- Balance sheet reconciliations are not up to date and are not being done periodically thus not all balance sheet accounts are clearly understood, This typically signifies a huge risk in the balance sheet which can come to bite especially at an exit due diligence.
a) Debtor accounts that contain a large amount of future bad debts.
b) Suppliers who are behind on payments schedules which will cause bad future payment terms.
c) Inventory which is inaccurate and thus risking a write-down.
d) Fixed asset inaccuracies – again risking a write-down.
- Lack of strong controls and governance – where there is a reasonable risk of a compliance risk/fraud by employees which could in the worst case put the company under (e.g. Enron!) Or at a minimum some fraudulent payments and petty expense theft.
- No set schedules for payment runs or set company payment terms to suppliers – ad-hoc payment runs leaving other functional areas in the business and suppliers unclear on “How We Operate”.
- Lack of service by finance to other functions (e.g. Finance Partnering) – examples being: not processing payments for services on time thus having disgruntled suppliers, expense claims taking too long to process thus disgruntled employees, inaccuracies in budgets vs. actual at end month.
- Lack of ability to supply valuable measurement of strategy to the CEO – no time to do the analysis that really shows how decisions are affecting the top and bottom lines and cashflow.
First Stop - Perform a Root Cause Analysis: There is a reason you are getting the results above – It will be a function of your processes, inputs and expectations. Firstly, I look to home in on the reasons, performing a root-cause analysis to roughly attribute the current bad outcomes to these. Hence I can focus on solving the right things with will have the largest bang for my time buck.
Typically the finance team issues are a combination of:
With any task – either someone can’t do it (i.e. time or expertise related) or they are not motivated to do it. Each of the above problem areas could have a time deficient component or an expertise deficient component either potentially coupled with a lack of motivation by the team. Firstly, you need to find which it is; it is most often a blend. Lack of expertise -> leads to time wasting -> leads to pressure -> and morale dropping and the circle continues. Low morale is easy to spot in team meetings by how engaged with contributions and upbeat colleagues are.
One good test I use (taken from High Output Management by Andy Groves): Consider “if someone’s life depended on it - could they achieve the task in question?” If the answer is “Yes” then it is a motivational issue in the main that is present.
The Five Steps
This has worked for me in situations with all the problems described above present - I find they are mainly a mixture of lack of time and lack of know-how mixed with some leadership/motivational issues.
Prerequisite to solving: The team needs as a leader; someone experienced who has been in wars – (e.g. a finance expert who knows how to grind out results with expertise and an ability to drive process cross-functionally in the company). This leader needs support from the CEO for cross-functional changes.
Step 1: Find time for the finance team to perform real finance work.
(Part A) Don’t let payments rule finance – set payment runs periodically and set company terms with all suppliers – no exceptions (30 days net is typical). I’ve worked with companies in the past that have let the finance function erode into payables function only. How does this happen? A company may be growing strongly – and thus everything is urgent. Growth fever has taken over and requests for payments occurring first daily, then hourly start to eat into the finance team’s time.
The pressure and demands on the finance team mount. Urgent payments are like a drug it is difficult to wean a company off. Slowly but surely without management intervention and strong policies – Finance has no time to do actual finance – just payments. (The drug addiction analogy is not from personal experience however the addiction to urgent payment runs is).
(Part B) Don’t let month end take the full month. I’ve seen companies closing April in July. Such a strain on a finance team working that far in the past while also dealing with the present. How to fix? Run bottleneck analysis on month end. (Israeli scientist Eli Goldratt developed the Theory of Constraints which is worth reading and using) How it works? Simple – if your last closing action is taking place on day 8 – there is no point moving a different closing action from day 4 to day 3 – you have achieved nothing - focus on the day 8 actions movement first! Move day 8 action to day 2 then tackle the day 4 action. Rinse and repeat. Your maximum performance can only be your slowest activity – it will hold all else back. The beauty of bottleneck analysis.
Know your enemy: Break month end activities into ones which have internal dependencies (e.g. the finance team itself) or external dependencies (e.g. suppliers & other functions). Also I find it good to analyse which activities are process volume based (e.g. bank reconciliations) versus which are more thought and opinion based (e.g. accruals, provisions estimates). This will allow estimation of workload and skillset needed and allow planning or resource which can be moved around your team. Get commitments on paper (e.g. email) on promised delivery from the external dependencies – their word is their bond.
Many month end activities can be moved to the last week and lessen the spike in workload in the first week (e.g depreciation and accrual calculations).
If bank recs are done weekly – then on month end there is also only a week to do – not four.
- Process issues – lack of batch work, automation, convoluted processes, lack of clarity on the job - causing wasted time and mistakes in the financials.
- Client demand alignment – unnecessary pressures of an urgent nature from your stakeholders (i.e. other departments/suppliers demands – causing wasted time)
- Resource issues – lack of know-how, time and motivation in the finance team
With any task – either someone can’t do it (i.e. time or expertise related) or they are not motivated to do it. Each of the above problem areas could have a time deficient component or an expertise deficient component either potentially coupled with a lack of motivation by the team. Firstly, you need to find which it is; it is most often a blend. Lack of expertise -> leads to time wasting -> leads to pressure -> and morale dropping and the circle continues. Low morale is easy to spot in team meetings by how engaged with contributions and upbeat colleagues are.
One good test I use (taken from High Output Management by Andy Groves): Consider “if someone’s life depended on it - could they achieve the task in question?” If the answer is “Yes” then it is a motivational issue in the main that is present.
The Five Steps
This has worked for me in situations with all the problems described above present - I find they are mainly a mixture of lack of time and lack of know-how mixed with some leadership/motivational issues.
Prerequisite to solving: The team needs as a leader; someone experienced who has been in wars – (e.g. a finance expert who knows how to grind out results with expertise and an ability to drive process cross-functionally in the company). This leader needs support from the CEO for cross-functional changes.
Step 1: Find time for the finance team to perform real finance work.
(Part A) Don’t let payments rule finance – set payment runs periodically and set company terms with all suppliers – no exceptions (30 days net is typical). I’ve worked with companies in the past that have let the finance function erode into payables function only. How does this happen? A company may be growing strongly – and thus everything is urgent. Growth fever has taken over and requests for payments occurring first daily, then hourly start to eat into the finance team’s time.
The pressure and demands on the finance team mount. Urgent payments are like a drug it is difficult to wean a company off. Slowly but surely without management intervention and strong policies – Finance has no time to do actual finance – just payments. (The drug addiction analogy is not from personal experience however the addiction to urgent payment runs is).
(Part B) Don’t let month end take the full month. I’ve seen companies closing April in July. Such a strain on a finance team working that far in the past while also dealing with the present. How to fix? Run bottleneck analysis on month end. (Israeli scientist Eli Goldratt developed the Theory of Constraints which is worth reading and using) How it works? Simple – if your last closing action is taking place on day 8 – there is no point moving a different closing action from day 4 to day 3 – you have achieved nothing - focus on the day 8 actions movement first! Move day 8 action to day 2 then tackle the day 4 action. Rinse and repeat. Your maximum performance can only be your slowest activity – it will hold all else back. The beauty of bottleneck analysis.
Know your enemy: Break month end activities into ones which have internal dependencies (e.g. the finance team itself) or external dependencies (e.g. suppliers & other functions). Also I find it good to analyse which activities are process volume based (e.g. bank reconciliations) versus which are more thought and opinion based (e.g. accruals, provisions estimates). This will allow estimation of workload and skillset needed and allow planning or resource which can be moved around your team. Get commitments on paper (e.g. email) on promised delivery from the external dependencies – their word is their bond.
Many month end activities can be moved to the last week and lessen the spike in workload in the first week (e.g depreciation and accrual calculations).
If bank recs are done weekly – then on month end there is also only a week to do – not four.
Step 2: Define what good service by finance means to other company functions – set up SLAs (Service Level Agreements) to deliver (i.e. Payment runs once per month with cut-off 3 days before, agreement on how long it will take to process expense claims). However there will also be rules for the other functions to adhere to in this SLA to allow finance to batch (e.g. no expenses older than 30 days) This helps keep accounts up to date. Once these rules are in place – batching of work with zero interruptions can occur immediately and with that great efficiency – buying time for the finance team to do higher value finance work.
Step 3: “Fail to plan - plan to fail”. Use of checklists and calendars for month end processes, reconciliations and compliance. Finance work is 75% repetitive - it can be planned to a fault - so the spare time for more creative finance can be located. Run against the checklist like it’s the bible. Setting up different calendars for compliance is useful and can be input for a year ahead – (e.g. Tax returns, VAT, Statutory payments for salaries).
Checklists I use are:
Step 4: Catch up on reconciliations as soon as possible – How to do this? There’s no time! Well if you did step 1 there should now be at least some time!
Work has a devious way of filling itself on the time available. Not all employees will put their hands up and come running looking for more tasks. The right blend of pressure and competition is helpful.
So another way to find time is to set KPIs to monitor team performance and look for improvement from them, improvements led by the team for their own pride. This can be done by the raw motivation of being monitored to see can last week’s performance be beaten however the real magic is in motivating the team to improve their own individual area processes themselves and gain continuous savings by changing to process. As the leader the job is to assist and train on how analyse processes and remove steps which really add nothing (e.g. In one firm I had spent time with, we had a third check on a payment run journal voucher which was absolutely null and void and was only given a cursory look but yet took up time - removed!). A good method is to draw a process map (free tools such as PUT work well) and look at each step in a brainstorming session and ask “what purpose does this step cover?”. Pointless steps will become apparent.
To monitor KPIs – measure the team for a period (4-5 weeks) as a benchmark – and then you can find going forward where in the team there is bandwidth to assist on reconciliations. Process work is easier to monitor and get targets for than more analytical work – yet both must be monitored. Process work example – processing payments daily – time per invoice is a useful metric. Analytical work – month end comparison to budget and previous month.
Catch up on important reconciliations first – the highest value accounts with the most movement and thus the highest risk to the balance sheet if incorrect.
Once reconciliations are up to date – set up a periodic checklist with responsibilities for the team to stick to. As one of my early mentors said to me –“Make every month end close to the same quality as a year end and the year end will be a breeze”.
Step 3: “Fail to plan - plan to fail”. Use of checklists and calendars for month end processes, reconciliations and compliance. Finance work is 75% repetitive - it can be planned to a fault - so the spare time for more creative finance can be located. Run against the checklist like it’s the bible. Setting up different calendars for compliance is useful and can be input for a year ahead – (e.g. Tax returns, VAT, Statutory payments for salaries).
Checklists I use are:
- Month end close
- Month end management accs checks and delivery
- Reconciliation schedule
- KPI reporting of the finance team (more on this soon)
Step 4: Catch up on reconciliations as soon as possible – How to do this? There’s no time! Well if you did step 1 there should now be at least some time!
Work has a devious way of filling itself on the time available. Not all employees will put their hands up and come running looking for more tasks. The right blend of pressure and competition is helpful.
So another way to find time is to set KPIs to monitor team performance and look for improvement from them, improvements led by the team for their own pride. This can be done by the raw motivation of being monitored to see can last week’s performance be beaten however the real magic is in motivating the team to improve their own individual area processes themselves and gain continuous savings by changing to process. As the leader the job is to assist and train on how analyse processes and remove steps which really add nothing (e.g. In one firm I had spent time with, we had a third check on a payment run journal voucher which was absolutely null and void and was only given a cursory look but yet took up time - removed!). A good method is to draw a process map (free tools such as PUT work well) and look at each step in a brainstorming session and ask “what purpose does this step cover?”. Pointless steps will become apparent.
To monitor KPIs – measure the team for a period (4-5 weeks) as a benchmark – and then you can find going forward where in the team there is bandwidth to assist on reconciliations. Process work is easier to monitor and get targets for than more analytical work – yet both must be monitored. Process work example – processing payments daily – time per invoice is a useful metric. Analytical work – month end comparison to budget and previous month.
Catch up on important reconciliations first – the highest value accounts with the most movement and thus the highest risk to the balance sheet if incorrect.
Once reconciliations are up to date – set up a periodic checklist with responsibilities for the team to stick to. As one of my early mentors said to me –“Make every month end close to the same quality as a year end and the year end will be a breeze”.
Step 5: Instill continuous improvement of the finance function output. Instill a Kaizen Culture in the finance team. Run regular training sessions. I liked to do once per week on a Friday evening. If morale is low this can be difficult to achieve. How do you raise morale? If steps 1-4 are working – a finance team will start to take some pride in itself as they see improvements. I talk to my teams about accounting to world standard – that makes me proud. Most employees like to work in an environment where morale is high. Employees like to feel their skillsets are improving and that they are part of a valued team and a valued company. In previous roles I have run simple competitions for finance where an improvement to process buys the winner a half-day on a Friday once per month and the pride of winning! The goal is to improve the finance team as much like a game to be won as possible!
Perseverance and strong leadership with a continued focus on the “To Be” vision of the finance team through the hard times will engender confidence in the team. The structure of the team and the split between financial and management accounting is another area to consider.
Now that things are under control and you have some time: Review controls – don’t let all the effort come crumbling down due to bad controls – more on that another day!
by John Rowland
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