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Far from being purely a reaction to business growth, the finance function plays a crucial role in development right from the start – and the earlier the better

This article was first published in the October 2012 UK edition of Accounting and Business magazine.

No entrepreneur aims to build a fully fledged finance function when they set out on their rocky business road. But as their businesses grow, so they will find, reluctantly perhaps, that they will need to invest in a department that will help drive them to success.

A recent ACCA report argues that by investing more, and earlier, in their finance functions, entrepreneurs could reap greater rewards. Indeed, an investment in financial capabilities can act as an enabler, and not just an evaluator, of growth.

The report, Driving SME growth through an evolving finance function, looked at a sample of data from BDRC Continental’s SME Finance Monitor project – some 10,000 interviews with UK SMEs – to see if there were any causal link between financial capability and business growth.

The results are eye-opening. The research concludes that the development of the finance function is not just the result of business growth but also one of its causes.

Even before a business is up and running, there are hints about the importance of finance through the development of a business plan. But it is only those that return to their plans, updating and verifying them against performance, which can be said to be performing a finance function. Even this basic step can give a business a crucial edge on its competition.

As a business grows, so changes can be expected in the form and functionality of the finance department. It moves from the proverbial shoebox, stuffed with receipts, invoices and bank statements, to a professionally managed and led unit. The report illustrates this in the three stages shown in the box opposite, and the BDRC Continental findings bear it out.

The ACCA report notes that the evidence demonstrates a strong but complex link between the early development of the finance function and SME growth. In particular, synergies develop between business planning, management reporting and the use of financially trained staff. The early combination of the three is an important contributor to sustainable and rapid growth, says the report.

This becomes more obvious from a comparison of the growth rates of businesses that could be said to be more proactive in their approach to management. 18% of the SMEs that had all three core areas covered – management accounts, written business plans and financially trained staff – had grown by at least 30% in each of the last three years; this was about twice the level of growth of other SMEs. The difference was significant even after accounting for headcount and turnover, and became even more striking when the researchers looked for businesses that combined rapid growth with a good credit score.

Missing the point

ACCA UK recently brought together a number of finance directors, researchers and business experts to discuss the results. Would their views bear out the analysis?

Manos Schizas, ACCA’s senior SME policy adviser, observed that it was nearly impossible for any business to reach a point where it had, say, more than 200 employees but none of the elements set out in the three steps described in the box opposite. ‘However, up to that point, you still get firms that are missing these things,’ he told the group. ‘This is a little understood fact; in fact, I was shocked at how a business could get to employing 100 people and not have, let’s say, regular management reporting. But it happens.’

Kennedy Opoku Agyeman FCCA, finance manager at IP telephony company Ipitomi, made the point that the business would not exist at all without a quality product or service. ‘It is about how good your product is; that’s what generates your revenue. So when it comes to monitoring the information you have, the finance function can help your business to grow, but the service or product is most important.’

However, Agyeman highlighted the importance of the finance function by citing his own experience of working in a company that grew rapidly, doubling its headcount within one-and-a-half years. ‘Certain things had to change; certain things needed to be formalised, especially as we were trying to get investors in. At that point, you need to bring in a lot of quality skills,’ he explained.

Peter Sturdy FCCA, FD at Thomas Murray, noted that accountants bring more than just financial skills to the business, citing his own experience as he has grown with the firm. ‘It’s not just the accounting that I now do; I do HR, I do insurance, I do treasury, I do company secretary. Rather than just being focused on the pure accounting function, we have to fill in the gaps. For a very small company to hire either a bookkeeper or an accountant may seem rather expensive, but they know that person is going to have skills elsewhere.’

The entrepreneur must, however, make choices, especially at the early stage of a business’s life – a point highlighted by Marc Fecher FCCA, former chair of ACCA’s Corporate Sector Panel and a partner with Kingston Smith. ‘I can employ an accountant and I can pay him X thousand pounds, or I can buy a new machine that can give me greater productivity,’ he said. ‘One’s about costs and managing internal resources and one’s about growing the business. Which one’s more beneficial, and how do I make that choice?’

Three steps to finance function development

Stage 1: financial controls

When a small business begins to generate consistent revenues, entrepreneurs must accept that they cannot control everything and are accountable to third parties. Such businesses, typically with fewer than 10 staff and a turnover of less than £100,000, will begin to use management reporting, formal business plans and financially trained staff. This is mostly about monitoring staff and aligning incentives with business objectives, but becomes particularly important for rapidly growing businesses.

Stage 2: standardisation and monitoring

Businesses with a turnover between £100,000 and £1m, or with no more than 50 staff, begin to use financial information to optimise their internal processes. Financially trained staff are hired to monitor cashflow and manage credit as well as report on progress and resource implications.

Stage 3: accounting for growth

With a turnover of over £1m or more than 50 employees, internal resources are being stretched. In these situations, the finance department will be supporting growth – enabling access to finance, making and assessing the case for new products and services, monitoring supply chains and managing headcount.

Philip Smith, journalist


Last updated: 8 Jan 2015