This article was first published in the October 2015 UK edition of Accounting and Business magazine.

For finance leaders in corporates and professional services firms considering a move to a small business, the challenges and opportunities can be as interesting and diverse as the businesses themselves. Many corporate finance directors take the well-trodden path to the CFO role in smaller and mid-sized organisations, with a key driver being the ability to take full ownership of a company’s financial management.

In the UK there are around five million small and medium-sized enterprises (SMEs), which employ 24 million people and have a combined turnover of £3.3bn. The employers’ body the Confederation of British Industry (CBI) lauds SMEs as the ‘future champions’ of British industry, with the capacity to inject a possible £20bn into the economy by 2020.

So what does it take to become a CFO in an SME, and what are the challenges involved?

Most CFOs who move to an SME will agree on one thing: it is a riskier position to occupy than a role in a larger, listed organisation. But is it a role only for the brave? Certainly, seasoned SME CFOs will undertake a careful analysis of the business fundamentals, strategy and products before joining; but with limitations on access to real data, particularly in private companies, the risk is apparent. In addition to analysing the business, many experienced SME CFOs have developed a heightened awareness of the type of chief executive they find they work best alongside.

Chemistry and more

Within an SME environment, where the CEO/CFO working relationship is particularly close, it is vital for the chemistry to be there from the start. And while the SME CFO needs to be in harmony with the CEO, success in the role is still determined by the ability to challenge and advise credibly. That makes it even more important to assess the business and its culture in a methodical way before applying for a role.

Once in post, the fun begins. An IBM survey of SME CFOs, Inside the Midmarket, highlighted a global trend towards increased corporate influence. However, 45% of respondents felt their finance functions were not up to speed in delivering the resulting increase in demands. Certainly, a major contemporary feature of the SME world is the elevation of finance leaders from professionals responsible for core accounting and reporting functions to genuine business partners to the CEO, driving strategic planning and growth.

While there are many small companies that still view finance as no more than a back-office function, the CFO business partner has become the norm among SMEs. The trend can be explained in part by economic volatility and an increased focus on cashflow and capital, which have given CFOs a greater forum in the boardroom. As promising a development as this trend is, it leaves CFOs with the unenviable task of delivering far more with the available resources.

Ensuring efficient financial management and making it a priority are essential tasks before value can be added through other activities. The SME CFO is consequently a holistic finance professional with a strong technical foundation augmented by a keen commercial and analytical mind. Both an accountant and a business leader, this finance executive has the ability to interchange between the two functions as the company demands.

Private equity challenge

In the UK, we have a broad range of ownership structures across the SME sector – from independent private companies and British corporate holding companies to those with foreign ownership or private equity backing. There has been a notable rise in private equity activity across the sector. That’s the natural result of greater market liquidity, a factor that has also benefited AIM-listed companies as they seek to expand their operations. While CFOs in smaller listed entities will contend with public company investor relations and exposure to equity market volatility, finance leaders within private equity-backed companies work in an environment where the principles of sound financial management remain the same but the agenda is more defined.

A common trend within SMEs that move into private equity ownership is the subsequent replacement of the incumbent CFO by the private equity firm, usually by a finance director who has had previous private equity experience. This trend is largely due to the increased demands on a CFO under this kind of ownership structure. Private equity stakeholders have a far greater requirement for regular, consistent and in-depth financial information and analysis.

The new structure will also typically involve a leveraged balance sheet and debt structure that requires careful management. CFOs who have worked in such environments, especially where they have seen their tenure through to a successful exit, are in high demand.

Private equity ownership also places a high degree of emphasis on the CFO’s ability to deliver efficiency measures to improve business performance, whether through cost-base transformation, improving controls or fostering a decision support culture within the business. For those SMEs with aspirational owners who seek to expand business operations into new markets, CFOs will have to adapt to the differing cultural, regulatory and economic environments within foreign markets, while maintaining strong governance and controls, and managing any currency exchange risks.

Extra strain

Against the backdrop of limited resources and an uncertain economy, CFOs face the additional challenge of driving cost reductions, placing additional strain on often inadequately staffed functions. The quest to deliver more for less is perennial for the SME CFO. Yet while the obstacles are clear, SMEs and their management teams generally demonstrate strong balance sheet controls with cashflow transparency and an ability to anticipate and respond effectively to external influencing factors. If this capability can be counterbalanced with more impactful business analysis through the harnessing of both technology and data, then the finance leader’s role naturally elevates to a more strategic plateau.

The balancing act of responsibilities is further strained through shouldering the responsibility for risk management, any investor relations or stakeholder management (including private equity), and supervision of external funding and bank relationships. With such breadth to the role, it is little wonder that an increasing number of SME CFOs are looking to appoint a strong second-in-command, both to share the workload and as a potential successor.

As ever, that is where a new discussion with the CEO on resource allocation begins.

Adam Akbar is managing director of Bronzegate, a specialist executive search firm dedicated to financial leadership