What does “Finance” do? While it sounds like a simple question, it’s actually a very legitimate one, because the answers even from a set of seasoned CFOs will be wide-ranging. Obviously, the larger the organization, the more granularly the functions can be defined. But for the types of businesses we see—typically in the range of $3-50M of annual revenues—it’s helpful to think of Finance as being divisible into “The Past” and “The Future”, with (ideally) two individuals, say, a VP Accounting and a VP Strategic Finance, dealing with their respective realm, and coming together to support the business as more than the sum of their parts.
1. Bookkeeping and Payables/Receivables
Bookkeeping is the most basic financial activity in a company. Before a business owner ever considers hiring a CFO, they bring in a bookkeeper, who tracks all of the transactions in the organization, covering both sales and expenses. As the organization grows, they might hire more specialized payables and receivables clerks, to take over functions such as corresponding with vendors and suppliers, above and beyond recording transactions.
2. Financial Reporting and Control
Financial Reporting and Control is the function that takes raw accounting entries and transforms them into usable and comparable financial statements. Requiring far more judgment than the bookkeeper’s role, this function involves everything from ruling on how to implement accounting principles to designing financial processes of the organization, selecting accounting systems, liaising with external auditors, and ensuring that there are no gaps or oversights in existing processes.
3. Tax and Compliance
Running a business involves paying tax, and paying tax means doing a lot of calculations and filling out a lot of forms. Often using the financial statements as a basis, along with various other configurations of the information produced by Bookkeeping and Payables/Receivables, the Tax and Compliance function will make sure all of the government forms and filings are sent complete and on-time to the taxman. A strong Tax and Compliance function will go one step beyond simple compliance, and will find ways to minimize tax, so as to maximize the company’s net income.
The role of the “VP Strategic Finance” typically looks to the future, using the past as a starting point but being aware that the future doesn’t always look like the past. Typical designations or degrees for this role will include the CMA, CFA, MBA and MFIN. Note that the larger number of headings below doesn’t indicate the VP Strategic Finance works harder than the VP Accounting!
4. Strategic Planning and Financial Planning & Analysis
This function, “FP&A” for short, is the true bridge between the Past and the Future. FP&A regularly creates strategic and financial plans that forecast what financial results (sales and expenses) will look like in future periods. Then, they compare actual results—prepared with the assistance of the Financial Reporting and Control function—to determine areas where the business can improve. With this “variance analysis” complete, they can then prepare more accurate forecasts for the future. A strong FP&A function will not only generate annual forecasts but will be able to update them even over the course of a day or two, and to run many scenarios that examine the effects of, say, losing a big customer or an economic contraction.
5. Treasury & Working Capital Management
The key role of Treasury is to make sure that the company doesn’t run out of cash. This means, among other things, forecasting the upcoming working capital (receivables, payables and inventory) needs of the company, investing surplus cash in short-term instruments to generate modest interest income, and managing currency risk.
6. Capital Budgeting
Capital Budgeting is the function responsible for selecting between the various uses of capital, or capital projects. After all, most organizations will have money available to invest in the business, with the hopes of either growing sales or reducing expenses. But the opportunities for spending typically exceed the amount available to spend, so Capital Budgeting develops business cases to evaluate and identify the most effective projects. A strong Capital Budgeting function will not only forecast project benefits, but will also track these benefits over time to determine whether the use of capital was as effective as originally anticipated.
7. Risk Management
Risk Management is a function that is rapidly developing after the financial scandals of the early 2000s (Enron, WorldCom, the Great Recession and Lehman/Bear Stearns collapse, etc.). In the financial services industry, the function is particularly central as most institutions run with a high amount of debt (leverage), though leaders in other industries are also bulking up this function. Risk Management takes a hard look at some of the key risks faced by the company—currency, interest rate, market, operational, legal, etc.—and tries to quantify the possible impacts so that they can be mitigated as much as possible. If FP&A looks at the base case scenario for the company’s financial results, Risk Management takes a wrecking ball to it.
8. Corporate Development & Corporate Strategy
Corporate Development and Corporate Strategy can be widely defined, but it is the area of Finance most heavily populated by former investment bankers and management consultants. As such, common tasks that fall to this function include sourcing and analyzing mergers & acquisitions deals, raising debt and equity financing, making capital structure decisions and providing insight into high-level strategic decisions such as entering a new market