This is the first of three articles/blogs about the changing role of CFO’s and their Finance teams worldwide. Targeted towards smaller to medium sized organisations (up to AUD$200m turnover but relevant to all organisations), the articles will look at;
-
The expectation on our CFO’s and their Finance team to move beyond core transactional
accounting and partner the business and add value, - Recognise the challenges of managing the day to day accounting and finance functions while developing and implementing strategies that demonstrate that value, and
- CFO's are expected to be strategic and add value to the business they support. But what if the Finance team that supports them does not have a value adding skill set?
IN THE BEGINNING
The evolution of the accounting profession has been a long one but it’s been the last couple of decades where expectations on the profession have increased significantly, especially Finance team’s that support a business whether private or public.
The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria and date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds (1).
When medieval Europe moved to a monetary economy in the 13th century, merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans. One important breakthrough took place around that time: the introduction of double-entry bookkeeping (2).
Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (early Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. Although Luca Pacioli did not invent double-entry bookkeeping, his 27-page exposition on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today (3).
Accountancy itself was not recognised as a profession until 1854. This took place in Scotland when The Institute of Accountants in Glasgow petitioned Queen Victoria for a Royal Charter giving legitimacy to a profession that was growing quickly. The Edinburgh Society of Accountants adopted the name "Chartered
Leap forward 150 years and abacus and manual ledgers have long gone and given way to increasingly sophisticated IT solutions that allow greater visibility of an organisations financial performance. How an organisation is able to utilise this information to add value is where our Finance teams have needed to step up. The expectation on our CFO’s and their team’s has been to move beyond core transactional accounting and partner the business and add value.
SAME OL’ STORY?
I attended a breakfast in Auckland back in March 2011 hosted by Hudson Accounting and Finance Recruitment who presented their report, “The Changing Face of Accounting and Finance (5).” Those that attended were predominately Heads of Finance of Auckland corporates. I believe they did the same in all of their Australasian offices.
It was an interesting session and with a lot of discussion about the report’s findings and the challenges these Heads of Finance had with developing their teams to support them and the business.
To develop my own Finance team and their understanding of value and having recently started the research for my book, Bean Soup – Beyond Bean Counting, I’d started pulling together a number of articles and reports like the Hudson one. One of the older reports dated back to 1998 and was titled “CFO of the Future” and discussed similar expectations as Hudson’s report did 13 years later. It seemed the challenges remained.
Now in 2013 does the issue of CFO’s and their Finance team’s adding sufficient value remain? My view is that the majority of CFO’s know they need to be strategic and add more value to the business they support, if they’re not already. Hudson’s report was interesting but did seem like the same ol’ story that every couple of years raises its head and shouts, “Hey, bean counter! You adding value yet?”
No longer to be seen as staid and boring bean counters that are out of touch with the business they supposedly support, CFOs have needed to become business partners, valued contributors and trusted financial advisors. Getting their whole Finance team to step up has been the challenge.
WHAT REALLY IS VALUE?
Here is a general definition of what adding value is from a Finance team’s perspective:
- Adding value is being able to supply insightful and decision-orientated information to the key decision makers of the business that the Finance function supports.
- It is also providing forward-looking information that the key decision makers of the business needs. Proactive decision support is a key part of providing value and ensures risks are minimised, opportunities seized, costs managed and strategies realised.
The above definition (6) includes a couple of terms that I’ll explain further and are key to value:
- Decision-orientated Information - This is information that is useful and assists the receiver in understanding and growing their business unit or department. They gain knowledge that they can use and do not need to interpret themselves – as opposed to providing ‘just the numbers.’
- Proactive Decision Support - Finance needs to provide a proactive flow of financial performance information and insights to their stakeholders without necessarily being asked for it. Being reactive is when it needs to be asked for and that is not a good sign for effective business partnering or decision support.
- Key Decision-makers - The key decision-makers are those people within an organisation whose decisions make the most significant impact on its direction. Those that make the most significant decisions generally set the strategy of the organisation. Lesser decision-makers make the strategy happen. The Board of Directors and CEO are key decision-makers, as are the heads of department. Who is “key” to decision-making will vary between organisations.
The accounting profession has come a long way since ancient Babylon yet in the last few decades it has gone through a lot of change with expectations to add value increasing significantly. But there remains the need to continue the day to day transactional processes and ever increasing compliance, thanks to the likes of Enron and more recently the failure of a large number local and international financial institutions, which competes with the time available to provide that value.
The next article/blog will look at the challenges of managing the day to day accounting and finance functions while developing and implementing strategies that demonstrate that value and Getting the Balance Right.
Stuart Bilbrough CA(NZ), FCPA (Aust) is the
REFERENCES
- Friedlob, G. Thomas & Plewa, Franklin James, Understanding balance sheets, John Wiley & Sons, NYC, 1996, p.1
- Heeffer, Albrecht (November 2009). "On the curious historical coincidence of algebra and double-entry bookkeeping". Foundations of the Formal Sciences. Ghent University. p. 11.
- Alan Sangster, Greg Stoner & Patricia McCarthy: "The market for Luca Pacioli's Summa Arithmetica" (Accounting, Business & Financial History Conference, Cardiff, September 2007) p.1–2, Cardiff.ac.uk
- Alexander, John R., "History of Accounting" (ClubExpress, 2002) Ch.12; From "A History of Accounting and Accountants" by Richard Brown, 1905
- “The Changing Face of Accounting and Finance,” Hudson Accounting and Finance Industry Leaders Series, Hudson 2011.
- Bilbrough, Stuart, “Bean Soup – Beyond Bean Counting, Steps for Lifting a Finance Function Towards ‘Adding Value,’” Finance Mechanics, 2013, p. 276.