When marketing agency Freshwater acquired a struggling rival in 2002, chief executive Steve Howell quickly realised he’d taken on more than he’d bargained for. “It was a very messy acquisition,” he says. “Once the deal had been done, we found the company had been more troubled than we thought.”
The problems created by the Cardiff-based company’s first takeover highlighted a lack of financial expertise in the management team. While the books were in order and debtors and creditors were handled efficiently, there was no one with the skills and experience to steer the company through the financial hazards associated with a difficult acquisition. Howell’s first reaction was to recruit a management accountant, but as he considered his company’s requirements, he came to the conclusion that he needed someone that would have a much greater strategic input into the development of Freshwater.
“It quickly became apparent that what we needed was a financial director,” he says.
The hire was made in 2003, and the company hasn’t looked back. Howell had always been ambitious and saw the arrival of a full-time finance chief as a catalyst that would help the company fulfil its ambitions.
“What we wanted was someone who would provide the financial expertise to help us fulfil our commercial objectives,” he says. Those goals included giving the business a national reach and raising cash to fund growth. In 2004, Freshwater made its second acquisition (this time in Scotland), and three years later the company floated on AIM. “The fact that we took on an FD to help us with that first acquisition put us ahead of the game when the time came to look at further transactions and the flotation,” Howell says.
What does an FD do?
The role of the FD is very different from that of the management accountant or bookkeeper. “A financial manager is there to record what the business is doing and deal with debtors and creditors. An FD takes a much more strategic role,” says Howell.
But what exactly does that mean in practice? Well, according to Mark Harris, chief financial officer of network management company Nimsoft, a key distinction between the management accountant and the full-blown FD is that the latter interprets information rather than simply presenting it.
“The role of the FD is to fully understand the data,” he says. “For instance, they will be able to tell the board what will happen to costs if sales double. It’s about understanding the key metrics, it’s about financial modelling and it’s about educating the board.”
For that reason, companies often seek the services of an FD when the business is going through expansion that also requires investment. For instance, when a company is planning a move into a new market or when it takes on a major new contract, the pot of gold at the end of the rainbow is an increase in revenue. But typically costs will rise, too, and well before the cash begins to flow in. In these situations, the FD plays a key role in identifying the company’s working capital needs and managing its cashflow.
Equally, if a company is planning to raise funds – either from private equity or through a flotation – the presence of an experienced FD is often a pre-requisite, not least because the presence of a board member with significant financial experience reassures investors. When Mark Harris joined Nimsoft, the company was seeking a £7m injection to fund its expansion plans, a sum that was ultimately raised through investment bank Goldman Sachs. “A big part of my role was to educate the investor,” he says. “The more confident the investor is about the integrity of the business metrics, the greater the likelihood that the deal will go ahead.”
As Colin Mills, chief executive of the FD Centre, observes: “A key FD function is to improve the quality of the reporting.” In many cases, this will mean introducing more formalised processes for gathering information into management reports, balance sheets and profit-and-loss reports.
Mills adds that FDs are a vital asset in bad times as well as good. His company supplies part-time FDs – essentially consultants fulfilling the FD role, rather than full-time board members – and he envisages the economic downturn creating demand for high-level financial skills. “We are seeing a lot of businesses struggling, and they are looking for people who have experience in guiding companies successfully through difficult times,” he says.
In these situations, the key skills tend to focus around cash flow and working capital management, but as Mark Harris points out, a good FD should be involved in just about every aspect of the business. “They should be looking at issues such as pricing strategy and whether the company’s remuneration policy is helping it to achieve its goals,” he explains.
That’s a theme that’s echoed by Hamad Farooqi, managing director of Azure Global, another provider of FD services. “FDs are often involved in setting up employee share and incentive schemes,” he says.
In other words, it’s a multi-faced position, but as Steve Howell sees it, the FD should play a single overarching role and one that is complementary to the chief executive’s role. “The chief executive is the architect of a company’s commercial objectives,” he says. “What the FD should be doing is providing the financial underpinning to enable the business to deliver on those commercial objectives.”
The right qualities
In other words, what you need is a financial wizard who is not only intimate with cash flow, financial modelling and balance sheets, but who also fully understands the realities of running a business. “Accountancy qualifications are the minimum pre-requisite,” says Mills. “But you should also be looking for someone who can show clear evidence that he or she has ‘made a difference’ in previous FD positions. You need someone who understands commercial functions, such as pricing a job.”
Experience puts a high premium on the head of FDs (most can command salaries of £100,000 or more), but even if you can afford a full-time finance chief, luring them to your company could prove difficult.
“You have to sell them a vision,” says Howell, adding that shares or share options can also prove useful. The alternative is a part-time FD, who will work on a set number of days every month. They can be hired for around £1,000 a day. A tidy sum, but cheap compared to a full timer.
Whether they are a full-time board member or a consultant, Mills recommends that owner-managers continue to evaluate their FDs, but concedes it isn’t easy. His best advice is to be clear about why you are making the hire and set measurable objectives accordingly. “You should be able to assess whether the FD is driving the business forward,” he says. Equally, if the FD isn’t contributing to the delivery of commercial objectives, you’re not getting value.
And that is the point about hiring an FD. The right man or woman will not only provide the financial know-how to underpin the growth plan of your business, but also actively contribute to driving that expansion.