Growth and profitability : optimizing the finance function for small and emerging businesses

265 Pages·2002·1.06 MB·English

by  Michael C Donegan

GROWTH AND
PROFITABILITY
Optimizing the Finance Function
for Small and Emerging Businesses
Michael C. Donegan
John Wiley & Sons, Inc.
This book is printed on acid-free paper.
Copyright ©2002 by John Wiley and Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data
Donegan, Michael C.
Growth and profitability : optimizing the finance function for small
and emerging businesses / Michael C. Donegan.
p. cm.
ISBN 0-471-21216-4 (CLOTH : alk. paper)
1. Small business—Finance. 2. Financial statements. I. Title.
HG4027.7 .D66 2002
658.1—dc21 2002001893
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
FOREWORD
Liquidity. No company can successfully operate without it. Access to cash, when
it’s needed, becomes so important that all other considerations are secondary. The
recent bankruptcies of industry giants Enron and Kmart and the severe liquidity
struggles at Lucent Technologies are sobering reminders of the need to maintain
healthy cash flow at all times. One might ask: if the “sophisticated”giants can fall
on their collective faces, then what hope does the small or emerging business
owner have?
The answer lies in having a solid plan. Actually, the planis less important than
the act of continuously planning.The road to business success is full of unexpected
twists and turns, and ongoing planning allows for the necessary adjustments that
make the journey worthwhile. Additionally, planning by its very nature commits
the owner/executive to the visualization and preparation needed for the future—a
necessity when put in a financial context.
But how should companies do it? This book lays the foundation for a solid
start. As Michael Donegan deftly points out, no entrepreneur startswith a finance
function, or a plan for strategically building that function. Yet, every transaction in
which the entrepreneur engages is ultimately measured by dollars and cents with
the medium of measure born from the finance function—data. Ignoring or mini-
mizing this function is certain to lead to trouble.
Although most owner/executives have an exclusive sales and operations fo-
cus, sooner or later an appreciation for the strategic necessity of the finance func-
tion is recognized as a key ingredient to success. Missing revenue or profitability
targets can happen multiple times but companies will only run out of cash once.
Don’t let it happen to your business.
Thomas F. Donahue
Corporate Finance Consultant
Former Corporate Treasurer—Sensormatic Electronics
Corporation and Citibank Universal Card Services Corp.
July, 2002
ACKNOWLEDGMENTS
Because writing a book is no easy task, I am truly indebted to Heidi Oneacre for
her diligence and persistence in editing this work. Her ability to deliver criticism
balanced with careful measures of sensitivity and encouragement was invaluable
and greatly appreciated. Additionally, I would like to thank Tim Oneacre for his
hospitality and keen insight into the English language.
Special thanks go to Chris Muccio, with whom much of the material for this
book was developed. I would also like to thank Mike Fredericks for being a wor-
thy partner in the trenches and a continuing source of technical knowledge rivaled
by none. Athank-you goes out to Jean Nelson for giving me the opportunity to ex-
cel. Finally, I’d like to thank Michael Sincere for providing direction when it was
most needed.
PREFACE
Information is the life-blood of decision making. While companies are willing to
dedicate resources to advertising, marketing, and sales initiatives, they are often-
times reluctant to devote the same to garnering accurate and timely financial in-
formation to make business decisions. Very few executives and business owners
will deny the value of building and maintaining reliable mechanisms for handling
the financial data needs of the organization. However, actions often fall short of
this intention. It is not unusual to see the proliferation of annotated information
systems and inadequate processes throughout the business community. Whether it
is the potentially ambiguous value proposition or the sheer complexity involved
with creating a reliable finance function, many organizations unintentionally dis-
count the need for a strong one or, worse, relegate it to the status of a necessary
evil. Understanding why this happens is second only to recognizing the telltale
signs that it is happening in the first place. Can the organization translate its busi-
ness to financial statements quickly and accurately? Can the reporting process rap-
idly reflect changes in the business organization? Amore overt hint may come in
the unwillingness to dedicate budget dollars to the finance area on an ongoing ba-
sis. While marketing, sales, or other key operations people can dictate major poli-
cies and resource commitments, can the finance area do the same? Companies, es-
pecially in their early years, will live and die with the success of marketing and
sales efforts. However, their capacity to translate financial data from the business
environment into knowledge will either bolster marketing and sales efforts or
negate them altogether. Ensuring the long-term stability of information flow and
the decision support system requires alignment of priorities in thought and action.
I have witnessed many times this juxtaposition in thought and actions. The
minimization of the accounting and finance aspect of the business is rarely inten-
tional, but rather a function of ignorance, misinformation, or misguided business
culture. Many executives and business owners are simply not equipped with an ad-
equate perspective of the finance function or the value it provides. Additionally,
they may not be committed to cultivating this aspect of their business. Executives
reared on the operations side often are led to believe that this area is overheadand
must be strictly controlled from a fiscal standpoint. The extreme return on invest-
ment (ROI) business culture that prevails has fueled this misconception. Having
spoken on the topic of strategizing the finance function to large and small groups,
I receive all sorts of feedback, most of which deals with the fact that there simply
viii PREFACE
is not a definitive base of knowledge that addresses the finance function in its en-
tirety. Many finance and nonfinance people want to address this aspect of their
business but find very little accessible guidance. Because easy-to-understand lit-
erature is lacking, many companies resort to engaging high-priced consultants
and/or hiring expensive finance executives to develop comprehensive finance
strategies. Much of the dialog I have with finance professionals comes about as a
result of a marked breakdown in the finance area that is manifesting itself in some
harmful way. Comments are often preceded by “Had I known ...” or “If someone
had only told me.” Throughout my career, I have designed, implemented, and
maintained finance applications on a global scale and discovered firsthand the
staggering lack of accessible knowledge on the overall topic of defining the fi-
nance function. The frustration I experienced in following through with my objec-
tives in this realm was the chief motivator for this book.
This book was almost titled Guerrilla Accounting, the premise being that it
does not take considerable depth and breadth of knowledge to lay the groundwork
for a sophisticated finance function. The objective of this text is to address the gen-
eral lack of knowledge and misinformation related to the finance area while creat-
ing the mind-set to establish a finance-friendly culture. Although no reader will
come away with all the answers to all the issues related to the finance function, it
is my hope that many will achieve that first breakthrough—realizing the need for
a finance function. The small and emerging business owner must recognize the
need for developing a culture in business that values a solid finance/accounting
function. Aculture of awareness will breed the development of good fundamentals
related to a strong data flow dynamic. The danger is waiting until the need for one
is great. Much like runners who reach for the water bottle when thirst is already
upon them, waiting until a critical juncture in the business’s life cycle to begin de-
veloping a solid finance/accounting organization may be too late. Laying the
groundwork early and developing sound fundamentals and awareness is much like
hydrating oneself before a race. The challenge is overcoming the subtle and some-
times long-term ROIs. Although ROIs are critical, establishing a mind-set of
growth and progressivity in the finance area will preempt the awkward recurring
rationalization of expenditures for seemingly unproven and expensive finance
projects.
My intention in pulling these thoughts together is to provide readers a defini-
tive starting point in dealing with this often confusing and complex area of their
business. The central focus of the book is the methodology for gathering all the
considerations that factor into developing the finance/accounting area of a busi-
ness. Because certain considerations are more fundamental to overall finance func-
tion development than others, these areas of focus are arranged in a pyramidlike
structure with the more fundamental business considerations appearing at the bot-
tom of the pyramid and the more finance specific considerations arranged at the
PREFACE ix
top. The small and emerging business owner, who may be short on time, money,
and know-how, can benefit greatly from referencing this model. It will provide a
knowledge base from which a relevant finance function can be developed and
maintained. The model itself is universal and applies to all businesses, large and
small, and can be utilized by business executives/owners regardless of their knowl-
edge level in the finance/accounting area. The essence of this multilevel approach
to strategizing the finance function is to provide insight on what needs to be done
and when. The model itself provides guidance in the initial setup and design of a
finance function as well as its evolution and adaptation as the business grows. The
considerations arranged in this pyramid form will allow the owner/executive to
make well-informed, relevant decisions related to employing systems technology,
designing processes, hiring professionals, and developing financial analysis tools.
The small and emerging business owner will face many challenges in the early
years of the business. This focus on the living, breathing data-flow dynamic will
preclude unnecessary attention on accounting issues related to properly employing
generally accepted accounting principles (GAAP). This book concentrates on de-
veloping concepts, imparting knowledge, and developing actionable strategies.
The object is to convey and develop a perspective and approach to addressing
overall developmental finance and accounting matters and spur action as it relates
to developing a suitable finance function. Developing a methodology for ap-
proaching this area as opposed to defining particular solutions will serve the small
and emerging business owner well as the business evolves and data needs change.
The best way to use this book is to identify and make note of similarities be-
tween your business circumstances and those highlighted in the examples dis-
cussed. Recognizing circumstances that prevail with your business peers and/or
competition is also recommended. Understanding what is being done wrong is as
important as recognizing what is being done right. Then use this as a reference in
troubleshooting or anticipating issues that may put your organization at a disad-
vantage. Particular areas of reference will be the chapters dealing with the multi-
level approach (Chapter 4), processes (Chapter 6), information systems (Chapter
7), and writing the strategy document (Chapter 9). There are no right answers or
premier solutions for the informational needs of a business; however, developing
the discipline to corral the issues and questions that must be addressed is impera-
tive. Developing and maintaining a sound finance function is an iterative process
and will take time and patience. While trial and error may be a necessary compo-
nent of development, this book will help clarify what needs to be done and when.
Be patient and open-minded as your finance function evolves. Change is unavoid-
able; in fact, it will be critical in the finance area if the finance function is to re-
main relevant and value-added for the organization.
The key to success in this area is an open mind and a willingness to embrace
new and innovative ideas in systems and process design. We are living in exciting
x PREFACE
times where technology is developing at what seems to be warp speed. Achieving
success will mean matching up well-defined needs with carefully crafted solutions.
More important, success in this area will be manifested by a thriving business.
Evolving data needs will mean the business is growing. It is critical that an aware-
ness of the finance function be maintained as the business matures. I wish you well
in developing your new business or growing your existing one.
CONTENTS
Chapter1 DOING BUSINESS IN TODAY’S
ENVIRONMENT 1
Objective 1
What Is the Perception of Finance and Accounting? 2
Defining Small and Emerging Businesses 4
Why Is the Business Owner in Business? 5
Data Needs 6
Going from Day to Day to Long-term Strategy 6
Dealing with the Business Environment 8
Going Public 9
Regulatory Requirements 12
Doing Business in Foreign Countries 13
Litigation 15
Technology Needs of Vendors and Customers 16
Employee Needs 17
Strikes 17
Natural Disasters 18
Ten Questions 18
Final Thoughts 21
Chapter 2 FINANCE FUNCTION DEFINED 23
Finance Function in Action 23
Defining the Finance Function 28
Component Parts 29
Traditional Perception of the Finance Function 32
Need for Integration into Operations 35
Strength and Scalability 40
Final Thoughts 43
Chapter 3 WHY STRATEGIZE? 45
Strategizing in All the Right Places 45
Benefits of Strategizing 49
xii CONTENTS
Initiatives Shaping the Finance Organization 53
Scope of Strategizing 55
When Does Strategizing Begin to Count? 58
Key Dependencies 58
Initiating the Culture of Strategy 60
The Future: Ready or Not, Here It Comes 63
Final Thoughts 66
Chapter 4 MULTILEVEL APPROACH 67
Initiating the Finance Strategy 67
Assessing Needs 70
Tier 1 Considerations: Life Cycle 74
Tier 2 Considerations: Data Customers 79
Tier 3 Considerations: Infrastructure 82
Upper-Tier Considerations 91
Tier 4 Considerations: Optimizing the Balance Sheet 95
Tier 5 Considerations: Optimizing Profit and Loss 98
Final Thoughts 103
Chapter 5 ANALYZING DATA CUSTOMERS 105
Why Analyze Data Customers? 105
Defining Data Customers 110
Evaluating Data Customers 117
Anticipating Data Customer Needs 122
Linking Data Customer Needs to Finance Strategy 124
Final Thoughts 127
Chapter 6 DATA FLOW PROCESS 129
Role of Processes 129
Data Flow Ecosystem 135
Evaluating Current Processes and
Conceptualizing Future Processes 142
Integrating Data Flow Process with the Business 147
Development with the Rest of Infrastructure 157
Final Thoughts 160
Chapter 7 INVESTIGATING
INFORMATION SYSTEMS 163
Information Systems Considerations
in the Multilevel Approach 163