The following 10-question self-examination serves to drive home the need to strategize the finance function.

1. How much time spent on finance matters is quality time? Are the decision makers really making decisions or performing clerical finance tasks? In a survey of over 1,000 large and small companies, Hackett Benchmarking Solutions, a consulting group in Hudson, Ohio, found that throughout the 1990s, finance managers were spending an increasing amount of time on clerical tasks such as billing, compliance, and booking journal entries and less time on decision support, planning, and managing the finance function. They found that from 1996 to 1999, the amount of time spent on transaction processing increased from 41% to 47%. In that same time period, the amount of time spent on strategic planning, business performance analysis, and cost analysis declined from 18% to 16%.8 Because the business executive’s time is at a premium in
the critical formative years of the business, it is worth the effort to set the stage for a well-oiled finance function that minimizes non-value-added tasks. Are the prime movers of the business making decisions or crunching numbers?

2. How often does the organization focus exclusively on financial/accounting tasks? Closing the books at the end of the month should not paralyze the organization. The objective should be to make a period-end close a nonevent. More time spent on pulling the numbers together means less time for analysis and interpretation of the numbers. This point applies to nonstandard information requests as well. The finance function should be able to respond to all standard and (reasonable) nonstandard information requests relatively quickly. How well does the organization’s finance function do this?

3. How reliant is the organization on financing? Growing a business with other people’s money is what is great about being in business. The down side—it is other people’s money, and strings are attached. Depending on the type of financing in place or being sought, the organization may be subject to audits or reviews that are a matter of law. Can the finance function hold up to scrutiny? If the validity of numbers is in doubt, the finance function is not adequate and the organization is not ready to use other people’s money to grow the business.

4. Does the flow of cash into the business move in proportion with earnings? Hardcore analysts look at these two major indicators of company performance—cash flow and earnings—and draw an overall conclusion on the health of the organization. If both indicators move in tandem over time, that is good news. If they diverge for any significant length of time, then red flags pop up all over the place. Without getting too technical, the business may have good reason for earnings and cash flow to diverge (investment in infrastructure may be one reason). The important question to ask is: How quickly does revenue translate to cash? Does the organization have to wait an inordinate amount of time to collect cash from customers? This is often a problem and businesses do not even know it. Good customers may not be good after all if they deprive the business of cash owed on the sale of products and services. In the spawning years of any business, optimizing cash flow is a must. Does the finance organization have the capability to track this crucial indicator?

5. Does the business have a manufacturing/supply chain? If the business is a manufacturer, how well is it using technology to streamline the management of data related to the supply chain? “Managing the supply chain” refers to maximizing margins on goods sold rather than managing inventory. If the organization has not considered initiatives such as purchasing supplies online or sharing product purchase forecast reports with vendors online, it may be letting dollars slip through its hands. Has the business owner evaluated and strategized the supply chain?

6. Is the industry in which the business operates reliant on the Internet? According to the Small Business Administration, small companies that rely on the Internet for doing business have higher revenues than those that do not. Internet-savvy small businesses average nearly 40% higher revenues than the average of all small business revenue.9 For all small and emerging businesses that are Internet ventures, it is no secret that the business environment is changing on a daily basis. These business owners must ask themselves if they are prepared to change their business model on a day’s notice. In addition, they must have a feel for how well their data gathering, processing, and analysis tools suit their changing information needs. Can the finance function change its focus at the drop of a hat? Being able to thrive in this environment will mean being able to gather the particular data needed, when it is needed most. How well can the finance function react to the organization’s changing needs?

7. Does the company rely on nonfinancial databases? The organization may be juggling a myriad of databases that gather both financial and nonfinancial data. The organization’s marketing department may be presiding over a substantial cache of data that grows daily. Is the finance function plugged into this? Are business owners enabling forecasting and budgeting by accessing this nonfinancial data? The ability for the finance organization to access all data gathered by the enterprise (financial or
otherwise) creates valuable synergies for the finance organization and magnifies its impact on operations. How well has the organization harnessed this data?

8. Is the organization a new player in a new industry? Being the new kid on the block is one thing, but starting up a business in an industry that is relatively new is quite another challenge. With nothing or no one to measure itself against, the organization will have a difficult time establishing meaningful metrics and benchmarks for growth. The need to be transparent (translate easily to financial statements) is more important than ever if the business is alone in a new industry or niche. The challenge of the small and emerging business owner will be to navigate a nonstandard season or fickle marketplace while balancing seed money and other financing alternatives. Getting a hand on the pulse of the organization and getting it quickly will require a robust forecast and budget function as well as an agile closing process. The small and emerging business owner must determine if the finance function is up to the task.

9. How does the small and emerging business owner visualize growing the business? Do the owners and executives subscribe to the model of growth through acquisition, or are they more comfortable with the organic (internally generated) growth model? If they subscribe to the former, are they prepared to adapt a target company’s finance model to theirs? If the business is predicated on an organic growth model, what metrics (measures) and analysis models are being employed to reach growth goals? As a practical matter, most business growth strategies should employ a fair mix of organic and acquisitive growth initiatives. If financing will play any role in growth strategies, having a sound data flow dynamic will be imperative to maintain compliance with loan covenants and financial statement deadlines. Is the organization prepared for this?

10. How savvy is the management team? As a small or emerging company, chances are the management team has a broad skill set with no consistent degree of depth in multiple areas. Most likely, the management team is heavy on the operations side, which can result in acute issues on the finance side going unaddressed (traditionally these are viewed as an administrative or back-office function). Waiting to deal with finance and accounting issues until they become a crisis will cost the organization in both dollars and/or lost opportunities. It is possible, however, to take steps in the early years of the business to set the stage for sound finance function development. Ignoring this part of the business in its infancy may put the organization’s decision-making, operational strategies, and customer relationships at risk. The organization’s management team must ask itself: How much attention has been given to the finance function?