Once you’ve made the decision that you need a qualified professional to head up your finance function, the next decision is determining how much horsepower you actually need in your CFO. And in order to do that, you need to realistically assess not only how much technical horsepower is required to handle the job but also how much operational input you actually need (and will take) from your top finance person. Someone who just wants timely and accurate accounting and financial reporting, adequate internal controls, management reports and some operational input at the department head level should probably hire a Controller. The owner-manager who wants all of those functions looked after plus meaningful input on operations and strategic decisions should look for someone with the experience of a Vice President of Finance.
Rules of Thumb
A good rule of thumb is that the Controller function is basically backward-looking. Their purview is capturing financial information that reflects the past and informs the present. The Vice President of Finance function is forward-looking. A good VP Finance helps the CEO and executive team at a high operational and strategic level and can often anticipate potential problems or identify opportunities that might not otherwise be recognized. More often than not, owner-managed enterprises require someone with the hands-on accounting skills of a Controller coupled with the heads-up strategic and forward-looking qualities of a Vice President of Finance. This position is often filled by someone in transition from Controller to VP Finance and usually goes by the title of Director of Finance.
The Five Key Components of the Finance/Accounting Function
There are five fundamental components of the finance/accounting function. The first three functions are common to Controllers, Directors and VPs of Finance. Operational input and the maximization of enterprise value are functions normally associated with the titles Director of Finance and Vice President of Finance.
The first function of any accounting department is the production of timely and accurate financial data. Out of this data comes the required financial reporting that is required by law and directed at outside stakeholders such as investors, banks and the various levels of government for tax remittance. Financial reports are historically accurate and can have a predictive value for people who are making financial decisions about the company.
Management reporting is used primarily within the company and is tailored to assist management run and monitor the performance of the organization. Budget and forecasts, historical and anticipated raw material cost reports and new venture feasibility studies are all examples of management reporting.
These are the internal policies and procedures that protect the company’s assets. Internal controls define specific roles and responsibilities of employees with the intended outcome of preventing errors, theft, embezzlement, expense record inflation, etc.
While various members of the executive team such as the VP Sales or VP Operations may understand their particular discipline inside and out, they may not fully understand the financial and /or tax implications of their respective operations. Finance can and should work closely with management to support their operations and add value that would have otherwise gone unrealized.
Maximizing Enterprise Value
For most, if not all, owner-managers, their company represents the biggest investment they are ever likely to make. Whether their plan is to keep running the company until they leave feet first, pass it along to the next generation or eventually sell all or part of their enterprise to a third party, it’s crucial that they keep an eye on enterprise value. A good financial executive can help the owner-manager maximize their company’s enterprise value in the present day and assist them in realizing that value in the indefinite future, should they choose.
In owner-managed companies, the person responsible for overseeing the finance function is invariably the CFO. However, they don’t necessarily carry the title of VP Finance. In fact, in most owner-managed companies, the top financial person is not a VP Finance. More commonly, they are a Director of Finance or sometimes the Controller. The reason it’s important to define the title correctly is so that you define the position correctly. Knowing exactly what you want from your top finance person and thoroughly defining their role will go a long way to aligning your expectations to their performance.