By James Nicholson-Smith, Business Development Director & Managing Principal, West Midlands Region, The FD Centre

For many business owners one of the hardest question they have to answer is “what sort of finance team do I need for my business?” In almost every other area of their business they will typically have direct operational experience. In the end, business owners need to consider what they want from their finance team before determining the composition.

The answer lies in the form of 4 simple questions:

1. Where are we now?
2. Where are we going?
3. What are the important risks we need to avoid?
4. How are we going to build a more valuable business?

By structuring the business strategy around the answers to these four questions, most businesses will be able to recognise what level of financial expertise and experience is required to take them forward.

Many early stage companies use external accountants as their finance teams at the start of the business lifecycle. This is often the best solution, because the input required is quite small. The partner is often available to highlight key risks and opportunities to save money and tax.

As most businesses grow, the first step is to appoint a part time bookkeeper who can take over the day-to-day processing. This leaves the external accountants to carry out the month end reconciliations and calculating the accruals, prepayments and the depreciation charges as well as processing stock movements. It is often timing or control issues that force a business to take on a financial controller to carry out these functions internally. From this point, the finance function shifts from being essentially external to internal.

At the more junior levels, the growth of both the capability and capacity of the finance team will depend almost entirely on the 1-2 people at the head of the finance function determining the needs of the function itself.

The difference between Finance Controller and Director

At this point it is worth noting that there are some differences in definition that occur at this time between large companies and small and medium sized enterprises “SMEs”. In SMEs, finance staff, who can reconcile the bank accounts, process sales and purchase invoices, deal with stock adjustments and calculate depreciation on fixed assets are essentially good bookkeepers.

Financial controllers “FCs” should be able to do all of the above and calculate all accruals and prepayments, maintain internal controls around costs, run a short term cashflow forecast and the better financial controllers should also be able to run a full company forecast, albeit with limitations.

Finance Directors “FDs”, should be able to do all of the above but will probably manage others and sign off that it has been done. More importantly he/she should be looking to integrate the finance function into the operations of the business, and run rolling monthly forecasts incorporating key performance indicators.

He/she should also be implementing internal controls around the key risks in the business and also sequencing the investments made by the business and securing any funding for such investments.

When is the right time to recruit an effective FD?

The most ambitious entrepreneurs tend to recognise their need for the best finance team much earlier than other entrepreneurs. As a result they frequently leapfrog the need for a financial controller and appoint a finance director earlier, albeit the cost often encourages a part-time appointment. In less ambitious businesses, the path is often slower and more evolutionary which often presents its own issues when titles are given to individuals who are not performing the full role.

Qualifications aside, FCs and FDs in SMEs should recognise the role that they are fulfilling, honestly and irrespective of the title that is bestowed on them. The finance team requirements of the business obviously change as the business grows and/or becomes more complex.

For FCs that are really good bookkeepers, the business almost certainly needs more skill and experience than you are able to give and more time and dedication than the partner at the accountants can provide on a cost effective basis. In such circumstances, the ambition of the individual is critical.

If the person has the necessary drive and knowledge to grow into a proper Financial Controller or even a Finance Director, then the right route is likely to be a combination of recruiting more data processing staff below to release more time to the FC, plus a mentor/coach to help them grow into the higher level role.

Read 'FDs Or FCs Considering The Composition Of Their Finance Team - Part 2'

As the largest provider of part-time Finance Directors in the UK, the FD Centre can help businesses achieve their strategic objectives. To find out if your business could benefit from a FREE Business Strategic Review and receive valuable advice for your business’s financial planning, visit www.thefdcentre.co.uk

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