To the blog for small and medium sized business (SME) owners.

Tuesday, January 02, 2007

How a Part Time Finance Director Can Help a Failing Business

The business environment will continually change and the role of the part time Finance Director must also change to meet the new demands of business.

Whilst it is only recently that employing a part time Finance Director has come more into vogue that in itself reflects the changing needs of business.

The part time Finance Director is expected to be more than a keeper of accounts but also to be an integral part of the management team contributing to the success of the business, much as a full time finance director would.

Typically this may include active participation in planning, strategy development, fund raising, management information systems, quality management systems, preparing for exit, training and so on and will afford the part time finance director the opportunity of working with his/her peers on making good informed decisions that will improve business performance and profitability.

For the owner of a troubled business without in-house financial expertise, a qualified part time finance director should provide the skill to help address the most common causes of business failure, particularly when the business owner is too involved with daily problems to objectively recognize that the business may have entered a period of potential terminal decline.

What are the common characteristics of business failure? How can a part time Financial Director help?

Some businesses fail due to exceptional circumstances, however, the more frequently found causes of failure include:

- No expert help readily available to advise the business owner.
The owner may have previously resisted appointing a mentor or part time finance director, consequently the owner’s skill set may be inadequate to address the problems of the business and a deteriorating business position may become exacerbated. A ‘problem denial’ phase may be experienced, however, it is rarely recognized that the cost of being proactive is far less than the cost of re-acting to problems.
- Debtors are slow in making payments.
Good cash management is jeopardized and the business owner must devote more time to cash collection activities or the risk of bad debts will become real.
- High staff turnover.
If good staff cannot be retained operational costs will increase and the lack of work continuity may adversely impact the business performance. Should the reason for high staff turnover not be fully understood by the owner, the trend should be taken as an indicator that areas for improvement exist within the organization.
- Lost customer accounts.
If customer accounts are lost and the reasons why are not established and corrective action taken, the business will suffer a continual downward trend. Often losing a customer is viewed as an expected event.
- Selling price pressure.
Competitive pressure on selling prices will always be evident, however, the business may fail to demonstrate the uniqueness of its proposition and consequently be only able to sell on price. In such circumstances the business must reduce its cost base to compensate for the lost revenue or suffer decline; thus reducing the value of the business.
- Reluctance to change – lack of skills.
The present technological based environment in which businesses operate dictates that the owner must keep abreast of new technologies and train staff to meet new challenges. Often there is inadequate training of staff and a reluctance to acquire external expert skills that lead to long term concerns.
- Poor management of Working Capital.
In addition to increasing debtors, inadequate control of inventory and other current assets will increase costs of the business and reduce the liquidity of the organization.
- Business growing too fast.
Fast growth in business may create a dangerous situation unless adequate liquidity and skills are present within the business to be able to discharge all increased commitments efficiently. Often the business owner fails to understand the interdependencies between the functions within the business. Rapid sales growth, unless managed and all business functions adequately resourced to meet the increase, may potentially cause failure in the business.

The qualified part time finance director will be able to work with the business owner and contribute in:
- taking a proactive approach in the management of the business
- evaluating the business risks
- taking responsibility for the preparation of management information
- and taking informed decisions based upon fact.

The role of the Part time Finance Director will vary in different environments, however, the import and expectation that the incumbent is keeping abreast of changing legislation and management trends, enhancing the appropriate skill sets of staff and is an active team player will be of great importance.

The business owner can now be comforted that professional accounting bodies mandate that members do carry out an ongoing programme of Continual Professional Development (CPD), which helps the qualified part time finance director to meet the needs and expectations of the business owner and further enhances the value of the part time Finance Director within small and medium sized organizations.

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