Ben Mekie is the founder of Acuity Associates. Before launching the business, which supplies full- and part-time financial directors (FDs) to startups, he trained as a chartered accountant. He has founded several successful startups, including a record label he sold via a trade sale and a tech support business he exited via IPO. Here, he explains how a good FD can help keep a growing business afloat.
What role should a good finance director perform?
There is a litmus test for whether or not your business needs a finance director. And that doesn't include a bookkeeper who calls themselves FD. The question is, do you think your business is scalable? If it isn't, it's a lifestyle business, and you don't need an FD. You're not going to have an exit event anytime soon. But if your business is scalable, you need a good FD, whether one day a month or five days a week. You need someone to help you model the future. Someone to help you make better decisions to reach your objective quickly.
Whether in good times or bad, a good FD has multiple functions. Above all, it's about cash flow. Does the business understand the sensitivities of revenue and costs? Does it know what would get it into trouble? Most companies go bust because they run out of cash, as opposed to not being profitable. The FD needs to know what funding the business might need. They need to do cash flow forecasting and be ahead of the curve.
The FD also needs to direct and manage any finance team. That might just be themselves, or it might be 20 people. Either way, they need to have the right skills in the business, and the team needs to be directed by the FD. They're also responsible for financial systems, processes, and management information (MI). Good MI is an invaluable resource. Successful businesses have systems and processes that produce MI that the board can easily digest to help them make decisions.
What should a founder look for in a good FD?
There is no room to hire a bad FD. How to spot a good FD is sometimes literally a million-dollar question. They need to be able to answer questions the founder needs to know about the business. They should tell you which products and services have the best margins and which are loss-making. You need to know the optimal product mix that helps you achieve your goals. The FD should talk to you about business ambitions and the possibility of a future exit. They should proactively engage with you about what the business is trying to achieve and create the roadmap to get there. They should look ahead and say to achieve X at this point in the future, we're going to need to sell Y at these margins to these people at this cost. A good FD helps you drive the business.
How do you get the CEO and FD relationship working well?
There needs to be chemistry between the CEO and FD; it's like a marriage. The reason it breaks down is an inability of the FD to communicate what's required. They need to have advanced communication skills. If they're talking to the CEO or the board of a private equity firm, they need to tailor their language so it's couched in a way that's palatable to the audience. The CEO will have a vision for the business, product and market. The FD needs to articulate where the business deviates from that plan and offer solutions. The FD needs to be able to move resources around and generate new KPIs. A good FD is proactive. They will push the founder, telling them, 'this is what we should be doing'.
How does the FD's role change in difficult times?
If you have a functional finance team headed by a good FD, they should know the sensitivities and the impacts of external events on cash flow and profitability. We've just been through Brexit and COVID-19 and are in the middle of a European war. All this suggests there's a bumpy road ahead. The FD should have an idea of what needs to be done. It's an enhanced version of any sensitivity analysis. The FD must think, 'what happens if sales drop 20%?'. Thinking about the changes needed to resources to maintain margins; considering which products or services to promote or stop; asking whether new products and services might sell better during a downturn.
They must consider how to fund the business if none of this is possible. They should think about what happens if the business becomes cash flow negative - meaning the bank balance is falling over time. How are we going to plug the gap?
How can a good FD's scenario planning help manage uncertainty?
The acid test is can you prepare for the unexpected? Few people saw Brexit or COVID-19 coming. And few forecast events in Ukraine. These "black swan" events come out of nowhere.
What you can do is understand, regardless of the nature of the event, whether your business can survive a 50% reduction in sales overnight. If it can't, you need to get used to the idea your business might go bust. Or you need to understand you need someone who can provide a solution. Until recently, it was axiomatic you'd have 12 months' cash in the bank in case something happened. But inflation at 10% means that after a year, every £100,000 is only worth £90,000. So you might think about investing cash into the business to generate increased revenue and profit or elsewhere where it offers a return.
What are the critical danger signs to look out for?
You should monitor debtor days, which is how long it takes clients to pay you. If it's usually 30 days and it starts creeping up to 35, you might not notice. When it moves beyond 40 days, you need to be on top of it because your working capital will reduce. The amount of cash in the business is a function of how quickly you receive payment and how slowly you pay suppliers. That is your cash cycle.
If you're taking longer to pay suppliers, there may also be a reason. If it creeps up, you might not notice. But watch to see how long clients take to pay. Is it tight at the month end to pay salaries and then on the 19th to pay tax? Have you started dipping into your VAT account to meet payroll? These are early warning signs.
What is the role of the FD in getting a business investment-ready?
Getting investment ready means that if a due diligence team from a big accounting firm walked in at 9 am on a Monday wanting to examine your books, you'd be ready.
They would go through your books and records, looking for errors. If you don't have the best quality information, you won't get the valuation you hope for. You have to demonstrate financial control. You need to be able to tell the story to whoever will acquire you. You have to show your success.
You need thorough analysis, forecasts, board reports and so on. The due diligence team is looking at whether the business is viable. If they can find things wrong, they may be able to chip the price. The more robust your financial infrastructure, and the more it tells the story of growth and how it will continue to grow after you are acquired, the more likely you are to defend the value of your business.
If you think opening your doors to an external due diligence team would be challenging, it's probably the time to bring in a good FD to build your financial infrastructure.
Barclays (including its employees, Directors and agents) accepts no responsibility and shall have no liability in contract, tort or otherwise to any person in connection with this content or the use of or reliance on any information or data set out in this content unless it expressly agrees otherwise in writing. It does not constitute an offer to sell or buy any security, investment, financial product or service and does not constitute investment, professional, legal or tax advice, or a recommendation with respect to any securities or financial instruments.
The information, statements and opinions contained in this content are of a general nature only and do not take into account your individual circumstances including any laws, policies, procedures or practices you, or your employer or businesses may have or be subject to. Although the statements of fact on this page have been obtained from and are based upon sources that Barclays believes to be reliable, Barclays does not guarantee their accuracy or completeness.