By Misheck Dera
FINANCE professionals play a significant role in business growth. As businesses grow, they create employment, contribute to growth of the economy, reduce poverty, and create a new middle class. Accounting and finance professionals are known for enforcing accountability around finances. In this article, I seek to highlight some of the most important roles of finance professionals in creating growth of businesses.
There are market sectors that are notorious for having dissatisfied customers because the product may not adequately meet the customer needs. Whether it is a completely new product, improvement or innovation, the Chief Finance Officer (CFO) and the finance team should play a significant role in product development.
Management accounting expertise is essential in examining the relationship between cost and product design prior to production by providing important cost and financial data (Hertenstein et al, 1998). The CFO usually also has a significant role in resource allocation for activities such as research and development (R&D).
R&D is important in most industries to create value and there is a need to properly plan, budget, and have proper performance management and accountability.
New property, plant , equipment
Expansion of the business beyond current capacity requires investment in new property, plant and equipment. The CFO plays a central role in capital budgeting and investment appraisal. Solid data on the cost of the new assets, incremental operating costs, working capital requirements, taxation and cost of capital is required and the finance team is often instrumental in providing this data.
The CFO and the finance team also perform an investment appraisal using techniques such as payback period and discounted cash flow analysis. Sensitivity analysis is also performed before the capital project is approved or recommended for approval. Proper financial skills, operational expertise and strategic perspectives are required in making the investment decision.
Make or buy decisions
Businesses must focus on both the production and transaction cost when considering outsourcing. The CFO will have the clearest visibility into these costs and can be important in providing a data-driven cost analysis approach that leads to good decision-making.
The CFO and finance team should be engaged to provide accurate quantitative and qualitative information, analyse and compare costs, and calculate what-if scenarios. From the entity’s information system, several other qualitative information, can be gathered and considered in making the appropriate decision.
Mergers & acquisitions
To create real value, M&A in driving growth should go beyond the acquisition or combining two companies and consider what additional value will be created so that the value of the combined companies is more than the sum of its parts.
This takes more than valuation models and needs real operating metrics. These metrics include revenues, operating costs, administration costs, assets and liabilities.
Proper due diligence on the target acquisition should contribute to an understanding of its business, the main drivers of growth, potential changes in cost structures and any minefields to look out for.
No business is perfect, but it is important to highlight the major problem areas so that the investor may make an informed decision. The problem areas may in fact be a source of value creation to the potential acquirer.
Although an internal department such as Corporate Strategy and Development or the Finance department can be used, an external consultant/advisor who is a properly skilled and experienced auditor is usually employed to perform a financial due diligence.
The financial due diligence is more than a finance audit and it is very important to get the terms of reference and the team right. The CFO plays an important role in overseeing this due diligence by his internal team or the external consultants/advisors.
Operational, tax, legal and human resources due diligence reviews are also very important, and the composition of the team to cover these areas will mainly be informed by the nature and complexity of the target acquisition.
With all due diligence covered, it comes down to negotiation of the price. As any finance and investment professional who is worth their salt will allude to, a significant portion of added value is made on the acquisition price. The rule is never to overpay for the acquisition as it will be difficult to create additional value on the acquisition.
CFOs are also instrumental in ensuring success of the business post acquisition. In an article by Ankar Agrawal et al (McKinsey, 2020), it was noted on surveys carried out that when the CFO was “very involved” in merger integrations, companies were much more likely to capture cost and revenue synergies.
To successfully integrate companies and cultures, business leaders must have an informed perspective on the synergies to be captured, the transformation opportunities to be pursued, the value to be created, and the cultural pitfalls to steer clear of.
The internal audit function is also very important in providing a consulting and advisory service to the executives and the board with a view to providing insights that ensure business resiliency and provide value adding insights to the business.
Although usually less extensive than the due diligence done on mergers and acquisitions, some due diligence analysis should also be done on minority investments to be made.
The analysis should focus on the fundamentals of the target investments, market dynamics and be informed by the strategic goals of the investor.
An internal finance/investment team or outsourced advisers may be involved in analysing the investments and issuing a recommendation before the investment is made. Both the primary and secondary markets have potential to create value. A business, which receives funds from investors and ploughs them into positive returns generating business creates additional value for the investors.
Divestitures, carve-outs and spin-offs
A divestiture, carve-out and spin-off of a business unit can create added value for both the business unit and the parent company. Key financial tasks in preparing for the divestiture, carve-out and spin-off include performing detailed financial projections, analysing potential deal structures and related costs/benefits, performing a detailed business valuation and preparing carve-out financial statements (Deloitte Divestiture Survey, 2013).The CFO and the finance team are important in driving these processes to ensure that the deal is successful.
The CFO plays an integral role in ensuring the financial health of the business and determining how to fund growth and expansion of the business. The CFO will consider the target capital structure, cost of the capital, and available sources to determine how to finance the investment decisions.
Bringing it all together
As can be seen from the examples above, the finance function plays an important role in company growth. It is also very important to know when to bring in outside service providers to assist in sourcing investments, conducting due diligence, valuations, investment appraisal and looking for the most appropriate or the desired source of funding. This is why there is always talk of a Chief Value Officer (CVO) as opposed to just a CFO.
The highest decision-making body in the company, which is usually the board of directors, also needs an appreciation of the roles played by the key actors in driving company growth and they should be able to ask the right questions in their oversight role.
- Dera is a chartered accountant and a chartered financial analyst charter holder. He is a finance, investments and audit consultant and is a manager at Instinct Risk Advisory. He also has a Certificate in Pension Scheme Trusteeship, is a Registered Public Auditor and is a Registered Public Accountant. — email@example.com.