Getting to basics of finance – Part 1

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Robert Likhang

THE whole purpose for establishing an enterprise is to obtain income in terms of dividends which are shares of profits, but principally to maximise long-term owner’s wealth, which is the appreciation of the market value of your shares or looked from a different angle the growth of your net assets.

To start the business, finance is required and sourced at the least cost, hence different sources are looked into, such as debt or owner’s equity or a mix, in such a way that the weighted cost of capital is low.  During the period of the business, short-term funding will also be needed to meet the medium and short-term needs, and similarly from different sources  such as bank loans and overdrafts, leasing finance etc.

There are complex decisions we need to make during the business, short-term decisions such as whether we produce one product more than the other, how we need to manage costs, how to price etc., as well as long-term business decisions such as whether or not we open another branch or buy a new plant etc. for which we invest over a long period in the midst of uncertainty. It is very clear from the above that financial management is key to business. Survey after survey indicate that poor financial management is the number one cause for business failure.

Role of financial management

Many organisations take the role of financial management, and indeed the role of the finance staff as merely production of financial statements. There is overemphasis on financial reporting followed by external auditing. We cannot underplay financial reporting as it needed for compliance and for communication with shareholders and capital providers. Auditing is critical especially for bigger organisations, public institutions, banks and deposit takers, where assurance is critical. However, important the overemphasis on financial reporting has given greater emphasis on financial operations (financial accounting and procedures), and we often look at the Chartered Accountants as mechanics of financial operations and judge their competence in producing a good set of financial statements.  It has become common to refer to these professionals as “bin counters”, mainly because parts or inputs during the Western industrial age, were put in bins in the mass production lines, and accountants were counting the number of inputs as part of their financial operations. In the pursuit of this great work, we miss even greater work that gives that properly positions the role of Financial Management in business.

As can be seen from the introduction, business is about money, and money is needed to start and continue the business, and any wrong money decisions lead to wrong business decisions and vice versa. We can easily conclude that finance is lifeblood of any business organisation, even non-profit organisations as there has to be “value for money” in its operations and as a goal. The question is often if the business managers and owners are aware of the importance of finance in a broader sense than merely financial accounting operations and reports. While Chartered Accountants have been referred to as “bin counters” I would like to bring the analogy to farming and call them rather “bean counters”, and more than that, I should state that good Chartered Accountants when so allowed by their clients and employers, they are “bean growers”.

At RL Consultants and Chartered Accountants, in our financial director outsourcing product, we emphasise the latter (growers) while not compromising the former (counters).  The proper role of Finance in organisations cannot be overemphasised. In the United States, the Sarbanes Oxley Act gives proper perspective in that the Chief Financial Officer (CFO) together with the Chief Executive Officer (CEO) can be imprisoned up to 21 years for their failures. Of the executives, the Finance Executive who is picked to be of greater fiduciary responsibility, and that on its own shows the expected role of the Finance function.  In a number of jurisdictions, South Africa being one, listed companies must have at least the CEO and the CFO as Executive board members.

Restructuring finance function

In the US, accounting falls in the top five fastest growing consultancy services. In India, accountancy outsourcing is a growing opportunity. Indeed there is a link between the economic growth and sustainability and the accountancy service quality.  In our jurisdiction, Lesotho, the link may not be seen, and it is not so much that we do not have services of Chartered Accountants, but that we are not placing Finance in its proper position.  Finance Unit is not an equal of other units it is the heart of the business. Finance is not a function but rather a cross functional function that cuts across and influences other units such a production, marketing, human resources etc. as for as long as the decisions those units make have a financial effect (which they do 110 percent of the times), the “veto” power of the CFO is needed.  With the new role of the CFO and new fiduciary responsibilities, the board decisions have to be funnelled through decision processes and policies designed by the CFO. In South Africa 65 percent of the listed companies are Chartered Accountants, in UK the it goes up to 75 percent, and more and more CFOs are being promoted to become CEOs. This is not a means of promoting Chartered Accountants, but rather talking about restructuring our own organisations to ensure that Finance plays a proper role as life blood for organisational success.

The organisations need to review their businesses and ensure that the Finance Function plays the rightful role. It is critical to have a Chartered Accountant at the helm of the Finance role and that the finance function plays a role of business partner or strategic partner rather merely counting the ‘beans’. The top of finance should concentrate more on strategic role where his or her inputs are on risk management, governance, strategic management, business performance management, investment decisions, cost restructuring, business processes restructuring , internal control reviews etc rather than the production of financial statements. Businesses often employ the junior (lower qualified) accountants (as employees or their outsourced accountants), and that is good as they may be able to run financial operations, but do not expect that they can be involved as business partners as they may not have the appropriate training as yet, hence my emphasis on Chartered Accountants who can play that role well. It is critical that young chartered accountants should be ready to play that role and obtain appropriate experience, rather than look building money (high salaries), they rather build careers, even if salaries start low.

Conclusion

We will be going more distance on this topic of Finance, and we will be discussing important financial management techniques to help businesses to grow. We had to start with this element of finance because that is where it all begins, getting the right people in the right positions and roles. At RL Consultants & Chartered Accountants, we often find resistance from clients when we do Finance Restructuring for them, and that is mainly coming from not understanding the new role of Finance if building successful businesses.

Mr Likhang FCIS, ACMA, CGMA, CA (L) is a business development consultant and accounting practitioner.  Principal RL Consulting (Pty) Ltd and RL Chartered Accountants www.yourfd.co.ls

 

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