By Misheck Dera
FINANCE professionals play an important role in business growth. As businesses grow, they create jobs, help grow the economy, reduce poverty, and create a new middle class. Accounting and finance professionals are known to enforce accountability in finance. In this article, I seek to highlight some of the most important roles finance professionals play in growing businesses.
Some areas of the market are known to have dissatisfied customers because the product may not adequately meet customer needs. Whether it’s an entirely new product, improvement, or innovation, the CFO and finance team must play an important role in product development.
Management accounting expertise is essential to examine the relationship between cost and product design prior to production by providing important financial and financial data (Hertenstein et al, 1998). The CFO usually also plays an important role in allocating resources for activities such as research and development (R&D).
R&D is important in most industries to create value and there is a need for proper planning, budgeting, and proper management and accountability for performance.
New tangible assets
Expanding 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. Strong data on the cost of new assets, incremental operating costs, working capital requirements, taxation, and cost of capital are needed and the finance team often plays a critical role in providing this data.
The CFO and finance team also perform an investment valuation using techniques such as payback period and discounted cash flow analysis. A sensitivity analysis is also performed before the capital project is approved or recommended for approval. Appropriate financial skills, operational expertise and strategic outlook are required to make the investment decision.
Make or buy decisions
Companies should focus on both production and transaction costs 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, analyze and compare costs, and calculate what-if scenarios. From the entity’s information system, several other qualitative information can be gathered and taken into account to make the appropriate decision.
Mergers and Acquisitions
To create real value, mergers and acquisitions to drive growth must go beyond the acquisition or combination of two companies and consider what additional value will be created so that the value of the combined companies is greater than the sum of its parts.
It takes more than evaluation models and requires real operational measurements. These measures include revenues, operating expenses, administration costs, assets and liabilities.
Proper due diligence on the target acquisition should contribute to an understanding of its business, the main growth drivers, potential changes in cost structures and minefields to watch.
No business is perfect, but it is important to highlight the main issues so that the investor can make an informed decision. Problem areas can indeed be a source of value creation for the potential buyer.
Although an internal department such as corporate strategy and development or the finance department can be used, an external consultant / advisor who is a suitably qualified and experienced auditor is usually employed to perform financial due diligence.
Financial due diligence is more than a financial audit and it is very important to clearly define the terms of reference and the team. The CFO plays an important role in overseeing this due diligence by his internal team or external consultants / advisers.
Operational, fiscal, legal and human resources due diligence are also very important, and the composition of the team to cover these areas will be primarily influenced by the nature and complexity of the target acquisition.
With all the due diligence covered, it’s about negotiating the price. As any finance and investment professional worthy of the name will allude to, a significant part of the added value is brought to the purchase price. The rule is never to pay too much for the acquisition as it will be difficult to create additional value on the acquisition.
CFOs also play a critical role in the success of the business after the acquisition. In an article by Ankar Agrawal et al (McKinsey, 2020), it was noted in surveys that when the CFO was “very involved” in merger integrations, companies were much more likely to seize synergies. costs and revenues.
To successfully integrate businesses and cultures, business leaders must have an informed point of view on the synergies to be captured, the transformation opportunities to be pursued, the value to be created and the cultural traps to be avoided.
The internal audit function is also very important to provide an advisory and consultancy service to managers and the board of directors with a view to providing information that ensures the resilience of the company and provides value-added information for the company. ‘business.
Although usually less in-depth than the due diligence performed on mergers and acquisitions, certain due diligence analyzes should also be performed on the minority investments to be made.
The analysis should focus on the fundamentals of target investments, market dynamics and be informed by the strategic objectives of the investor.
An internal finance / investment team or external advisers can be involved in the investment analysis and make a recommendation before the investment is made. Primary and secondary markets have the potential to create value. A business, which receives funds from investors and invests them in activities that generate positive returns, creates additional value for investors.
Divestments, carve-outs and spin-offs
A divestiture, carve-out and split 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, spin-off and spin-off include making detailed financial projections, analyzing potential transaction structures and associated costs / benefits, performing a detailed assessment of the company and the preparation of demerger financial statements (Deloitte Divestiture Survey, 2013). The CFO and finance team play an important role in driving these processes to ensure the success of the transaction.
The CFO plays a critical role in ensuring the financial health of the business and determining how to finance the growth and expansion of the business. The CFO will examine the target capital structure, cost of capital, and available sources to determine how to fund investment decisions.
Put it all together
As the above examples show, the finance function plays an important role in the growth of the business. It is also very important to know when to use external service providers to help with investment research, conduct due diligence, appraisals, investment appraisal and seek the most suitable or desired source of funding. This is why we always speak of a Chief Value Officer (CVO) as opposed to a simple CFO.
The highest decision-making body in the business, which is usually the board of directors, also needs an appreciation of the roles played by key players in the growth of the business and they should be able to ask the right questions in their supervisory role.
- Dera is a Chartered Accountant and holder of the Chartered Financial Analyst Charter. He is a consultant in finance, investments and audit and director at Instinct Risk Advisory. He also holds a certificate in supervision of pension plans, is a chartered public auditor and chartered accountant. – [email protected]