The blame game

Finance functions have been at the epicentre of the economic earthquake. The
downturn brings with it an array of new demands. There is greater pressure to
protect cash and liquidity. Operational leadership grappling with critical
decisions require additional information and analysis. New budgets and
reforecasts need to be prepared and new funding may need to be raised. The list
goes on.

This additional pressure is often aggravated by the need to demonstrate your
own cost-cutting credentials. Senior management colleagues will be looking to
the finance function to accept its share of any cost and headcount reductions.

The question facing finance leadership is how to deal with a simultaneous
increase in demand and a reduction in resources.

In a steady state finance, headcount reductions can be achieved by changing
structures, organisations, processes, systems or by removing underperformers.
But this is not the circumstances we find ourselves in.

So, the overall starting point for a finance leader is to have a clear
understanding of the factors that drive the efforts of the finance team. These
factors may be numerous. They might include the number of legal entities,
business units, products, systems, manufacturing sites, improvement initiatives,
business development opportunities, suppliers, customers, terms, conditions and
reports. In addition, activity is also impacted by defined materiality and risk
levels.

Whatever those drivers might be we can broadly split the activities of the
finance function into cash management, transaction processing, financial
reporting and governance and business information.

In any downturn cash management is the number one priority, driving a big
increase in finance activity. Existing stakeholders will need to be managed to
avoid any adverse breach of existing contractual commitments and prevent any
negative reassessment of the company. In addition, alternatives and
contingencies need to be developed to mitigate any undesirable response and
protect liquidity.

This will put a significant demand on resources including additional
meetings, increased analysis and further documentation that will be almost
impossible to avoid. It is therefore critical to educate business and management
colleagues in the importance of this activity.

Transaction processing should broadly decrease in line with the reduction in
business activity. If well managed, the reduction can even exceed the decreases
in business. This can be achieved by techniques such as ensuring that suppliers
are paid only on defined dates as opposed to when invoices are submitted.

A key consideration in executing any reduction in this area is to consider
what the implications would be in any subsequent upturn. How easy would it be to
scale up the function again? What alternatives would exist? Good analysis of
transactions volumes and processes is critical.

Activity in financial reporting and governance has increased during the
downturn. As economic activity has declined, the need for improved financial
control has increased together with additional activity in respect of reported
results. For example, as a result of the downturn, many companies have been
forced to revalue balance sheet goodwill on an exceptional basis outside of the
normal annual cycle. Headcount reduction can be achieved but this often
increases risk, which needs to be fully understood and approved by the board.
Inevitably financial pressure exposes the quality of governance.

And finally, the demand for business information from all stakeholders
usually increases in a downturn.

This is caused by the need to understand variances to budget, develop
upsides, identify solutions and improve forecast accuracy. Senior management
colleagues need to understand that headcount in this area is driven by the
service level provided to the business.

The impact on service levels as a result of any planned headcount reductions
need to be understood and agreed. Clearly there is the opportunity for finance
leadership to be proactive. It is critical to be clear on what the priorities of
the finance function are and how they relate to those of the business. Only then
can we ask questions like: What are we currently doing that adds no value? Does
anyone in the organisation make any decisions using that report?

Adjusting these drivers and activities ­ and therefore finance headcount ­
with business in steadier conditions is a significant challenge. The scenario in
a downturn requires a different type of strategic and operational finance
leadership. It represents a huge challenge to a generation of finance leaders
who have been used to quarter-on-quarter economic growth over 16 years.

When all of the above is resolved, the finance function must still interact
in the right way with the business. If business performance is falling there are
inevitably difficult questions to answer.

Operational leaders should be prepared for this to happen within a
co-operative process. The aim is not to catch people out or ambush them with
clever questions, it is to make sure the business makes the right decisions (see
box). Teamwork is clearly the most effective means. This may lead to additional
benefits and opportunities for the finance team, for example operational support
with cash collection may be particularly helpful when customers are trying to
manage their cash flows more effectively.

This is clearly a moment of opportunity for finance functions and
professionals to demonstrate their value as teams and as individuals. The
rewards will be great. If you prove your worth you may open up your career
vista. People attach huge credibility to those that can handle themselves in a
crisis because they substantiate that they have the right personal
characteristics to deal with challenging commercial circumstances. Watch out for
an emerging new breed of business leader, hardened in the kiln of adversity.

Paul Goodman is the Founder of Goodman Masson, a specialist financial
recruitment business, and a member of the executive of the Association of
Professional Staffing Companies. Colin Bond is the CFO of Novelis Europe and an
Associate Lecturer at the Open University Business School.