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THE FINANCE FUNCTION OF THE FUTURE

There are many forces of change impacting on finance functions both in the for-profit and non profit sector. Increased globalisation and competition impacts non profit organisations in a number of ways. The increased pace of change results in increased importance of strategic management and forward thinking. As organisations focus on core competencies they have to carefully assess the complexities of business risk (and I use the word business advisedly). This in turn has an impact on the finance function. The increased pace of change means there is a greater volatility in financial affairs and real time information becomes a necessity and finance has to have information which allows it to partake in strategic decision making and to make financial evaluations of strategies.

“The prime role of finance directors is to contribute to that systematic, comprehensive analysis, but the real challenge in more strategic decisions is sometimes to bridge the gulf between the two separate worlds of intuition and analysis: one so easily precludes the other with results that prove dismal, if not occasionally disastrous” (Car and Tomkins, 1996)

The broad picture

Successful organisations are innovative and should be proactive and anticipatory in their approach to meeting needs both in income generation and service delivery. Creativity should be allowed to flourish and diverse ideas should emerge. These should be evaluated carefully against all the opportunities and threats.

The information Super Highway is an overworked cliché and the focus should be on finance turning information into knowledge that adds real value to the organisation. With the emergence of “the learning” organisation, finance is expected to have the total picture rather than just be a transaction processor. There is no denying that the non profit sector is getting increasingly competitive and knowledge is power with finance needing to become the information facilitator. It will have to orchestrate information flows and synthesise and prioritise information for top management (As against just delivering information). This means that the finance team must have greater involvement in trend analysis, data interpretation and value added services.

How do we match up? This might sound like heresy coming from an accountant but much of finance today is dominated by low level activities. Research shows that about 60%-70% of the finance teams’ time is spent in transaction processing, with about 15% spent in managing accounting risk and 15% spent on internal and external reporting. Quite clearly this leaves minimal time towards effort available to support business partnering initiatives. Unfortunately, many finance functions are not yet ready to meet these challenges although the issues and shortcomings have been identified for a number of years. A major research study carried by the Economist Intelligence Unit (EIU) and Arthur Andersen in 1997 ‘The evolving role of Finance: Charting a strategic course for the future’ provides interesting statistics. 50% of the respondents thought that the finance staff needed to improve product and market knowledge. 44%thought that finance staff must improve the understanding of how parts of the business interrelate. The same percentage thought that finance must also improve their communication skills. Almost two-thirds of the finance executives said they were dissatisfied with the frameworks used to measure the performance of finance. Nearly as many were unhappy with the way their departments are organised and the way they interact with other functional areas. In addition, about three-quarters of the respondents said their finance groups’ current methods of identifying and collecting relevant information are not keeping pace with the needs of their internal customers and that too much of their time (71%on average) is spent on routine, rather than value-added work. Respondents also expressed concern about having to rely on inadequate information systems. More than 75% said that their organisations’ information systems are not sufficiently integrated.

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Whilst this research appears outdated much of tis findings would still apply today.

Low-value activity Finance is often still dominated by ‘low-value’ activity. Low-value activities are those that are optimal when they provide the highest level of accuracy at the lowest possible cost. They typically do not add value no matter how well they are performed. One example is payroll. Accurate and reliable payroll processing is a mission-critical process; anything less is unacceptable. Beyond that, a better payroll process is simply one that costs less. Managing accounting risk presents a similar challenge. Accurate numbers are critical, but increasing automation is bringing new levels of accuracy to every organisation. Users of financial information expect that ‘the numbers are right’. Only a new concept of risk can add value. Internal and external reporting, as traditionally defined, is also an area of low value. The traditional ‘information delivery’ role of finance is being eliminated by increasing use of technology. In short, much of what finance organisations do does not always present opportunities to add value to the business, no matter how well they are performed. As a consequence finance needs to focus on new business partnering activities that add value.

The strategic finance framework The heart of the EIU and Andersen report discussed a framework for change that identifies the most important challenges that now confront Finance Directors. The evolved finance organisation, and the new role of the Finance Director who leads it, is captured graphically by the Strategic Finance Framework, in essence, a road-map for change.

Improving fundamentalfinancial processes

Conducting value added business analysis

Developing organisation-wide performance measurement systems

Managing business risksand opportunities

Expanding

competencies

Sharing knowledge

Initiating change

Source EIU/ AA

The Strategic Finance The Strategic Finance

FrameworkFramework

Source: ‘The Evolving Role of Finance: charting a strategic course for the future’ - Economic Intelligence Unit The Strategic Finance Framework provides a direction for the finance function that seeks to become an agent of leadership and change. It incorporates the critical roles and responsibilities finance must adopt and the types of changes it must undertake to become a complete partner with the other parts of the organisation. The framework facilitates a shift in focus from low-value tasks to higher value activities.

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The Framework has two dimensions: Critical Imperatives and Strategic Enablers. There are four Critical Imperatives: (1) Finance must improve its core business processes so that it can allocate additional resources to

more strategic undertakings.

(2) Finance must undertake value-added interpretative analysis that will help operating managers understand the financial consequences of their strategies and decisions.

(3) Finance must take the reins on organisation-wide management of financial and non-financial risks and balance them with non-traditional development opportunities.

(4) Finance must develop organisation-wide systems that help operating managers ensure that their day-today decisions reflect long-term strategic goals.

To guarantee that these imperatives are carried out, finance will turn to three Strategic Enablers: (1) Expanding competencies: Before finance can become a partner adding real value to operating

managers, it must build on traditional skills and capabilities – not just technical skills such as management accounting but “soft skills” such as communicating and working in a team environment.

(2) Knowledge-sharing: Finance professionals must devise systems and procedures for both

collecting and disseminating relevant information throughout the non profit. Without a reliable infrastructure for managing knowledge and intelligence, skills and capabilities in finance go to waste.

(3) Initiating change: Once finance has the skills it requires and the systems in place to share

knowledge, it will be ready to complete its evolution by initiating change throughout the organisation, whether that is in the strategic planning process, fund management, cost control or performance measurement.

The relationship between imperative and enabler is fairly intuitive. The enablers equip finance with the knowledge, tools and leadership necessary to help the organisation pursue strategic aims, grow the business and satisfy stakeholders. Indeed, the enablers give finance the capacity for a quick and efficient response to the ever changing needs of the sector. In effect, the enablers allow the role of finance to evolve to face the new times and new challenges. In essence, most activities within the finance team can be broadly categorised under the following three headings; i) interpretation and analysis; ii) control and monitoring; and iii) transaction processing.

By their very nature these are “ever improving“ aspects and will be as relevant in the years to come as they were in the years gone. The relationship between imperative and enabler is fairly intuitive. The enablers equip finance with the knowledge, tools and leadership necessary to help the organisation pursue strategic aims, grow the business and satisfy stakeholders. Indeed, the enablers give finance the capacity for a quick and efficient response to the ever changing needs of the sector. In effect, the enablers allow the role of finance to evolve to face the new times and new challenges.

In writing this guidance I have often used the terms Finance Director and finance function interchangeably. The tone at the top is vital and the finance function will not evolve if the Finance Director is ready to accept the status quo. As the Finance Function evolves the role of the Finance Director and the rest of the fiancé team will continue to evolve. The evolving role of Finance Functions and those who lead them was considered in material written for the Charity Finance Directors Group (CFDG) by me. This was based on research carried out by consultancies such as Accenture and Deloitte.

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Regrettably some Finance Directors have not been ready to embrace the necessary changes that are required although it is quite clear that a paradigm shift is often needed in approach, mindset and competencies. The market place is clearly demanding more from Finance Directors in the way they shape and lead their Finance Functions. This is apparent from a review of the more recent job descriptions and person specifications. Technical skills are taken for granted and although they are still a vital requirement for a core finance team the job descriptions and person specification are changing noticeably. At the CFDG conference in 2006 I used a job advertisement to illustrate this. The responsibilities included

Overall leadership of the charity as part of the senior team. Setting overall organisational strategy and ensuring its implementation within sound financial planning.

Promoting organisational values and culture

Representing the charity at a senior level, actively networking and building relationships with key stakeholders and partners to promote the organisations achievements and increase support.

Actively promoting and encouraging cross departmental working

Developing the charity’s financial and administrative strategy, policies and practice

Leading and managing significant cross functional projects This is a long way from an advertisement for a similar sized charity some years ago, which asked for “a person to lead the finance department in preparing financial reports and year end accounts”. Traditionally focused on the mechanics of finance and the integrity of financial reporting, Finance Functions are now being pulled in different directions to help their organisation meet strategic, operational, and performance needs. As their sphere of responsibility expands and pressure mounts, more finance functions will continue to seek better ways to manage their multiple roles and effectively address a widening spectrum of risk. The Finance Director’s dilemma is real: The Finance Director of the future will have to be even more multi talented. The role is and will continue to get wider and Finance Directors are not only accountable for the charity’s financial reporting, funder interactions, and regulatory requirements, but they are also managing people, dealing with systems and technology infrastructure, and serving as a strategic partner Notwithstanding this, the Finance Director need not feel trapped or oppressed by these increasing responsibilities. These are real opportunities and not threats. I talk with Finance Directors on a daily basis and I see that the best are relishing the challenge and are taking control. They are ensuring that their organisations are investing in efforts that can help finance boost its productivity with fewer resources, deliver higher-quality information in shorter time frames, drive down the costs while addressing regulatory compliance, and bring about sustainable process improvements for greater efficiency. Accomplishing this requires a comprehensive and sustainable framework. These are real opportunities and not threats. Finance Function leaders are relishing the challenge and are ensuring that their organisations are investing in efforts that can help the Finance Function boost its productivity with fewer resources, deliver higher-quality information in shorter time frames, drive down the costs while addressing regulatory compliance, and bring about sustainable process improvements for greater efficiency. Accomplishing this requires a comprehensive and sustainable framework. In the concluding chapter in the Charity Finance Directors’ Group publication I cited research and work from Accenture and Deloitte to discuss the attributes for the Finance leaders of the future. The Deloitte research sorted these responsibilities into four categories, a framework which was called the “Four Faces of the Finance Director”

Steward – protect and preserve the assets of the organization

Operator – balance capabilities, costs, and service levels to fulfil the finance organization’s responsibilities

Strategist – provide financial leadership in determining strategic business direction and align financial strategies

Catalyst – stimulate behaviours across the organisation to achieve strategic and financial objectives

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CFO

Focus

Triangle

CFO

Focus

Triangle

Threshold

Performance

Finance

Function

Leading Edge

The Four Faces of Finance is the key to understanding the CFO’s

challenges

Provide financial

leadership in determining strategic business direction and

align financial strategies

Balance capabilities, costs and service levels

to fulfill the Finance organisation’sresponsibilities

Protect and preserve the assets of the

organisation

Stimulate behaviors

across the organisationto achieve strategic and

financial objectives

Source – Deloitte

Finance Directors and their finance organisations may differ in their priorities and appetite for change. The next twenty years will be a case of leaders and followers and the individual needs of the organisation will be important. However, certain trends are apparent and based on our research and work with Finance Directors, we believe that in the coming years Finance Directors will pay even greater attention to: 1. Understanding and developing the four distinct, but interrelated roles they play in the organisation

and how finance resources are aligned. They will determine how Finance fulfils the four roles and this will dynamically prioritise the Finance Directors personal focus.

2. Recognising the inherent conflicts these roles may cause in organisation, leadership development

models, incentives and operating models. I personally believe that the Finance Director has the inherent skills to be the Deputy CEO and many organisations recognise that as the CEOs role becomes more externally focused there is need to have someone manage the organisation. Some charities have developed a Chief Operational Officer Role but others are turning to and yet more will turn to the Finance Director to take up this challenge.

3. Identifying the critical challenges to fulfilling each of the four roles individually and the overall

mission of finance collectively. At present it is only the larger charities that have a depth of skilled resource in the Finance function. I expect this to change, as the importance of underpinning the Finance Director with staff with competencies in at least some of the four critical roles becomes more widely understood.

4. Recognising the value drivers and capabilities required of finance. This will lead to determining

which gaps in current versus required performance to address first. (And the pitfalls of getting the sequence wrong). As Boards understand their roles and responsibilities better I expect to see a sea shift in thinking about overheads and infrastructure. The question will increasingly move from “are we spending too much on finance resource?” to “are we spending enough, in the right way and on the right things?”

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The table below summarises the four faces and their attributes and competencies. It is a simple way of considering the key aspects by asking the following questions for each of the four faces:

1) What is the focus

2) What is the role

3) What are the expected competencies

4) What are the critical issues that must be addressed

Steward Operator Strategist Catalyst

Focus Accounting and Control

Efficiency and service levels

Business performance and stakeholder value

Disciplined execution of strategic choices

Role Ensure organisational compliance with financial reporting and control requirements

Dynamically balance cost and service levels in delivering on the finance organisation’s responsibilities

Leveraging financial perspective to improve risk-awareness, strategic decision-making, integrating performance management

Gain business alignment to successfully identify, evaluate and execute strategies

Competencies Accounting and reporting, compliance, applying good judgment

Leverage system capabilities, program/project management, problem solving

Critical thinking, analysis and presentation of data, financial perspective, strategic agility, dealing with ambiguity

Business perspective, change management, organisational agility and facilitation, conflict management

Critical issues Information quality, rationalising controls and protection of assets and resources

Finance operating model development and evolution, talent management in financial disciplines, budget management

Providing a financial perspective on innovation and growth, translating expectations into internal business imperatives

Establishing structure of accountability for results, driving execution and change

A useful exercise is to consider how the Finance Function and key individuals are positioned against the desired roles and attributes In recent years, most finance functions are centre stage in their role as stewards, protecting and preserving the organisations assets. Separately, many have also become consummate “operators,” balancing capabilities, costs and service levels to fulfil the finance function’s organisational responsibilities. Indeed, the roles of steward and operator are vital and non-negotiable responsibilities for the Finance Director. As a consequence Finance Directors have justifiably spent significant time, energy and resources getting them right. Therefore as finance functions become confident in their abilities as stewards and operators, they will also refocus on their other responsibilities. In particular, their attention will increasingly be on value creation. This entails an emphasis on the two other roles of strategist, (providing financial leadership to determine business direction and align financial strategies); and catalyst, (stimulating behaviours across the organisation to achieve objectives).

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These roles will also likely drive how the Finance Director thinks about talent and underlying processes,

technologies, and strategies. Each of these roles, in turn, carries associated risks, such as

understanding how the organisation is doing from a compliance standpoint, providing effective levels of

quality information, protecting the organisation against losses and fraud, assessing consequences of key

organizational strategies, and communicating about the risk threshold from the finance function

perspective.

This will mean that not just the Finance Director, but also the whole finance team will have to raise the bar. The key challenge for charities will be how to be equal players in the war for talent. This is highlighted in “The Finance talent challenge: How leading CFOs are taking charge”, a publication prepared by the EIU. This draws on quantitative and qualitative research conducted in April-May 2007 with finance executives across sectors, and from around the world. There are many interesting findings, which show what is happening now and provide indicators for the future. The survey’s findings on delegated activities illustrate the shift in the focus of the Finance Director. Survey respondents were provided with a list of thirteen activities, and asked which ones Finance Directors have delegated in the last year. Among responding Finance Directors, many said they have delegated a variety of those activities, most of which are typically non-core activities, such as participating on committees. However, Finance Directors must still be careful not to cede their stake in activities they should own, or at least contribute to, in order to add value to the company. 40% of responding Finance Directors said that they have delegated the task of ensuring alignment between strategic and operational planning in the past year, an activity the value-creating Finance Director should arguably own outright. And 35% have delegated the identification of business growth opportunities, a task to which value-focused Finance Director should at least contribute. So the role of the Finance Director will continue to evolve and with it the key activities will evolve to. The next few pages consider some of these activities.

Management information Many organisations are going through a period of re-engineering and new organisation structures and requirements are emerging. There are fewer levels between boards/management and the “customer”. Information goes to more people faster throughout the organisation and this means that finance has the important task of ensuring that the information has integrity. Management information must be relevant, timely and accurate. Too often I see the situation where other departments set up their own sub systems because they do not believe that the finance team is meeting their needs. The finance team must use a thorough process driven approach to the development of management information systems. A key feature should be the integration and interpretation of vital non-financial operational information with accounting data to provide information that can be used effectively. In the process of designing practical, user-friendly information systems it is important to consider:

exactly what management information is required and how it adds value for decision making;

who needs it and why;

how it will be prepared and by whom;

whether it can be obtained as a product of another process; and

whether the cost of having the information is commensurate with the benefit. The aim should be to ensure that data is accurately transferred into information that can be used to create knowledge that adds value to the organisation’s values and goals.

Knowledge management

Knowledge management is the process of accumulating knowledge efficiently, administering the knowledge base, and facilitating the sharing of knowledge so that it can be applied effectively throughout the organisation.

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Knowledge management applies particularly to ‘organisational knowledge’ the valuable information retained in an organisational system despite the comings and going of the individuals who collectively make up the system. As organisations plan for proactive knowledge management, they face many critical issues, including

How will individual organisations define knowledge in order to manage it effectively?

Who has responsibility for leadership of this area.

How strategic is knowledge management?

How can the Finance team participate in the knowledge management process as a catalyst for information transfer and exchange?

What processes and disciplines are needed to manage knowledge? What tools and technologies are necessary to support knowledge management?

What cultural attributes reflect leading edge knowledge management capabilities?

How effective are the ways in which we evaluate knowledge management efforts?

How well do they enable us to link our knowledge management to financial results?

What specific measures drive desired behaviours? In a highly competitive sector true competitive advantage is often dependent on knowledge. Historically, non profit organisations have been very good in gathering data. They have not been as good in converting that data into information and generally they have been quite poor in converting that information into knowledge that adds real value. Knowledge gathering and knowledge dissemination is an important part of the finance role. Increasingly, finance functions are moving effort away from transaction processing and focussing more on interpretation and knowledge sharing. The modern organisation environment requires a financial infrastructure, which is nimble and flexible, and attuned to adjustment from different perspectives. This means partnering with others in the organisation and providing what they need. In my experience, a non profit’s senior management team and trustees now expect finance teams to provide real assistance in managing the dramatic changes brought about by more demanding stakeholders. They are turning to the finance team to bring inherent analytical capability to bear on the problems and decision-making challenges facing the senior management team on a day-to-day basis. Finance personnel are known for their expertise in quantitative analysis, information management, objectivity, etc. and this is leading to responsibility for broader initiatives. Once a producer of information, the Finance Team needs to mover further to synthesise information to promote knowledge, understanding and enable change by proactive knowledge sharing. To do this well it is necessary to:

Spotlight team players

Provide access to collected information

Develop incentives for sharing

Demonstrate the value of knowledge sharing

Have enthusiastic management

Access needed technology

Performance measurement Individual, team and organisation based goals are now linked to both non-financial and financial measures. Thus the finance team has to facilitate the creation and monitoring of new performance measurement systems. To be effective, performance measures should be the ‘vital signs’ in an organisation. They should show not only how well a non profit’s objectives have been achieved, but also how well it is building capabilities for the future. Performance measurement has been shown to be the most critical area of the best practice in world class organisations. Finance must enable both the effective monitoring and evaluation of performance measures. This means that the system:

should focus on measures aligned to the needs and expectations of stakeholders;

must be easy to use and simple to understand;

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must be aligned to the organisation’s strategies and processes, and illustrate cause and effect relationships;

should satisfy all key information needs: financial, operational and strategic; and

should stimulate and direct change throughout the organisation.

Information technology The impact of computers on business processes cannot be over-stressed. Efficiency becomes a given and there is the inevitable pressure to use computerisation to streamline financial processes. This leads to shorter reaction times and opportunity windows and finance is often tasked with ensuring that the organisation has adequate systems to meet organisational needs. The current generation of client/server application packages enables these changes through technologies like:

package integration: ie the seamless connection of modules within the application to provide transparent movement of data between business areas without need for expensive interfaces;

workflow, i.e. electronic routing of transactions to relevant people;

powerful analytical decision support and reporting tools embedded into the application;

document image processing; and

data warehousing.

When new technology is required the signs are usually obvious:

Hardware and/or software are no longer supported

Business demands have outgrown current systems Increased number of users/transactions Need to support multiple sites Foreign currency /language requirements More complex business requirements New lines of business

Increasing use of non-integrated spreadsheets to bridge gaps in systems; and

Reporting /information access is inadequate

Business Risk Management

Business risk management is the process of assessing and controlling the risks that are inherent in any business operation. It should be an important part of reengineering the finance function since new initiatives always carry with them a degree of risk. Conversely, new initiatives present tremendous opportunities to re-evaluate the nature of business risk and build in effective risk management instruments at the outset. Close partnering is necessary between finance and other departments as finance takes on a new responsibility for identifying, prioritising and controlling risk. Presently most Finance Functions focus on the risk of material misstatement in their accounts. They also need to focus on the risk of fraud and error and the risk of operational failure. This requires a holistic approach to consider:

Environment risk - that external forces that could significantly change the fundamentals that impact on the non profit;

Process risk - that processes are not clearly defined, are poorly aligned with strategies and expose assets to unacceptable losses; and

Decision making risk – that information and structures do not support strategic, operational and financial decisions.

Changes should be made with a view to adding value to the broader role of finance since:

Traditional controls are being swept away as organisations change

New technologies are introducing new risks

Business transactions and practices are increasing in complexity and risk/reward trade-offs

Fraud continues to be a problem for some organisations

The cost of strategic error and the speed at which it impacts most organisations is increasing

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The finance role must be flexible to respond to evolving risks. Problems can arise when:

Business risk is not being clearly linked to its impact on stakeholder value

No common language or approach exists for risk assessment

Internal communications about risk assessment and control are sporadic or reactionary

After-the-fact evaluations by auditors are too often seen as an integral part of “the front line of defence”

Specialised skills for evaluating and controlling complex risks are not used productively.

New thinking focuses on the concepts of rewarded and unrewarded risks. Some risks are all downside

and no upside. For example, failure to comply with laws and regulation can have significant

consequences, but there’s no extra credit for being exceptionally compliant. Similarly, it’s important to

avoid disruptions to critical operations and systems, but doing so doesn’t earn a premium from

stakeholders, it simply meets their expectations. These are the unrewarded risks. They can’t be ignored,

but the primary incentive for tackling them is value protection.

Other risks are all about upside, for example, introducing new innovations in service delivery or

expanding into new areas of income generation. The primary impetus for taking these rewarded risks is

value creation. Although they might have a very significant downside, the potential upside is even

greater.

This distinction between rewarded and unrewarded risks seems simple, but it’s amazing how often

organisations fail to recognize the difference. In my experience, Finance Directors have tended to focus

on unrewarded risks. Perhaps because nobody else wanted to but I think that this is changing. Of

course, Finance Directors will probably continue to be naturally cautious and worried about failures but

the risk is that they focus the bulk of their attention on the threats and wind up missing out on the

opportunities.

Many Finance Directors are criticised for doing whatever they can to avoid significant risks, regardless of

the potential benefits. In the past this has led to underinvestment in the kinds of opportunities that drive

growth and create value for stakeholders. Risk intelligent Finance Directors, on the other hand will

understand the distinction between rewarded and unrewarded risks, and they will respond accordingly.

Therefore Finance needs to strike the right balance between being the “person minding the purse strings” and the person helping to develop the business. The shift of focus will depend on the financial status of the organisation and its risk appetite and risk tolerance. It is worth remembering that if the organisation is prospering then the finance function may have a different role to when an organisation is facing financial difficulties. In the latter case the finance function needs to make sure it is really “minding the purse strings”. (For more detailed information see our guidance on Risk Management)

Good Reporting

The Finance Director has to be informed of the ever-changing reporting requirements. On a practical level, information has to be gathered, monitored, evaluated and collated to produce the financial information from different income and expenditure streams. I expect that we will see an international standard for Not for Profit reporting which to a large extent will be based on the UK charity SORP. At the same time, the information gathering must be aimed at meeting the organisations operational needs rather just a statutory year-end format. A real and practical understanding of the underlying business principles and the spirit of the external reporting recommendations as well as the operating processes are important. At the same time Finance Directors will be focusing on enhanced internal reporting and good information for decision-making. This might sound like heresy coming from an accountant but there is much more to good reporting than pounds and pence. One has only to look at so many of the excellent annual reports available today to see that the charity sector has made massive advancements in this area – and in many cases before the private sector.

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Expect to see even more of this; Donors and Funders are already asking for information on outputs,

outcomes and impact and charities are reacting positively to this. A new International Non

Governmental Organisation has offered donors five project reports over two years on the 200 projects it

is supporting.

Users of accounts are already turning to the words and narrative rather than the numbers to really get to

grips with what the organisation is doing and more importantly what it is planning to do. There is a

concern that whist there is guidance of what should be said in the narrative report there is little “check”

that what is being said is not being economical with the truth or putting a spin on facts.

I expect that this will change and that in the coming years we will see more defined standards for

reporting in the more subjective and qualitative areas and having to consider the rules for such reporting

will become as commonplace as following generally accepted accounting practice.

We will see much more reporting on what is being achieved by the charity sector and hopefully this will

foster more sustained giving and support for ongoing endeavours in addition to the much needed

responses to emergencies. The task of setting priorities for charitable action itself will remain as difficult

as ever, matching the demands to satisfy short term needs against pressure for the resources required

to achieve long-term solutions. The Finance function of the future has a real and important task in these

areas.

Most importantly the Finance Director will have to understand operational performance as well as

financial performance. I often ask my clients to tell me how they define success, to articulate how they

know that their charity has had a successful year but without reference to the financial results. I also ask

how they know that they are properly explaining this to their stakeholders. These seem to be tough

questions and to answer them effectively the finance team will have to focus on new skills.

Collaborative working and Strategic alliances

Charities work collaboratively in a number of ways and for many reasons this can range from very loose affiliations to more formal strategic alliances leading to full mergers. Shared service centres will become more common. Typically charities can use these for many Finance Department functions which have certain characteristics such as repetitive processes and other administrative activities including basic accounting, accounts payable, accounts receivable, etc. Many low value repetitive activities lend themselves to being outsourced or shared with other orgnaisations. Charity Finance Directors will pay this area more attention in the future and there are a number of issues that will lead this. These include:

• Cost and economic pressures are driving the need to enhance efficiency wherever possible • Support Services have to deliver added value strategic support and advice • Competition drives the need for achieving world class standards • New opportunities have to be detected and implementation supported • Support services are becoming increasingly complex to deliver • Technology is driving and enabling new options • Coordination and standardisation is a reality • Eliminating geographic constraints

Broadening the income base

There have already been references in the charity sector of the Finance Director being a Funding Director rather than a Finance Director. This comes from arecognition of the fact that Finance Directors are having to focus on issues of how the organisation is funded. Trustees and management of charities are trying to balance moral imperatives, which may appear to compromise maximum financial benefit to their charities. This surfaces in issues such as investment policies, trading, exploitation of the brand, sponsorship deals and other areas of earned income. Finance Directors are finding that plans for the future will require even greater investment.

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To maximise income, charities will be employing more sophisticated methods of income generation. As new techniques are developed, so surrounding tax and charity law will be probed and operational capabilities and skill sets will need to grow. The Finance Director needs to be seen as the person to help keep the charity on the right side of the fence without stifling enterprise and innovation. Twenty years ago most charities raised funds through traditional fundraising or though the management of investments but this is changing and will continue to change more that half the income for the top 3000 charities comes form fees and charges. We will continue to see more innovative ways of raising funds for charities. Charities are involved in complex earned income schemes and other financing initiatives. Public service delivery and further developments in the contract culture will require better understanding of costs and risks of income flows and opportunities. Whilst the Finance Director may have had to take a back seat on the raising of funds in the past this will no longer be the case in the future.

The Evolving Role

Effective Finance Functions need a range of skills and competencies. Some of these will exist already and some will need to be developed so as to ensure that the Finance Function has the right people, with the right skills, doing the right jobs, in the right place, at the right time. This is depicted in the graphic below.

Getting started

To create a best practice finance function it is important to establish “Where you are now?” Consider your resources and what your staff do. Ask each member of the team to detail:

What they do?

Why they do it?

Who they do it for?

How long it takes?

How often it is done?

Should someone else be doing it?

Should it be done at all?

Can the task be improved?

Much can be learned internally and the results may be surprising. This exercise alone can drive improvement and change. The way forward is to:

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Create a shared vision for finance - Start by assessing your business strategy in terms of the information needed in the

business - Start to envision how these concepts of business partner can be applied to your

organisation

Drive down transaction processing and reporting costs by: - Benchmarking processes and implementing best practices - Reengineering end-to-end processes - Leveraging technology

Provide leadership in the assessment and control of business risk

Partner with senior management and operations to: - Align strategic and operating plans - Develop balanced performance measures - Continuously improve business performance - Align resource allocation process with the strategy

Develop the skills to provide value-added information

When reviewing a Finance Function there are certain key questions to address:

1. Customers and stakeholders: who are the stakeholders and customers and what are their requirements in areas such as management knowledge, business partnering and decision support?

2.Communication: How does Finance communicate and interfaced with these with customers and stakeholders

3.Processes: how should Finance processes be executed?

4.Knowledge: what knowledge is required to add real value?

5.Technology and data: what enabling technology and information should Finance have access to?

6.Structure: how should the Finance Function be structured?

7.People and Capabilities: what are the skills and competencies requires in the Finance Function?

8.Location: where should the Finance Function be based?

Babies and bath water Clearly if finance is to become more effective and directly support the organisation’s objectives, finance employees must first change the ways in which they interact with other areas of the organisation. A new mind set will be required. However, it is important to recognise that it is not just about cost cutting and reducing finance staff. There is a danger that if the organisation focuses on this as the object of streamlining financial processes and implementing new systems efficiency, it will create a narrow focus. This may eliminate the very people and information that the organisation needs to serve it in a more strategic capacity.

Unfortunately, a number of Chief Executives continue to think about the Finance Director in a stereotyped way. They think of the senior finance staff purely as service providers and not as valued members of the strategic team. They are often surprised at the contribution that they have been missing when the Finance Director is finally let out of the ‘finance box’. This of course requires that the Finance Director has the right skills, aptitude and core competency to embrace the concept of the finance function of the future. Finance Directors must be ready to face the new times and new challenges and Chief Executives and Boards must expect them to do so.

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In conclusion

Organisations in all sectors of the economy are facing a wider array of changes, challenges and opportunities on a greater variety of fronts than ever before. This is due to the many “mega-trends” that are reshaping the landscape so profoundly. Pressure from these changes is being felt throughout many organisations. Finance functions should be dealing with the need to transform themselves for this new order by asking: How should our organisation change to increase its relevance? How can our core competencies be best deployed to contribute more? It is important to bear in mind that real and significant cost savings and quality improvements won’t last without fundamental change. Organisations must: Implement benchmarking and best practices Transform transaction and reporting processes with reengineering and new technology Integrate systems so that data is entered once, at the source Outsource where cost effective and practical Migrate to shared services The Finance Function of the Future will be more strategic. As the traditional role (transaction processing) becomes less resource intensive, the Finance Function will reallocate its investment to drive value creation throughout the organisation. The aim is to optimise the structure, enabling this shift to occur. In the words of Peter Drucker, “the best way to protect the future is to create it.” Finance teams must ensure that they lead the way in creating the finance function of the future that adds real value to their organisations. The bean counter of yesterday must become the knowledge manager of tomorrow.

Pesh Framjee

Updated December 2012 Pesh Framjee is Head of the Crowe Clark Whitehill Not for Profit Unit the lead providers of audit and related services to the charity sector. He is also Special Advisor to the Charity Finance Group (CFG) and Joint author of Charities- the law and practice He assists organisations with improving effectiveness and has carried out a number of Finance Function Reviews.

This article is written in general terms and is not intended to be comprehensive. Before taking any decisions on the basis of the suggestions and indications given in this article you should consult your professional advisers.

For other useful resources and a list of our guidance notes see the Not for Profit Section of our website: www.croweclarkwhitehill.co.uk/nfp

If you want to receive our regular alerts and information about our seminar programme please email nonprofits@crowecw.co.uk

Acknowledgement This guidance note is based on articles written by me for the Charity Finance Yearbook in 1997 and 1998 and the CFDG 20

th anniversary book “The Role of the Charity Finance Director” published in 2008.

The Strategic Finance Framework is adapted from ‘The Evolving Role of Finance: charting a strategic course for the future’ produced by the Economic Intelligence Unit and Arthur Andersen. I am grateful to colleagues past and present, at Arthur Andersen, Deloitte and Crowe Horwath International who have carried out research and produced invaluable material that I have used in writing this guidance note.