Stephen Brooker is a consultant specialising in governance and financial strategy.
A client rang me up just before Christmas saying he wasn't sure if he was getting all he needed from the finance function and asking if I could "come and take a look at things". I turned up, ready to do the usual things - interview staff, review the management accounts, gather data on transaction volumes and so on.
I had only been there a couple of hours when the (recently arrived) head of finance came to me saying that the last set of management accounts had shown far too rosy a picture of the financial position. His September accounts showed a thumping excess of expenditure over income, whereas a month earlier the picture was a surplus.
"What's gone wrong?" asked a perturbed chief executive.
There were several lessons to be learned, and these have a general application.
First, the finance function had not been in close enough touch with the business units to track these things on a timely basis, and this was an organisation with very erratic income and expenditure.
The previous head of finance had obviously not been overendowed with that vital attitude of scepticism. I well remember being taught as a young accountant that scepticism, informed by realism, was the correct attitude of mind, particularly when assessing expected out-turns.
It is the job of a head of finance to examine all estimates with that scepticism well to the fore - this is never popular, but that's the way it has to be.
Second, the finance function was not integrated into the top team - the head of finance was not part of the senior management team, so it in turn had not reviewed the management accounts with any rigour. A good chief executive will never let finance dominate the senior management agenda, but it has to have its place - regularly and with enough time to allow in-depth consideration of the key issues.
Where the pattern of income or expense is irregular, it is particularly important to hold reviews at the right time and on a regular basis - but after allowing enough time for the finance function to be confident that all the financial outcomes are known.
Third, there was not enough firepower in the finance function. The routine processing was not always up to date because of insufficient staffing, and the department was too self-contained to be fully in the picture as events unfolded.
The chief executive had been right all along - there had been something wrong in the finance function and he would not have had such a nasty surprise if he had sought advice earlier, when he first had misgivings.
- The finance function needs to be in close enough contact with the business unit to be aware of any problems
- It also needs to be integrated into the senior management team
- It needs to have enough firepower and sufficient staffing.