The Finance Function: Looking Back And Looking Forward
High growth companies need to have a strong finance function. You can’t drive a car (or a plane) without some instrumentation. Most importantly, you need to know when you are going to run out of gas (or electricity).
The mission critical things that must be done in the finance function are mostly accounting related functions; pay bills, make payroll, keep track of expenses, maintain the books and records of the company. These are “must dos” and you need a person who has an accounting background to do most of them. But these are all “looking back” functions in the way I think about the finance function.
What is even more important in a high growth situation is the ability to look forward, to project, and to make sure that the company doesn’t run out of money.
In order to look forward, you need to know where you are, and that requires a solid baseline derived from looking back. So one feeds the other. But they are different.
Looking forward requires modeling and it requires the ability to anticipate. An example of this is “we are going to get a big order from a new customer next month, let’s put that revenue into the model.” But if you don’t anticipate that it may take up to ninety (or more) days to collect that revenue, then you have messed up the modeling and that is the sort of rookie error that could lead to an unexpected cash crisis.
There are many reasons why a company needs a forward looking projection to run the business but avoiding the unexpected cash crisis is number on on that list in my view.
In my experience, the people who are strong at the looking back function are often not strong at the looking forward function. You may need different people to do these roles. In a large company, there are entirely different departments that do these functions. There is an accounting department and there is a financial planning department (often called FP&A).
If you are a small company and have limited resources, you will often attempt to get both the look back and the look forward from the same person. If you aren’t getting what you want in doing that, don’t be surprised. I would rather see a small company outsource the accounting work and staff for the planning/modeling work. Accounting is a bit of a commodity, many people can do it well. Seeing the future from around the corner is most definitely not commodity and if you have someone who can do that well, hold on to them, pay them well, and make sure they are happy and rewarded in the job.
Because looking forward is really where it is at in the finance function at the end of the day. That’s where the good stuff and the bad stuff mostly happen. And when it is done well, it is a thing of beauty.