The Four Pillars of Finance: A Structure to Drive Higher Profits
Updated: 4 days ago
The finance team should be a strategic function.
It must be a function that consistently adds measurable value to your business.
Sadly, small businesses can often limit themselves by an overreliance on bookkeepers and a record keeping mindset.
While it is critically important to have accurate financials, this singular focus puts far too much emphasis on the past with little time spent analyzing what is ahead.
It is hard to see where you are going when you are looking out of the rear-view mirror.
Implementing a structured framework for your finance organization will help to strike a balance between the necessary financial reporting with the forward-looking, strategic aspect of finance.
With the right processes, tools, and development, this structure can be applied to companies of any size.
What Should the Finance Function be Doing to Create Measurable Value for Your Business
Let us start with what is meant by ‘measurable value’.
This refers to the return you can expect from investing in your finance resources, or to put it another way, the ROI or return on investment.
If finance, or any other function for that matter, does not generate a return for your business, it is a drain on your valuable resources. Each functional area within a business should be able to measure the value their collective input generates.
The return, or value, generated by the finance function can take several different forms. Some examples include:
Pricing – Is your business capturing the full value provided to your customers in pricing? What margin expansion opportunities exist?
Efficiency & Cost Reduction – Where is there opportunity to take waste out of the process and where can targeted investment help drive additional efficiency resulting in margin expansion?
Working Capital
Accounts Receivable – How are your customers currently paying versus stated payment terms? Where is there an opportunity to improve on existing terms
Inventory – How is your inventory being managed? Where do you have excess and obsolete material that is a drain on your cash-cycle? Where are you facing part shortages, which are negatively impacting shipments and on-time delivery?
Accounts Payable – How are you currently paying your vendors and where is there room to extend terms or to seek discounts for early payment?
Capital Expenditures (CAPEX) – How are you planning future capital expenditures and what is your process for assessing the opportunities? How will these projects be funded and what is the expected return on investment?
Capital Structure – How will your business be funded both in the short term and the longer term? What financing options do you have and what is the optimal capital structure for your business?
New Business Development – What opportunities exist to win new business, add product lines, or to expand into new geographies? What investment is needed and how can this be funded?
These examples include a mix of revenue generating items (pricing, new business development, CAPEX), margin improvement measures (efficiency & cost reduction, CAPEX), and other cash-flow generation actions (working capital, capital structure).
Your finance team should be leading your business in identifying, assessing, and implementing actions that generate measurable returns.
Limiting Factors – What Can Prevent Finance Teams from Realizing Full Value
So, what can derail your finance team from delivering sustainable value?
Processes - Key processes are either missing or outdated, which leads to tasks being missed, delayed, or not understood across the broader team
Systems and Tools – Systems are not integrated, are approaching end-of-life, or are very manual
Team Engagement and Development – The in-house team does not have the necessary skillset to lead change or does not have the access to development opportunities
You can address these limiting factors by implementing a structured approach to your finance functional strategy. An outsourced Fractional CFO can lead you through this transformation.
Let's take a look.
The 4 Pillars – An Overview
Companies vary by size, complexity, and ownership structure.
As a result, there will be differences in the resources allocated to the finance function. However, regardless of the size of your business, you can still take a structured approach to elevate your strategy.
The Four Pillars of Finance.
The four pillars your finance function must have include:
Financial Reporting
Internal Controls
Financial Planning & Analysis
Treasury Management
Individually, each area is not sufficient to support your business.
Each pillar will only remain standing if built upon a solid foundation consisting of strong processes, integrated systems, and an engaged and developed team.
Collectively, these four pillars will support the strategy and decision-making process required to take your business to the next level.
Financial Reporting – An Emphasis on Timeliness and Accuracy
Financial Reporting is the pillar of finance that most, if not all, small businesses will have in place in some manner.
This includes the accounting processes commonly referred to as record-to-report (R2R), which covers most aspects of record keeping and accounting.
The outputs of the R2R process are the three financial statements:
The Income Statement (the name is used interchangeably with P&L, or Profit & Loss)
The Balance Sheet
The Statement of Cash Flow
Collectively, these statements provide a snapshot of how the business has performed. However, the three financial statements alone are not sufficient to help run your business.
The preparation of these statements, in line with GAAP (generally accepted accounting principles), is intended for external stakeholders such as banks, other lenders, and auditors.
Your finance team should focus on providing internal management reporting to support your leadership team that provides additional layers of detail tailored to the functional area in question.
To do this, the account structure in the financial system will need to be set up to support this level of analysis.
The information and reporting generated as part of the R2R process will be the foundation for analysis performed in the other functional pillars. As such, it is imperative that that information is recorded and reported in both an accurate and timely manner.
There should be one source of the truth for all financial and business analysis. That is, the data used in the analysis of your business should be maintained centrally so that the entire team is referring to common datasets when reviewing the performance of the business, or by functional area.
Process improvements for the Financial Reporting pillar should focus on improving accuracy, timeliness, and accessibility.
Internal Controls – More than Just a Checklist
The widely publicized financial frauds and internal controls failures of the early 2000s (including Enron and WorldCom) precipitated the introduction of more stringent internal controls frameworks.
Following the passing of the Sarbanes-Oxley act in 2002, publicly traded companies were required to implement internal controls structure with the aim of protecting investors and other stakeholders from fraudulent activities.
Structured internal control frameworks are no longer only found in larger publicly trade organizations, instead, such controls are commonplace in companies of all sizes.
Such controls are typically reviewed as part of annual financial audits, but can, and should be visited and reviewed more frequently.
Effective internal controls go beyond having a checklist, these are controls to ensure the accuracy of data, to protect your company’s assets, and protect against unintentional errors.
Process improvements for the Internal Controls pillar should focus on developing an accessible internal control framework, educating the team on the importance of internal controls, and implementing the structure across the entire organization.
Financial Planning & Analysis – A Compass for Your Business
Financial statements alone are not enough to run your business effectively.
Your business needs to develop and review appropriate metrics to assess current and past performance, while implementing a forecasting and strategy process to plan for the future.
The method of communication, and the types of insights provided, should be tailored for specific audiences. The users of the data should not be expected to wade through financial statements.
Financial Planning & Analysis deals with Full-Cycle Business Planning, that is it goes beyond looking at the current year’s budget and beyond the simple preparation of financial statements.
The planning cycle should go beyond the current calendar or fiscal year
The forecasting should be dynamic and include multiple scenarios
The analysis should be focused on providing insights rather than simple variance analysis
The process should be owned by the finance team but requires collaboration and input from all functional areas.
Process improvements for the Financial Planning & Analysis pillar should focus on identifying whether a current framework exists before reviewing the full cycle, which should include longer-term strategic planning, annual budgeting, variance analysis and data visualization, and periodic rolling forecasts.
Additional consideration should be given to risk mitigation and scenario planning along with capital expenditure (CAPEX) planning. You must prepare for the good and challenging times.
Treasury Management – Both a Short-Term and Long-Term View
Your business is not sustainable without a long-term financing plan. This is where treasury management comes into play.
Treasury management needs to include more than just the monthly bank reconciliation your bookkeeper provides.
Knowing your current cash position is important but understanding your future availability and overall liquidity is even more critical.
How will the business be funded in the current operating cycle and how does this change under different forecasting scenarios?
How will the business be funded in the longer term?
Is operating cash flow sufficient to fund future growth and investment, or will additional financing be necessary?
How can current liquidity be improved through changes in working capital management?
How can future liquidity prospects be improved through margin improvement initiatives?
Process improvements for Treasury Management should begin with implementing a thirteen-week rolling cash-flow forecast if one does not already exist.
Following this, a review should take place to see how much cash can be relieved through actions to improve working capital.
A full assessment of the capital structure of the business, and identifying the optimal capital structure, should be included as part of the ongoing financial planning process.
Now, Let’s Get Going!
Let’s briefly recap what we have discussed:
Implementing a structured framework for your finance organization will help to strike a balance between the necessary financial reporting with the forward-looking strategic aspect of finance
Financial Reporting shows you where you are and where you have been
Internal Controls provide confidence in your data
Financial Planning & Analysis provides your business insight and direction
Treasury Management ensures you have the funding to meet your growth objectives
All tied together - where you've been, where you're going, and how it will be funded.
If your business has growth aspirations, you need the added expertise that comes with adding a CFO. A Fractional CFO offers you the flexibility to scale this added skillset to match your business growth.
Enter your email address in the box below to subscribe to Your Weekly CFO newsletter. Each Saturday morning, you'll receive insights and tips to challenge your preconceptions of finance.
Please click here to schedule a free consultation if you would like to discuss how I can support you and your business.
About Colin Murray
Colin is an experienced finance executive with over fifteen years of diversified experiences for companies spanning multiple industry segments and ownership structures. Colin has built a career on transforming finance teams into business partnering organizations with a focus on continuous improvement.
Prior to founding Your Weekly CFO, Colin was the CFO of a private-equity backed manufacturer. Previous roles including heading finance for multi-national business units of public companies.
Colin has bachelors degree in finance from Miami University and an MBA from The University of North Carolina a Chapel Hill.
About Your Weekly CFO
Your Weekly CFO is a boutique CFO Advisory Services Firm specializing in Finance Performance Improvement (FPI). FPI allows clients to extract maximum value from their existing business while increasing projected returns on future business through strategy alignment, and people and resource development