Value Added by Finance

CAs are Cost Centers and MBAs are Profit Center.

This is a discussion which has been going on for long. I am not going to share statistics on the values added by CAs and MBAs and compare with. Instead, I will share insights into what values a Finance functions adds to organization.

There are few models around this, but most a very subtle. And that is the reason why many organizations (mainly non MNCs) do not believe much in adding resources for Finance & Accounts fuction. Eg. In a medium sized company managed & run by its founder, any addition in Finance & accounts is a rare event. The functions of Finance & accounts in such organizations are mainly focused on payment to vendors, bank balances, financial reporting for Tax purposes, and Excise / VAT. Other than Vendor payments, Documentation part of the Taxation is something which all dislike. Let’s face it, if you are an entrepreneur and start a business, get it running and start earning profit. Govt. wants to take part of that profit and also add further cost to you by requiring you to employee people. Paying Tax is not so much of a concern (since they also understand the benefit they get in terms of Infrastructure, etc.) but the complexity of Tax structures and due to this complexity, further costs gets added, that bothers such entrepreneurs. It bothers me as well.

For MNCs, it’s both Compliance and Control. Since MNCs are professionally managed, the person whose money is invested is not directly looking over the business activities. Hence, controls form an important part in MNC.

So, that’s 3 fields where accountants add value.

- Transactional & Operational (ie. Payments, Receipts, cash/bank/treasury management, etc.)

- Compliances (ie. Statutory Financial reporting, Taxes)

- Controls (for confidence in the financial reports of the organization)

Most of us, focus on first two, or at most three. Either we are in Financial Management (treasury, forex, heding, cash management, etc), or Compliances (Financial reporting as per companies act, Excise/ST/VAT returns, litigations, etc), or Controls (Audits).

There are two more which are not yet focused, and I think that is where the debate goes in favor of MBAs instead of CAs.

Analysis

Understanding what financials mean, not from an investor’s point of view, but for business’s own consumption. Providing business insights. Having worked in large to small organizations, I know this for sure, most of the “Value Adding” functions, such as Production, QA, Sales, R&D, does not have the slightest of the idea where the business is going. There are only a handful of elite people, mostly at a very senior level, who understand the impacts on business as a whole. Other than that, even the functional heads have very little idea. They stay focused in adding value in their own domain. The overall picture and information are not available to them. This is where Finance adds value. Finance has the best measurement tool for business performance – Financials. And also knows it inside and out. But that is where we stop. Analysis goes one step further. Analysis means identifying trends, exceptions or noteable items in financials, and converting them in useful information that business can digest. And not just digest but take action over it.

There are organizations where Finance functions effectively execute this. But such organizations are rare.

Strategy

Analysis is more of a post mortem activity. Strategy on the other hand is preventing mortem itself. Strategy here is the overall Business strategy. It can be from a high level organizational structural changes (Eg. Capacity Expansion, Mergers, Acquisitions, Discontinuing Business, etc.) to New Product, entering new customer region, setting up of new Manufacturing facility, etc. Key theme here is “Change”. Finance function should drive for change. On the contrary, many finance functions love to stick to Policies and Processes, which gives the opposite impression.

This is more to do with individuals, but there happens to be more opportunity for people in Finance function than others, the value addition as Leadership.

Being in understanding of the business since beginning, many Finance leaders go on to become Business Leaders. Leadership is an important part even in a small organization. There is a lot of literation in HBR and other portals on Leadership, so I will not write much about it here. You can google it. I will add just one comment to all those; those who are coming from Non-Finance background, at a later stage in their life when they are knocking on the doors of leadership, want to get knowledge on Finance. There are programs by leading B-Schools for such folks. And it’s important. The business is being run for earning money, and who is better to know about money than Finance.

The writing of this article began as a research for my own, in search for identification of value additions that a Finance function does for the Organization. This is my first article on CAClubIndia. Hope you have enjoyed it. I would be super thrilled to have your feedback / comments.