by Real Business - Thursday, 30th August 2007

Former stockbroker Johnnie Boden started his mail-order clothes company in 1991. For the first three years, the business was in permanent crisis and ran up large losses.

“We kept on running out of cash,” says Boden. “Although the concept was strong, I had no decent business plan and I misjudged the cost of stockholding and customer recruitment. It wasn’t a swanky start-up; I was growing the business from virtually nothing. As a result, we were seriously under-capitalised. We had £300,000, but we needed to more than double that.”

Financial controls were limited to the basic information provided by a part-time bookkeeper, a semi-qualified accountant who processed invoices. It was only when turnover hit £2m and Boden started negotiations to raise money from outside backers that one of the investors insisted that he hire a full-time, fully qualified FD.

Despite a textbook hiring operation using a headhunter, Boden botched the first attempt. “We took on someone who wasn’t really suited.” The new FD soon became an ex-FD. In 1995, at the second attempt, Boden found Julian Granville. He was a friend of a friend with an excellent CV, who has since been promoted to managing director. Boden is now on the hunt for a replacement FD.

Granville says it wasn’t just a case of swanning in and doing basic things right. “My task was to stop the business going bankrupt. But there was no fat to trim. So I renegotiated terms with suppliers, changed banks and kept the new bank happy with weekly reports of key performance indicators.”

Granville gave the company a more professional appearance and allowed Boden to see precisely how his business was operating. The £12m-turnover company is now one of the fastest-growing companies in the UK.

Boden found himself facing a problem that confronts many small companies at some stage. At first the business is too frail to bear the cost of an FD. But without one, the business won’t grow so fast. And, as it expands, it may even become unmanageable.

So when is the right time to hire an FD? “There are no firm size thresholds, but I don’t know of many companies with a turnover of £3m plus without one,” says Patrick Dunne, director at 3i, Europe’s largest venture capital outfit. “It depends on your ambitions, knowledge and skills, and what you want one for.”

If all you want is a steady small business, then you can make do with a bookkeeper. And there are halfway measures, such as having a part-time FD or appointing a non-executive director with the right skills. Or you could rely on your accountant.

But that may not be enough. “An FD brings technical skills, accountancy, treasury, corporate husbandry and, importantly, a strategic viewpoint,” says Dunne.

His message is clear: if you have any serious ambitions for your company, get an FD - as soon as possible. “If you want really tight financial controls, so you know exactly where you are and where you are going, then you need a finance director right now,” says Dunne. “And if you want an FD to build systems and infrastructure for growth, get one before you need one, which again probably means now.”

This may be a slight exaggeration. If you are going to float your company or raise a large loan, the FD will have to be in place some months beforehand. Given that a good FD can be hard to find, you should leave another six to nine months for recruitment. In all, you’re looking at a good year before your planned activity.

Having made up your mind to recruit, your troubles are just beginning. Technical proficiency is hard for a non-expert to judge. “Finance skills are not a homogenous lump. You can’t buy them by the yard. You need to be aware of what you need,” says Dunne.

To raise venture capital, you need a chartered accountant. If you want to float, previous corporate experience is essential. If you aren’t sure, get someone - your accountant, bank or backers - to help you. “The biggest blunder is trying to do it yourself if you don’t have the skills,” says Dunne.

Then there are the thorny issues of personal and cultural match. “Accountants tend to be risk-averse. You have to find an FD who you can get on with and who isn’t so risk-averse that they hold back the business,” warns Boden. Many FDs may not feel comfortable in the all-hands-to-the-pump ethos of a young company. “At the start, I spent a lot of time answering the phones, packing boxes and generally getting my hands dirty. Not everyone would be prepared to do that,” says Granville.

Last but not least is the question of salary. There’s a shortage of good finance directors at the moment. Salaries range from £25k to £2m*, depending on area, size of company and previous experience. But, given the importance of the FD and opportunities for mischief, you’ll probably want to tie them in and incentivise them with some kind of equity arrangement.

* source: michael page 1998 salary survey.

To FD or not to FD?

Bookkeeper
Makes sense when you have a very small company and/or you are strapped for cash. They should keep accurate records of day-to-day incomings and outgoings, be able to deal with accounts receivable, pay bills, wages and bank proceeds. Increasingly computer packages can be used for much of this work. They should also be able to help your accountant prepare year-end accounts.

Accounts manager
Should be able to do all the above, but adds a degree of sophistication to proceedings. They should also be able to choose the right software package, generate weekly and monthly financial reports and keep cash flow in basic order. However, they may lack a strategic dimension.

Finance director
You will almost certainly need an FD to reassure significant outside investors. This could be very early on, when you grow beyond your ability to understand everything that’s going in the company, or when you are setting up a long-term growth strategy.

An FD will control the present by budgeting and providing cash flow management and management accounts to assess the returns on investments in various pieces of equipment. He or she should also look to the future by helping to manage growth, negotiate finance, ensure maximum tax efficiency, consider mergers and acquisitions, and deal with financial reporting, planning, issues of corporate governance and other legislation. “If you want to assess the performance of your FD, consider benchmarking your company’s performance on a series of indicators against that of competitors,” suggests Robin Vaughn, secretary to the Board for Chartered Accountants in Business.

Contacts
Johnnie Boden and Julian Granville, Bodens, tel: 0181-453 1535. Patrick Dunne, 3I, tel: 0171-928 3131.

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