Nowadays the financial director is expected to have a broad grasp of the entire business and control costs, manage risk, set and monitor KPI’s and generally play a full role in the executive management team.
This co-pilot role means a broader level of skills are also important, such as communication within the business whether it be with fellow directors or external executives during negotiations of a merger or acquisition.
However, with power comes great responsibility and this means one’s fiduciary and legal obligations also extend.
Let’s run through some of core duties:
- control costs and overheads
- manage risk and maintain liquidity
- develop and control the company’s annual operating budget
- ensure that all financial targets are met, and financial and statutory regulations complied with
- have an ongoing understanding of the current financial position of the business
- develop effective financial strategies
- explore tax mitigation strategies
- monitor and direct the implementation of business plans
- forecasts staff and capital requirements
- carry out all necessary actions to ensure that the company meets its financial and legal obligations
- monitor external contracts and services provided by suppliers to ensure that these are operating effectively and provide the best value to the company
- develop and maintain all necessary systems, policies and procedures to ensure effective and efficient financial management within the company
- direct and control finance staff to ensure that they are appropriately motivated and developed and so that they carry out their responsibilities to the required standard
The emergence of the more rounded FD is self-evident with over 55% of the FTSE 100 CEO’s coming from a CFO or FD background. You will also be viewed as the member of the board with responsibility for the financial well-being of the entire business, and as such your broader remits are extending across:
- providing financial advice and guidance to the company’s managers and staff to enable them to achieve their objectives.
- delivering financial analysis to assist the CEO on investment strategies
- researches economic trends and identifies revenue opportunities.
- contribute to the achievement of the company’s business objectives by providing advice and guidance on financial strategy.
A finance director will be a full board member and therefore subject to the duties and responsibilities that fall on board members.
These are defined in the UK Companies Act as: ‘to act within powers; to promote the success of the company and act in good faith; to exercise independent judgement; to exercise reasonable care skill and diligence; to avoid conflicts of interest (current and probable); not to accept benefits from third parties; and to declare personal interests in proposed transactions.’
A financial director’s legal obligations to Companies House include:
- financial filings
- changes to the articles of association, and some shareholder resolutions
- changes to directors or their details
- changes to the registered office address
- if the company has one, changes to the company secretary or their details (company secretaries are optional for private companies)
- any change to the company’s accounting reference date (i.e. year end)
- any issue of shares or changes to the company’s share structure
- if the company grants a mortgage or charge over an asset
A financial director’s role in a merger or acquisition.
You may be sharing a comparable role to the MD or CEO during a merger or acquisition and your central role will involve scrutinising the financials and driving the deal forward, both through strong negotiation and compromise.
Responsibility for evaluating the risk on both sides of the table will fall to you and your advice will be invaluable to your CEO as you’ll be expected to guide proceedings based on assessing current and future profitability by identifying growth opportunities or savings through merging duplicated assets. Particular attention should be paid to accurate financial reporting (again on both sides of the table) and asking (and answering) the hard questions such as:
- are revenues being correctly represented
- are all liability accruals being made to give a fair indication
- are all applicable taxes settled or considered
- are supplier and client relationships secure
During a merger or acquisition, a company’s CFO and FD will be central figures in the negotiations and their performance in the boardroom can influence whether the deal goes ahead or not.
Trading whilst insolvent.
It’s important as FD that you keep a close eye on day to day metrics so you can forecast troubled waters ahead. It’s all too easy to slip in to trading insolvent (normally with best intentions) but the risks are high and you may well find yourself on the wrong side of the law if this situation arises.
This occurs when a company can no longer make day to day payments for the continuation of its trade, or its assets are outweighed by its liabilities on the balance sheet.
It’s a serious issue and brings scrutiny upon the suitability of the individuals running the business and have they been acting responsibly.
What are consequences of trading whilst insolvent?
If evidence is found that directors could have shown more foresight, directors may find they become personally liable for the company’s debt to its creditors. There may be further consequences such as being disqualified as a director for a maximum of 15 years.
Once can expect an investigation by the liquidators and the directors involved will certainly come under an unwelcomed spotlight to determine if they have acted responsibly and took timely and appropriate action.
It’s vital that if a company is heading in this direction, the FD must make sure that all transactions are for the benefit of rectifying the situation. Obvious actions to avoid during this period include:
- extracting company monies to fund personal luxuries such as cars or holidays
- drawing a high salary when the company cannot afford it
- transferring assets from the insolvent company for free or for significantly less than valued in an attempt to exclude it from any future insolvency proceedings.
- paying creditors in preference to others
Fraud advice for financial directors.
Financial fraud is also evolving and the fraudsters are becoming ever more creative. As financial director you will be expected to initiate protocols and procedures to prevent this.
An example of one such fraud was an FD receiving instruction from an ‘employee’ that their bank details had changed, and could they be paid to a new account at the end of the month. The FD instructed his staff and the ‘employees’ wages were sent to his new account.
The alarm was only raised when the genuine employee asked where his salary was! It became clear that their email accounts had been hacked and funds diverted to a fraudsters account. Now it’s reasonable to expect the IT department may have prevented this, but even so, the FD should have had a procedure in place that eliminated the possibility of the request being successful. Such as a verification procedure.
The consequences? In this particular case, the FD was external to the main company and had to pay for the shortfall himself.
Just as important as being vigilant to financial crime from external sources, from an internal point of view, it will be down to the FD to determine any fraud being committed within the business.
Protection from legal action.
Understanding your responsibilities is crucial and you should not allow situations you are concerned about to develop further.
Call a board meeting as soon as you can, or at very least discuss the situation (and document it) with your MD of CEO.
If you are concerned that things are not as they should be, please get in touch and we can discreetly advise you on your position.
You should also consider directors liability insurance. Whilst it cannot protect you from legal action, it can, in certain circumstances, cover the costs of legal advice and potentially any damages awarded against you by a court.
At Lupton Fawcett we can offer you the best advice for your circumstances and you can call us on 0333 323 5292