Has Your Finance Function Kept Up With the Business?
The short answer: a finance function grows through four stages — keeping records, reporting, forecasting and deciding — and it only moves up when someone decides to change it. Score yourself on the ten questions below to see which stage you’re at, then compare it with where a business of your size should be.
The short version
| Stage | What it looks like | Right for |
|---|---|---|
| 1. Keeping records | Books up to date, VAT on time, decisions made from the bank balance | Under about £1M |
| 2. Reporting | Monthly management accounts showing what happened last month | £1M to £3M |
| 3. Forecasting | Budget vs actuals monthly, a rolling cash forecast, margin by line | £3M to £10M |
| 4. Deciding | Finance in the room before decisions, spending controls, scalable systems | Heading past £10M |
One stage behind your size is a project to plan. Two behind usually shows up first as a cash problem nobody saw coming.
The business has probably doubled since anyone last looked properly at how the finance side is set up. There are more people, more customers, maybe a second office or a first overseas contract. Meanwhile the finance function is the same bookkeeper, the same Xero file, and the same spreadsheet that gets rebuilt from scratch whenever someone asks how the year is going.
A finance function doesn’t grow on its own. It grows when somebody decides to change it, and in a busy business that decision usually gets made late, often straight after a cash scare. This is a way of making it early.
The four stages of a finance function
The stages don’t line up neatly with revenue, which is exactly why it’s worth scoring. I come across plenty of £6M businesses running a finance function that was built for £1M.
Stage 1: Keeping records. The bookkeeping is up to date, VAT goes in on time and the year-end accounts get done. Decisions are made by looking at the bank balance. Under about £1M that’s fine. You’ve outgrown it when you start asking questions the books can’t answer, such as which clients actually make you money.
Stage 2: Reporting. Monthly management accounts arrive, with a P&L, a balance sheet and perhaps a handful of KPIs. You can see what happened last month. The weakness is that everything looks backwards, and at this stage the accounts often land five or six weeks after month end, by which time you’ve already made the next month’s decisions without them. Between £1M and £3M this is where you should be, and a good controller is usually the person who gets you here and keeps you here.
Stage 3: Forecasting. You’re looking ahead as well as back. There’s a budget, actuals are compared with it every month, and a rolling cashflow forecast tells you roughly what the bank will look like in three months’ time. You know your margin by product, service or client rather than just overall. From about £3M, this is the stage you want. The sign it’s working is that you’ve seen a cash squeeze coming and dealt with it before it arrived.
Stage 4: Deciding. Finance is in the room before decisions are made, not afterwards. A new hire, a price rise or a new market comes with a proper numbers case, including what happens if it goes badly. Spending controls mean you’re no longer approving every invoice yourself, and the systems can take more volume without the finance team growing at the same rate. A business heading past £10M needs this, and it’s what investors and buyers will assume you already have.
The stage you’re at matters less than the gap between your stage and your size.
The finance function scorecard: ten questions
Score each one 0 if the answer is no, 1 if it’s partly true or only happens some months, and 2 if it’s yes, reliably, without you having to chase it.
- Do your management accounts arrive within ten working days of month end?
- Do you trust them enough that nobody reworks the numbers in a separate spreadsheet afterwards?
- Do you know your gross margin by product, service or client, and not only for the business as a whole?
- Is there a cashflow forecast looking at least thirteen weeks ahead, which someone updates at least monthly?
- Could you say today, within a sensible range, what will be in the bank at the end of next quarter?
- Is there a budget for this year that actuals are compared against every month?
- Can someone other than you approve spending, within limits you’ve set?
- Is there a named person whose job includes tracking debtor days and chasing late payers?
- Could your finance systems handle twice today’s volume of invoices and transactions without an extra person?
- When you make a big decision, is there a financial case in front of you before you commit?
What your score means
| Score | Stage |
|---|---|
| 0 to 6 | Stage 1, keeping records |
| 7 to 11 | Stage 2, reporting |
| 12 to 16 | Stage 3, forecasting |
| 17 to 20 | Stage 4, deciding |
Now set that against your revenue. Under £1M, Stage 1 is fine and Stage 2 puts you ahead. From £1M to £3M you want Stage 2 and to be moving towards Stage 3. Between £3M and £10M you want to be at Stage 3, and if you’re heading past £10M you want Stage 4.
If you’re one stage behind, you’ve got a project to plan. If you’re two behind, the business is making bigger decisions than its numbers can support, and that tends to show up first as a cash problem nobody saw coming.
We worked with a games and puzzles manufacturer whose finance team couldn’t keep pace with the opportunity in front of it. One of the first jobs was restructuring that team and hiring a qualified controller. The debt financing that let them take on their first £1M client was built on top of that, and the business went from £400K to £20M.
Where the scoring goes wrong
The first mistake is scoring the forecast you’ve got rather than the one you use. A cashflow forecast built in January and not opened since scores 0 on question 4, however good it looked at the time.
The second is buying a dashboard to get to Stage 4 while the monthly accounts still need fixing by hand. I see this a fair amount, and all the software does is show you the wrong numbers more attractively. (ICAEW’s guidance on finance transformation is a sensible place to start before buying tools.)
The third is being the control yourself. If question 7 is a 0 because everything comes to you for sign-off, the rest of your score is being propped up by how hard you work, and that lasts until the first time you take a fortnight off.
Where are you, and where should you be?
It works best in this order:
- Score the ten questions on your own, without asking anyone.
- Ask whoever runs your finance to score them separately. Anywhere you’re two points apart is worth a conversation on Monday.
- Find your stage and compare it with where you should be for your revenue.
- Take your lowest-scoring question and decide who will fix it, and by when. Just that one for now.
The finance function scorecard spreadsheet
Paid subscribers to The Scaling CFO get Toolkit 01, the scorecard as a working spreadsheet. It does the maths, puts your answers side by side with your finance lead’s, and turns your lowest scores into an action plan with a first step for each. Subscribe to The Scaling CFO.
If your score came in below where it should be, closing that gap is exactly the work our CFOs take on. WrightCFO is a practice of fractional CFOs: experienced finance people who work alongside you for a few days a month, get your monthly numbers in on time and trusted, and build the forecasting and controls that come next. Sometimes that starts with helping you hire the right controller. If that’s useful, book a 30-minute call with me.
— Sophie
Frequently asked questions
What are the stages of a finance function?
A common way to describe them is four stages: keeping records (bookkeeping and compliance), reporting (monthly management accounts), forecasting (budgets, cash forecasts and margin by line) and deciding (finance involved before decisions, with controls and scalable systems).
How do I know if my finance function has kept up with my business?
Compare its stage with your revenue. Roughly, £1M to £3M businesses need reliable monthly reporting, £3M to £10M businesses need forecasting, and businesses heading past £10M need finance involved in decisions. Being two stages behind is a warning sign.
How quickly should management accounts be produced?
Within about ten working days of month end. Accounts that arrive five or six weeks later describe decisions you have already made without them.
Who should run the finance function in a growing business?
Typically a bookkeeper under £1M, a financial controller from around £1M to £3M, and a controller supported by a fractional CFO from around £3M, with a full-time CFO when the strategic workload becomes daily.
Should I buy a finance dashboard?
Only once the underlying monthly numbers are reliable. A dashboard built on accounts that are corrected by hand simply shows the wrong numbers more attractively.
This article was first published in The Scaling CFO, Sophie Wright’s fortnightly newsletter for founders between £1M and £20M. Subscribe free. Related reading: The two clocks every scaling business runs on.
Sophie Wright is the founder of WrightCFO, a UK fractional CFO practice. WrightCFO provides fractional (part-time) Chief Financial Officers to founder-led and private equity-backed businesses, typically between £1M and £20M in revenue, scaling towards and beyond £10M. The practice specialises in cashflow forecasting, margin and pricing, investor-ready reporting, post-acquisition integration and exit readiness, across the technology, creative, media, professional services and not-for-profit sectors. WrightCFO works alongside clients’ existing accountants rather than replacing them.
