The modern FD’s guide to funding and investing

The business environment for small and medium-sized enterprises ("SMEs") has completely changed since the financial crisis.

One consequence is that SMEs are having to think far more strategically as they plan for business growth and consider the different funding options at their disposal – conventional finance may not be accessible or suitable, while new sources of funding are more widely available.

The role of the finance director - within SMEs and larger companies - has changed in recent times. More than ever, the modern FD is the key figure in ensuring the business is ready for future growth.

1. The changing nature of the finance director’s role

There was a time when finance directors were widely perceived as pure accountants. No longer: while finance directors still have a crucial role to play to ensure the business’s accounts stand up to examination, they must also work much more strategically, often hand-in-hand with the chief executive to develop corporate strategy.

The result of this shift is that finance directors now need a much broader skill set than in the past. While they must still be excellent finance professionals, they also need to evolve their capabilities in areas such as:

Commercial perspective
Relationship building and communication
Strategic planning
Conflict resolution
Project management

Making this leap will not be easy, as finance directors continue to face a heavy workload from the traditional areas of the job. However, those who are able to adapt to the new environment are in a strong position to play a crucial role in driving their businesses forward.

2. Funding is crucial

The more risk-averse approach of the banking sector to SME finance following the banking crisis has changed the way many growing companies think about funding.

This is a central challenge for finance directors today. They must ensure that the business not only has the cash flow and operating capital it requires for day-to-day operations, but that it also has funding in place to underpin its ambitions for growth. This is an area where chief executives are looking for their finance executives to take the lead.

With the UK economy now in recovery mode and the uncertainties of the general election overcome, businesses are thinking hard about how to exploit new opportunities. Yet funding, often so crucial for expansion, continues to be a headache.

To illustrate this point, the Close Brothers Business Barometer shows that 45.8% of SMEs do not plan to seek funding for business investment within the next year.

While some of this reluctance to borrow may reflect continued uncertainties about the future, it’s also clear that many SMEs are not confident about the ability of traditional banks to meet their needs. No wonder: 49% of CEOs have been declined access to finance by a bank in the last 6 months.

3. Late payments continue to bite

To make matters worse, many finance directors are struggling with a late payments problem that continues to deteriorate. While larger companies now have fewer excuses to pay their bills late, with the broader economic outlook improving, more of them are doing just that.

Late payments are now a problem for half of all UK SMEs according to the latest Close Brothers Business Barometer. This is a serious issue for finance directors. The late payment of bills poses immediate difficulties for finance departments attempting to manage the business’s cash flow. And where resources are diverted from elsewhere, they are not available for investment in projects aimed at delivering profitable future growth.

4. Invoice finance provides a solution

For many finance directors, invoice finance provides a potential solution to the concerns about conventional funding and late payments. It is a way to unlock up to 90% of value tied up in the company’s unpaid bills so as to provide finance that can be used to ease cash flow pressures today, freeing up funding for tomorrow’s growth strategies.

Invoice finance is not a new concept, but both awareness of its advantages and take-up from SMEs has increased notably in recent times as funding from the banks has become more scarce.

5. Ready for the next challenge

Modern finance directors are rethinking their priorities. In their new roles as strategic business partners to the CEO and other executives, they’re constantly assessing how to ensure their businesses are capable of exploiting the opportunities that lie ahead, while also protecting the company from the risk of setbacks and disappointments.

In order to achieve that balance, finance directors must secure a sound funding foundation for their businesses. The first challenge is to ensure that operational cash flows are sufficient for the business to meet its responsibilities. But finance directors also know they need resources for investment in the future.

These demands must be seen against a backdrop of a banking sector where funding for SMEs has never come close to returning to the levels seen before the financial crisis and a trading environment in which late payments continue to challenge many companies.

Within this context, it’s not surprising that many FDs are increasingly turning to differing sources of funding, such as invoice finance, in order to manage risk and achieve their aspirations.