Financial governance is key

Good governance is vital for a board to be effective, and strong financial governance especially is one of the reasons successful companies do so well. As my good friend and governance expert Bernadette Young said recently, “having a strong system of governance is not easy but it is a creator of resilient businesses not a burden that we should seek to do away with”.

For a business to succeed and grow the board must have a strong grip on the finances. If the board doesn’t understand how the business is performing financially it cannot make the right decisions that make the business prosper. The board needs to understand the historic financial results to date and have forward looking information to help them plan, and it should instil a culture of financial responsibility and checks and balances across the business.

Robust internal controls and a culture of accountability and ethics ensure that the financial information is accurate, and the risks of fraud and corruption are minimised. There must be clear roles and responsibilities for everyone to prevent gaps and ensure everyone understands how they contribute to financial success.

Finance plans should support the strategic plan and the financial information that the board receives should be clear, concise, and timely, looking at performance to date against the plan and expected performance in the future.

Effective financial risk management involves strategies for risk mitigation, ensuring there is sufficient capital and liquidity and plans for managing failure. The board should interrogate and challenge the financial information, rather than accepting it at face value. And a system of continuous improvement is needed to review and assess the effectiveness of financial systems and processes.

During my 30+ years in business I have come across many companies with poor financial governance that lurch from one cashflow crisis to another until they finally stop trading. The distress such businesses create for customers, staff and suppliers is significant and can be avoided if someone on the board has some understanding of financial governance.

One of the reasons we turned around MA Group from a loss-making business in 2009 to a profitable and cash-generative group of companies was our strong understanding of financial governance and the role that everyone in the business plays. E.g. the claims handlers making the right notes on claim files helped progress a claim and made sure we got paid, the account managers understood the significance of overdue client debt and helped get it paid, and the supplier performance managers managed supplier contracts to protect the financial interests of the business. And of course, the finance team understood compliance and how to prepare the right information for board.

If you would like to know more about financial governance and how to implement it, please get in touch.