THE CONTRIBUTION OF FINANCE MANAGERS TO FAMILY BUSINESS A SURVEY OF SMALL TO MEDIUM SIZED ENTERPRISES

Transcription

1 THE CONTRIBUTION OF FINANCE MANAGERS TO FAMILY BUSINESS A SURVEY OF SMALL TO MEDIUM SIZED ENTERPRISES Dr Bruce Gurd International Graduate School of Business, University of South Australia, Adelaide, Australia bruce.gurd@unisa.edu.au Dr Jill Thomas Adelaide Graduate School of Business, University of Adelaide, Adelaide, Australia jill.thomas@adelaide.edu.au

2 ABSTRACT This paper explores the role of the finance manager within the professionalised family business, based on a survey of practising finance managers in Australian small to medium sized (SME) family businesses. Family commitment to the business and the support of the CEO were found to be important to the success of the finance manager s role. Finance managers commented that they enjoyed relative freedom to use their expertise in the family business and they appreciated the speed at which decisions could be made; while lack of communication and lack of business planning were considered problematic for success in their roles. Some aspects of the finance manager s role were found to be more important in different industry types; for example, variance reporting was more important in manufacturing companies. Keywords: Family business, finance manager, professionalisation INTRODUCTION As a family firm increases in size and professionalism it is likely to create a position for a finance manager within its management team. In part, this will be driven by the need for the family owned small to medium enterprise (SME) to source finance and maintain adequate cash flow (Cheatham, Dunn, Cheatham, 1993). Parker (2001: 445) suggests further research is needed about the positions occupied, levels of responsibility and scope of work undertaken by accountants in organizations. As the family firm is an important organizational form, it is worthwhile exploring how accountants will operate within these businesses. While a variety of terms are used for accounting roles, [including Accountant, Chief Finance Officer, and Finance and Administration Manager], in this paper the term finance manager is used to denote the most senior accounting person employed in the family business. BACKGROUND There is little published research in the family business literature as to the role of the accounting and finance specialist in the family firm. The entrepreneurship and small business literatures have focused on sources of finance rather than the contribution of skills of the finance professional. There is some evidence in the accounting literature on accounting skills and the SME, but it is more to do with how accounting firms can assist (eg Harper and Churchill, 1987), not how accountants within the family owned SMEs could best contribute to the firms professionalisation. Smith and Briggs (1999) describe the role of the accountant as action hero where the accountant is expected to be an enthusiastic part of the strategic decision-making team, not someone undertaking only routine tasks such as preparing accounts. While the finance manager 1

3 may welcome such changes in role, they may not be achievable in the family business as decision-making there requires a degree of involvement in the family s affairs that the family may not feel comfortable with. Indeed the family may find it more desirable to have a less qualified accountant who is satisfied with being a bean-counter in ensuring that the recording and summarising of transactions is done correctly, and who does not seek to intrude into the management of the business. The family business literature includes research on processes to ensure the recruitment and development of good family talent into the business (Aronoff, Astrachan and Ward, 1998; Ward 1987; Neubauer and Lank, 1998), and studies have looked at the need to recruit effective non-family managers when family talent is not available or when the business matures beyond the family s capacity to provide a supply of competent personnel (Lansberg, 1983; Ward, 1987). However, what might be required of those recruited as finance managers within these businesses have not been articulated. Gersick et al (1997) identify professionalisation of the family business as the formalisation stage of development highlighted by an increasing functional structure and key challenges including strategic planning, establishing systems and policies, and cash management. However, these challenges are for the business as a whole and the actual contribution a finance manager employed within the professionalised family business, can make to the resolution of these challenges is not clearly identified. Professionalisation is generally characterised by less dependence on the owner/founder, employment of more specialized managers, and the formation of an executive management team. A unique aspect of the professionalisation of the family business is that the recruitment of specialised managers heralds the time to integrate family resources with those of other professional managers. Non-family managers or outsider managers are sought and employed with the challenge being to integrate them into the family business culture (Dyer, 1989). 2

4 The current study extends that research which has focused on the external advisor, and the external accountant s role in SMEs and in part in family owned businesses, by exploring the roles of accounting professionals employed in financial management roles within the family business. This paper reports on three key research questions: (1) What is the role of the finance manager employed in the family business? (2) What are the barriers to and opportunities for the finance manager to make the best contribution to the family business? (3) What factors differentiate the role and attitudes of finance managers employed in family businesses from those of external accountants discussed in the literature RESEARCH DESIGN AND SAMPLE The sample for was drawn from finance managers employed in the family business membership category of Family Business Australia (FBA) to ensure as wide a cross section of industries as possible. A stratified sample of FBA members was chosen from every state except Queensland and a sampling plan proportional to the number of firms was used. A minimum of three firms was chosen from each state which resulted in a sample size of 103 family businesses. For convenience, it was decided to use a telephone survey. The Marketing Science Centre at the University of South Australia conducted the telephone survey as they have substantial experience in producing high quality research in this medium. Profile of the sample The focus of the survey was on family owned small to medium businesses (employing employees); 103 respondent firms met the definition of being more than 50% owned by the founding family or their descendents. Fifty six percent of the sample employed up to 20 staff, thirty-five percent employed staff and only eight percent employed between 1001 and 200 staff. There was a spread of industries with 33% manufacturing, 23% retail, 30% service and 14% wholesalers. Most firms showed significant growth in 3

5 sales with only 1% indicating no growth, 37% indicating growth of up to 10% of sales, and 62% indicating growth in excess of 10% over the last year. Only 17% of the firms sampled had only the first generation still working in the business but in 35% of the sample, the first generation retained some or all ownership. Thus, the majority of the sample were owned and managed by the second generation. This is consistent with the view that the bona fide family business is that which has undergone a transition from one generation to another (Moores and Mula, 1993). Of the CEOs, 88% of CEOs were male and 87% were family members. Forty percent of the firms did not have a formalised board of directors which met regularly. Of the finance managers sampled, 44% were family members suggesting that, for these specialised finance skills, these businesses needed to recruit from outside of the family. FINDINGS The Activities of the Finance Manager In describing their roles, finance managers in the sample indicated a range of functions for which they were primarily responsible confirming the suggestion from the earlier exploratory study (Thomas and Gurd, 2004) that they are indeed considerably multiskilled. The question asked the finance manager to identify who performed various functions for the firm. Routine accounting and administration functions such as accounts receivable, accounts payable and cash flow budgets are usually handled in house by the finance manager. The CEO or the finance manager handles liaising with banks and negotiating for loans but sometimes jointly. Strategic planning is done 29% by the CEO and 5% by external. So in more than one third of the cases the finance manage was not involved. When asked about the split of their duties, financial reporting emerged as a common responsibility, with a mean in the category of 21 to 30% of the finance managers time being spent on this activity. It is our view 4

6 that in organisations where the finance manager is spending more than 30% of their time on financial reporting, he or she is likely to be considered a bean counter rather than being given the opportunity to use their expertise the business more productively. Financial management and administration were seen as very important with the mode in the category of the 21 to 30% range but with the bias towards the lower end. Corporate management was the area where finance managers seemed to spend little time. This was consistent with the interviews in the qualitative research stage, where interviewees were concerned that they could make a greater contribution to strategic planning and corporate management than they were doing. The Role of the External Accountant As previously discussed, the role of the external accountant for the family business is recognised as very influential. Of the 103 respondents, 97 had an external accountant. Respondents were asked what those external accountants did for the family and/or the family business; the results are detailed in Table 1. Table 1 Roles of External Accountants Yes No Taxation returns 94 3 Audit Financial reports Family personal and accounting 92 4 While these results are generally not exceptional, the level of involvement of external accountant in preparing the financial reports of the business is much higher than might be expected given that in each case there was also a finance manager employed within the business. A subsequent similar question gained a lower response. We presume this suggests that external accountants are involved in the preparation of annual accounts to be used as an input to taxation and other statutory purposes while the monthly financials are more often prepared in-house. An open-ended question was also asked about finance managers interactions with the external accountant. The most common response was that the external accountant was a good source of advice, especially on new 5

7 projects or for business planning. Only one negative comment was received about the external accountant. but, in an earlier qualitative stage, the external accountant was perceived as a potential problem, because they sometimes reinforced the family s assumptions about the business instead of challenging or testing those assumptions. Finance managers seem most comfortable when the external accountant is mainly concentrating on taxation planning and personal family financial information, and in providing advice as requested as an objective observer. Business activities Finance managers were asked about the attitude of the business to various activities listed in Table 2. None of the practices received overwhelming priority although the feedback process of variance reporting was of least interest and the feed forward processes of strategic planning and setting budgets were of the highest importance. In relation to these activities, finance managers were then asked what role they played (See Table 2), on a scale of 1 to 5 with 5 representing highest importance. Table 2 Finance Managers Involvement in activities Activities Mean Std. Deviation Budget process Variance reporting Strategic planning Developing a vision Setting objectives Establishing performance measures It is not surprising that finance managers have the greatest involvement in what would be considered mainstream financial functions such as budgeting and variance reporting, and least involvement in matters such as developing a vision and strategic planning. Subsequent qualitative research suggested that this was the area where managers considered that they could make a greater contribution. One aspect of the strategic planning process is the setting of performance measures for the business. The respondents were asked how financial indicators were set in the business with most respondents indicating 6

8 that they were set by the CEO in conjunction with the finance manager (FM), but in 14% of cases by the CEO without consultation. Factors which assisted the finance manager in perform their responsibilities. The finance managers were asked how important a group of factors were in the family business environment to help them to perform their responsibilities as a finance manager effectively. In these questions 10 was the highest value and zero indicated that the factor was of no importance. The results are shown in Table 3. All of the observed means are greater than the theoretical mean; and statistically significant at less than 5%. Table 3 Factors assisting the finance manager perform their responsibilities. Factors Mean Std. Deviation Availability of back up finance Slow pace of business Flexibility of decision making Development opportunities Free reign to use your experience Support from the CEO Financial knowledge of the CEO Family commitment to the business All of these factors are positive and significant at 5% level. The most important two were support from the CEO and the family commitment to the business. Both of these relate to a positive environment in which the finance manager felt supported and the owners were positive to the business. The extent to which the manager felt he or she had a free reign or freedom to operate in the business was also important as they appreciated the flexibility of decision-making. The finance managers were then asked about what factors made their role more difficult (Table 4) Table 4 Factors hindering finance managers in performing their roles Factors Mean Std. Deviation Lack of financial knowledge of CEO Lack of appreciation by other managers of your role Lack of financial resources

9 Lack of staff resources Perception of privacy of financial information Lack of business planning Lack of communication An apparent lack of communication was the most significant factor inhibiting the finance manager s performance of their roles, followed by the lack of business planning. However there was not wide spread agreement about factors causing the most difficulty. The issue of privacy of financial information did not come out as a major issue as had been suggested in the exploratory stage interviews. Perhaps there are a small number of family firms that are concerned about secrecy and this fact has been over emphasised. The large standard deviations indicate considerable differences of opinion, even though all of these variables are statistically significant. DISCUSSION AND CONTRIBUTION TO PRACTICE Finance managers have a positive role in providing financial information and advice to family businesses. They are usually involved in the processing of financial information and preparing and analysing financial statements and, not surprisingly, the finance managers considered their roles to be important for the family business. As one respondent said: [we] control the financial decisions, [our] work is important to [the] success of [the] business. Several commented on the breadth of the role that was expected: It is important that (the finance managers) are a part of a team not just involved in finance, it s an integrated role ; I also contribute to product development. However, the role was generally not considered to be an autonomous one and was constrained by the family influence. Finance managers recognised that the family depended on the business for their livelihood and security, however they noted influence from the politics of family businesses: One needs to be aware of the dynamics of the family, THEY don't leave their problems at home ; The politics is harder than the job itself, in the family there are two sons versus two daughters so we also have a gender problem ; To be the only 8

10 outsider in a family context it is always a cautious path to tread ; It is very difficult in a family business - different view points, no common goal, and the split in generations is difficult ; You have other pressures that relate to keeping a family business together which may be non commercial. There is one area where they would like to contribute more strategic planning and management. Linked with this may be more involvement in setting the performance indicators for the business. It is possible that their perception that they can contribute in these areas may not be the family CEO s perception. More education in strategic management may be needed. Bodies in the family business area may be able to run development workshops on how to get more support in these areas from the finance managers. The two features that were highlighted to make their roles easier were the support from the CEO and the commitment of the family to the business. While the commitment of the family may simultaneously be advantageous and disadvantageous, finance managers believed that the commitment of the family working in the business gave the firm an energy beyond the publicly listed company or government instrumentality. They also enjoyed the freedom to make their decisions and use their skills. This suggests a high level of job satisfaction. While there were no standout problems identified for the finance managers in exercising their roles, lack of communication and lack of business planning rated the highest. These problems also emerged in the earlier qualitative phase of the study. The increased professionalism of family businesses may ameliorate these two problems. Accountants need to develop skills to handle the politics and tensions of family businesses. In the undergraduate education courses this could be included by the use of family businesses as case studies when studying strategy setting, budgeting or performance measurement systems. Particular attention to this in the post-tertiary education and in professional development would be helpful. 9

11 It appears that family business CEOs are both willing to ask for financial information and act on it. It is the other managers who are least willing to ask and act on financial information. Some family businesses may still not be willing to share financial information and may not have well developed management accounting systems that address the needs of the other managers. CONCLUSIONS Finance managers in family businesses have been under-researched. The external accountant plays a critical role in helping the family with taxation and personal financial planning. Many family businesses have sourced the expertise of an outside expert, often non-family, who can work effectively with a CEO who supports them and shows commitment to the business. They do spend a lot of time on financial reporting and data collection, but this is not unexpected given the size of the enterprises in this sample. They do believe that they have more to contribute in strategic planning and management and setting performance indicators. A non-family professional in a family business will often find family politics difficult. The most important factor in making the role more difficult is communication issues. Our study shows that on the whole finance managers in this sector find great benefits from the family business environment. There is considerable freedom and room to use their talents. Decision-making is much faster than in other environments. We have identified some areas where this role could be improved. We have some concerns about the effective use of financial information across a family business which may be reducing the quality of decision-making, and hence their success. Future research might focus on how the CEO perceives the involvement and contribution of the finance manager. 10

12 REFERENCES Aronoff, C.E., Astrachan and Ward, J.L. (1998) Developing Family Business Policies: Your Guide to the Future, Family Business Leadership Series, No 11, Marietta, Georgia: Business Owner Resources. Cheatham, L., Dunn, P. and Cheatham, C. (1993) Do College Level Business Courses Provide Adequate Financial Management Expertise? Journal of Business and Entrepreneurship, Volume 5, Number 1, pp Dyer, J.G. (1989) Integrating Professional Management into a Family Owned Business, Family Business Review, Volume 2, Number 3, pp Gersick, K.E., Davis, J.A., McCollum Hampton, M. and Lansberg, I. (1997) Generation to generation: Life cycles of the family business, Boston, Massachusetts: Harvard Business School Press. Harper, B.J., and Churchill, N.C. (1987) Serving Small Business: What CPAs Should Know, Journal of Accounting, June 1987, pp Lansberg, I.S. (1983) Managing Human Resources in Family Firms, Organisational Dynamics, Summer, pp Moores, K. and Mula, J (1993) Managing and controlling family owned businesses: A life cycle perspective of Australian Firms, Queensland, Bond University Paper. Neubauer, F and Lank, A (1998) The family business: Its governance for sustainability London, UK: Macmillan Press Ltd. Parker, L.D. (2001) Back to the Future: The Broadening Accounting Trajectory The British Accounting Review, Vol.33, No.4 pp Smith, M and Briggs, S (1999) From bean counter to action hero, Management Accounting, Vol 77 No1 pp Thomas, J and Gurd, B (2004) Professionalising the Family Business: The Influence of the Finance Manager. Australian and New Zealand Academy of Management (ANZAM), Dunedin, New Zealand, December. Ward, J.L. (1987) Keeping the Family Business Healthy: How To Plan For Continuing Growth, Profitability, and Family Leadership, San Francisco: Jossey-Bass Publishers. 11