UK's Fastest Growing Companies - Dissertation Example

? THE ROLE OF FINANCIAL LEADERSHIP IN GOAL SETTING AND PERFORMANCE IN THE UK'S FASTEST GROWING BUSINESSES Content Page Numbers 6 - 7 Introduction 8 1.0 Background 8 1.1 Research Questions 8 - 9 1.2 Aims & Objectives 9 1.3 Motivation for Research 9 - 10 1.4 Research Design 10 1.5 Interpretation of Results 10 2. Literature Review 11 2.1 Introduction 11 2.2 Leadership & Corporate Finance 11 - 12 2.3 Financial Strategy 12 - 14 2.4 Variety in Financial Leadership 14 - 15 2.5 Technical Elements of Financial Leadership 15 - 17 2.6 The Financial Manager 17 - 18 2.7 Components of the Financial Management 18 - 19 2.8 Role of Financial Leadership 19 - 22 2.9 Elements of Success in the Financial Depart 22 - 23 2.10 Financial Innovation 23 2.11 Conclusions 23 - 24 3. Methodology 25 3.0 Background 25 - 26 3.1 Problem Statement 26 - 27 3.2 Aims & Objectives 27 3.3 Research Design 27 - 28 3.4 Data Collection 28 - 29 3.5 Data Analysis 29 3.6 Ethical Concerns & Limitations 30 4. Results 31 4.0 Introduction 31 4.1 Question 1 31 - 32 4.2 Question 2 32 - 33 4.3 Question 3 33 - 34 4.4 Question 4 34 4.5 Question 5 35 4.6 Question 6 35 4.7 Question 7 35 - 36 4.8 Question 8 36 - 37 4.9 Question 9 37 4.10 Question 10 38 4.11 Question 11 38 - 39 4.12 Question 12 39 4.13 Question 13 39 - 40 4.14 Question 14 40 - 41 4.15 Question 15 41 4.16 Question 16 41 - 42 4.17 Question 17 42 4.18 Question 18 42 - 43 4.19 Question 19 43 4.20 Question 20 43 - 44 4.21 Question 21 44 - 45 4.22 Question 22 45 4.23 Question 23 45 - 46 4.24 Question 24 46 - 47 5. Discussions 48 5.0 Introduction 48 - 49 5.1 Question 1 49 - 50 5.2 Question 2 50 5.3 Question 3 50 - 51 5.4 Question 4 & 5 51 - 52 5.5 Question 6 & 7 52 - 53 5.6 Question 8 53 5.7 Question 9 & 10 53 - 54 5.8 Question 11 & 12 54 - 55 5.9 Question 13 & 14 55 5.10 Question 18 55 5.11 Question 15 56 5.12 Question 16 & 17 56 5.13 Question 19 56 - 57 5.14 Question 20 57 5.15 Question 21 57 - 58 5.16 Question 22 58 5.17 Question 23 58 - 59 5.18 Question 24 59 6 Conclusion 60 6.0 Introduction 60 6.1 Structures of Financial Leadership 60 - 61 6.2 Systems of Contribution 62 6.3 Role of Financial Department 63 - 64 6.4 Summary 64 - 65 References 66 - 68 Appendix 69 - 71 Abstract This dissertation focuses on the structure, role and inputs of financial leadership in UK's fastest growing companies. It defines the major elements of financial leadership in corporate entities from academic authorities as well as other authoritative texts and sources. These definitions focuses on a wide range of corporate finance and its role in the improvement of these businesses and the attainment of corporate goals and objectives. The methodology employed for the research involved the identification of UK's fastest growing companies in 2010 and the study of their financial structures. The research involved the collection of data from CEOs or Financial Directors about the actual structures that were in operation in the period within which their businesses experienced unprecedented growth. In the research, it was concluded that financial departments of UK's fastest growing companies played a major role in establishing and the creation of value through innovation and technological advancement. This was in contrast to the belief that these companies were involved in financial innovation. Rather, innovation was focused on the technology and the products rather than the financial department. The research also identified that financial leadership was a crucial element of the routine management of the companies. Also it was identified that in the fastest growing companies of UK, the leaders of the financial department was represented directly on the board of directors, thereby having a direct contribution to corporate governance. It was also identified that the financial departments were limited in a number of circumstances. These includes the involvement in strategic business units in financial decision making an the fiduciary powers and authority vested in the board of directors. However, in spite of these limitations, the financial department had very strong technical roles and they had a large extent of power in the financial decisions of the companies studied. Chapter 1 Introduction 1.0 Background The global financial crises and the credit crunch hit companies in the UK severely. Several companies had to fold up and many workers had to be laid off. However, on April 17, 2011, the Sunday Times studied a number of companies which had grown at a very fast pace in the same macroeconomic conditions. The top three companies on this list had grown between 150% and 210%. This shows that there is an incredible source of success for these companies in a time where everyone else is reporting lower profits. This research therefore attempts to identify the elements of the financial departments of these companies that led to the attainment of such high rates of increase although things are going bad for most companies operating in the UK. 1.1 Research Question Although it is possible that there could be several factors that could be responsible for the financial success of these fastest growing companies, the research seeks to identify the elements of financial leadership that contributed to the success and growth that the companies enjoyed. The research question is therefore as follows: “What is the elements of financial leadership that contributed to the success of UK's fastest growing companies?” In order to answer these questions, a series of aims and objectives were identified for the purpose of the research. 1.2 Aims & Objectives The aim of the research is to identify the elements of financial success in the fastest growing companies in the UK. The following objectives are therefore covered in the research to attain this aim: 1. Identification of the structures of financial leadership that supported these companies to attain these growths 2. Systems through which the financial departments of these companies contribute to the goal-setting and performance of these companies and 3. The actual role of financial departments of the fastest growing companies in the attainment of business performances. The research therefore employs elements of empirical research to achieve the objectives outlined above for conclusions to be drawn on the explanations of financial success in these companies. 1.3 Motivation for Research The research is being conducted in partial fulfilment of my degree. It aims at employing the skills and knowledge I have studied in my duration in this course to evaluate and solve a real life problem under the able guidance of my supervisor. The research also seeks to identify positive standards and structures used by the fastest growing companies to attain results in these turbulent economic times. The research will therefore lay the foundation for businesses to identify the best ways of staying profitable in these harsh economic conditions. This dissertation therefore seeks to study and add up to knowledge on new financial methods and strategies for the provision of solutions to companies and businesses that are faced with similar challenges. 1.4 Research Designs and Methods The research design is fashioned out to study the actual systems and structures used by the fastest growing companies in the UK. It does so through the questioning of top-level managers in a sample of companies in the top 20 fastest growing companies in the country. The tools used include email surveys and telephone surveys. 1.5 Interpretation of Results The results for the research are collated and disclosed in a form of data presented through visual representations like pie charts and bar charts. The trends and other methods striking features of each of the financial systems identified are collated, discussed and conclusions are drawn on them. Chapter 2 Literature Review 2.1 Introduction This literature review examines the concept of financial leadership from authoritative sources in secondary literature. It sets off by identifying the link between leadership and the financial department. 2.2 Leadership and Corporate Finance Leadership is an important element of businesses in our modern era. Leadership in entrepreneurship involves the building of teams with complementary talents that can enable a business attain its objectives (Timmons and Spinelli, 2006). In essence, financial leadership is entrepreneurship in its own right. This is because entrepreneurship is about the combination of factors of production for the best results for the owners of a business This suggests that a strong leadership is an indispensable tool for businesses. This is because the kind of leadership structure it has creates the framework for the pooling of resources for the attainment of a specific goal. In the era of privatisation and the optimisation of resources, leadership is central and essential in every business venture. Timmons and Spinelli (2006) identify five main attributes of a leader in a business venture which include self concept, intellectual honesty, pace making, courage and communication. Self concept is about a vision and a realistic approach to division of power for the attainment of results. Intellectual honesty suggests trustworthiness and high standards of integrity that a person in a leadership position has and encourages his/her followers to build and observe. Pace making refers to the ability to inspire and drive the attainment of set standards and visions. Courage refers to the building of a will and the motivation of members of the team to attain very high standards and expectations that are set for the group. Also, communication is about how the leader institutes and monitors the liaising of activities of the different individuals in the organizations to attain the purpose for which the constituted group was formed. In general terms Timmons and Spinelli (2006) state that entrepreneurs need to be rational and seek to grow their venture. In order to do this, an average entrepreneurs needs to have a good understanding of financial matters and have a foresight and broad long term vision for the attainment of results (Timmons & Spinelli, 2006). The relevant areas of financial knowledge that entrepreneurs and managers of businesses need to be sensitive to include fund raising strategies, fund assessment and financial statement analysis (Timmons & Spinelli, 2006). This is because these areas determine the growth and survival of businesses and ensures their existence as going concerns. 2.3 Financial Strategy Thus the central role of finance in businesses cannot be denied. This is because “the aim of a company is to create value for its owners” (Bender & Ward, 2009). This statement holds because aside the fact that businesses exist to solve problems of members in the wider society, it can be pointed out that no matter how good a business concept is, the funding of its owners is want ensures that it is set up and maintained. Thus, finance and capital matters are two important things that every business needs to be very responsive to and take reasonable steps to ensure that they are safeguarded and enhanced. According to Bender & Ward (2009), financial strategy has two main components: 1. Raising funds needed by an organisation in the most appropriate manner. 2. Managing the employment of those funds within the organisation including the decision to reinvest or distribute any subsequent profits generated. This means that the overall strategy of an organisation needs to be concerned with the raising of finance and the management of the use of funds in the most optimum way and methods under a strong finance leader. Financial strategy is one of the most important tasks that leadership in an organisation is concerned with. This is because the strategy determines the overall and long term financial matters of an organisation (Brigham & Ehrhardt, 2010). Financial strategy therefore gives a technical view of financial matters in strategic decision making which include the analysis of perceived risks and required returns (Bender & Ward, 2009). This implies that the technical aspects of financial matters include the quantification and analysis of risks and also, the valuation of returns and the creation of shareholder values. This is achieved where the leaders of the entity take steps to use principles, theories and models of finance to analyse and take decisions about the best use of resources using scientifically accepted methods and tools of financial analysis. Finance strategy forms a crucial part of the overall strategy of a business and it aids the leaders of the business to take decisions that are directly concerned with the financial health of the business. Riether (1999) points out that in recent times, there is a focus on analytical approaches to financial leadership through the use of mathematical models for specific optimum courses and the use of models to understand decision making processes better. This shows that finance has evolved over the years to include the use of accepted models, tools and techniques for the analysis of various finance options available to a business. These models are often proven systems of analysing various variables in ways that enables the entity to attain the most desirable end. Corporate financial planning is a technical planning system that focuses on the use of financial models, tools and techniques to take decisions that seek the maximisation of sales, market share, earnings per share, returns on investment, growth, stock price and stockholders' wellbeing (Reither, 1999). The use of finance provides the necessary techniques and structures for the use of appropriate finance tools and models to analyse the relevant variables for decisions to be made about the financial implications of various decisions that the entity would take. Stated differently, financial leadership provides the top-level management information about how to proceeds with the use of capital and other funds for activities that bring the best of results in respect to the wider vision and strategy of the business in question. 2.4 Variations in Financial Leadership Riether (1999) places financial leadership decisions into two categories: one-time and repetitive. These two categories suggests that some finance decisions are taken in a one-off manner where the leaders of a business take a single decision about an important finance matte or where a decision is to be linked with a series of other related financial decisions on matters. In both instances, leaders will be required to use the adjusted present value of costs and revenues to ensure that they can measure the implications of each course of action that they might choose (Riether, 1999). Ogilvie (2009) identifies how financial strategy fits into the bigger picture of entrepreneurs and overall leadership of an organisation. He begins by defining 'strategy' from the CIMA official terminology as “a course of action, including the specification of resources required to achieve a specific objective” p3. This indicates that strategy is about the choice of the best course of action for the attainment of a given objective and the specification of the resources needed to attain that end. This definition presents strategy as a conscious activity that seeks to present a given line of action for the achievement of specified resources for an organisation. However, in reality, most organisations have room for the fashioning of strategy as and when the need arises. This is because no matter how well and meticulously a business plans its strategy, there is the need for the business to be opened to new ways of restructuring to take up unpredictable opportunities that come the way of the business. This therefore explains the two faces of strategy structured and emergent (Dosi, 2010). Dosi (2010) states that emergent strategies are those strategies that allow a business to take up new opportunities as and when they come up. These opportunities come up as a result of technological change, government policy changes and other factors that may come up in the business' environment. This is very important since it can determine the success or failure of a business in terms of finance. 2.5 Technical Elements of Financial Leadership In financial leadership however, a business will need to come up with a strategy that is quite distinct from the general strategy of the overall business. Ogilvie quotes CIMA's definition of strategic financial management as “the identification of the possible strategies capable of maximising an entity's NPV, the allocation of scarce financial resources among the competing opportunities and the implementation and monitoring of the chosen strategy so as to achieve stated objectives”. This definition of strategic financial management brings to light the need for a business to maximise its net present value through the use of techniques and tools that are relevant to financial management. This suggests the use of models, tools, techniques and systems that are used for the forecasting and analysis of options in choosing between a number of opportunities that are available to an entity. When these decisions are taken, the principles of financial management are used as guidelines for the implementation of these ideas. When the implementation is done, a business uses the tools and techniques of financial management to monitor results and ensure that corrections are made as appropriate and optimum aspects of the decision are encouraged. Another end of financial leadership is the attainment of 'value for money' which the CIMA terminology list defines as “achieving the best possible combination of services from the least resources” (Ogilvie, 2009). In other words, financial leadership should aim at maximising returns from a given level of inputs. This means that financial leaders like managers and heads of organisations will have to get the best of returns from the resources they put to use. This is because the agency theory requires leaders in organisations to seek the best interest of their principals, which in the case of businesses, is the maximisation of returns. Thus, it implies that managers will have to find ways of assessing each and every alternative available to them to take a decision about the best options that they have for the attainment of results. Ogilvie identifies three different dimensions for ensuring value for money, the 3Es: economy, effectiveness and efficiency. Economy refers to the minimisation of the cost of inputs required to deliver a given level of outputs. This includes the use of techniques necessary for the reduction of costs in a given economic venture. Efficiency is about productivity and this entails the reduction of the input-output ratio to ensure that less inputs will be sacrificed for higher levels of outputs. Effectiveness is about the outcomes for defined levels of outputs. This is the increase of value for stakeholders from a given level of outputs. Attaining financial goals revolves around cash generation which is the increase in cash inflows to the organisation. This is done by increasing the value added to the organisation's products that is made available to the markets. When this is done, the business will become more profitable and there will be more returns which will ensure the attainment of more by way of objectives and visions. These financial decisions complement other non-financial factors that affect the growth of the organisation like market share, customer satisfaction, competitive position and risk exposure. These factors affect the growth and profitability of a business and it is imperative upon management to identify the link between their financial systems and structures and the attainment of these important objectives. The central elements of finance decisions are investment decisions, financing decisions and dividend decisions (Ogilvie, 2009). Financing decision is important because it enables an organisation to raise funds to support its operations and asset position. This is important because it gives a business important funds for the operations and the funding of other expenses and costs that are relevant to the survival of the business. Investment decisions are related to how to invest excess funds from the money made by a business. Additionally, how much to pay back to stockholders after profits have been declared is also a finance decision. 2.6 The Financial Manager Financial managers always have to face and overcome some forms of internal and external constraints (Ogilvie, 2009). Internal constraints include limitations in the sources of find available to a business, need to maintain good investor relationships, shortage of key skills and limited production capacity (Ogilvie, 2009). These limitations makes it difficult for the leaders of an organisation to meet their targets easily. It is therefore important for the management of organisations to come up with a system that ensures that these limited internal resources are utilized to attain the best resources for the groups of stakeholders. This therefore presents a strong case for managers to employ the best financial managers to use the techniques and models of finance to ensure this. There are also external constraints that makes it difficult for businesses to operate and to attain the necessary results for the attainment of objectives. These external constraints include government influence, regulatory influence, major economic influence, accounting concepts, sources of finance and cost of capital (Ogilvie, 2009). External constraints like these can stand in the way of businesses attaining their results from a finance perspective. Again, this makes it imperative for management to make use of scientific tools and techniques to analyse these challenges to take the best decision in business. 2.7 Components of Financial Management In practice though, the finance department is divided into two main units, Finance and Accounting (Siciliano, 2003). Finance is about managing a company's financial resources whilst Accounting relates to the recording and reporting of all of a business' financial transactions. Although these two departments are often separated in larger organisations, it is sometimes merged as a single unit of an organisation (Siciliano, 2003). Siciliano (2003) identifies that the finance unit is often concerned with the sourcing of funds, the growth of capital, the safeguard of assets and the continuous trading process. On the other hand, the accounting department is concerned with the recording and summarizing of information, the presentation of up-to-date management financial information and the external reporting on the basis of Generally Accepted Accounting Principles (GAAP). Chandra (2008) identify the differences between the treasurer and accountant. This is summarised below as follows: Issue Finance Accounting Finance Obtaining finance Financial accounting Stakeholders External stakeholders like fund managers Internal audit so internal stakeholders Important fund concerns Cash Management Documentation and taxation returns Administration Credit administration Management accounting Budgeting Capital budgeting Budget controls This table shows that there is a difference between the finance department and the accounting department. First of all, the finance department is concerned with sourcing for and obtaining funds. The accountant is primarily concerned with the documentation of such funds and how they are used according to principles of accounting laid out by law. The finance department is concerned with dealing with external stakeholders like creditors directly. Accountants on the other hand have a concern with the reports and information about internal stakeholders. The finance department is concerned with the disbursement and use of funds and capital of the business. The accounting department is concerned with the documentation and the payment of tax returns to the relevant authorities. The finance department is concerned with the administration of credit and the repayment of debts. On the other hand, the accounting department is concerned with management accounting and the preparation of information from internal sources. The financial department will have to prepare capital budgets for the organisation. On the other hand, the accounting department will have to implement budgetary controls for the company to ensure that the budgetary limits and constraints set by the finance department are adhered to and targets are met. 2.8 Role of Financial Leadership Gitman (1988) states that there are three main differences in the leadership role of the two units of financial leadership. First of all, finance is concerned with value maximisation whilst accounting is concerned with the safe keeping of funds. In other words, finance is about how to get more returns for the organisation whilst accounting concentrates fully on the documentation and tracking of these funds to ensure that they are used for the purposes for which they were planned. Finance uses the cashflow method whilst accounting utilises the accruals method. In other words, finance is primarily concerned with the cash worth of each transaction. It examines the actual amount received and the actual returns to be made from the money. Accounting on the other hand uses the matching concept to ensure that income and expenditure are matched to reflect the true and fair view of transactions in a given period for an organisation. Finally, finance is concerned with risks and uncertainties, this is because it is based on so much planning and predictions which might or might not happen in the future. However, accounting is based on a set of rules that are laid out clearly by various accounting authorities in a given country. Porter et al (2005) state that there are about six interrelated activities that the finance department is involved in. They include: 1. Financial Accounting: involves the external and internal reporting of financial proceedings in the organisation. 2. Treasury Management: Sourcing for funds, financial planning and budgeting. 3. Working Capital Management: Cash, debts, credits and inventory management that affects the day-to-day trading activities of the business. 4. Cost Management & Accounting: Planning, control, and decision making process. 5. Purchasing & Procurement: Choice of suppliers and the payment for such services. 6. Internal Auditing & Operations Management: Ensuring that the operations of a business is in sync with the 3Es, economy, efficiency and effectiveness. Although 1 – 4 are primary activities of the finance department, procurement and internal auditing is a management activity which has strong links with the finance matters which brings it under the scope of finance. Chandra (2008) takes the analysis of the finance department to a different level. He identifies that the market value of a firm is based on the returns and risks of the company. According to him, the two issues; returns and risk are as a result of four main things: 1. Capital budgeting decisions 2. Capital structure decisions 3. Dividend decisions 4. Working capital decisions. Capital budgeting decisions are concerned with the decisions about how money should be disbursed and spent as determined right from the beginning of a given period of time. Capital structure decisions is about the kind of finance decisions and systems that will be in used in the company in relation to how funds will be invested and put to use. Dividend decisions have to do with how much money will be paid out to shareholders from profits. Also, there is the decision of how much money to release to day-to-day operations of the business and which processes to use. In every business, each of the four factors has implications for the risks and returns of the organisation. For instance, the capital budgeting and capital structure decisions give a business the opportunity to make the optimum resources through planning of how money will be spent. This comes with the risk of making decisions that will lead to a loss. On the other hand, there is the dividend decision which helps the management to maintain the interest of shareholders and prospective investors in the business and at the same time have the risk of causing the business to lose important funds which could be invested for more resources. Working capital decisions have to do with drawing the balance between trading and capitalisation issues in the company. Whereas trading is necessary for profitability, capitalisation is also important for the long-term survival of the organisation. It is therefore important for businesses to draw the balance between the two elements of a business. 2.9 Elements of Success in the Financial Department Brigham & Ehrhardt (2010) state that successful organisations are based on three things: skilled people, successful relationships and good funding. This is true because a business is always at its best if it is made up of people who are experienced, educated and operate ethically in the roles that they are given. Secondly, subordinates have to report to their superiors on matters and trends that are relevant to duties that were delegated to them. This creates the concept of organisational structure which distributes authority in a given entity and spells out the reporting relationships. Thirdly, there is the need for good funding to ensure that a business attains its ends and objectives. This is because without the right funds, a business will be very much limited in attaining its ends and objectives. Eilenberger et al (2009) state that the capital market changes periodically and these changes affects businesses. Businesses therefore need to have a good financial leadership system that will enable the business to gain timely information and act in the right manner to respond by way of price changes, quantity adjustments and strategic thinking. One of the most important financial decisions is about how to diversify the investments of an organisation. Chabotar (2006) also states that there is the need for businesses to identify the debt and equity financing options for the financial structure of the organisation. Such a blend is important because it enables an optimum plan for the debt and equity financing systems to be gained through a balance of principles and ideas. Neff also raises that financial leadership must focus on how to reduce tax benefits through debt financing, increase agency costs, assymetric information and corporate control are vital elements of finance. These four principles must be honoured by the financial leadership team of each and every business. 2.10 Financial Innovation In recent times, a lot of innovations in financial instruments have come up (Molyneux & Shamroukh (1999). A lot of new financial instruments have come up to solve a wider range of financial challenges. There have been various types of fund innovations that have allowed venture capitalists to design numerous funding products for businesses and entities (Metrick & Yasuda, 2009). Commercial banks have come up with innovative technological systems which have led to changes in banking products, services and production technology (Frame, 2009). “Financial innovation has contributed to the production of a multitude of new products including many new forms of derivatives, alternative risk transfer products, exchange traded funds and a variety of tax-deductible equity” (Constantinides, 2003). However, each of the financial products available comes with its pros and cons. There is therefore the need for a good financial leadership to analyse and understand the implications for each financial product and then take a good decision for the best interest of a company. Also, the global financial crises have affected so many small companies. This is because banks have reduced the scope of the credit facilities they offer to companies and there is a lack of trust by investors because of the increasing uncertainties in the business environment (Mahagaonkar, 2009). 2.11 Conclusion There are two main elements of finance in organisations: raising of funds and managing the use of funds. The finance department comes with two main branches, the finance department, responsible for the raising of funds, investment of funds and the payment of dividends and the accounting department basically responsible for the monitoring and documenting of information about the acquisition and usage of funds and controlling of the disbursement of funds. Financial leadership is steeped in financial strategy. Financial strategy is mainly structured but a good business has an emergent strategy system that enables the business to get benefits from current activities that occur in the business environment. Financial strategies employ scientific tools and techniques for the analysis of internal and external factors for the taking of decisions on growth as well as survival factors of the organisation. Financial leadership has to do with capital budgeting, investment decisions, dividend decisions and working capital decisions. These decisions are implemented in a companywide manner through the organisational structure and are monitored and controlled via reporting relationships. Important aspects of financial leadership are the analysis of the external financial markets, diversification and decisions on debt/equity financing. In recent times, the credit crunch and innovation in the financial sector are two major elements that have affected financial leadership. Chapter 3 Methodology 3.0 Background Leadership is the human trait and activity that emanate from a person in authority which enables other people to work and gain results (Rowe, 2007). Leadership is necessary and critical at the top or strategic level of an organisation as well as the functional units (Ryan, 2002) The finance department is a crucial unit of every organisation (Bragg, 2011). The finance department is responsible for the design and maintenance of accounting systems like performance management and control systems, sourcing for funds and the investment of excess funds (Bragg, 2011). Generally, this requires a finance strategy (Bender & Ward, 2009) that seeks the maximisation of sales, market share, profits, earning per share, return on investment, growth, stock price and stockholders' well being (Bierman, 1999). Finance leadership is important in attaining good results for corporate entities. Financial leadership involves strategic thinking, innovation, management of business risks and change (Militello & Schwalber, 2000). Strategic thinking entails the use of structured and emergent systems to plan and attain results for the whole organisation over a long period of time. A leader has the responsibility of considering the internal organisational and external environmental factors in order to come up with a good strategy. When a strategy is in operation in an organisation, the leaders will have to identify inhibitors and other factors that can prevent them from attaining their objectives and solve them through a comprehensive risk management system. Innovation has to do with the continuous improvement of systems, processes and products of an organisation and it requires deep thinking and analysis to be attained. Financial management requires four things: Leadership, Ethics, Structures & Responsiveness (Blore et al, 2004). In other words, a financial leadership structure must be sensitive to the technical elements of leadership as well as the ethical concerns of leadership. It should also have structures of rules and regulations that would regulate activities throughout the organisation and be responsive to emergent matters and situations that would come up. The distribution of authority in organisations is done through a defined organisational structure which sets out the relationship between various units of the organisation (Stevens & Loudon, 2005). For the sake of accountability, there is the need for reporting to be done by subordinates to people in authority (Stevens & Loudon, 2005). Therefore people who have power delegated to them have the duty of reporting to their leaders at regular intervals. Some of these reports include financial reports like management financial information from lower units which culminates in the creation of income and position statements that are used by various stakeholders for decision making. 3. 1 Problem Statement In practical terms, there is a questions about how these necessary qualities of financial leadership relate to businesses and their goals. For instance one would wonder why some companies are growing quickly financially whilst others are folding up in the UK. It is true that the global recession is making business difficult but how come some are growing fast and some are growing slowly? It therefore suggests that some businesses are getting some principles of finance right whilst others are not. What are the structures in financial systems and structures that affect financial goals of an organisation? What are the effects of the human resource capabilities of financial managers on financial goals? What is the role of financial leadership on financial goals when there are changes in the external environment? This leads us to the research question which states: “What are the elements and significance of financial leadership in the fastest growing businesses the UK?” 3.2 Aims & Objectives The of the research is to identify the actual relationship that exists between the type of financial leadership in the UK and the financial goals of an organisation. The main objectives of the research will be: 3. To critically assess the quality and structures of financial leadership in UK's fastest growing businesses. 4. To evaluate the system through which the financial leadership of the fastest growing UK businesses contribute to financial goals. 5. To critically examine the effects of the quality and involvement of financial leadership on a business' financial goals. 3.3 Research Design The research will study ten of Britain's firms with the fastest growing profits. These businesses are identified by the Sunday Times as to include R & R Ice Cream, Power Perfector, Moonpig.com, McLauren, Supacat, Liquid Capital, Adey Heating Solutions, Ramsden, UPP and Fridays (Sunday Times, 2011). The research would begin by the examination of key concepts and principles in existing literature. It would attempt to define the elements of financial leadership from two angles. First the structures and systems of good and ideal financial departments. Secondly, there would be an examination of how emergent matters are incorporated into organisations. The literature review, which will focus on secondary sources will look at economic situations and conditions in recent times including a review of the credit crunch and its effects on finance as a department of businesses. The next thing would be to define the variables for the two objectives of the research. The first would be to define the elements of the structures for financial leadership in modern time. This will lead to the creation of ordinal variables that can be tested. After that, data of the variables would be collected from the various companies under study. This would be followed up by analysis of these information on how they affect the financial goals of these businesses under study. 3.4 Data Collection The data for the paper will identify the main nominal variables: Financial Structures/Systems. The elements of financial systems and structures would be identified from secondary sources. In other words, they would be deduced from the literature review and they would be put into ordinal variables according to the best ways and systems to reflect the realities in practice. These would be put into the form of questions to be sent to the various companies to find out about the state of their operations through telephone interviews and email survey. The content of the questionnaires are shown in Appendix 1 below. The questions will seek to identify three main elements of the financial and treasury department of the organisations under review. The first set will be to examine the existing capital strategy and systems for long-term finance in the organisations.. The next set of questions will identify the working capital systems and structures of the companies under review. In-between, there will be an analysis of the new trends and activities meant to create sustainable and competitive structures for the organisations. The research will therefore look at the factors that promote the competitiveness of these companies through finance. The telephone interviews will try to ascertain certain basic systems and structures whilst the email survey will gather in-depth knowledge about the activities within the businesses. The questions will revolve around the variables of the financial structures and systems. It will find out about important matters like Leadership Systems, Reporting Systems, Financial Modelling, Responses to the Austerity measures, and the unique financial leadership structures they put in place that will be identified from the literature review. Also, there would be follow up interviews after the data collected in the data has been analysed. These interviews would seek to help in the confirmation or rejection of the ideas and concepts that would be deduced from the data collected. 3.5 Data Analysis The data of the ordinal variables in the elements of financial leadership and Systems would be presented in the forms of diagrams. The data collected from each of the companies studied in the review would be input into the spreadsheet and then processed into charts for further interpretation. The trends and averages of each ordinal variable would be identified and noted in a summary format. This format would be used as yardstick for the next phase. Interpretation The research would be a deductive research. The trends, averages and findings from the data analysis would be generalised and then theories would be propounded from the findings. This would lead to the deduction of trends and common financial leadership systems and structures that are used by these ten fast growing companies in this era of serious economic conditions and crises. 3.6 Ethical Concerns & Limitations The research is meant to communicate with the finance departments of the fastest growing businesses in the UK. This means that the research would be dependent on the cooperation of each of these companies. However, in the event of the researcher not being able to get information, the next company in the list of 10 most profitable companies in the UK would be examined in its stead, up till the fifteenth. In the event where less than ten of the most profitable companies in the UK is available out of the fifteen, data gathered from the available companies will be used as basis for the research. The limitation of the research's deduction will be the fact that there is no clear way of quantifying certain elements of research in organisation like management's manipulation, dominant personality and some emergent issues. Chapter 4 Results 4.0 Introduction The results from the research consisted of a survey conducted on UK's fastest growing companies. These companies were identified by the Sunday Times in April, 2011 and are the fastest growing in the country based on their 2010 annual reports. These companies grew at a rate of between 50% and 210% (Sunday Times). The research studied the financial department and financial structures in companies around the UK that are growing at the fastest rates over the past three years. The research involved the forwarding out email surveys to top level managers in companies studied. These electronic mails contained links to the survey which the respondents answered. The survey consisted of 25 questions which were relevant to financial leadership and the financial departments of the companies studied. Question 1 What primary production activities are you involved in? Figure 1: Primary Activities Businesses Surveyed are Involved in In summary, 60% of the businesses were involved in IT and Communications which mainly focuses on innovation and new technology offerings. Another 40% are involved in manufacturing and assembling. These companies share a strong passion for innovation and the presentation of new systems and structures to customers. In a related analysis, this finding prompted the study of the trading activities of the UK's top 20 companies. It was found out that they were involved in a diversity of trading activities. The average operation activities of these companies are as follows: Figure 1.1 Primary Business Activities of UK's Fastest Growing Companies Most of the companies in the UK's classification of fastest growing businesses are involved in manufacturing. The second category of these companies are involved in Information and Telecommunication systems and technologies. Most of these companies in the major classes studied use innovative and scientifically advanced technologies and systems to carry out their operations. Thus, the sample, drawn from IT and manufacturing was carefully taken to reflect the innovation and interest in these companies, to test the effects of their financial leadership and how it integrates into the the wider business structures. More IT and Telecommunication companies were studied because they had systems and structures of operation and financial management that were representative of most of the other companies in the category. This is steeped in the fact that the IT and Telecommunication companies are involved in innovation, which cut across all the industries in the wider population. Question 2 What is the blend of debt and equity that you use to fund your business operations? Figure 2: A Pie Chart of the Debt/Equity Ratio of the Companies Reviewed In this quest, we sought to identify the blend of external finance to shareholder's wealth used in trading. Due to the differences in accounting conventions and systems used by the various companies, the study focused on a very simple debt/equity ration. The respondents were thus required to give an estimation of their total liabilities as against the shareholder equity. Total liabilities included creditors, debt financing and other sources of finance that was due to external sources like debentures. Equity was defined as shares. In this sense, a simplistic model, Debt (Liabilities)/Equity was the yardstick and NOT Debt/Debt + Equity. This simplified the process for the respondents and also enabled easy comparison amongst companies. 40% of the respondents stated that they use an aggressive debt/equity ratio of 3:1 because they were using more external funding and less of the owners' equity to trade. 20% showed a more moderate position of 2:1. Another 20% used a very conservative ratio of 1:3 whilst another 20% used an innovative system whereby large projects with high and quick returns are self-financed whilst smaller ones are financed by equity. This effectively eliminated the need for external financing. Question 3 Aside your primary activity, what activity do you invest in? Figure 3: Percentage of the Main Investment activities Conducted by Businesses Studied In terms of investment, 60% of the companies spend their excess income on new technologies over the past 3 years. Another 20% spent most of their excess funds on the acquisition of new sites and premises to expand their operations. A further 20% invested through cash and other forms of financial derivatives and instruments. This means that they spent a bulk of their excess funds on external investments that was not related to their primary business activities and was in the form of cash or other financial instruments. Question 4 Has your business been involved in financial innovation in the past 3 years? Figure 4: Major Financial Innovation Conducted over the Past 3 Years The respondents were asked if they had been involved in any form of financial re-engineering or major changes in financial structures. This was designed to test whether some of these companies had been involved in a reactive change due to the recent global financial crises or local economic changes that had affected them adversely. The result was that, all the companies reviewed indicated that they had not been involved in any such major changes or restructuring. Question 5 Please give details of the financial changes that were involved. Due to the fact that most of the respondents had not been involved in any major financial innovations or re-engineering activities in the past three years, this particular question was not applicable in the research. Question 6 What is the total staff level of your business? Figure 6: Range of Total Number of Staff Members Employed in the Companies Studied All of the companies studied had over 20 staff members. 40% had a staff strength of between 20 and 50 workers who were working in the company. 60% of the businesses had staff members of over 50. On further enquiries, it was identified that most of these companies had staff members between 50 and 100. Question 7 How many staff members do you have in your financial department? Figure 7: Range of People Employed in the Finance Department of the Companies Reviewed. The aim of this question was to identify the range of the size of the financial departments of each company. The question was open ended and it sought to get an idea of how many people each company employs in broad terms. It was discovered that 20% employ between 1 and 5 people in its finance department. However, it was found that most of the companies, 80% have between 5 and 10 employees in the finance department. None of the companies had more than 10 people employed in the finance department. In an analytical review, it can be identified that the mean number of employees in the businesses studied is as follows: Total Number of Employees 20 – 50 = 40% 50 – 100 = 60% This translates to an average of (20+50)/2 * 0.4 which is 14. And (50+100)/2 * 0.6 which is 45. This therefore gives a total average of 59 (14+45) per company. The staff strength of the financial department is as follows: 1 – 5 = 20% 5 – 10 = 80%. This gives an average of (1+5)/2 * 0.2 which is 0.6. And (5 + 10)/2 * 0.8 which is 6 which shows an average of 6.6 finance staff in each of the companies. When compared to the total staff strength, 6.6/59, we notice there is an average of 11.2% financial staff member per company. Question 8 How many hierarchies or tiers of chain of command does your financial department have? Figure 8: Chart on the Number of Tiers in the Command Structure of the Companies Studied This part of the survey sought to find out the number of levels in the organisational structure of the finance departments of the fastest growing companies in the UK. This was to identify whether the finance departments had flat or tall organisational structures. This was to give an idea of the command structure and how power accrues to the top of the financial leadership structure of these companies. Question 9 Who does the head of the financial department report to? Figure 9: The Report Structure of the Leadership of the Financial Departments This was aimed at identifying how the leadership of the financial departments of the companies link to the overall strategic leadership structure. We identified that 60% of the companies have the financial department reporting directly to the CEO of the company. 40% of the companies however had their financial leaders reporting directly to the Owners or the Managing Directors. Question 10 Is your finance department involved in strategic decisions? Figure 10: Involvement of Financial Leadership in Strategic Management Process This was to identify if the Financial Leadership is directly involved in Strategic Management and Decision Making Process or not. It was found out that all the companies had their financial department strongly involved with strategic level decision making and policies. Question 11 Is the head of your financial department involved in the board of directors? Figure 11: Representation of the Head of Finance Department on the Board of Directors This was to identify whether the heads of the financial departments were members of the board of directors or not. It was identified that 80% of the companies had a clear representation on the board of directors. This means that the head of finance was a board member and was directly involved in the governing of the company. Only 20% did not have their head of finance department as a member of the board of directors. A further question was therefore figured out for further details. Question 12 Who represents the financial department on the board if the head of the financial department is not represented on the board? On further enquiry, the popular explanation was that the head of financial department was being groomed to take up a position on the board of directors. Question 13 Is the financial department solely responsible for budgeting? Figure 13: Budgeting as the Sole Responsibility of the Finance Department This was to examine the extent of the power of the finance department. Since the finance department is primarily responsible for the technical elements of the preparation of corporate and departmental budget, we wanted to find out if the finance department was in control of the whole budgeting process or not. We identified that in all the companies, the finance department was not the only department involved in the preparation of the budgets of the whole company. Question 14 Is there the involvement of other departments in the budgeting process? Figure 14: Involvement of other departments in the Budgeting Process This was to ascertain whether the budgeting was to identify the role of other departments in the budgeting process. It was to find out whether it was only the finance department and the senior management who were involved in budgeting or not. It was found that in all the companies, there were other departments who contributed to the budgetary process. Question 15 Does the Board of Directors seek clarifications and justifications from the financial department before approving budgets? Figure 15: Board Consultation with Finance Department Before Approval of Budget This was to identify the relationship between the board of directors and the finance department in technical matters. It was to find out the extent to which the technical abilities of the finance department is utilised by the top level management. It was identified that in all the companies, the board consulted the finance department before approving the company's budgets. Question 16 Do you have a structured method of prompting budget change? Figure 16: Presence of a Structured Method of Prompting Budgetary Change This was to identify the whether the companies had a laid down set of procedures for the examination and the acceptance of a change in budget. It was identified that most of the companies, do not have such a system. 80% of the companies use a fire-fighting approach in altering its budget. However, 20% had a laid-down system for the alteration of budgets Question 17 If yes, what is the driving force or system? The main driving force for structured systems was linked to the marketing forecast and sales figures. Once changes in sales figures could be proven, this could prompt the commencement of a procedure for the change in the corporate budget. Question 18 Is the Board of Directors the sole authorising unit for budgetary change? Figure 18: The Board of Directors As the Sole Authorising Agent for Budgetary Change This was to ascertain whether there was another department other than the board of directors that had the power or authority to alter the budget. It was identified that in all the companies, whether they had a structured or unstructured method of adjusting the budget, the board's approval was indispensable and everyone needed the board's consent before the budget could be changed. Question 19 What is done when a department is not meeting financial targets? This question was to identify what is done when a department was not capable of meeting its targets and requirements. All the companies reported that such failures are reported to the CEO and discussed at the board level for appropriate action to be taken about the company. Question 20 Apart from evaluating new financial opportunities, what additional services do the financial department render in the face of new opportunities? Figure 20: Additional Services Finance Department Renders in the Face of New Opportunities This was to find out whether the finance department renders other services other than evaluation and the obvious technical services that a finance department is expected to render. It was identified that the financial department renders project costing services in 40% of the companies. In another 40% of the companies, the finance department stuck to traditional accounting duties of only evaluating minor elements of the new project. In 20% of the companies, the finance department is tasked with due diligence checks as well as the co-ordination of outsourced agents and companies being used by the company for the process. Question 21 What kind of scenario planning method do you use? Figure 21: Types of Scenario Planning Used by the Companies This was aimed at identifying how companies reviewed plan financial scenarios in order to utilise forecasting techniques and scenarios. It was identified that 60% of the companies use a blend of three or more financial scenario planning techniques. However, 20% use sensitivity analysis for most of their financial planning and forecasting whilst another 20% uses project based scenario planning techniques and tools. Question 22 What discounting techniques do you use for decision making in the financial department? Figure 22: Discounting Techniques Used by the Financial Departments This quest was to identify the discounting techniques of finding present values and future values for forecasting. 60% predominantly use discounting cash flow techniques to ascertain the present and future values of potential financial commitments. 20% use a volume based system of discounting and this is done by the use of specific systems and techniques for each and every financial transaction that they are involved in. 20% does not use any form of discounting technique in its financial department. Question 23 What cost of capital measuring system do you use? Figure 23: Measuring Cost of Capital Systems This sought to identify the various methods of evaluating costs of projects and other break-even analysis. 80% use the Internal Rate of Return (IRR) technique most of the times. However, another 20% use other methods and techniques in a diverse manner so it is difficult to identify a popular system for checking break-even. Question 24 What kind of currency hedging system do you use? Figure 24: Currency Hedging Blend In this quest, we sought to identify the kind of currency hedging techniques used by the companies. It was identified that only 20% of the companies uses pure active currency management systems. 40% use a blend of active and passive currency management techniques. However, another 40% of the companies do not use any form of currency hedging systems. Chapter 5 Discussions 5.0 Introduction The research was designed to test the role of the financial department, particularly the leadership if the financial department in the creation and attainment of strategic goals in the fastest growing companies in the UK. The research therefore sought to understand what financial leadership and the entire department did to support their companies to grow at a fast pace although the UK has faced so many financial problems and challenges in the past three years. Thus, the findings are to be analysed on the basis of the role that the financial department played in the development of these companies. I this quest, the following objectives are the reference point for the research: 1. To critically assess the quality and structures of financial leadership in UK's fastest growing businesses. 2. To evaluate the system through which the financial leadership of the fastest growing UK businesses contribute to financial goals. 3. To critically examine the effects of the quality and involvement of financial leadership on a business' financial goals. The findings of the research are therefore to be employed to explain the quality and elements of the various financial departments and financial leadership systems. Also, the systems and inclinations of the financial systems and structures of these fast growing UK companies were to be measured in the research. In summary, the results of the financial department and financial activities and how it blends into the overall organisation in each case was to be examined. Thus, the discussions in this chapter attempts to evaluate the findings in relation to these objectives. Question 1 This question focused on the primary business activities of the top 20 fastest growing companies in the UK. For the purpose of the study, it was identified that 60% of the companies were into IT & Telecommunication related activities whilst another 40% were involved in manufacturing and assembling. It was observed that the IT and telecommunication companies in this category were powered by highly innovative services that they offered to their customers. Most of them were into the provision of highly sophisticated systems and structures that were patronised at a high scale by the public. Also, the manufacturing companies used the best technologies. On a further analysis of the 20 fastest growing companies in the UK, it was found that they belonged to on of five sectors: Manufacturing, IT & Telecommunication, Finance, Retail and Innovation. Each of the companies in this category focused on innovation and the offering of effective and efficient technology to the public. It is therefore conclusive from this, that the capital of these companies were invested in innovation and technology. This therefore shows that the finance department of these companies were tilted towards more efficient products that put them ahead of their competitors. Question 2 This question assessed the Debt/Equity ratio of companies in the UK's top 20 companies. The finding was that 40% had a ratio of about 3:1 and 20% had a ratio of about 2:1. This showed that these companies had a strong and aggressive debt/equity position. This suggests that these companies preferred external funding. It also indicated that the companies had the confidence of various stakeholders like creditors, suppliers and other external parties who were always willing to provide some form of funding for these companies to remain in business. It also showed that these companies were spending more in paying for capital. On the other hand, some companies had a ration of 1:3 (20%) whilst another 20% had a contingent system whereby projects were so liquid that they were almost always self-financed, thus preventing the need to rely heavily on external funding. These two companies show that the fastest growing companies sometimes use equity more than external sources. The research found out that these companies had less overheads and they used very efficient technologies that cost much less. It is therefore identified form this question that the top 20 companies were generally like any other company and they operated with a fair share of external funding and this is a financial strategy to promote growth. However, smaller companies with less overheads used equity rather than external funding. Question 3 This question was to test the preferred method of investment used by these companies. It was identified that 60% of the companies invested more in some form of new technology or research. Another 20% invested directly in new systems and structures. Only 20% preferred to invest in cash and other liquid ventures. This shows clearly that the financial leadership system of these companies saw more potential in technological advancement rather than other forms of investment which most businesses are inclined towards. This is indicative that the improvement in the systems and structures was a priority in the strategies of these companies studied. This explains the reason why these companies spend more of their excess funds on new ways of doing things. This is because technology is a major area of these leading companies. It also appears that traditional investment systems and structures are fast losing their popularity. This is because the financial leadership appear to favour the attainment of competitive advantage ahead of investment in other activities that are not connected to the primary business activities of the company. Questions 4 & 5 This question attempted to identify if any of the companies in the UK's list of top 20 companies had undertaken any form of financial innovation or re-engineering. All the companies studied answered in the negative. This is because they had not made fundamental changes to their financial systems over the past three years. This implies that in spite of Read More