This article was updated on June 18, 2018.
When CFOs are faced with the many complexities of expansion, from adapting to different tax laws to complying with new HR-related laws and regulations, getting their finance team ready to support the expansion can be highly challenging.
The Reasons for Business Expansion
No matter the reason for expansion, it's vital for finance departments to be agile enough to support that expansion. If, for example, you're expanding to gain access to local talent, like General Electric moving its headquarters to talent-laden Boston, as reported in CFO Magazine, you'll need the funds to truly attract and retain that talent with best-in-class benefits and compensation packages. Your budget will also have to account for local HR-related labor laws and tax regulations, so tapping local experts to serve as guides and investing in IT systems to support the adaptation to new regulations will be key.
For example, expanding business operations into a country like Colombia can be challenging because of the complexity of their labor laws. Since 2014, Colombia has enacted a number of tax reforms and changes to their labor regulations, which is why it was cited as the "third-most complex country for multinational companies to stay compliant with corporate regulation and legislation," according to TMF Group's Global Benchmark Complexity Index 2015. Not doing your due diligence and going into a place like Colombia without the know-how about how to comply with complicated Colombian labor and tax laws is a formula for trouble.
There is a positive side to doing your due diligence prior to expansion: tax credits offered by state and local governments for expanding into their jurisdictions. Not all organizations are ready to take advantage of those available benefits, which obviously impacts their bottom lines. According to an article in CFO Magazine, "more than 50 percent of credits and incentives go unclaimed each year. Many state and local governments offer businesses incentives, such as grants, cost reimbursement, and tax credits for job creation, retention, and training." When an organization passes up tax breaks, you know they're probably not managing the complexities of expansion well.
That's why it's essential to empower your finance team and tax specialists to get involved right away in any expansion plan: "To safeguard a company's relocation and capture the greatest amount of benefits available, it's imperative to get tax professionals involved as early in the process as possible. They can secure and negotiate credits and incentives for expansion into new markets," according to same CFO Magazine article. Looping your finance team in as early as possible and giving them influence over strategic planning should limit the possibilities that you'll lose financial benefits or miss out on opportunities to save money.
CFOs Must Have a Seat at the Table
Because financial considerations are behind so many expansions, and because the finance-related issues (such as tax and labor laws) can be so complex and costly, CFOs need to play a central role in expansion efforts. CFOs should identify where finance department resources, in terms of people and budget, should be allocated to support a more seamless expansion effort, and ensure those resources are leveraged accordingly. On a related note, if you recognize that the finance department lacks the in-house expertise or capability necessary to make the expansion work, you should consider third-party support wherever you feel your organization is deficient.
When organizations expand their business into multiple jurisdictions, whether across state or national boundaries, the level of financial- and compliance-related complications grow immensely. The CFO is crucial to ensure that there is appropriate resource allocation to adapt to new jurisdictions. Whether it's adding in-house finance capacity or bringing in trusted third parties, the CFO should play a central role in the strategic elements of the change management process to facilitate as smooth a transition as possible.