By Richard Reinderhoff, Freelance Consultant Strategy & Operations
A ‘financial’ strategist is a strategist first, and a financial second. For decades financials have been applying solutions to become a strategic business partner for the C-suite, from financial engineering and tax planning, to centralising (global) operations and deep analytics today. To avoid drilling deeper and still find nothing, reverse engineering the strategic role of the financial will show another route to be of value and increase the yield on IRR or profits with double digits…
If the aim of CFO’s and FD’s is to improve the decision-making process by the C-suite, meaning add value to the business, accounting and compliance aren't helping this quest. In fact, if you read the report by American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), Joining the Dots: Decision Making for a New Era, you’ll be in shock:
It is all about information, yet more details or more of the same data will give you the same answers, only in more detail or at a higher spend (Capex). The trick is to reverse the direction the financial is looking: from ‘stargazing into a black hole’ to ‘storytelling based on facts’. For this to happen, the strategy of the business needs to be placed into the ‘accounting’ systems.
A simplified example will be used to show, how this ‘street smart’ solution was encountered (step 1) and how it is set-up (step 2).
A strategy is often a group of plans, where the numbers disappear in PowerPoint presentations, Excel sheets or BI software. Many financials are hooked by their screens, yet the story in the plans is ‘lost in translation’.
For example, what does the following overview tell you?
Not much, it just shows you the composition of spend, not the strategic intent. As a board member, you might even be tempted to reduce Consultancy fees and Temps, as part of a company-wide ‘savings initiative’ as a response to market pressures.
The first step to increasing your understanding is to talk to Sales & Operations and ask what drives and blocks their business. For the same example, the “Accounts” have been decomposed and reshuffled into the “Business Drivers”, it shows how each business is planning to be developed.
When result are lagging, which question will you ask now?
Of course, as a board member, you will ask where and why performance is lagging. This is how the quality of the decision is increased, avoiding ‘one size fits all’ solutions. And normally, it’s the financials that should have provided the CEO, CFO or GM with the right answer.
As a financial, you have talked to Sales & Operation (managers, directors, and global VP’s) and they have given you a jointly agreed list of key “business drivers” for each market. This list should match their business plans or strategy. One problem, there are no such descriptions in the Chart of Accounts or as Cost Centres. Here enters project accounting.
What is a project? Basically, it is a sequential flow of various tasks. Each project task can contain any kind of spend, following the Chart of Accounts, and different ‘Cost Centres’ can book on a project activity, when working (or purchasing) together.
Within project management, each project task or activity is called a Work-Breakdown-Structure (WBS), with a WBS-description and WBS-number. To transform project accounting into a strategy storyboard, you give each project task a WBS-description of a “business driver”, and have a term which lasts e.g. 20 years or more. Now the strategy is in the accounting system!
The only instruction you have to give to the budget owners is that their assistant books each transaction and allocation with one additional code: the WBS-number, which is given by the budget owner and related to one of the business drivers.
Now that you have the strategy translated into a storyboard in your accounting system and amount are being booked, this is what you get:
Project accounting has more reporting advantages, e.g. it ‘overwrites’ / no cross-border limits, bookings can be split between different WBS-numbers, and various consolidation hierarchies possible.
How does this increase the yield with double digits? Re-allocation of Capital!
A company using a traditional business planning method will learn quickly. After management sees where the money really went into and noticing they spent less time understanding the numbers, they will start to permanently reduce spend on non-value added activities and fund only the best new opportunities.
Those companies familiar with Beyond Budgeting, Driver-Based Planning, or (strategic) Zero-Based Budgeting, will immediately see the real advantages:
The increase in returns comes from the effective execution of the strategy and adapting it in accordance with the business environment. By linking the strategy with accounting, and not the other way around(!), project accounting is writing the real success story, every month!
Independent on the accounting, ERP or BI system installed, using project accounting can turbocharge any financial into a strategic business partner without the need for any significant investment. When FP&A is placed within this bigger picture, the link to strategic planning becomes evident. By translating the strategic intent of the company into business drivers made visible through the ‘use-of-funds’, the execution of the strategy becomes fact-based, transparent and verifiable: ‘talks & figures’. Just think about it, and add real value to your role and your company.
By Niels Van Hove, Mental Toughness Coach & Supply Chain Consultant
Integrated Business Planning (IBP) is often seen as a natural progression from Sales and Operations Planning (S&OP), which came to life in the 80’s to align sales and operations. As S&OP found its origin in the supply chain, IBP is often biased with supply chain terminology and reasoning. It can be argued that current IBP development is still driven by a supply chain bias. With this lack of diverse thinking, IBP innovation runs the risk of being not truly ‘integrated’.
Contrary to most current defined maturity phases of IBP one can find on the internet, we also can define IBP maturity phases from a more strategic angle. Many experts agree that IBP has a monthly check and balance with the budget and the strategic intentions of a business. Therefore, a well executed IBP cycle will provide monthly visibility and measures progress against business objectives and strategy in the long term horizon. Furthermore, we can say that a business strategy and the required strategic resources and capabilities have the goal to get a company closer to its vision.
According to Collins and Porras a company vision exists from its core values, core purpose, a BHAG (big, hairy, audacious goal) and a vivid description. The core purpose is the reason for being; it captures the soul of the organization. Where you can fulfill a strategy, you can’t fulfill a purpose. Core values define what the company stands for. A company will stick to them, even if it became a competitive disadvantage in certain situations. Well defined, integrated and truly lived, purpose and values will drive companywide behavior. Imbedded company behaviors will drive a sustainable company culture, which will last over time. A well-defined achievable BHAG with a vivid description provides employees with an envisioned future they can identify with and which creates an emotional attachment, which makes them go the extra mile. As CEO Bob McDonald says on the emotional component and innovation at P&G; ‘People will innovate for financial gain or for competitive advantage, but this can be self-limiting, there is a need for an emotional component as well – a source of inspiration that motivates people‘.
If a company wants to track its budget and strategy and we use this vision framework and IBP as the planning process to support the business, IBP can be defined with the following maturity phases:
In this phase, companies start to focus on integrated planning between previously siloed functional areas. Some functions are more advanced than others. A company might have focused on state of the art finance processes and systems, but doesn’t reap the full benefits of that due to lack of integration of other functional areas into the finance process. Some integration exists, but not across all functional area’s and there is not enough integration with finance to make a monthly financial prediction on EBIT level in the long term horizon. S&OP as most define it will be in this phase.
In this phase, enough functional areas plan in an integrated way for the process to provide their input to the P&L to create a fully loaded forward projected P&L. Finance understands the ‘volume’ input and the other functional areas understand the financial ‘value’ planning. This will provide the company visibility on how it is tracking versus the budget or annual operating plan on a monthly basis on EBIT level. Why EBIT level? Because I heard too many times in a boardroom the argument, when only gross profit was on the table; ‘we can’t decide on this because we don’t have EBIT a number’. We can also expect these companies to deliver monthly balance sheet and cash flow prediction. For these companies, there is no separate budgeting or forecasting cycle. Every month can be the budgeting cycle. Dynamic indicates that opportunity and risk scenarios across all functional areas are integrated into the financial projection.
In this phase, the company has defined its strategic goals, measurements, and targets and is capable of checking and communicating monthly if they are on track to meet the strategy in the horizon beyond the budget. The strategic intent, which can be defined on lower levels like product segment, country or business unit level, will also guide in decision making for decisions on the budget horizon.
The company has also defined its core strategic capabilities to meet its strategy. There are many strategic capabilities possible. Ideally, a company shouldn’t have more than a handful as if it will define more it will erode the focus on these capabilities. Some examples are:
The list can go on and on with Technology, Sustainability etc. Once a company has defined its strategic capabilities and has defined goals, measurements and targets for these capabilities, it needs plans to implement or improve these strategic capabilities. An update on status, progress, risks and mitigations for those plans will be part of the IBP cycle in this phase. Dynamic indicates that sensitivity analysis around the plans to reach the goals of the strategic capability is part of the update.
In this phase, companies have a well-defined purpose, values and an achievable BHAG with a vivid description that people can identify with and which create an emotional attachment. The company aims to integrate this with the IBP cycle. A company can decide not to pursue strategic opportunities because doing so would compromise their core purpose or values. A large multi-billion dollar beverage company, for example, decided not to enter the very lucrative market of premium RTD’s (Ready to Drink) alcoholic beverages because the alcohol content was too high. Although the opportunity was achievable and margins were very interesting, the alcohol content would not be in line with their core purpose of ‘bringing more sociability and wellbeing to our world’. The purpose guided decision making in the strategic horizon.
The company values and the emotional attachment will be tracked in the monthly IBP process and have actions, goals, and measurement. Executives follow progress to understand if employees believe and identify with the companies values, BHAG, and purpose and show emotional attachment. This can be done by 360 degrees feedback, engagement surveys or roundtable discussion between executives and employees. Executives also have to lead by example in behavior and actions. Their own behavior will have goals and measurements and progress is tracked,
For all phases, communication is important, although it can be argued that it’s most important when developing an emotional connection. An IBP document on the key decision, outcomes, progress and wins in the IBP cycle can be communicated to a well-defined stakeholder group in the company. This will both give the stakeholders an understanding of business performance, priorities, improvement opportunities and successes, as well as keep the engagement with the company vision, purpose, and the IBP process. Executives have to realize and appreciate that this communication document is the results of all the hard work from middle and lower management to gather all required IBP information for the executives to make decisions in the IBP meeting. This communication makes sure the IBP meeting is not seen as a ‘black hole’ which only sucks up information and doesn’t provide feedback.
Once a company masters these four phases, it tracks and plans on a monthly basis the budget, the strategic intent and strategic capabilities, the company values, and purpose and the emotional attachment of the employees. If a company then links these plans with shorter term control plans and execution, we might call it real Integrated Business Planning.
Would these four phases be IBP innovation?
A purpose of FP&A is to help people acquire insight into how organizations function. People acquire insight from a variety of sources; they can acquire insight by reading reports, talking to people, or walking through facilities. A reason people choose a certain source to acquire insight is accessibility and as a result FP&A practitioners should make their insight accessible.
Technology has created significant changes in our ability to acquire access. Hardware like smartphones and tablets makes it easier for us to receive as well as send information. Software is no longer constrained to desktops and laptops; software can be stored on servers that allow us to record as well as obtain information. Perhaps the greatest change due to technology is the internet. The internet has transformed our ability to acquire access. Changes in our ability to acquire access will no doubt continue. The elements of FP&A, planning and analysis, should welcome these changes as a way to enhance its role within organizations.
Accessibility within financial planning can be achieved in a number of ways. Using shared document software like Dropbox and Google Docs can allow people to review as well as update elements within financial plans. Using communication software like Skype can allow people to engage in the financial planning process regardless of physical location. Using cloud accounting software like QuickBooks Online and Xero can allow people to evaluate budgets wherever they are. The internet serves as a valuable resource for support reference class forecasting. Reference class forecasting is an important part of the financial planning process dues to its ability to minimize the effect of optimism within financial plans. These are only examples; one’s education and experience can discover additional ways to develop accessible financial planning.
Accessibility within financial analysis can be achieved in a number of ways. The internet acts as a library containing volumes of information. These volumes provide insight into the profitability, liquidity, and solvency of companies as well as industries. Cloud accounting software provides statistics that can be obtained by people wherever they are. Smartphones and tablets can be used to obtain statistics in a manner that reduces the burden of using desktops or laptop. Financial analysis is a process that helps people learn how organizations function. Learning how organizations function should be made as accessible as possible in order to improve the well-being of not only the organization but also its stakeholders.
FP&A is an important part of an organization. Thinking about how an organization will function and learning about how an organization functions are tasks that help an organization move closer to its goals. Accessible FP&A is and will continue to be a part of a commitment to continuous improvement.
By Steve Morlidge, Business Forecasting thought leader, author of "Future Ready: How to Master Business Forecasting" and "The Little Book of Beyond Budgeting"
The concept of ‘Beyond Budgeting’ has been around for nearly twenty years now. Although it has helped transform many businesses and has become part of mainstream management thinking in some parts of the world, I talk to many business people who have still not heard of Beyond Budgeting. And many of those that are aware of it find the concepts difficult to grasp.
I believe that these ideas are too important to be overlooked or ignored – so I wrote a short book to fill these gaps in awareness and understanding.
The name of the organisation itself gives some clue as to why these gaps exist. ‘Beyond Budgeting’ (BB) describes what it wants to get rid of but not what should take its place. And the alternative that it advocates is not a simple blueprint that can be copied and rolled out across an organisation. Rather BB is a set of principles that have to be interpreted in the context of the unique challenges and opportunities faced by any particular organisation
For finance professionals, Beyond Budgeting changes how they do things not what they do.
So, instead of setting fixed targets for the end of the financial year, they would set relative targets that do not expire at period ends. And forecasting across a rolling horizon would replace detailed annual plans.
Resource allocation is a continuous process, made in response to emerging threats and opportunities, rather than an annual set piece event. And performance is measured by tracking trends rather than analyzing variances to budget.
Finally, the elimination of fixed annual budgets also has implications for other, related, business processes, such as how incentives are set and business activities co-ordinated.
If BB sounds like a small idea, of interest only to the Finance community, think again. But in reality, it is a large and subtle set of concepts that have important implications for the way that work is done and how organisations are structured and governed. To use an analogy from computing, BB looks like an organisational ‘app’ but it is more like an operating system - largely hidden from view but critically important to the functioning of the entire system and how it performs for its users: its employees, customers, suppliers and shareholders.
Beyond Budgeting creates an opportunity for finance professionals to contribute to business decisions making in a positive way rather than being the guardian of a process that everybody hates and adds so little to the business. I see BB as being liberating for the business and for the people working in it - finance people included.
Do you want to learn more about Beyond Budgeting? Learn from the best, Register to attend Steve Morlidge's workshop on Beyond Budgeting on the 4th of May 2017 in London city.
By Emmanuel Jibodu, Sr. Analyst, Global Finance - Stericycle Inc.
The inspiration for this article stems from a recent conversation on a Financial Planning & Analysis (FP&A) LinkedIn group that I'm a member of. A highly regarded FP&A professional posited that we discuss the differences between the controllership function and FP&A. This post will highlight a couple of differences from an FP&A practitioner's perspective.
CFOs, historically, cut their teeth in Controllership, FP&A, and Treasury before their ascension to the CFO role. Today, in most large corporations, the controllership function and FP&A have been bifurcated; they operate as two separate teams and have different mandates. The controllership function, nowadays, reports to the Chief Accounting Officer, while the FP&A function reports to the Chief Financial Officer (CFO). Itemized below are 2 main differences between Controllership and FP&A you will notice in the Office of Finance for most world-class organizations.
• Historical vs. Forward Looking
• Compliance vs. Exploratory
• Cost Control vs. Top Line Growth
The guiding principles of Controllership and FP&A functions can be subdivided into three categories:
Historical vs. Forward Looking
Controllership involves the accurate preparation of financial statements based on past periodic, quarterly, and annual financial performance. Financial reports are used by senior leadership to evaluate the performance of an enterprise or business unit. Investors use financial statements to gauge the performance of senior executives and whether the strategy adopted by a company's C-suite is successful. Creditors use financial statements to determine whether an enterprise can take on additional financing or has violated debt covenants.
Although the FP&A function sometimes gets involved in the historical analysis and reporting of trends in key performance indicators (KPIs), the bread and butter of FP&A work are predictive. FP&A offers senior leaders insight into the future financial position of an organization; this is done by leveraging statistical/data analysis - for example, multiple regression, moving average methods, what-if analysis, etc., performance indicators, macroeconomic indicators, and business intelligence systems to forecast the operational and financial performance of an enterprise. The forecasts FP&A teams provide senior leaders help guide: (a) resource allocation such as personnel, capital allocations, and investments (b) the rarefied circles of Wall Street and manage "street expectations."
Compliance vs. Exploratory
Financial statements must be in compliance with tax laws, IFRS, US GAAP, Sarbanes-Oxley (SOX). The remit of the controllership function is to capture the economic reality of the company's performance to the last cent (or dollar). When capturing items such as depreciation, amortization, impairment, pension obligations, revenue, leases, research & development costs, the controllership function cannot deviate from the guidelines or rules that IFRS or US GAAP provide them.
There are certainly best practices that are adopted by most FP&A teams, however, FP&A practitioners can explore different analytics methodologies and procedures for their assignments in the areas of planning, forecasting, budgeting, and ad hoc analytics. For example, there are a couple of methods an FP&A professional can deploy when tasked with forecasting sales for a software company. Traditionally, software companies have significant forecasting risk due to their inherent high operating leverage, as a result of their significant personnel costs. To forecast revenues for the next 5 quarters, he or she could analyze the number of request for proposals (RFPs) submitted per quarter per line of business (licenses, consulting), by product line, by geography, by target market (government, health care), - then this metric is forecasted for next 5 quarters. See formulas below to determine: New License Revenues per quarter.
Hence, he or she has to explore several dimensions during the course of the analysis. It would also be prudent for FP&A to model different scenarios for the sales forecast. For example, competitive pressures could cause the company to lower prices on their products and services - causing the average dollar amount per deal to decrease in future quarters. Alternatively, to produce a sales forecast, the FP&A professional can use historical data to forecast total sales using an exponential smoothing model.
Cost Control vs. Top Line Growth
An FP&A function that does not deliver financial insights that lead to enterprise sales growth is likely not delivering the return on investment (ROI) that senior leadership expects. Sales growth, among other financial indicators, is a sign that Wall Street examines when analyzing a company's performance. I imagine the conversation between a Controller and an FP&A Director at a cocktail event would go something like this:
FP&A Director: Hi... What a great event, isn't it...How was your year, at work?
Controller: Excellent! Our team saved the company a lot of money...by controlling our expenses in admin...and direct costs as well. Our expenses came under budget for the first time in 3 years... How was your year?
FP&A Director: We had a great year as well. We provided the CFO with insight into a market entry opportunity for our company... by acquiring the #3 company in Europe for our industry. We are expecting this deal to be accretive to Cash earnings per share (EPS)...by at least 12.3% over the next 3 years...Importantly, we're anticipating revenue synergies that will enable us to be the #2 company in our industry in the next 2-4 years...in terms of global market share.
The Controllership function mainly uses internal financial data that stems from Enterprise Resource Planning systems (ERP) to accomplish their objectives. Journal entries are posted to the General ledger system, the trial balance is prepared, adjusting entries are recorded (if needed), accounts are closed, and financial statements are prepared.
FP&A teams use both external and internal data to accomplish their objectives. For example, to develop a sales forecast for a software company whose clients are large corporations, FP&A would have to consider external macroeconomic indicators (i.e. leading indicators) that impact sales performance, as a variable. These indicators could be GDP growth and durable goods orders.
The Controllership and FP&A functions are two important components of any high performing organization, they have different mandates, however, they speak the same language, the language of numbers.
Comment below if you are a controller, member of an FP&A team, or treasurer and share your own professional experiences.
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