By Christian FOURNIER, Author (Globalisation - adapter l'organisation de son entreprise face à la mondialisation...)
Tools and processes used by finance and FP&A (commercial management, billing, accounting, operational statistics, competitive intelligence, planning, budget, forecast, variance analysis, reporting) needs to be customized in order to achieve both efficiency and relevance. There is nothing like on the shelf tools. Company’s industries, size, profile and positioning, geographic reach, product reach, etc. … constitute “forces” that needs to be understood in order to build a relevant and efficient set of tools.
There are debates about the relevance of (some of) these tools. Such as, is so call “traditional” budget or variance analysis still relevant? or beyond budget supporters or what granularity for chart of accounts, etc... These are based on (supposed) opinion that CFO’s and/or managers are not satisfied with the results of their own processes or tools.
In fact, such opinions are generally developing from
Prior reinventing the wheel, I would strongly suggest to thoroughly analyze these three “causes” and to take necessary actions.
First, look at the two last areas then concentrate on the process built and organization. Obviously, there are interacting but it is still important and more easy to analyze them separately.
1 - A wide range of potential issues can be originated from culture:
From a finance perspective,
From a management perspective,
These cultural issues impact the image of the finance outputs and needs to be assessed and considered as such.
2 - The ways objectives, bonuses and evaluations are articulated have also a major impact on the perceptions of the finance output. Obviously, managers (and employees) like and want to be considered as successful and to receive the financial and other elements of recognition that goes with it. As such the tools used for definitions and measurement, are subject to a lot of pressure, in particular when the environment is difficult or aggressive and when results are not in line with expectations. Questions about validity of the objectives definition or on the way performance is measured will for sure be raised and may be valid. This is a complex issue and I am afraid that no simple and single response exists.
I would still advocate the fact that plan, budget and forecast shall be set as per the best understanding on the business conditions and environment and shall not be polluted by “aggressive” or “defensive” individuals objectives and targets settings. This suppose a certain level of disconnect between the two set of tools.
3 - The relevance and effectiveness of the finance processes is definitely a finance responsibility but involve inputs from all parties. Over the statutory and tax obligations, finance processes must be design in order to give company management the best chances to take necessary decisions in a timely manner. This brings us to the first “dimension” that needs to be looked at: the time dimension.
The competitive or market intelligence is the next dimension to be analyzed i.e. the markets with its different components:
The external and internal resources are the next dimension to be analyzed with its different components:
The “statutory time” tends to naturally drive the finances processes. Accounting would be the prime example and it may be satisfactory for certain business or industries. The calendar month/quarter/year will drive the different finance activities (commercial and operational statistics, accounting, planning, budget and forecast, reporting…).
Still, some industries or business type require a different way to “respire” and then it is essential to take this in consideration in the design of the overall process. Some industries have a material seasonality, some have a very short order to revenue time (immediate to few days) where for others it is month(s) potentially year(s). This needs to be correctly assessed and integrated in the whole time table i.e. from order reporting to forecasting and reporting both in terms of timing/delay and in terms of periodicity.
A further aspect of timing to be integrated into the processes is the “time… to”. Time from proposal to order, time from order to revenue, time from contract to orders, time from launch to delivery, just in time ... depending on industry and company there are always a certain number of key “time to” which needs to be managed and which are critical for the accuracy of the forecasting exercises and in the explanation of the variances. Their identification, measurement and proper application are in most case vital to the quality of the overall process.
In certain business you may want to report and analyze revenues on a daily basis considering weekends and public holidays (distribution, restaurants…). At opposite in others, the contract or order to revenue cycle is such that even monthly reporting and analysis is too short to properly integrate any meaningful changes in trends. A material change or delay may impacts your revenues and revenue forecast. Optimistic or aggressing views may very well impacts the quality of your forecast.
The market dimension and its components are keys that need to be properly integrated within the design of the overall finance processed (end to end).
Those data dimensions will obviously combine on a dynamic way. This shall permit to capture and measure accurately (in the most extended configuration) (i) who sell what to whom in which currency per country destination at order processing level (ii) the revenue generation and associated Cost of sales in the same data configuration (billing/accounting) (iii) in order to compare to past periods and to budget and/or reforecast made along the same lines. This end to end chain is essential.
Effectiveness and relevance will get reduced each time the chain is ”broken” (or oversimplified). One “traditional” place is when information existing at order and billing level are “aggregated” at accounting level whereas budget/reforecast would be supposedly prepared based on business drivers that “miss” some of the dimension. Example with currency, if the pricing and billing currency information is lost when converted to statutory currency in accounting and if budget/reforecast is build using the latest revenue trend from accounting, any chance to accurately and efficiently understand, report and forecast incidences of currency fluctuation is lost. Similar issues can be met if the customer (or customer profiles) is lost along the process or if the product granularity is oversimplified.
Whereas finance may consolidate all information, sales and marketing shall be key contributors. Company objectives/targets (budget/reforecast) shall be logical with the market trends, correspond to a clear set of strategical and tactical options/hypothesis and performance shall be “benchmarked” to these options/hypothesis. Most of these options/hypothesis represent real decisions rather than simple “forecast”. Over the quality of the process, this is the quality of these decisions that is key to the final result. It means a necessary and material involvement of the management structure all along the process. Those decisions must be captured / embedded in the final output. They shall be tested with reality at end. If in any forecast there is a part of mechanical data gathering, there is also a fair amount of managerial pro-forma decisions and it should definitively avoid all form of wishful thinking.
Without those elements the relevance and effectiveness of the planning, budget and forecast processes thus reporting are questionable as well as individual objectives setting and evaluations. This is the main source of the uneasiness with those processes.
The challenge in there is in two folds:
In each category, the degree of importance may largely vary from strategic to common/easily exchangeable. This may be linked to the importance in terms of costs, to the scarcity or uniqueness of such resources or any other industry specific reason. The whole process shall then attach more attention to those resources than to the more common one. Data structure decisions are not just technical decisions, they are key fundamental decisions impacting business.
Whereas in the “theory country” evolution of costs shall reflex in the prices of product sold, in the “reality country” it is far to be so simple and automatic. Something very similar and parallel to revenue must then be design and implemented for the goods / suppliers / geography combination (at least for all strategic ones). Purchasing shall be a key contributor in-there.
The combination of revenue and cost of sales processes shall permit to understand and forecast margin on cost of sales evolution. In most business, the revenue, cost of sales and margin constitute the major business challenge and thus the area where effort in analysis and forecast shall be concentrated.
The other costs and investments will be captured, analyzed and forecasted following the company organization structure using enough granularities to have a detail breakdown covering every process of the company and matching it to the management structure. Certain non-strategic functions can be profitably outsourced to more specialized firms.
Again depending on industries and company those can represent quite a different challenge. Over the traditional analysis of the costs and investments it represents, it’s their productivity and utilization rate that must be measured, analyzed and forecasted.
Depending on business type, the weight of staff and associated costs can largely vary in percentage of revenue or even of the margin on Cost of sale. Services industries would concentrate large percentages in staff costs whereas manufacturing or extraction industries will concentrate a far lower percentage.
The head count by ranks and the statutory costs by function are largely insufficient. It shall be complemented by a true qualitative analysis in particular for the key competencies. Associated costs such as training, recruitment, redundancy,… shall also be substantiated over and above the “traditional” statistical trend.
A company cannot survive without proper financing. It supposes a dedicated / structured follow up and forecasting (that is a subject in itself).
Finally, keep an eye on your communication. Efficiently gathering and analyzing data, furthermore producing relevant synthesis represents probably 90% of finance work. Still, what may make the difference is the last 10% i.e. the way those are communicated internally and externally.
By Tijana Balotic Truong, Performance Management Professional
Becoming a business partner is usually a choice. There are several areas to consider when preparing for your new way of working:
Everything starts with you, and the understanding of what you want and why. Then follows how.
What is the purpose of you becoming the business partner, why do you want that to happen?
What do you expect from the role?
How realistic are those expectations?
How else could you achieve the same purpose/goal and meet your expectations if not by becoming the business partner?
What are your motivators?
How does your role of the business partner fit into the existing organizational culture?
What will be the implications (both positive and negative) of you becoming the business partner for you, your family, team, company?
Where do you see the biggest challenges?
What are the tools that you need in order to overcome them?
What kind of support do you need?
What do you require from your (future) partners in order for your role to add the most value to the organization?
How is best to obtain the necessary tools and support?
It is crucial to understand your own primary drivers and assess whether business partnering is the way forward for you.
If you decide to work towards becoming a business partner, it would be helpful to anticipate the main changes which will occur once your journey starts. Planning how to address these changes will be very important.
At the same time, it is necessary to accept that you will not have all the answers and that some of your views will change as the learning evolves. Staying open, connected to the reality and flexible will enable you to timely adjust.
Focus on the big picture will keep your priorities straight.
Although this assessment is about you, it does not mean that you should do it alone – feedback from the others will help you get the additional perspective. It is people who know you well, those in your organization and in your network you can trust, people who have been/are going through the similar process who can give you the relevant inputs. The more realistic picture you have, the clearer your next steps would be.
Adequate support at home would make it easier for you to focus on what needs to be done at work. Open conversations about the following topics will help you prepare:
Talking in advance about how the life outside of the office will change once the workload increases would make you and everyone impacted more ready. Going through the agenda of an ordinary day under the new circumstances would help arrive at a realistic plan of who can do what and where the bottlenecks are. If, for example, it turns necessary to hire someone to help with children/household/pets etc., it is better to start the search early.
For you to succeed as a business partner, it is critical to have your team on board. Discuss with your team members what becoming a business partner would mean for them, benefits that it would bring, challenges they would they face, what expectations and concerns they might have and how to manage those.
Your team members should conduct the assessment similar to the one you have done for yourself. If the expectations and the motivation are aligned, it would provide a solid ground.
After identifying the challenges, next step would be to design a plan to overcome them.
Prioritization is important in this process to define the optimal path. Ensuring some quick wins will help motivate and encourage the team.
The discussion will also contribute to the assessment if you already have the right people or you need the team to change/increase. In order for you to succeed, it is essential to have a strong team who shares the same vision and values.
The model of working should be designed in a way that helps everyone, instead of loading your department with the additional projects to work on. That is why it is important for everyone to understands and agree that you and your team will provide the support where relevant and that you will get the adequate support from the rest of the company.
However, is the company ready for this? How has the organization considered people in finance so far? It would be your role to demonstrate the importance and the benefits of bringing finance to the table while protecting your team.
Remember that this would be a long process and your role will evolve. Requirements from your partners are not always going to be obvious, sometimes your biggest contribution would be to identify the areas for the others to focus on. And there would be cases when it would be necessary for you not to get involved.
Being a business partner will increase your scope and you will be more dependent on others. Learning to delegate, choosing the battles to fight for, saying no without compromising the relationship, continuing to expand your knowledge, surrounding yourself with the right people and supporting them would be the keys to success.
Planning will help you get prepared, although it would not provide all the answers. Situations will evolve over time and you will be adapting together with the rest of the company.
It might also happen that you come to the realization that the overall price for you to pay to become a business partner is going to be too high. There is nothing wrong with that. Actually, the earlier you understand that, the better you can prepare for the alternatives.
Becoming the business partner is only the beginning; the main challenge would be to remain a relevant party at the table. The journey would be dynamic and you will learn a lot. Enjoy!
The dusk of Management Taylorism is the dawn for the strategic CxO. Constant cooperation, communication and deep business process knowledge are the answer to digitalization, data lakes and disruptive threats. The opportunity for Finance is to extend resource allocation and financial planning towards becoming the trusted strategic advisor beyond the mere financials. How can FP&A support this achievement?
BY TAKING THE CFO BACK TO SCHOOL!
Mintzberg, Ahlstrand and Lampel go on a strategy safari and present the historic schools of strategy. Each school has a distinctive focus and their combination put the corporate strategy beast to live. There are there main classes that shape the decision-making of future profitability:
The Prescriptive Schools of Strategy
1. The Design School
2. The Planning School
3. The Analytical Positioning School
Designing a conceptual framework for strategy formulation, developing an organizational planning process and enhancing it with an analytical positioning in the marketplace dominated the literature from the 60s to the 80s. Financial Planning & Analysis is by its very name a kid of these decades. A visual sneak into the "Technology of the 80s" makes it obvious why FP&A can't stop there. Yet, these schools are the compulsory exercise for the CFO with the following six schools to be considered the free skate event.
Challenge the CxO league in all strategic schools!
The Descriptive Schools of Strategy
4. The Entrepreneurial School
5. The Cognitive School
6. The Learning School
7. The Power School
8. The Cultural School
9. The Environmental School
Moving from the foundation schools about strategy to the field exercise, entrepreneurs envision products and put them to live. This strain is a prerequisite to formulating a strategy to be a cognitive process deriving from individual brain activity and psychology. The Cognitive School is small yet powerful with Daniel Kahnemann and Edgar Schein contributing as psychologists to the strategist's mind. Btw, Eric Kandel, like Kahnemann also a Nobel laureate, wrote a tremendous book on the brain, perception and learning.
"Culture determines and limits strategy!" Edgar Schein, MIT (pdf Review here)
Taking a perspective beyond the individual are the latter four schools. Learning is equal to an emerging strategy as the complexity of the world is neither grasped in a moment nor steady enough for a once for all determination of the business future. The schools set a strong argument for a frequent planning and forecasting process facilitated by FP&A.
The Power School implies strategy as a result of negotiation and compromise. In this fpa-trends article, I laid out the negative effects of a group decision: the compromise tends to be loaded with risk. This being the most cooperative and communicative school, the CFO is well advised to cross borders into knowledge about the process of political decision-making (the german standard at google books). This holds true, esp. as the traditional, military styled organization makes room for more cooperative and communicative forms. The democratic design of special forces worldwide proofs, that the military again leads the way.
While the schools from 1 to 8 take an active stance, the Environmental School is a reactive school with a strategy derived from external forces. The CFO can manifest it in comparative KPIs and benchmarks. Being blind on this side, strategic actions will flow around Finance.
Look at the competition and express their performance to underline the strategic ambitions of the company!
Combinative and transformative:
10. The Configuration School
combines any selection of the empirical and theoretical findings clustered in the schools above. Here, why can't Finance hold the grail to a strategically shaped future with a
as laid out by the International FP&A Board? There may be a few personal related ones which bring us back to the beginning: back to School, learning never ends!
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.
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