SWTCH by Pigment
Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
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SWTCH by Pigment
Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
Register now here
By Christian Fournier, former Head of Finance Europe at Orange Business Services
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.
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