Today’s CFO is more than a numbers person. In addition to fulfilling the traditional oversight function, the finance executive is also now a key business performance manager mandated to achieve operational excellence.
He or she has to make sure that the business is getting the operations right the first time and meeting operating targets – optimized processes, reduced error rates, lower costs, higher quality products and services etc. In today’s constantly changing business environment, this might look easier said than done, but they key to operational success is ensuring that the business operating model is aligned with the new economic realities.
This is how we have always done business no longer cuts it through in our current industrialized and digitized economy. New technologies and innovation are disrupting business models. Customer behaviours and spending habits are constantly shifting. Geopolitical risk across the globe is at its peak. Growth in developed economies is stagnating while in emerging economies it is fraught with severe challenges. Competition is intensifying.
In short, the world is now extremely volatile, uncertain, complex and ambiguous (VUCA).
Such changes are exerting immense pressure on the operational performance of the business. Thus, to survive and improve performance in this dynamic environment, businesses must learn to adapt, become agile and innovative.
Finance can play an important role in improving the company’s operating performance by helping the business navigate around these challenges.
Develop and strengthen relationships with operating managers
The ability to forge positive long lasting relationships with business unit managers is now a critical skill necessary to achieve finance effectiveness. Finance can longer sit comfortably in the back office, and expect to add value to the business.
Instead, finance needs to obtain front-line and hands-on operational experience. For instance, join operational teams on site visits or other external stakeholder meetings. It is through these interactions that finance can develop and demonstrate own understanding of the business and how it works.
The function will be able to acquire knowledge on the operating unit’s markets, competition, customers, supply chain and risks. This information is necessary for developing and implementing reliable and meaningful performance measurement metrics and ensure that everyone is on the same page. It will also help determine whether or not any business-related changes being made will have a positive or negative impact on the company.
Gaining knowledge of operations and the business is not an overnight process. Thus, finance needs to work with operations more closely and more frequently. Regularly maintaining contact and discussing business performance with operating managers is key to developing trust and strengthening the relationship between finance and operations.
On the other hand, infrequent contact with business unit managers will unfortunately hinder finance’s progress of becoming the business’s trusted advisor.
Finance effectiveness goes beyond simply publishing the numbers
In addition to reporting the numbers, finance must also be able to tell the story behind the numbers. What is driving the numbers? Can the numbers be maintained? Are they trustworthy?
Decision makers are always looking for information that is objective, insightful, relevant and usable so that they can understand the financial implications of their decisions and actions. In other words, one version of the truth.
Unfortunately, for many finance organizations, they are failing to provide information and insights operating managers need. Rather, they are providing what finance thinks they need. This in itself is a recipe for disastrous decision-making processes.
To avoid falling into this trap, finance must regularly meet with business managers and discuss their information needs. This will ensure the function is providing relevant information and insights on performance drivers as well as factors that will have the most impact on the business.
How often does your organization’s finance team discuss performance issues with business unit managers? Daily, weekly, monthly, quarterly or there is no regular discussion about metrics and performance? How influential is finance in defining improvement goals? What role does finance play in measuring, managing and monitoring performance?
By leveraging data analytics technologies, finance can help optimize operations and provide business managers with reliable information on what happened, why it happened, what will happen in the future and how it will happen. Instead of relying on hindsight and insight to optimize operations, business managers will develop foresight about the future and improve their decision-making processes.
Recognize the need to do more
Finance must show a continued interest in helping the business achieve operational excellence.
It is important to note that finance business partnering is not an occasional process whereby finance shows an interest in improving operations, fades away for a while, comes back into the picture, disappears again and the cycle continues like this. Rather, the focus should be on continuous improvement.
Although some organizations have already started transforming their finance organizations, the gap between finance’s actual and desired involvement in operations is still enormous. Closing this gap requires finance to recognize the need to do more.There must be a hunger to add value to the business and become a critical player.
Finance must continuously evolve and become a learning organization. It must adapt its operating model and embrace the important role it plays in helping the business advance its operational performance. It is common to encounter significant hurdles during the transformation process but this must not act as a trigger to give up.
The focus should be on becoming better and making performance improvement an everyday mandate. Identify a few operational targets, processes and critical reporting and analysis that are in dire need of improving and focus on these. Once you have worked on these and are happy with the progress made, you then move to the next areas of improvement. Sometimes it is better to start small and celebrate small wins than not start at all.
Finance can only do more if the corporate culture and senior executives support the collaboration of finance with the rest of the business. Thus, the type of an organization the CFO works for can influence the role that finance plays.
If the organization is traditional, slow to change and lacks executive support, finance will forever play the oversight and reporting role. On the other hand, if the organization is adaptive, innovative and executives rely on information to drive decisions, then finance will play the key strategic advisory role.
I welcome your thoughts and comments
The risk landscape is changing fast. Risks are multiplying at an alarming rate threatening to cause both financial and reputation ruin to the business. Because of this increasing risk complexity, there is a heightened focus on effective risk management.
Senior management and board members are consistently looking for a deeper understanding of the organization’s risk profile and how various risks to the business are managed.
Risk management is an enabler of higher level performance.
Without taking risks, organizations cannot grow and achieve strategic success. Risk is no longer something to only dread, minimize and avoid. Instead, leading organizations are using risk management activities to create value and help them improve their businesses.
It is therefore critical to ensure that efforts to mitigate the downside impact of risks are coordinated with efforts to manage risks that support business growth.
As a strategic thinker, the CFO should play an important role in helping other executives and the board get a deeper understanding of the organization’s key risks and risk management capabilities. He or she can help build an ERM framework that is entrenched in the organization’s management processes and functions.
A well-structured and coordinated ERM framework provides support and guidance on risk management activities, helps identify and manage enterprise risks holistically and makes risk consideration an inherent part of key decision-making processes. On the contrary, a siloed approach to managing risks exposes the business to significant risks and value erosion.
Unfortunately, in most organizations, risk management is a disjointed process. Multiple functions are managing one or more aspects of the company’s risk profile, and there is minimal coordination with each other. For instance, each function carries out its own risk assessment process using different risk terminologies, methodologies and reporting practices. Decision makers are overwhelmed with more than one versions of the truth.
The problem with this approach is that it often leads to confusion on the true meaning of risk, duplication of efforts, unnecessary bureaucracy and costs and poor risk decision-making processes.
When there is a common risk language across the enterprise better decisions are made, for example, concerning market entry, new products and acquisitions. This often leads to reduced earnings fluctuations and increased stakeholder confidence.
Build a clear picture of significant risks.
As the role of the CFO continues to evolve into a more business-partnering one, it is imperative that the finance organization is rightly equipped to proactively identify all the potential risks and defend their businesses. What are the key risks to the achievement of your business objectives? Do you have the required risk management capabilities to address this risk profile? Who is responsible for monitoring and reporting risk information to decision makers?
Thus, the CFO and his team need to consistently assess, improve and monitor the way the organization manages its evolving risk profile. The risk assessment process must provide actionable and real-time insights on inherent risks and link them to the organization’s objectives, initiatives and business processes.
A thorough risk assessment process helps identify and prioritize risks that require urgent monitoring and mitigation. It also allows for the testing of existing internal controls and identification of opportunities for improving controls and risk mitigation strategies.
On the other hand, insufficient risk management processes can lead to costly lawsuits, significant financial losses, massive reputational damage and fly-by-night financial reporting, which can raise fundamental questions about the business as whole, its management team and viability.
An effective continuous risk assessment and management system therefore requires the team given the responsibility to do so to develop thorough knowledge of the company’s strategic objectives, operations, products, services, risk history, internal environment and its external environment.
Some organizations are leveraging data analytics tools to access forward-looking data from a range of sources, generate insights about changing market conditions and behavioural changes, evaluate metrics and integrate this real-time information to build risk models and forecasts as well as comprehensive risk strategies.
Coordinate and align business processes.
Risk management activities should be a key element of normal business operations. For this to happen, there must be top management buy-in to the business case for embedding risk strategy into the day-to-day running of the business as well as enhancing risk management performance.
It is therefore important to receive clear communication, proper oversight and accountability from senior management and the board concerning risk and governance. This will ensure that a common risk framework and universe is embraced and implemented across the organization.
Maturity models and benchmarks of leading practices can be used to help management determine the existing state of their organization’s risk management capabilities and define the desired state.
As one of the organization’s senior executives, the CFO should play a leading role in defining risk management objectives and embedding risk principles into the business processes. They can leverage their analytical and communication skills to broadcast to the business the benefits of risk management and the disadvantages of inadequate risk management processes.
The CFO plays a critical role in establishing the organization’s risk appetite, determining how the business will measure risk and ensures risk taking is within the acceptable risk thresholds of the organization.
By regularly reporting risk information and coverage to business unit managers, a risk aware culture is embedded in everyday business practices, and this in turn will help business managers understand the implications of their decisions on business performance.
I welcome your thoughts and comments.
Finance is increasingly taking an important role as the business partner. Thanks to digital and technology advancements, CFOs and their teams are now able to expand expectations beyond the traditional accounting and compliance functions. Routine finance and accounting activities are now automated thereby freeing up more time for finance executives to spend on strategic issues.
In high performing organizations, finance is collaborating more with the business and making a deeper impact on critical business decisions. Instead of taking the back seat, the function is playing a leading role supporting change initiatives and driving performance improvements.
Increased regulatory demands, competitive pressures, volatility, uncertainty and shifting customer behaviours are posing immense challenges on the day-to-day running of the business. In order to succeed and grow in this world, businesses must adapt to change and become forward-looking. Thus, managers and executives are calling on their finance executives to help shape the future of their companies.
With many expectations before them, it is no longer enough for finance to focus on scorekeeping and reporting the past. Finance must help business managers understand the current results, predict future performance based on different scenarios and provide insightful recommendations on how to run the business better and propel the business forward. Business managers are constantly looking for real-time information that will help them make informed decisions and finance can successfully act as the source of support.
Finance must embrace change.
Finance cannot continue to do things the same way repeatedly. To succeed in the current environment you need to change your processes, systems and periodically review your finance operating model and strategy. Many finance organizations are still reliant on legacy systems and outdated processes that are stifling the much needed innovation and growth.
Despite advanced developments in financial technologies, low performing organizations have not automated routine accounting and finance activities; these are still manual. These organizations are spending the majority of their time manually gathering, manipulating, consolidating and reporting historical performance. Budgeting and forecasting processes are also manual. Very little time is spend on performance analysis, risk analysis, strategy review and predicting the future. As a result, decision makers are lacking critical insights that drive robust decision-making processes.
Finance needs to embrace modern technologies, innovative and agile business models in order to improve the function’s effectiveness and efficiency. Strategies that have worked in the past will not automatically take you to the highest rank of success. Thus, as the business environment changes you also need to review and adjust your finance strategy. The finance strategy must be aligned with the business strategy of the organization. It doesn’t help for finance to do its own thing and the business to do theirs.
Finance must step up and prove its value
Although the expectations on finance to play a strategic role and improve business performance are high, the function must prove its value and that it deserves a seat around the table.
Making critical decisions such as which markets to play, improving the company’s product and service offerings, improving profitability and selecting mergers and acquisitions targets all require finance’s informational capabilities and analytical expertise. Finance must therefore understand the needs of the business and apply its expertise to those activities that are linked directly to the company’s success or failure in the marketplace.
The challenge for many finance leaders is that business managers are not completely trusting of the information provided by finance. When there is no trust in the source of information, it is difficult for the manager to act on that particular information. Finance must therefore collaborate more with business units to build and strengthen partnerships with their operational colleagues.
Rather than stand in the path of progress, finance must act as a navigator and help steer the business in the right direction. For instance, instead of blocking investment proposals and constantly saying NO to business managers, finance need to first understand competitive and environmental dynamics, model decisions under different scenarios, evaluate their financial impact and then explain to decision makers the revenue, cost and profit implications of their decisions.
If the decisions proposed by business unit managers and other executives have a negative financial impact, finance must be able to find and propose alternative opportunities to improve operational performance.
By continuously collaborating with the business and providing decision makers with actionable recommendations, finance will be offered a seat around the table.
Finance must become a trusted advisor and risk taker.
Good business decisions often depend on insights that emerge from good data analysis. Basing decisions on wrong assumptions and information often results in loses and devastating consequences for the business.
Thus, in order to become a trusted advisor finance must base its recommendations on facts and not gut feel. Finance must help the company get value from the data it currently owns. In today’s world of big data and analytics, organizations that are able to mine this data and find meaning will have an enormous advantage over those that do not.
Successfully executing a business growth strategy comes with both benefits and costs. Unfortunately, the majority of finance professionals are risk averse and fail to look at the bigger picture. Growing and succeeding in the current economic environment requires the business to develop a risk appetite and take calculated risks. Remember high risk, high returns.
However, this does not mean that all decisions should be taken lightly with no consideration of risk at all. Instead, finance should help articulate the company’s risk appetite to the business and ensure that all activities and investments undertaken are within the approved limit levels.
I welcome your thoughts and comments.
Digital and technology advances are profoundly transforming the finance function from a number cruncher to an enterprise data and analytics powerhouse. Disruption is taking place at alarming levels and for CFOs, it is no longer a case of whether they should respond to this change or not but rather how and how quickly. They need to be able to make sense of this digital economy, drive economic value and improve business decision making.
Internet of Things (IoT), Big Data and Analytics, Machine Learning, Cloud, Robotic Process Automation (RPA), Security Threat Intelligence, In-memory Computing, Mobile and Artificial Intelligence (AI) are all enabling businesses to:
- Transform their supply chains.
- Anticipate the future, mitigate risks and take advantage of opportunities.
- Deliver efficiencies, accelerate business growth and improve profitability.
- Redefine their operating model, become more agile and responsive to changing market conditions and customer expectations.
- Get closer to existing and potential customers, understand their needs and wants and create unique experiences and solutions.
In order to realize the above benefits and digital’s full value it is imperative to change the organization’s finance operating model and adopt new ways of working.
Investing in digital is a strategic move rather than a technological issue. Many digital investments fail to take off from the ground because management view these an expense and not an enabler of strategic success. There is therefore an urgent need to change this perception. For instance, embracing digital technologies can help finance apply advanced analytics tool sets to volumes of structured and unstructured data, make sense of this data, and produce real-time reporting and business insights.
Changing the perception that investing in digital is an expense requires finance to develop an activist mindset. CFOs must build a strong business case for embracing digitization, help business leaders understand what the digital advances mean for their business units and determine the appropriate strategies and capabilities needed to respond.
Important to note though is that not every organization has a use for every digital technology in the market. You need to identify and select a tool based on the specific needs of your business. Thus, CFOs must develop a coherent digital finance strategy that is aligned with the business strategy. Technology alone is not the answer to your business needs. In order to experience real digital transformation, the business must also have the right support systems in place, from the optimal talent mix to the appropriate operating model.
Furthermore, for finance to successfully embrace digital technologies and making a positive impact to the business, the function must quickly adapt its skills set around digital and IT innovations. Artificial Intelligence and RPA are taking over many routine and rules based accounting and finance roles. This means finance professionals must move beyond their traditional historical reporting role to a more predictive analytical and business partnering role.
They need to sharpen their analytical capabilities, ask the right questions from structured and unstructured data sets, turn the analysis into commercial insights and drive business strategy across economic, market, competitor and customer perspectives. Today’s finance professional has to be more collaborative and strategically focused, engaging with the business and delivering insightful advice.
As data and analytics continue to transform businesses, it is no longer advisable for the finance organization to fill up with accountants only. In order to exploit to full potential the internal and external data the business holds, finance must be made up of diverse teams with different skills sets (Data Science, Analytics, Statistics, Behavioural Economics, Systems Thinking etc.) to encourage creativity and debate.
With digital opportunities also comes threats. The number of cyber incidents is growing exponentially thereby increasing the risk to the business. Phishing emails, Trojans and other multiple virus attacks are some of the security challenges that CFOs have to deal with on a continuous basis. Because the finance function is normally the custodian of sensitive information within the business, it is imperative that the CFO is on top cyber security. You need to have answers to the questions below:
- Do you know where your information is at all times?
- How the information is stored and kept safe?
- Who might want to steal it (disgruntled employees, criminals or hacktivists.)?
- How can intruders gain access to the information?
- What is the financial impact of a cyber-attack?
- In the event of a cyber-attack, do you have a clear and credible contingency plan?
It is therefore critical that finance takes the lead in assessing and advising the Board on all cyber-security matters. You need to identify the most valuable assets that differentiate your business and are in most need of protection.
There is no doubt that digital and IT advancements are reshaping the way we live and work. Organizations that are quick to embrace these changes and make innovation an every day part of their business will more than likely reap benefits in the long-term.
Because of its analytical capabilities, finance is best positioned within the business to drive the digital transformation agenda and act as a reliable source of analytic insights since the function is able to connect structured and unstructured data from various sources and produce reliable insights from its analysis.
I welcome your thoughts and comments.
Businesses today are operating in an increasingly complex, volatile, uncertain and competitive environment. To cope with these challenges, organizations are increasingly calling on their finance teams to move beyond their traditional role of historical performance reporting and start providing more forward-looking decision support.
In the past, businesses have focused more on lean accounting practices to achieve profitability growth. However, there is a tipping point for these measures. Organizations are realizing that they can cut costs only up to a certain level and for a certain period. In the long-term, cost cutting alone is not sustainable. Because of this, there is increased pressure on the organization to find other ways of stimulating growth, for example, expand into new and unfamiliar markets.
Unfortunately, organizations cannot nosedive into a new market without first understanding its strategic and operational dynamics. A deeper understanding of the markets and the competitive landscape is necessary. Finance can play that important role of providing enriched, reliable and objective information to senior management to enable them make successful strategic investment decisions.
To successfully play this strategic business partnering role, finance personnel must start working towards raising their profile within the organization. The perception that finance is a back office function is still large, and for this to change, finance must increasingly support business managers and contribute to company performance.
Finance is a lot more than measuring income and costs
Finance teams are under pressure to improve business performance and help the company grow in the midst of the current economic conditions and challenges. To be able achieve this, finance personnel need to recognize that their responsibility goes beyond the realms of number crunching. There is a difference, for example, between reporting the revenues made by the business and understanding the key performance drivers of those revenues.
Revenue is more than a number. For instance, do you have an understanding of the level of risk that is being taken by the business against this revenue? Also, how much capital is being allocated for this revenue? It is therefore critical that finance develops a detailed understanding of the revenue drivers, and move beyond evaluating past financial performance and help the business grow by providing high quality analysis and actionable recommendations that are fact-based and real-time.
The starting point for finance executives is to perform a thorough and objective analysis of their finance talent mix. Whereas in the past it was ideal for the finance function to only be filled by accountants and auditors who are naturally transaction-oriented, the modern finance function requires a different skills composition. There is need of personnel with more capabilities in strategy setting and execution, operational experience, advanced analytics and a broad business perspective.
How can finance expect to provide good advice and decision support to the business if it lacks enough knowledge about its business, industry and the competitive landscape?
Finance must take a supportive approach to the business
It is no secret that in many organizations the image of the finance function is tainted. There is a large perception that finance stifles business growth by constantly looking for problems and saying “no” to strategic investment decisions. By taking a supportive approach to the business, finance can create a positive image for itself.
Instead of being viewed as the policemen of the organization, finance personnel must strive to improve their identity and become the trusted strategic advisors of the business. Business leaders are constantly looking for information capable of helping them get a better understanding of the profitability of each customer, segment, market or geography they operate in and how they can improve that performance. Finance can act as a source of this information. It is therefore important for these leaders to find the analysis, information and recommendations produced by finance useful.
To avoid being labelled “bearers of bad news”, finance must learn to bring objectivity to the discussion table. In other words, finance must bring a different perspective and help business managers view the future differently. For example, leveraging on the function’s analytical rigour, finance can help forecast trends and conduct business reviews aimed at anticipating market movements, future disruption and opportunities. This in turn helps the organization allocate resources more effectively and effectively, and drive value creation.
Create Centres of Excellence
Many finance functions across the globe are not adding strategic value to the business as much as they would love to. This is mainly because of their current focus. Findings from numerous studies have revealed that finance executives are spending the majority of their time on non-value add transaction recording and reporting processes.
However, some finance organizations have managed to get it right. In order to free up time on value-add activities, they have created and implemented shared-service centres that bring together certain functions (e.g. procurement, customer services, audit, payroll, tax, treasury etc.) under one roof and also created Centres of Excellence aimed at improving future performance, for example, Financial Planning and Analysis (FP&A).
This integration of different functions enables finance not only to reduce costs but also to collaborate more with the business and supply high quality and more timely information. By spending more time with the business, finance can move beyond simply observing the impact of decisions made by business managers and be directly involved in the creation of that value.
Routine transactions and processes are being automated via Robotic Process Automation (RPA) technologies. At the same time, our current data-driven economy is leading companies to invest in advanced analytics. This is also freeing up time for finance to focus more on data analysis and insight generation. However, business leaders must understand that investing in technology alone is not enough. The organization still needs trained and experienced analytically finance personnel to bring the best out of the system.
I welcome your thoughts and comments
One of the challenges facing today’s finance executives in transforming the finance organization from a back office function into a successful front office strategic advisory role is a shortage of talented finance professionals and leaders. Without the necessary finance talent and an operating model to support finance transformation initiatives, it is increasingly difficult for CFOs and their teams to become effective business partners.
Have An Effective Finance Talent Strategy
The skills required for successfully executing the Finance Business Partnering role are different from the skills required to fulfill finance’s stewardship and operator roles. It is therefore critical for CFOs to take stock of the current talent and evaluate whether the available talent is capable of moving the business forward.
Although in most organizations the HR function is responsible for overseeing the overall talent strategy of the organization, it is critical for the CFO to partner with HR to determine Finance talent needs and allocation with the function. The CFO is in a better position than the HR Manager to know and understand the skills required to drive Finance effectiveness.
In one of their CFO Insights publication, Deloitte identifies critical questions that Finance leaders must answer prior developing their organization’s finance talent strategy:
- What knowledge, skills, abilities, and experiences do we need now? Where do we need them? How many do we need? When do we need them?
- Which skills will be most critical to our business in the next three years? Five years? Longer term? How are these skills and skill mix changing?
- What are the specific competencies that we need to develop in our finance workforce, from both the technical and leadership perspective? Are there new competencies required in both finance and the business generally?
- What are the “people” or talent programs, policies, and practices necessary to realize both those technical and managerial competencies? Can we leverage or build upon what HR already provides, or do we need something new or unique?
- Why would somebody join our company’s finance department, given the high demand of finance professionals? Why would they stay? What makes our finance function a career destination rather than a career way station?
- What is my role and those of our finance leaders and C-suite colleagues in fostering a talent experience within finance that emphasizes the right combination of development, opportunity, and work-life balance?
Honestly answering the questions above will help you identify strengths and weaknesses in your current talent strategy and act as a starting point for a successful transformation journey. You need to have an effective strategy that not only supports Finance, but also the broader strategy of the business.
Finance Business Partnering is More Than Number-Crunching
Finance professionals must also be able to extract meaning from the numbers and influence business decisions. This requires the function to increase its commercial acumen as well as improve its leadership and influencing behaviours. The CFOs role is more than producing management accounts. It is not about putting data together but asking the right questions. The CFO must be able to interpret the numbers produced, have a good understanding of all the facets of the business and be solution-focused.
Thus, Finance needs to stop focusing on historical backward looking data (descriptive analytics), and leverage predictive and prescriptive analytics for better decision-making. Are you looking to the future through the use of leading key performance indicators? You need to be a good story-teller and help executives understand the drivers of the numbers and map the future and its outcomes. Are you helping your CEO look at the future differently? Reporting on the past alone is not enough.
Finance Transformation is a Journey, Celebrate Small Wins
Transforming the finance organization into a successful strategic advisor is a journey and not a once-off initiative. There will always be room for improvement. It is therefore imperative that CFOs take a strategic approach to adding value. Instead of tackling all partnering opportunities at once, they need to collaborate with the business and identify requirements, challenges, priority areas and activities. By focusing on these priority activities, Finance will be able to focus attention on what is critical, allocate resources accordingly, deliver real value and prove the function’s add-on value to the business.
As a Finance leader, care must be taken that you are engaging your team in many activities at once as this will probably cause your team to lose focus and produce sub-optimal results, which in turn will relegate Finance back to the back office. Small business partnering wins will result in further partnering opportunities in the future.
Get the Basics Right the First Time
If the numbers are not right the first time, then it becomes difficult for the CFO to build credibility and become a strategic partner. Although there is increased demand on the CFOs to be more strategic in their approach, stewardship and operator roles still remain critical and must never be regarded as non-critical. These roles still play a critical role in delivering the broader Finance strategy of the business.
I welcome your thoughts and comments
One of the challenges facing today’s finance executives is improving operating margins for the business. Top-line growth is very slow, inflationary pressures are causing higher input costs, and customers are pushing for innovative new products and services, albeit at discounted prices. All these factors, among others, are significantly squeezing company margins left, right and centre.
Uncertainty is the norm today, rendering tried and tested ways of creating value unfit for purpose. Thus, finance executives and their teams have to come up with new innovative and agile ways of capturing value and striving in this environment, while at the same time keeping costs down. Look no further than the number of profit warnings, earnings miss and business closure announcements by companies of all types and sizes. This just shows how the pressures on margins are considerably increasing, and also not expected to abate anytime soon.
When it comes to improving operating margins, many finance executives normally make one of these common mistakes. Implement across the board cost-cutting initiatives (mostly focused on reducing employment costs), raise products/services prices, or offer steep pricing discounts with the hope that the discounting will boost revenues and translate into higher operating margins. The problem with these approaches is that they fail to take into consideration the value-add to the customer.
So what must finance do?
Think and Act Differently
Most of the time the finance executive’s focus is on improving specific elements of the Income Statement, instead of the entire business. This in turn results in the finance organization embarking on one-off cost reduction initiatives, that fail to differentiate and understand the difference between good and bad cost.
Instead of focusing on cost reduction, heavy discounting and price increases, the CFO and the team must apply innovative, non-traditional thinking to margin management. They need to have a deeper understanding of the forces (both internal and external) driving the business margins. Many finance executives are aware of the factors influencing their margins. But, do they really know the significant drivers at granular levels for each product, channel, geography, segment, market, or business unit?
Thinking differently and making use of ABC/M, Customer Life-cycle Value and Customer/Product Profitability Analysis techniques can help CFOs understand their organization’s costs and their drivers. It also helps them to think beyond historical top-line focus and current constraints, and focus on doing the right things. For example, the CFO will be able to ask and answer the following questions:
- What does our customers value most?
- Is our current value proposition delivering customer value?
- Do we need to change our current business operating model?
- Should we sell all the under-performing assets or not?
- Should we exit all the under-performing businesses, brands, markets or channels?
In order to improve operating margins, it is critical that executives consistently apply margin management to the entire business. You need to manage margin the end to end processes of the entire value chain, and find a more integrated way of driving overall results as opposed to one element of the income statement or business. This helps eliminate waste and also leads to more transparent and informed decision making.
Make Insight-Driven Decisions
Although information systems have improved significantly, many organizations are still struggling to benefit from their use. For instance, there is an organization class that is still reliant on primitive systems that are no longer fit for purpose in today’s data driven-economy. Then there is another class of organizations who have implemented modern technologies to enhance decision making but are struggling to integrate these with existing systems or have experienced dismal implementations with far-reaching consequences.
The modern finance organization must leverage data and analytics to inform margin decision-making. For instance, CFOs can make use of advanced predictive modelling and simulation tools to identify drivers of margin, calculate margins under different scenarios and evaluate ways of improving the margins.
Care must be taken that you do not embark on a data-hoarding spree without first understanding why you need that specific data. You need to make sure that you are collecting the right data to analyse and extract meaning from, otherwise you will end up wasting your time, energy and resources analyzing wrong data and generating ineffective insights. Information is only as valuable as the decisions it drives.
Wrong data collection often results in ineffective analysis and generation of misleading insights which ultimately leads to slow and ineffective decision making. This also causes the business to react slowly to new opportunities and threats. Instead of being proactive, overall decision-making is mostly reactive.
When margin decisions are made based on insights, more emphasis is placed on adding value to the customer and not on quick fixes such as slashing more costs. You can cut costs only up to a certain extent, long-term this is not sustainable. Hence the need to find alternative ways of boosting margins. Evidenced-based decision making also enables executives to develop a more detailed understanding of the full set of profitability drivers for the company.
Cultivate a Margin-Focused Culture
Delivering improved margins also requires the organization to develop a common understanding of the meaning of margin management and why this is crucial. This is necessary to promote accountability, drive the right behaviours across the organization and ensure that margin optimization remains a key priority.
Successful fostering of this culture depends on senior management buy-in and involvement. If the drive is coming from the very top, it becomes easier to embed the culture into the business and make margin improvement an everyday part of the decision making processes. Senior executives have to therefore show a commitment to margin improvement otherwise the middle and lower level employees will also not be committed.
CFOs are better placed to drive this culture because of their constant engagement with the business – Sales, Marketing, Operations, R&D etc. By collaboratively working with other business units, finance executives can provide them with the information and the tools they need to make decisions that support profitability goals. They can also help put in place metrics that are not focused on volume alone but also drive the right behaviours and stimulate growth.
Furthermore, CFOs have to ensure that they are consistently reporting and reviewing margin performance across all brands, product categories, channels, segments and markets on a monthly basis. This will enable margin management to get embedded in the fabric of the business, and also be fully integrated with the broader strategy of the business.
Improving operating margins is not the responsibility of the finance organization only. It should be everyone’s concern. However, finance must lead the conversation. The CFO must ensure that the right operating model and capabilities have been developed to identify areas of margin leakage and define improvement actions.
I welcome your thoughts and comments.
These days there is a lot of talk about the transformation of the finance organization from being a traditional back-office function to playing a more strategic advisory role. The CFO is being touted as the CEO’s wingman responsible for helping him/her execute the company’s strategy and improve performance. Once regarded as the bean-counter of the organization, finance is being demanded to partner with operations and sales and help grow the beans.
Despite the transformation of the finance organization’s role over the years, can we certainly say that CFOs and finance executives have successfully embraced their new strategic advisory role? Are they delivering reliable advice and information for the company CEO and the Board to act on? Can the CEO confidently vouch for the CFO and his abilities in helping shape and drive the company’s future direction?
Unfortunately, although progress has been made in reshaping the finance organization, there is still more room for improvement. Various research findings have revealed what many finance professionals do not like to hear – CFOs in the majority of organizations are not providing enough strategic counsel to the CEO. In these organizations, the focus is still on cost control and accurate financial reporting. There is minimal provision of forward-looking information to support decision making. The desire by the CFO to provide strategic input to board-level decision making is there, but constant unnecessary fires that need putting out are consuming much of the CFO’s energy, resources and time.
There is no doubt that the modern business environment requires the organization’s CFO to be strategic in nature. With disruptive changes taking place everywhere at unprecedented levels, it is the responsibility of the CFO and his team to protect the organization against the threats, harness the opportunities and strengthen the organization’s competitiveness. This means moving beyond cost management and wearing the new strategic hat of the business. Unless the CFO and the other finance executives transform, partner with the business and facilitate meaningful strategic conversations, finance business partnering will remain a far-fetched reality for many.
What then should CFOs do to command a seat around the strategy table?
Know Their Organizations Inside Out
Many finance professionals have a narrower view of the organization. All they know are the numbers and that is it. Ask them to articulate to you their company’s mission, vision and strategy, you will be fortunate enough to get a good answer. In order to play a strategic advisory role to the CEO and the Board, CFOs must have a clearer understanding and knowledge of what the organization stands for. They need to know where the organization is coming from, the direction it is heading, what the constraints as well as a deeper understanding of its differentiating capabilities.
In today’s technological and information age, CEOs are looking for real-time insights to help them make better decisions. In order to make these decisions, they need to have accurate information on the drivers of the business (both internal and external). Thus, it is imperative for finance to know what is driving the numbers to enable the finance team tell a better story of the organization’s strategic performance. Knowing the numbers alone is not good enough. You need to have a bigger picture, knowledge and an understanding of how the different functions of the organization collaborate together to ensure successful execution of the strategy.
Adapt to The Changing Environment & Provide Reliable Insights
Volatility, uncertainty, complexity and ambiguity are the norm these days. These factors alone are disrupting business models and causing company strategies to quickly become obsolete. Strategies that might have helped you to achieve higher performance in the past are no longer sufficient to sustain that performance. The risk landscape is rapidly evolving and the number of risks influencing enterprise performance are also sky-rocketing..
CFOs and management teams therefore need to be on the guard against the disruptive forces threatening the existence of their businesses. Achieving this success means a continuous scanning of the playing field to identify and evaluate possible threats and opportunities. In this environment, it is therefore critical for finance to improve its Financial Planning & Analysis (FP&A) capabilities and provide reliable actionable insights to improve strategic decision making. For example, the function must be able to model various scenarios and their outcomes and evaluate their respective impact on the overall strategy of the organization. In doing so, there is need to consider all sources of data, its reliability, relevance and accuracy.
Embrace Modern Technologies
Technology and digital transformations are also constantly evolving. With these new innovations comes both risks and opportunities. As a CFO you should be asking yourself – Which technologies can the organization embrace to optimize processes and drive performance? Is our organization’s performance management framework integrated enough to support decision making.
These days technology is acting as an enabler to drive strategic execution and performance. Yes you might have standardized your processes, data management systems and implemented a cloud-based solution, but think of Artificial Intelligence, Robotics, Advanced Analytics, Cognitive Computing, Machine Learning, E-Commerce, and Internet of Things (IoT). What impact do these technologies have now, and in the future on your business model? Do they threaten to force your business out of existence or sustain and enhance it?
The CFO needs to partner with the CIO/CTO and establish how the information strategy fits into the bigger picture. Which areas of the business should leverage technology to drive innovation and strategic success? Since CFOs in most organizations have taken over the responsibility of IT investments, the CFO must be conversant in IT language, and be able to clearly communicate the benefits accrued to the organization from investing in any one of these new technologies. He or she must also be able to lead the conversation around the table and secure buy-in from the CEO and other senior executives.
Turn Threats into Opportunities
CFOs and finance executives are known to say no to majority of company investments which in most cases causes them to be at loggerheads with their CEOs. Many finance professionals are trained to identify risks and everything capable of going wrong which often blinds them to the bigger picture. There is nothing wrong with identifying risks but what is important is for the CFO to avoid constantly saying no to strategic investments.
Instead of only seeing the threats and keeping the company purse closed, the CFO must also be able to identify the upside of the risks. They should help the CEO take a calculated risk that is within the risk tolerance and appetite levels of the organization. In order to advance in today’s business climate, successful execution of certain strategies requires the organization to develop a certain degree of risk appetite, otherwise the organization should not expect to make great leaps forward if it is always risk averse.
What else do you think CFOs should do to be successful strategic advisers to the CEO?
As organizations continue to change at an unprecedented pace, the role of finance also continues to expand and transform. The function must do more than just reporting results and provide forward-looking analysis that supports strategic decision-making processes and enhances business performance. This increased pressure on CFOs to be more business partners and strategic partners is renewing the call for finance to embrace and be at the forefront of data analytics to guide smarter decision making.
CFOs Must Cultivate a Data-Driven Culture
Businesses are operating in an economy that is more technologically driven and data-centric. Digitization, increased globalization, changing business models, increased volatility and a changing regulatory environment continue to pose challenges on businesses, especially with regards to decision-making.Unfortunately, data alone is not enough to make smarter decisions.
Making smarter decisions requires organizations to develop capabilities that enable them to quickly and easily transform this raw data into useful insights. These insights must be available to management in real-time otherwise they will end up working with a lot of “Dead Data.”
Finance is already used to dealing with large amounts of data and because the function is centrally positioned within the business to oversee various key decisions, CFOs should work more closely with business teams in driving their analytics agenda. For example, they can:
- Ask business leaders critical questions they expect data analytics to answer. The more CFOs and their analytical teams continue to probe, the better the insights generated. In a constantly volatile environment, management must be able to model various what-if-scenarios and their outcomes.
- Provide data-driven insights in the areas of pricing, inventory management, supply chain optimization, customer profitability and M&A, thereby demonstrating the value brought to the business by analytics.
- Deploy dashboards that not only show financial metrics, but also operational, customer and process metrics and allow business leaders to drill down to the specifics themselves and make improved decisions.
Expand CFO Influence Outside the Finance Function
Traditional financial data from legacy ERP systems is no longer the main driver of decisions. Today’s businesses have more data (Structured and Unstructured) than in the past, and the rate at which this data is being produced continues to increase at alarming levels. The predicted growth in data is exponential, with some experts predicting a 4,300 percent increase in annual data production by 2020.
It is not a case of collecting data and leaving it to become obsolete and irrelevant before it can be used for the purpose it was collected for. Decision makers are depending more on insights derived from data to make better decisions. In the fight against cyber crime, companies are using predictive analytics to identify anomalies within their systems, assess vulnerabilities, predict attacks and automatically resolve. No longer are companies relying solely on threat signatures to fight cyber crime.
In the retailing industry, companies are using analytics to understand customer preferences, segment customers, create market differentiation and improve margins. In other organizations, analytics are being applied to improve and strengthen operations. IoT devices are helping companies assess, monitor and enhance machine performance.
This above examples alone show how data has become a strategic asset. By owning and driving analytics initiatives within their businesses, CFOs can continue to expand their strategic leadership role, strengthen their ties throughout the organization, expand their influence outside the finance function and become strategic business partners.
Adopt Modern Analytical Systems
Advancement in technologies and the growth in Shared Services business models has reduced the amount of time finance executives spend on transactional and routine activities. Today, much of the CFO’s time is spend on strategic issues, for example, helping the CEO and other business leaders execute strategy, identifying M&A opportunities, purchasing and implementing IT systems, creating shareholder value, assessing and monitoring risks, and driving business performance.
In order to continue delivering on the above, CFOs must reduce their reliance on disconnected analytical data processes and legacy analytical systems, and invest in analytical capabilities that enable them to execute strategy more effectively, reduce processing cycle times, improve financial productivity and reduce finance operating costs.
Spreadsheets have their role in analytics but it is important to note that upon reaching a certain level, they become limited. As the business grows and the amount of data produced increases, it is worth investing in a data analytics system that is suited to your business needs and helps you achieve your strategic objectives. This is not just about replacing spreadsheets and the old software with the new system and tools. Instead, it is about understanding the fact that the new system is just an enabler and not your lottery ticket to riches.
By becoming an analytics powerhouse, the finance function will be able to model various what-if-scenarios and provide the foresight to predict future outcomes, the insight to make real-time strategic decisions, and the hindsight to analyze and improve historical performance. Overall, the organization will have an advantage over its competitors.
I welcome your thoughts and comments
The annual budgeting process has been around for decades and still forms part of the performance management framework for the majority of organizations. As the economic environment has evolved and become more dynamic, has the budgeting and forecasting capabilities in your organization also evolved and adapted to this change?
Unfortunately, for many organizations, the annual budgeting process still rules. Despite the evident drawbacks of the traditional budgeting process and developments in financial planning technologies, there is still widespread reluctance by top management to embrace alternative planning processes. The traditional annual budget used by many companies is static in nature, not aligned to strategy setting and execution, and focuses mainly on cost reduction as opposed to value creation.
In today’s volatile, uncertain, complex and ambiguous economic environment, in order to make effective decisions, management must be able to understand and respond quickly to the impact of competitive forces and rapid changes affecting their businesses. They must be able to look into the future, assess risks and potential opportunities and proactively manage them. Different decisions require different time horizons and planning capabilities.
The problem with the annual budget is that it distorts this long-term visibility and stifles innovation. Much emphasis is placed on the current fiscal year, which is normally twelve months. As a result of this short-term focus where management is driven to achieve the predefined annual targets, a culture of predict-and-control becomes prevalent. The focus is on making sure that the forecast numbers are achieved.
What do I mean by the above? In the traditional budgeting and forecasting processes, management come up with an annual performance targets, mostly financial, broken down in a twelve-month period. Every month, actual results are compared against planned results and variances (Monthly and YTD) identified. The computation for the monthly forecast therefore becomes:
The problem with the above approach is that the forecasting process is disconnected from the specific drivers of the business. It fails to understand that the purpose of forecasting is to map the strategic direction of the organization, identify risks and potential opportunities, and coordinate future activities. It is not a performance evaluation tool and a re-validation of the company’s commitments. When forecasting is used as a performance evaluation yardstick, chances are that management will purely focus on achieving the targets set at the beginning of the year.
What is critical to note is that forecasting should be based on real business demands and the real business environment. At the same time, rewards must be according to the value created and not based on meeting set financial targets because the later can easily be gamed.
Does this therefore mean that the traditional annual budgeting and forecasting process should completely be abolished? Some scholars and professionals have called for a complete elimination of the entire process raising some of the issues already mentioned here. I personally believe that combining a number of practices such as driver-based planning, rolling forecasts, Strategy Maps and their associated Balanced Scorecards is key to addressing traditional budgeting and forecasting drawbacks. No one practice offers a remedy for all these issues. Remember enterprise performance management (EPM) is the integration of various managerial techniques to support strategic decision-making and improve performance.
The Benefits of Implementing Rolling Forecasts
Enables Management to Adapt to a Changing Economic Environment
One of the mostly mentioned disadvantages of the annual budget is that it is static in nature and ignores changes in the market place. Targets are set based on the various assumptions identified at the beginning of the year and by the time the final budget is signed-off, most of these assumptions are out-of-date and irrelevant.
For example, in many companies, the annual budgeting process lasts on average between three and six months, and sometimes even longer. The process is back-and-forth with revision after revision. In today’s volatile economic environment, a lot can happen in the six-month period which has far implications on the strategic performance of the business. Because of the amount of time taken to agree and sign-off the final budget, these changes are not factored in.
Implementing continuous rolling forecasts offers a remedy for this issue of adaptability. Most continuous rolling forecasts are prepared at least four to eight quarters past the current quarter’s actual results. This gives management greater visibility into the business and prepare agile responses to changing market conditions.
Even at the time of budgeting, at the end of the second quarter of the financial year, you would have already gained insights that relate to first half of the next fiscal year and this immensely reduces the time required to produce the final budget.
Management need to be able to look at what is possible, rather than merely react to what has occurred. Hence the need for forward-looking forecasts which act as early warning systems when you have drifted off-course.
Allows Management to Perform What-if-Analysis
Most budgeting and forecasting processes are a series of one-off annual or quarterly events. They are prepared based on historical data imports from the company’s ERP system thereby ignoring the key business drivers of the business. Plans are often extrapolated from historical performance and end up being a simple accumulation of financial trends.
With rolling forecasts, management are able to focus on key assumptions and drivers of strategic performance, model possible future outcomes and identify the events that might trigger them, evaluate the impact of these events and design contingency plans to remedy the negatives.
Unlike budgets that may have hundreds of line items to focus on, continuous rolling forecasts focus on the strategic key business drivers. This reduces the amount of time spent on planning and frees up time on other initiatives that drive greater value and high performance. Because rolling forecasts challenge management to have a continuous business outlook, the focus is on leading indicators which helps the organization identify future performance gaps and re-adjust.
Shifts Management’s Mind-set from Annual Planning to Continuous Planning
Traditional budgeting often creates a fixed performance contract that limits an organization’s ability to be responsive to ever-changing market conditions. Because of this, there is natural tendency for management to ignore changes after the fiscal period even if they do have negative impact on the performance of the business.
On the contrary, rolling forecasts help management eliminate this annual mind-set, are aligned to business cycles and help managers continuously look into the future and proactively design counter-measures to remedy the drawbacks of the annual budget.
As already mentioned, it is time-consuming to produce the final budget and get it signed-off. By the time the budget is finalized, the market has changed dramatically and its assumptions are out of date. Because the budgeting process is an annual exercise, there is no room to adjust the levers that drive business performance.
Quoting a great quote by one of the Chinese Philosophers, Lao Tzu:
A good traveller has no fixed plans, and is not intent on arriving.
The same applies to businesses. The fiscal year end must not be the destination. It is therefore imperative that management considers all scenarios when making key strategic decisions. By implementing rolling forecasts and continuously updating the forecast to reflect current business conditions, management will be able to mitigate the risks of traditional budgeting and forecasting inaccuracies.
In order to fully benefit from rolling forecasts, the budgeting and forecasting capabilities must form part of the organization’s integrated enterprise performance management (EPM) framework. Additionally, there must be strong executive buy-in with regards to use of rolling forecasts to drive business performance. This buy-in is key to ensuring greater acceptance of the use of rolling forecasts by the organization’s business unit managers.
I welcome your thoughts and comments.