Company’s financial departments have been subject to more surveys and benchmarking studies during the past few years than most other functions.   Part of this interest has been the result of shareholders expecting better visibility to their investments and the underlying financial stability.   While these surveys may not always be the most objective, they do support the assumption that few finance departments provide stakeholders clear predictive insight into their company’s direction.  Today’s finance departments must be able to answer three questions.  Where is the company heading?  Will the company have the resources to get there?  Is the finance department providing objective navigational guidance to take it there? 

So what’s gone wrong?  

Not Enough Time Gets Devoted to Decision Support

Although many finance departments have done a great job lowering its costs, according to the surveys, time and resources devoted to decision support activities are diminishing.    These activities include cost analysis, business performance analysis, competitor analysis and benchmarking, new business pricing, new business analysis and strategic planning support.  The average finance department spends 66% of its time processing transactions, preparing reports, gathering data and 11% of their time on decision support activities.  This is in stark contrast to leading-edge organizations who spend 50% on transactions and 20% on decision support activities. 

One of the ways to dramatically improve time spent on decision support is through technology.  Yet, most companies find it difficult to get its IT resources focused on automating its closing processes.  According to a study developed by the Hackett Group, only 2% of companies surveyed have fully integrated systems and 69% partly integrated with 29% having no integrated systems at all.   In my experience, lack of improvement in this area is largely due to how ineffective the finance department can be in presenting its case for improvement to upper management and too often, due to the accountant’s lack of training and experience in developing the decision support area for their companies. 

Inadequate Forecasting Capability

Too many CFOs still see their roles as making sure the numbers “add” and don’t openly challenge the validity of the projections. By accepting forecasts from their peers without requiring an explanation of the processes supporting the numbers, the CFO creates a very fuzzy often erroneous vision.  

Under limited time constraints, too often unsupported forecasts are included in company projections with little push back from the finance department.   As sales forecasts are complied with production and staffing forecasts, the end result can become quite nonsensical.   When you multiply all these forecasts by several locations or divisions you have little chance of developing a sound expectation of your company’s future.  All the numbers may “add up” but the end result is a management team that loses its credibility with top management and wastes resources preparing meaningless forecasts.

Another reason most companies’ forecasts are inaccurate is the absence of applying risk management techniques to the process.  In a recent survey, only 19% of CEO’s believe their financial team does a good job managing risk.  That means in most companies there is not enough thought being applied to how risks and uncertainty affect decision making processes.  Unrealistic stretch targets are an example of unchecked risk taking.  Relying on goals set without understanding of what’s required to achieve them is another example of inadequate risk management.  Sometimes these problems are unfairly blamed on an over zealot employee, but it is the system supporting these actions that’s really at fault. 

To fix this problem you must first accept this is a “system” issue that cannot be solved by simply holding people more accountable for the results of their forecast.  Whenever you are predicting something will happen there is always a certain amount of risk that it won’t.  The more you understand about what it will take to make something happen the more you can predict the risk that it won’t.   To improve accuracy in predicting any event, the down-side and up-side risk must be a central component of the system.  When the finance department helps its organization focus on risk factors, the attention gets shifted from “the who” to “the why”.  By studying “the why” forecasting accuracy will continually get better. 

Too Many Measures

According to a recent survey, companies report an average of 132 metrics to its management team every month (83 financial and 49 operational).  This is more than six times the number recommended by Kaplan and Norton, the creators of the balanced scorecard.  The average management report is not only too long and complex but managers typically only use a fraction of the information.    One reason this happens is the misguided belief that more details lead to greater accuracy. 

The doctrine “manage to the numbers” has also driven many companies to accept an unreasonable level complexity.   This complexity slows down month-end reporting and makes organizational change a nightmare for the finance department.    Too many measures also leave the management team in a fog of numbers.   Few measures actually address where a company is and where it is headed.   And even fewer measures lead to action and change behavior.  The best finance organizations avoid the temptation to report the operational metrics just because they are the easiest to get.

Many times financial managers don’t understand how to develop performance metrics appropriate for their organization.  This is not a topic on the CPA exam and does not get enough attention at the business schools.  This educational void leave too many financial managers reporting metrics based on financial data without an appreciation of how this data will help improve future performance. Keep in mind, all financial metrics are “lagging” indicators as they are based on results, not on future performance.  While lagging indicators may be important for the board of directors, this kind of reporting provides little value in improving performance.  Finding true business drivers requires a deeper analysis and understanding of the organization, its processes and its operations. 

Simply stated, effective performance reporting should help somebody understand and improve their performance.   The finance department should lead the charge in finding and closely monitoring the right set of performance indicators to move the organization forward. 

Conclusion

 

 

Irv Williamson

Managing Partner

Growth Guidance Solutions LLC

www.Growth-Guidance.com