Finance and the Business: Building a Performance Management Framework

The effectiveness of business decisions is dependent on the management information flowing to business from the CFO’s team. If the business does not have access to relevant and accurate information, then there is risk of inappropriate decisions being made.

Many a time, there is a disconnect between what the business is looking for, and the reports that finance produces

More importantly, in today’s fast-paced world, the timeliness of decisions is vital to seize the right business opportunity or to know about and act on a brewing internal problem. If business does not have access to timely information, then there may be a revenue opportunity missed. Or the impact of an internal problem, say on operational costs, may be larger than what it could have been otherwise.

As someone pointed out, it is better to be roughly right but on time than to be precisely wrong much later on.

Here are five action steps that, if managed well, could help in creating a strong performance management framework within an organization.

  • Understand what the business wants
  • Determine the right frequency of reports
  • Ensure one version of the truth across the organization
  • Create a performance management culture
  • Understand the "so what" of the numbers and communicate it to the business

What does the business want?

This is something that the CFO and finance team should clearly establish, in discussion with the business head(s).

Many a time, there is a disconnect between what the business is looking for, and the reports that finance produces. Finance is sometimes guilty of thinking: “We have always generated these reports, hence we will continue generating them."

The CFO should rather have his team focus, say, on the top three reports the business head needs to run his business, than continue producing a large number of reports that may be produced  simply because they have always been produced.

A good starting point is to have a conversation with the business head(s) on what reports he finds useful and what incremental or new reports would be useful going forward. This exercise will help finance not only align their resources, but also free up capacity by letting go of wasteful or redundant reports and devote time to new requirements.  

What is the right frequency of reports?

The timing of management reports is most important. The right frequency needs to be established in discussion with the business. In other words, what is needed on a daily, weekly, monthly or quarterly basis would be useful to establish for each business that the CFO’s team is supporting.

The finance unit can then organize themselves in a way that will enable them to produce the agreed standard reports every month. At the same time, finance team should be alert to proactively point out any exceptions or abnormal deviations during a given month to trigger suitable action by the business.

Take the example of the cards business in a bank. If the fee income is trending low at mid-month versus a similar month in the past, it is more useful for the business to know about it at mid-month itself, even if based on a rough estimation, rather than knowing about it post facto, i.e. at the end of the month.

With two weeks to go in the month, the product managers would have an opportunity to initiate say a marketing program, to positively influence fee revenue for that month. 

Ensure one version of the truth

Consistency of numbers across the organization is key. For instance, the sales reports and the finance reports have to be totally aligned on what the revenue for the month is.

Often, it has been found that sales personnel are driven by sales reports that record revenue numbers differently than finance. This can happen due to many factors, such as timing or issues related to accounting.

A vast amount of time is generally spent to produce the management reports, leaving little time for analyses or insights

The onus is on finance to set this right by creating a standard set of reports that is consistently made available to every key function across the organization. In addition, the CFO would do well to educate the functional heads (Sales, Product, Marketing etc.) about accounting requirements that may result in accounting for revenue or cost differently than what the business understands.

This will go a long way in ensuring that any performance discussion with the business head(s) is focused around core business issues rather than number reconciliations.

Create the discipline of the monthly performance review

Doing this with all stakeholders is critical. The performance review helps in establishing a common understanding of the financials and their interpretation. It should include not only the business head, but also the product head(s), sales head, marketing head and other relevant stakeholders.

Another advantage of getting into this monthly routine is that it helps create ownership. The CFO can highlight the key issues related to financial performance and agree suitable remedial measures with the concerned unit head(s). Agreed action plans are reviewed for progress at subsequent meetings until closure. Monthly reviews help dispel the implied notion that the onus of delivering the overall financial targets is solely that of the Business Head along with the CFO.

Produce meaningful commentary

Instituting the right performance tracking tools to be able to provide relevant analyses to business is important. Ratios, trends, per unit metrics, product profitability and segment profitability are some of the tools available to the finance team in order to analyze the numbers.

Interpreting the numbers is perhaps the single largest responsibility of the finance function. The business head invariably and rightfully looks at the CFO for obtaining this.

Yet, it is the aspect that receives the least attention in terms of time spent. This is because a vast amount of time is generally spent to produce the management reports, leaving little time for analyses or insights.

Investing time to get to the bottom of the numbers is paramount to understanding business performance well, which in turn can help the finance unit have meaningful discussions with business.

The finance team would do well to do their homework right before performance discussions with the business, so that numbers can be interpreted in the correct way, appropriate conclusions drawn, the right issues raised, and the right accountability fixed.

Whether it is a sales issue or a product issue, a sourcing issue or a credit issue is something that can be clearly established by correctly interpreting the numbers.

About the Author

Ramesh Narasimhan is the Founder and Principal of Singapore-based Value Consulting Asia, which provides CFO advisory and related services. He is also a Senior Consultant with StraitsBridge Advisors, a specialist firm providing advisory and execution support for CFOs in banks and financial firms.

Photo credit: Shutterstock

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