How Finance Can Help Improve the Company’s Operating Performance

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.

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Finance’s Role in Managing Enterprise Risks

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.

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The Finance Function: A Business Growth Partner or Detractor?

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.

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The Digital Finance Function

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:

  1. Transform their supply chains.
  2. Anticipate the future, mitigate risks and take advantage of opportunities.
  3. Deliver efficiencies, accelerate business growth and improve profitability.
  4. Redefine their operating model, become more agile and responsive to changing market conditions and customer expectations.
  5. 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:

  1. Do you know where your information is at all times?
  2. How the information is stored and kept safe?
  3. Who might want to steal it (disgruntled employees, criminals or hacktivists.)?
  4. How can intruders gain access to the information?
  5. What is the financial impact of a cyber-attack?
  6. 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.

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Raising the Internal Profile for Finance

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.

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