5 Ways Finance Can Help Improve Company Profitability

Businesses in various industrial sectors are undergoing a fundamental transformation as a result of the effects of globalization, advancement in new technologies and increasing digitalization.  Apart from presenting a wealth of opportunities to help the organization soar to greater heights, these changes are also presenting a variety of challenges on the business model.

They are altering customer behaviours, placing increased pressure on existing markets and impacting financial performance.  In these trying times, the finance function is being called upon to help steer the organization in the right direction and improve profitability.

Popularly known as bean counters, accountants are now required to support business growth initiatives and help grow the beans within their organizations. The modern finance function has evolved from being a “just numbers” back-office function to a “strategic partnering” front-office role providing deeper insights and a clear direction for translating the numbers into effective actions for those operating on the front lines of the business.

Whereas in the past the finance professional spent his day behind the scenes, glued to his computer, producing and reporting the numbers, today’s finance professional is involved in the business interacting with the other organizational functions and helping drive business performance. There is a joke about an accountant without a spreadsheet being described as “lost”. In the past, this could have been true, but not today. The bean grower of today is a strategist, a motivator, a leader, a team player, a change agent, completely understands the drivers of business performance and drives improvements in respect of new revenue and value-producing opportunities.

It is no secret that the finance function is the custodian of the business profit and loss. In times of economic downturn when cost control is critical, the finance professional is called upon to help identify areas where the organization can scale back in order to improve overall profitability. In good times, finance helps senior management identify new opportunities (new markets, new products, potential acquisition targets, new services etc.) that need exploiting. Disrupt or be disrupted is the mantra in today’s ever-changing business environment. The business has to evolve with times.

The challenge on the finance function is to deliver more with less. This has led to many organizations to embark on ad-hoc cost-cutting programs hoping to improve the bottom-line. Unfortunately, cost control alone is not sufficient or effective enough to enable the organization realize the targeted gains. You can only cut costs up to a certain level. This is because each cost initiative reaches a point of diminishing return, after which, the company has to explore new ways of improving profitability. In order to grow its influence on company profitability, the finance function must:

  1. Understand the Drivers of Business Performance.  To be effective bean growers, accountants need to move beyond numbers and get an understanding of the company’s product s and services and how they affect the profitability of the business. This means finance teams lifting their heads up from their financial reports and obtaining a better view of the business itself. Instead of focusing only on where the business has previously failed, finance should provide strategic insights, competitive intelligence and analysis that enable effective decision-making by the senior management team. For example, finance should be able to provide data, metrics and analysis that helps transfer the function’s own understanding of the drivers of profitability to others throughout the organization, in order to ensure that profitability develops into a basis for action.
  2. Help Identify New Pathways Toward Profitability. When it comes to profitability improvement initiatives, many at times the focus is on the bottom-line. As mentioned earlier on, eliminating fat from the bottom line works up to a certain extent. Cost reduction is a short-term fix but not sustainable in the long-term, especially if the company is looking to grow. Management become misguided and believe that by laying-off people to contain salary costs or postponing capital investments they are placing the organization in a better competitive position. The opposite is true.  In fact, cost cutting by itself is counterproductive as it can lead to inefficiencies, missed opportunities and higher operational costs. There is nothing wrong in getting the business lean, but getting lean has to be linked to the business strategy, done the right way, at the right time and for the right reasons. Attention should also be focused on the revenue side of the business, for example, diversifying the business, internally growing existing business units, making additional productivity improvement, improving existing product or service offerings and making major business purchases.
  3. Invest in Modern Technologies. As the amount of data generated continues to grow, an enormous demand is being placed on finance to make meaning of this data, identify trends and develop the most effective responses that will help protect and improve company margins. Finance must know what information will have the greatest impact on profitability since having the right information is at the core of improving company profitability. Equally important is placing this information in the right hands. Relying on spreadsheets alone will not cut it. Finance must invest and make use of modern Business Intelligence and Analytics technologies in order to be able to identify accurate, reliable and relevant information and place it in the hands of the right people at the right times. These modern technologies help transform finance into a more flexible, responsive and forward-looking function. The modern finance function must have the ability to use technology to gain a more detailed understanding of the metrics underlying the company’s profitability.
  4. Develop Effective Pricing Capabilities. The sales organization is normally rewarded on revenue made and this sometimes results in the sales team being interested only in closing the deal at the expense of profitability. Not all customers are equally profitable to the organization; therefore sales should be tailored to optimize profitability. Getting the pricing wrong has negative consequences on the overall profitability of the company. Finance need to have an advanced understanding of the company’s different customer and product portfolios. By performing customer profitability analysis and product profitability analysis, finance will be able to understand the customer costs-to-serve and use these costs to segment customers, fine-tune pricing and manage profitability by helping direct efforts towards growing profitable product and customer combinations. Sales personnel can then use this cost-to-serve in negotiations as well as forward-looking analyses to drive effective decision-making.
  5. Collaborate With the Rest of the Organization. Although finance plays a central role, maintaining and improving company profitability is a team effort – it should be everyone’s concern. It is imperative that finance professionals work directly with their colleagues outside of finance (Sales, Marketing, Operations and R&D.) and develop a list of actionable items which impact profitability. For example, working more closely with the sales organization will ensure that sales personnel have all the information and tools they require to make decisions that support profitability goals, otherwise they will be ill-equipped to make the best decisions. Getting the buy-in and commitment of the C-Suite is also critical since the C-Suite is involved in setting the direction of the company. The C-Suite’s involvement will in turn lead to the establishment of a common goal and set of metrics shared with the front lines of the business through synergies with their finance teams. Remember Individuals don’t win, teams do.

If the organization is to succeed in maintaining and improving its margins, finance’s involvement is important. Finance helps make meaningful and measurable profitability improvements.  Look at the bigger picture and beyond quick fixes such as rapid cost reductions. Develop a more detailed understanding of the full set of your business’s profitability drivers and take full advantage of new technologies capabilities to uncover the organization’s key profitability levers and challenges.

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Finance Analytics: It’s Not About the Size of The Data

As the need to make impactful operational and strategic decisions in real time increases, CFOs are playing a greater role in the adoption and integration of data analytics in their organizations to support data-driven decision making.

Executives and business unit leaders are increasingly relying on insights produced by Finance to better understand enterprise performance. That is, what has happened, why it has happened, what is most likely to happen in the future, and the appropriate course of action to take.

In an era where data is proliferating in volume and variety, decision makers have realized it’s no longer enough to base key enterprise performance and risk decisions on experience and intuition alone.

Rather, this must be combined with a facts-based approach. Which means CFOs must set up modernized reporting and analytics capabilities with one of the main goals being the use of data as a tool for business decision making.

Appropriately analyzed and interpreted, data always has a story, and there’s always something to discover from it. However, many finance functions are failing to deliver value from their existing data analytics capabilities.

There is a misconception that to deliver actionable insights, the function needs more data for analysis. As a result, the supply of data keeps rising, while the ability to use it to generate informed insights lags badly.

Yet it’s not about the size of the data. It’s about translating available data and making it understandable and useful.

In other words, it’s about context and understanding that numbers alone do not tell the whole story. Finance leaders should connect the dots in ways that produce valuable insights or discoveries, and determine for example:

  • What is being measured, why, and how is it measured?
  • How extensive the exploration for such discoveries was?
  • How many additional factors were also reviewed for a correlation?

Further, to use data intelligently and influence better decision making, CFOs and their teams should recognize that most enterprise data is accumulated not to serve analytics, but as the by-product of routine tasks and activities.

Consider customer online and offline purchases data. Social media posts. Logs of customer communications for billing and other transactional purposes.

Such data is not produced for the purpose of prediction yet when analyzed, this data can reveal valuable insights that can be translated into action which delivers measurable benefits.

Often the company already has the data that it needs to answer its critical business performance questions, but little of it is being aggregated, cleaned, analyzed, and linked to decision making activities in a coherent way.

Exacerbating the issue is the mere fact that the company has a mishmash of incompatible computer systems and data formats added over the years ultimately making it difficult to perform granular analysis at a product, supplier, geographic, customer, and channel level, and many other variables.

There is nothing grand about data itself. What matters most is how you are handling the flood of data your systems are collecting daily. Yes, data can always be accumulated but as a finance leader:

  • Are you taking time to dig down into the data and observing patterns?
  • Are the observed patterns significant to altering the strategic direction of the organization?
  • Are you measuring what you really want to know, what matters for the success of the business?
  • Or you are just measuring what is easy to measure rather than what is most relevant?

CFOs do not need more data. What they need right now is the ability to aggregate, clean and analyze the existing data sitting in the company’s computer systems and understand what story it is telling them.

Before they can focus on prediction, they first need to observe what is happening and why. Bear in mind correlation does not imply causation.

Yes, you might have discovered a predictive relationship between X and Y but this does not mean one causes the other, not even indirectly.

For instance, employee training hours and sales revenue. Just because there is a high correlation between the two does not mean increase in training hours is causing a corresponding increase in sales revenue. A third variable might be driving the revenue the increase.

Jumping to conclusions too soon about causality for a correlation observed in data can lead to bad decisions and far-reaching consequences, hence finance leaders should validate whether an observed trend is real rather than misleading noise before providing any causal explanation.

Certainly, big data can be a powerful tool, but it has its limits. Not all data is created equal, or evenly valuable. There are situations where big data sets play a pivotal role, and others where small, rich data sets trump big data sets.

Before they decide to collect more data, CFOs should always remember data is comparable to an unexploited resource.

Even though data is now considered an important strategic asset for the organization, raw data is like oil that has been drilled and pulled out of the ground but not yet refined to its finer version of kerosene and gasoline.

The data oil has not yet been converted into insights that can be translated into action to cut costs, boost revenues, streamline operations, and guide the company’s strategic direction.

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Doing The Right Thing For Too Long

Markets and business models are shifting, and so should you keep up with these market changes if your business is to survive and succeed. Compared with the past, the current era of digitization represents an inflection point.

Consider individual trends such as artificial intelligence, virtual reality, Big Data, cybersecurity threats, drones, the Internet of Things, driverless cars, blockchain technologies, and more.

These new technologies have significantly changed the way we connect and interact as individuals, including how businesses deliver products and services to their customers.

Reinventing your business will determine whether you succeed or fail in the digital age. As the saying goes, disrupt or be disrupted. No company, business, or industry is safe from disruption. Today, individual businesses have the potential to compete against multinational companies and win.

These businesses are quick to anticipate market changes and flexible to get ahead of the curve. Sadly, many companies are blinded by their successes and aren’t willing to disrupt themselves. They are not experiencing their desired growth trajectory because they are stuck doing the right thing for too long.

Don’t get comfortable with the status quo and allow your business to get stuck on a strategy and mindset that no longer fit the market.

Here are a few questions to ponder, the answers to which will determine the future of your business:

  • What is at the core of your strategy?
  • Are you in touch with the customers you want to serve? When customers give you negative feedback, how often do you listen and act on it?
  • Are you operating your business on the premise that you know what is best for your customers therefore they are supposed to buy whatever product or service you offer them?
  • Are you keeping up with market shifts or you only know how to grow under one set of conditions or products and services, but not how to survive and strive under another?
  • How robust and flexible is your IT infrastructure to help you innovate, perform your company’s Jobs To Be Done, and scale your business?
  • Are you creating a strong culture that is focused on customers, including a culture that not only embraces change but seeks it out?

Given our world is changing faster, it’s imperative to continuously look for signs that things are changing and think about how those shifts would play out in the short-term, medium-term, and long-term, not forgetting the impact on the execution of your strategy and enterprise performance.

The signs can reveal individually. At times, they are part of a wider trend.

Nonetheless, how you adapt will determine whether you succeed or fail. Keep learning. Learn about innovations in your industry and beyond. Try out new business models and technologies and embrace a philosophy of constant change.

Once you understand how the market is changing and evolving, you can develop the right product or service and strategy that will help you achieve your desired outcomes.

We often talk of the ability to “connect the dots” and “take a helicopter view of the business” as key ingredients for success. But how often are business leaders and their teams doing this?

Across the organization, a culture of “them versus us” prevails. Important decisions are made at a functional level with little or no consideration of their impact at the enterprise level.

Having the ability to grasp the big picture and see how different trends intersect is essential for determining the right path or course of action to pursue.

So, how do you spot market transitions and develop a clear sense of where the market is going?

  • Be curious and hungry for new ideas. Continuously ask tons of key performance questions and pay attention to what’s around you.
  • From time to time, challenge conventional wisdom. It’s easy to stick with what you know about your business model, customers, competitors, markets, or industry but dare to pivot when conditions change.
  • Don’t be nostalgic about the past or worried about protecting what you’ve built in the present. Always be curious about the future and develop a willingness to take calculated risks.
  • Ask existing and would-be customers how they feel about your company’s products, services, and strategy. Instead of turning to sources that reinforce your existing point of view, seek multiple perspectives and cross-reference them as new facts come in.
  • Develop an ability to handle multiple random data points at once. This will help you generate critical market, customer, and business performance insights and make smarter, informed decisions. Be careful to distinguish between the signal and the noise since data can be deceiving, especially when you’re looking for “confirmation” that protects your business model.

Data might not tell you why something is happening, but it does tell you what’s going on.

  • Look for patterns and abnormalities that might suggest something is going on, including any interdependencies.
  • Anticipate all the various scenarios of what could happen.
  • Plan your course of action in response to what’s happening in real time.

As the signals of a market shift increase, the need to act becomes more imperative. Note, monitoring and identifying market shifts, and effectively taking the appropriate course of action is a matter of timing.

If you continue doing the right thing for too long and lack the boldness to disrupt both the market and your own organization, you risk being disrupted and left behind. There is no company that is too big to fail. Neither is there a startup that is too small to succeed.

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How Feasible Are Your Strategic Objectives?

Every organization sets out its goals and objectives, to accomplish its mission and vision. The two often seem like two interchangeable phrases but there is a distinction.

A goal is a desired result you want to achieve and is typically broad and vague. An objective, on the other hand, defines the specific, measurable actions each employee must take to achieve the overall goal.

It is every leader’s job to create a coherent set of feasible objectives or what Richard Rumelt calls proximate objectives. Objectives that define targets the organization is fairly expected to achieve, even overwhelm.

This is essential for ensuring energy and resources are focused on one, or a very few, critical objectives whose accomplishment will lead to a cascade of positive outcomes.

An effective strategy defines a critical challenge or opportunity and clearly articulates how the organization is going to play to win or perform customers’ Jobs to Be Done.

Thus, the objectives an effective strategy sets should stand a good chance of being accomplished, given existing resources and competence.

On the contrary, a bad strategy results in the setting of bad strategic objectives.

Long lists of “things to be done,” are often labeled wrongly as strategies or objectives. Or the desired outcome is simply rehashed with no explanation of how this will be accomplished.

It doesn’t matter how well-thought your strategy is in response to an identified challenge or opportunity. If the resultant strategic objectives are merely a list of things to do, or just as difficult to achieve as the identified key challenge, there has been little value added by the strategy.

In today’s highly competitive, uncertain, dynamic, and complex environment in which a leader’s ability to look further ahead is diminished, it is better to focus on a few pivotal items through taking strong positions, creating options, and building advantage.

First identify the key challenges or opportunities for the business. Look very closely at the changes happening within your business, where you might get an added advantage over competition.

Next, create a list of the issues, including the actions your company should take.

Then, trim the original list to a noticeably short list of pivotal issues and proximate objectives by identifying one or two feasible objective(s), when achieved, would make the biggest difference. Remember, the identified objectives should be more like tasks and less like goals.

Now, focus on the objectives by channeling skills and available resources to accomplish the overall goal.

Once accomplished, new opportunities will open up resulting in the creation of more ambitious objectives. This cycle will help you develop a system that enables the setting of feasible strategic objectives.

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