4 Barriers Finance Must Overcome To Become Trusted Advisor

This post is based on an excerpt from the book The Performance Manager: Proven Strategies for Turning Information into Higher Business Performance.

Various studies have been carried out on the role of the Finance department in creating organizational value with the aim of establishing whether Finance should now be considered a Business Partner.

For example in 2010, the Financial Management arm of KPMG the advisory firm published a report entitled “Finance of the Future – Looking forward to 2020”.

In the report, the authors shed light on how the Finance function of today is much more than the “beancounter” of the past.

Finance is now viewed as a trusted advisor to senior management possessing the potential to create value by supporting decision making processes.

So how can organizations best leverage their Finance functions and achieve higher business performance? According to the authors of the book:

In the first, Finance must focus on checks and controls. In the second, it leverages its extensive expertise in understanding what resources are required to generate which revenues.

How Finance strikes this balance (and many others) to a large measure determines the success or failure of the company.

Although some organizations have made significant strides in reshaping their Finance organizations to yield higher business performance, some are still lagging. They are failing to realize the nature of change knocking at their doorsteps.

The nature of business as a whole has changed significantly, global markets have risen and continue to do so and there has also been gigantic advances in technology and changes in the investment landscape.

All these changes require the Finance function of today to be proactive as opposed to being reactive.

Finance is the mind of the business and as such, has more information than most departments.

This places the function in far much better position to structurally evaluate the viability of the many business propositions and opportunities the organization faces every day and advise on future directions.

In the book, the authors point out some of the barriers being faced by Finance when it comes to information and how to use it:

Barrier 1: Lack of information needed to regulate what has happened and shape what will happen

In order to execute its responsibilities efficiently and effectively, Finance requires new levels of information about past and present processes and events as well as drivers of business results and their impact on future business opportunities.

This means collaborative relationships must be fostered between Finance, Sales, Human Resources, IT and other departments.

Barrier 2: The relevance, visibility and credibility of what you measure and analyse is designed for accounting rather than business management

The traditional role of Finance is to collect, monitor and report information with distinct legal, tax and organizational requirements to fulfill its compliance role. However, today’s Finance function must move one step further.

Finance must have an integrated view of these information silos and play the role of the trusted advisor.

Thus, in addition to reporting the numbers, Finance must also possess analytical skills capable of adding value to those numbers.

Barrier 3: Finance must balance short term and long term, detailed focus and the big picture

Finance balances different and contradictory requirements. For example, it must deliver on shareholder expectations and at the same time manage costs and investments to meet short-term profit objectives.

The big question then becomes; At what point does this affect long-term financial position of the company?. The Finance function must be able to understand the drivers, opportunities and threats when balancing short-term and long-term financial performance.

Financial measures need to be augmented with more detailed measures that capture sales, market share gains and revenue growth targets to understand the real health of the company, and strike a good balance between long and short-term growth.

Barrier 4: Finance must find the path between top-down and bottom-up circumstances

To what extent should goals be set top-down versus bottom-up?

If the executive team mandates double-digit profit growth, does this translate into sensible targets at the lower levels of the organization? Does it require a double-digit target at the lowest profit centre?

Top-down financial goals must be adjusted to bottom-up realities. In other words, whilst setting up targets to be achieved by specific business units, Finance must ensure that they are aligned with top-management vision.

It is therefore important to engage frontline managers in financial reporting, planning and budgeting. This decentralized approach to decision making has the benefits of engaging the business as a whole rather than relying on a centralized function to generate information.

Finance functions that need to become trusted advisors and create sustainable value for their organizations will therefore need to overcome these barriers otherwise they will still be regarded as “beancounters”.

In addition, they should become strategic players by implementing Enterprise Performance Management methodologies such as scorecards, dashboards, strategy maps, customer profitability analysis, predictive analytics, rolling forecasts, dynamic pricing, enterprise risk management and value-based management.

What other barriers can you think of that are causing the Finance function to remain stagnant instead of moving forwards?

References: The Performance Manager: Proven Strategies for Turning Information into Higher Business Performance