Nimble thinking takes the lead

The race has changed for finance professionals. A new mindset is necessary so they can take a more holistic view of the organisation, enabling them to make quick, confident strategic decisions and communicate forward-looking insight throughout the business.

If any CFO or FD sat down at the beginning of each of the past six years and tried to predict what the economic landscape would look like at the end of that year, he or she probably would have missed the mark every time.

The past few years have seen unprecedented uncertainty. The ever-increasing rate of change in global trade, the regulatory environment, technology — even social expectations of businesses — have set strategies in new directions and confounded those charged with developing credible forecasts and setting capital investment priorities.

The dynamics also have prompted people to think differently about finance, forecasting and the role of financial planning and analysis. Business leaders are focused on understanding the impact of uncertainty and volatility, and they’re looking to their finance teams to help them understand the trade-offs around strategy. They want finance professionals to act as business advisers and help the business make more confident decisions.

Useful insight, however, requires more than just traditional accounting skills. Today, being great with the books is merely the price of admission. The successful finance professional also is comfortable with providing insight and ideas.

To fulfill this expectation, finance professionals must embrace uncertainty. And to do that, they need to develop business acumen, which manifests itself in the ability to make faster, more confident strategic decisions. Business acumen requires a more holistic view of the business. It requires a better understanding of the objectives of key stakeholders, better risk awareness and better collaboration across the organisation.

To get there, several themes are front and centre: Finance must, in certain cases, spend less time focusing on the past and more time seeking better predictions about the future. Finance must collaborate with the rest of the business and measure the most important indicators that drive the business. It must be a filter to deliver correct, actionable information and drive decisions quickly and with confidence. And it must synthesise that information into a strategy that capitalises on the strengths of the business.

A more global view

Forecasting is challenging today, in part because organisations are required to take a global view. Events in one part of the world have a ripple effect across the globe and are meaningful and material elsewhere; many more variables are at play.

Sixty years ago, the automotive supply chain in the United States went from Detroit to Cleveland. Today, microchips are being manufactured in Thailand and installed in cars in Germany that are then being sold in the United States.

Because of this changing landscape, high-performing finance professionals must have a global view, not just from a geographic standpoint but also from an ecosystem standpoint — the ecosystem of customers, competitors, suppliers, employees and other stakeholders within the business.

They must have a comprehensive understanding of what drives profitability, cash flow and shareholder value creation within the organisation. They also must know how decisions will impact each of these elements, and this is where accounting moves into planning and analysis. Being able to show the value that is being created — but also being able to understand how different decisions will affect that value creation at some point in the future — is the essence of business acumen.

Finance professionals need to understand the competitive strategies required for success. They need to understand the people and activities needed to create and sell products and services in the market. And they need to think about business processes that enable a manager to deal with a much more complex operating environment.

Take, for example, a company that is selling multiple products through multiple channels to multiple customer segments. That creates a three-dimensional matrix around profitability reporting, resource allocation and prioritisation of activity, capital and cash allocation. It is finance’s role to demystify that for business partners so they can understand the levers that drive superior performance.

This more global view has three basic components:

  • The world out there: No one has the luxury of ignoring the macro environment. Demographics, politics and economics shape what’s going on in the world today. Political leaders, for example, can have a fundamental impact on many aspects of the economy. A CFO cannot be effective if he or she doesn’t understand the impact of the world environment on the organisation.
  • Markets: What are customers doing? What are competitors doing? What are regulators doing? These groups will change the dynamics of the marketplace, which will change what is important or not important within the business.
  • The organisation: What’s the organisation’s strategy? Does it align with the business goals and direction of the market? More importantly, within that strategy, how is the company seeking an advantage over competing offerings in the marketplace? What are the sources of advantage, differentiation and uniqueness that allow the organisation to be competitive? Is it the best product? Is it delivering the best service? Does it have the best price? Does it have the best reputation?

A number of different levers describe the advantages the company has as well as the risks facing the organisation. And that knowledge has a fundamental impact on the types of tools finance will use and the kinds of analyses finance will do.

This broad view can’t be developed in a vacuum. The deepest insight comes from finance collaborating with people in other functional areas, across geographies or with colleagues in other parts of finance to truly understand cause-and-effect relationships.

Armed with a more holistic view, finance professionals can think more effectively and clearly about the future.

Looking into the future

The definition of “insight”, as it relates to financial planning and analysis, amounts to the ability to answer three basic questions: What’s happening in the business? Why is it happening? And what are we going to do about it? The ability to answer those questions — particularly the last one, offering choices with a financial evaluation of positive or negative impact — can speed decision-making within the business. But too often we dwell in the past.

Take the budget. Many companies’ budgets are obsolete the day they’re created. The budget may have been correct when it was signed off on. But markets change rapidly. If the organisation is spending too much time looking backwards, trying to work out how last month’s variances occurred, then it is wasting valuable time that should be spent positioning the business for the future.

Finance professionals instead need to think about how their organisations might change the way they allocate resources in different economic environments. If the economy improves, certain projects might be more advantageous. If the economy dips, those investments might decrease in importance. The ability to do upfront scenario-planning allows organisations to make more confident decisions when the environment changes, instead of being thrown into reactive mode. Even if the organisation didn’t get the scenario perfectly right, at least it has a better understanding of the direction of the changes it needs to make and is equipped, as an organisation, to execute with speed and greater confidence.

Key to that is the more holistic, global view, but also measuring the right stuff. Organisations measure a lot of things that relate to input, such as spending. But they tend not to be very good at measuring the outputs, such as the consequences of certain investments and customer satisfaction. Therein lies a weakness.

Reporting on the business is often driven by the chart of accounts. But where in the chart of accounts are the line items for the investment in retaining existing customers? Where is the line item detailing investment in attracting new customers? Finance can tell exactly how much was spent on travel last month, but it often can’t tell whether that travel was directed towards growing the business and increasing sales or whether it was the result of administrative issues or service delivery problems with customers.

One of the obstacles in presenting and analysing these data: inefficient processes.

The data monster

Finance teams are still wrestling with the data monster created in recent years. Many still use inefficient tools to accumulate the information value of all of that data.

The spreadsheet remains the reporting and analytic tool of choice. It’s a very labour-intensive process to extract data, organise it, download it into presentation slides and update the spreadsheets next month or next quarter for all the organisational accounting changes that have taken place.

Finance leaders must eliminate much of that low-value-added activity so that the function can apply its expertise to financial planning and analysis. And finance needs to have a consistent and disciplined approach to analysis and decision-making. Many finance teams spend only a fraction of their time actually performing analysis and discussing those findings with decision-makers. Successful organisations, on the other hand, spend significantly less time collecting data and more time doing the analysis and making plans based on analyses.

Finance professionals need to become better synthesisers and communicators of information, offering insight on what is important to the executive and the decisions he or she is trying to make. To do that, finance needs to move from being descriptive to being analytical. In doing so, there needs to be a balance of financial and operational information, internal and external information, and backward-looking and forward-looking information.

Instead of just comparing to budget, for instance, consider comparing to prior-year performance, to benchmarks in the marketplace or to the results of competitors. Those are real and tangible, whereas the budget may have been laden with assumptions that are no longer valid.

Instead of analysing variances, finance should analyse the potential outcome of future decisions. Finance’s job is only half finished when it puts the forecast to bed, completes the budget or creates the report. The other half is communication of the insight that each of those deliverables provides the organisation, which helps business make better, smarter decisions. Ultimately, this is what determines the value of the work finance delivers.

At Trifin Financial Services we keep abreast of international best practice in order to enhance our relevant experience in small and large businesses and are able to help you ensure that your financial environment is secure, and adds value. Please feel free to contact us for an explorative discussion as to how we can add value to your business.

Give us a call to discuss this further.

Wayne Jaggard                  wayne@trifinservs.co.za               082 800 2508

We're here to help you succeed

Get in touch, we would love to hear from you.