Tools and processes used by finance and FP&A (commercial management, billing, accounting, operational statistics, competitive intelligence, planning, budget, forecast, variance analysis, reporting) needs to be customized in order to achieve both efficiency and relevance. There is nothing like on the shelf tools. Company’s industries, size, profile and positioning, geographic reach, product reach, etc. … constitute “forces” that needs to be understood in order to build a relevant and efficient set of tools.

There are debates about the relevance of (some of) these tools. Such as, is so call “traditional” budget or variance analysis still relevant? or beyond budget supporters or what granularity for chart of accounts, etc... These are based on (supposed) opinion that CFO’s and/or managers are not satisfied with the results of their own processes or tools.

In fact, such opinions are generally developing from

• effectiveness issues in FP&A processes
• and/or in the ways objectives, bonuses and evaluations are articulated
• not to mention potential cultural issues either in the finance function or in the management team concerned.

Prior reinventing the wheel, I would strongly suggest to thoroughly analyze these three “causes” and to take necessary actions.

First, look at the two last areas then concentrate on the process built and organization. Obviously, there are interacting but it is still important and more easy to analyze them separately.

1 - A wide range of potential issues can be originated from culture:

From a finance perspective,

• It can come from a “statutory” vision that may impact/reduce/tint the whole finance output to the detriment of a “business” vision. This would transpire in the way the chart of account is built, the way the data flow are captured and reported, the reporting is made, etc.… There is a definitively need for both vision!
• It can come from an ownership issue. In other words, up to what point finance (FP&A in particular) is an active business partner to the other functions or only a “bean counter” and “reporter” of other’s performances.
• Finance set the truth! No, unfortunately, it would be too easy! Our tools are limited and not perfect. We will see how to build an effective set later but still at end the business variables and realities may be quite more complex and uncertain that what we may think.

From a management perspective,

• Power struggle! Planning, budget, forecasting, reporting are definitively among the “battle fields” of internal politics and power struggle. Let’s face it (rather than unnecessarily criticizing those processes).
• Ownership issuese. Up to what point managers buy in the plan, budgets,…
• Reality perceptione. Up to what point managers understand their internal and external environment and face it effectively. The “reality country” is different and far more demanding than the “theory country”.

These cultural issues impact the image of the finance outputs and needs to be assessed and considered as such.

2 - The ways objectives, bonuses and evaluations are articulated have also a major impact on the perceptions of the finance output. Obviously, managers (and employees) like and want to be considered as successful and to receive the financial and other elements of recognition that goes with it. As such the tools used for definitions and measurement, are subject to a lot of pressure, in particular when the environment is difficult or aggressive and when results are not in line with expectations. Questions about validity of the objectives definition or on the way performance is measured will for sure be raised and may be valid. This is a complex issue and I am afraid that no simple and single response exists.

I would still advocate the fact that plan, budget and forecast shall be set as per the best understanding on the business conditions and environment and shall not be polluted by “aggressive” or “defensive” individuals objectives and targets settings. This suppose a certain level of disconnect between the two set of tools.

3 - The relevance and effectiveness of the finance processes is definitely a finance responsibility but involve inputs from all parties. Over the statutory and tax obligations, finance processes must be design in order to give company management the best chances to take necessary decisions in a timely manner. This brings us to the first “dimension” that needs to be looked at: the time dimension.

The competitive or market intelligence is the next dimension to be analyzed i.e. the markets with its different components:

• The geographic reach,
• The company profile,
• The customers or customer profile(s)
• The products
• And their trends (development stage, volume, price, competition…)

The external and internal resources are the next dimension to be analyzed with its different components:

• Inputs (raw materials, components, services)
• Structures (factories, premises, …)
• Equipment (manufacturing equipment, IT, …)
• Staff
• Financing
• And for each component, they are elements with different degree of strategic importance for the business.

The time dimension: 

The “statutory time” tends to naturally drive the finances processes. Accounting would be the prime example and it may be satisfactory for certain business or industries. The calendar month/quarter/year will drive the different finance activities (commercial and operational statistics, accounting, planning, budget and forecast, reporting…).

Still, some industries or business type require a different way to “respire” and then it is essential to take this in consideration in the design of the overall process. Some industries have a material seasonality, some have a very short order to revenue time (immediate to few days) where for others it is month(s) potentially year(s). This needs to be correctly assessed and integrated in the whole time table i.e. from order reporting to forecasting and reporting both in terms of timing/delay and in terms of periodicity.

A further aspect of timing to be integrated into the processes is the “time… to”. Time from proposal to order, time from order to revenue, time from contract to orders, time from launch to delivery, just in time ... depending on industry and company there are always a certain number of key “time to” which needs to be managed and which are critical for the accuracy of the forecasting exercises and in the explanation of the variances. Their identification, measurement and proper application are in most case vital to the quality of the overall process.

In certain business you may want to report and analyze revenues on a daily basis considering weekends and public holidays (distribution, restaurants…). At opposite in others, the contract or order to revenue cycle is such that even monthly reporting and analysis is too short to properly integrate any meaningful changes in trends.  A material change or delay may impacts your revenues and revenue forecast. Optimistic or aggressing views may very well impacts the quality of your forecast.

Market dimension:

The market dimension and its components are keys that need to be properly integrated within the design of the overall finance processed (end to end). 

• Geographic reach will set constraints that depend both on markets and company size. For purely local markets and companies, this element is not so important and statutory may prevail. Still for international and global markets it becomes an essential element of analysis, from a purely geographic point of view but also from a currency perspective. The statutory entity dimensions (country/currency) needs then to be complemented by the delivery country and the pricing/billing currency in order to correctly capture, analyze, forecast the evolutions.
• Company profile, The legal structure in large companies do not reflex accurately the actual business organization (center of excellence, production, call or logistic centers, cross border teams,…). It is then of utmost importance that the organization is properly represented in the way the whole data structure and flows are organized. Over detailed it may be heavy to manage, too “simple” i.e. simplistic, it may lose relevance.
• The customer profile(s), needs to be carefully taken in consideration while building the process. From few customers to a very large/diversified customer base, from direct to indirect sales, the overall process needs to keep track of the fundamental characteristic of your customer base. It may be more or less easy and there is always a cost benefit ratio to be considered, still at end, you need to ensure that you have a meaningful end to end customer (or customer profile) tracking and management.
• Products or services need also an end to end tracking and management. Like for customers, this may correspond to data amplitude that can range from few to millions. So similarly, through a proper cost benefit ratio the product dimension shall be organized and followed in a way that is both manageable and relevant for the business.

Those data dimensions will obviously combine on a dynamic way. This shall permit to capture and measure accurately (in the most extended configuration) (i) who sell what to whom in which currency per country destination at order processing level (ii) the revenue generation and associated Cost of sales in the same data configuration (billing/accounting) (iii) in order to compare to past periods and to budget and/or reforecast made along the same lines. This end to end chain is essential.

Effectiveness and relevance will get reduced each time the chain is ”broken” (or oversimplified). One “traditional” place is when information existing at order and billing level are “aggregated” at accounting level whereas budget/reforecast would be supposedly prepared based on business drivers that “miss” some of the dimension. Example with currency, if the pricing and billing currency information is lost when converted to statutory currency in accounting and if budget/reforecast is build using the latest revenue trend from accounting, any chance to accurately and efficiently understand, report and forecast incidences of currency fluctuation is lost. Similar issues can be met if the customer (or customer profiles) is lost along the process or if the product granularity is oversimplified.    

• Key trends such as development stage, volume, price, competition… of markets needs to be gathered and structured in order to understand, report and forecast. Each company needs to understand which combination products/customers/geography is meaningful in terms of market evolution and competition, and to develop/implement competitive intelligence along those lines. Prices and volumes are the most common; those depend more generally on the development stage of the market (developing/mature/declining markets and/or investment versus replacement markets) and level of competition. Competitor’s movement and major product change/innovation are also key and must be tracked.

Whereas finance may consolidate all information, sales and marketing shall be key contributors. Company objectives/targets (budget/reforecast) shall be logical with the market trends, correspond to a clear set of strategical and tactical options/hypothesis and performance shall be “benchmarked” to these options/hypothesis. Most of these options/hypothesis represent real decisions rather than simple “forecast”. Over the quality of the process, this is the quality of these decisions that is key to the final result. It means a necessary and material involvement of the management structure all along the process. Those decisions must be captured / embedded in the final output. They shall be tested with reality at end. If in any forecast there is a part of mechanical data gathering, there is also a fair amount of managerial pro-forma decisions and it should definitively avoid all form of wishful thinking.

Without those elements the relevance and effectiveness of the planning, budget and forecast processes thus reporting are questionable as well as individual objectives setting and evaluations. This is the main source of the uneasiness with those processes.

The challenge in there is in two folds:

• Access to market data, evaluation and analysis (market or competitive intelligence). Difficulty here covers a wide range of possibility and complexity. A reasonable effort shall be made but it shall be understood that it may not be perfect or with a large degree of accuracy.
• Capture and analysis of equivalent data for the company shall be more easy and manageable provided a proper organization is put in place. Rather than educated guess, capturing and analyzing the volume and price evolutions (including the specific incidences of currency variances) for each meaningful products/customers/geography combination with reasonable accuracy from past to present shall not be such an issue, nor forecasting (budget/reforecast). The total volume and the unit price may well not be sufficient. For example, the order/delivery size might be a key component of the effective price billed (discounts/regressive prices), in such case this analysis must be structured in the process (actual/forecast/variance analysis).

External and internal resources

In each category, the degree of importance may largely vary from strategic to common/easily exchangeable. This may be linked to the importance in terms of costs, to the scarcity or uniqueness of such resources or any other industry specific reason. The whole process shall then attach more attention to those resources than to the more common one. Data structure decisions are not just technical  decisions, they are key fundamental decisions impacting business.   

• Costs of sales (raw materials, components, services). Those will largely follow the analysis of the revenues in terms of overall “volume” variances. Still they may also have their own particular element to be tracked and analyzed. Currency may be one of them (i.e. when the buying currency is different from the selling currency) creating potential variance in margin. Price evolution may not be linked or similar to the one of the related products sold…

Whereas in the “theory country” evolution of costs shall reflex in the prices of product sold, in the “reality country” it is far to be so simple and automatic. Something very similar and parallel to revenue must then be design and implemented for the goods / suppliers / geography combination (at least for all strategic ones). Purchasing shall be a key contributor in-there.

The combination of revenue and cost of sales processes shall permit to understand and forecast margin on cost of sales evolution. In most business, the revenue, cost of sales and margin constitute the major business challenge and thus the area where effort in analysis and forecast shall be concentrated.

The other costs and investments will be captured, analyzed and forecasted following the company organization structure using enough granularities to have a detail breakdown covering every process of the company and matching it to the management structure. Certain non-strategic functions can be profitably outsourced to more specialized firms.

• Structures (factories, premises, …) and
• Equipment (manufacturing equipment, IT, …)

Again depending on industries and company those can represent quite a different challenge. Over the traditional analysis of the costs and investments it represents, it’s their productivity and utilization rate that must be measured, analyzed and forecasted.

Depending on business type, the weight of staff and associated costs can largely vary in percentage of revenue or even of the margin on Cost of sale. Services industries would concentrate large percentages in staff costs whereas manufacturing or extraction industries will concentrate a far lower percentage.

The head count by ranks and the statutory costs by function are largely insufficient. It shall be complemented by a true qualitative analysis in particular for the key competencies. Associated costs such as training, recruitment, redundancy,… shall also be substantiated over and above the “traditional” statistical trend.  

• Financing and treasury.

A company cannot survive without proper financing. It supposes a dedicated / structured follow up and forecasting (that is a subject in itself).

Finally, keep an eye on your communication. Efficiently gathering and analyzing data, furthermore producing relevant synthesis represents probably 90% of finance work. Still, what may make the difference is the last 10% i.e. the way those are communicated internally and externally.