Lesson #1: Finance understanding the business

For performance management to work well it is absolutely critical that finance teams have a deep understanding of the different business functions otherwise it is difficult to be truly collaborative. 

There are a couple of things, in the budgeting or forecasting process, that help the team to:

  • gain a better understanding of the financial impact of their activities so they manage spending more effectively, and 
  • understand the non-financial metrics that are going to help make their functions succeed. 

The second item is particularly valuable because it leads to greater confidence in the shared understanding between finance and operations. 

Lesson #2: Helping create the right culture helps better performance management

It is important for the finance team to help set the right tone and culture in relation to enterprise performance management (EPM). In particular finance needs to help create a culture of openness budgeting and forecasting.  

If, for example, budgets don’t reflect the operational reality you may have significant issues such as disputes around overspending when it is essential to seize business opportunities, or lost savings opportunities when divisions underspend because operational teams feel they need to catch up on spending towards the period end to justify a budget position for next year.  

By creating a more transparent and collaborative culture, you are able to have honest conversations regarding spending, operations, and performance. The key is a mutual understanding the business so you can build that trust. 

Lesson #3: Linking financial metrics with operational metrics

One of the challenges many organisations have is a disconnect between financial and operational metrics and data. A highly effective finance organisation has to understand the operational metrics and recognise when they conflict with financial metrics.  

These conflicts are normally caused by accounting conventions and standards that do not reflect the cause and effect relationships that guide operational metrics.  

This is a challenge for many management accountants because accounting education is very focused on generally accepted accounting principles (GAAP) and financial reporting standards. GAAP and standards are for general purpose financial statements which are externally focused for the benefit of investors and creditors.

Management accountants need to recognise that internal decision making by many levels of managers requires absolute adherence to cause and effect relationships, not standards.  

Highly effective finance organisations identify where conflicts will occur between financial metrics and operational metrics, educate managers on the issue, and ensure appropriate financial information is gathered for both external reporting and internal decision making.

Operating managers who are doing their best to manage resources and operations effectively should be supported by financial information that causally reflects the work they do and reinforces good operational decision making.  

Lesson #4: Look to implement rolling forecasts

There is no doubt that the advent of rolling forecasts and the discipline around these is beneficial. Businesses should continually revisit their operations to gain the most up to date picture of how their business is changing in the face of a changing market and business dynamics enabling more time sensitive decisions and potentially better management of risks.

One specific challenge here I think for the finance team is understanding fixed versus proportional costs and modelling these (and then explaining them to the operational end users!). In a world of rolling forecasts this is particularly key.