Financial Appraisal – Improving ROI of Finance Functions

Are you a financial professional and can relate to this story? It’s month end, you start looking at the performance of the organization and you note very material variances in profitability to the finance teams’ budget and forecast. Scratching your head, you proceed to spend hours trawling through sales and marketing activity trackers and production and procurement plans to find root causes. Armed with information, you proceed to reach out to your business partners to get their view of the issues. Following a back and forth with multiple team members, you collect a myriad of isolated viewpoints, which you stitch together to relay to the executive team, along with some recommendations on how to improve. The executive team asks some probing questions in a month end review meeting, which you field to the best of your ability. You then take a big sigh of relief and commence the cycle again.

If this story is familiar, you’re not alone. A lot of finance functions are following this monthly operating rhythm. They are not only disconnected from the organization, who are focused on monthly and quarterly deadlines, but spend most of their time looking at the past. This means they are unable to proactively manage the future with their business partners. A recent article by CFO.com cited research from the American Productivity & Quality Center, which found that the median cost of planning management and accounting was $1.08 for every $1,000 in revenue, and at the 75th percentile it jumps to $1.91 for every $1,000. This shows there is a lot of money being left on the table from inefficient planning processes! If your organization wants to create competitive advantage, your finance team needs to adapt their approach by embracing an integrated financial appraisal.

What is a financial appraisal?
A financial appraisal is a continuous process, where finance translates the latest view of the core operating plans into financial statements. In the context of the Integrated Business Model (see image) that means the product, service, demand, and supply plans are translated into financial outcomes and integrated to form the financial statement projections for the organization. To put it another way, financial statement forecasts become an output of operating plans, not a standalone finance activity that is then retrofitted to operational plans before reporting deadlines.

How finance can reorganize to drive effective financial appraisal

1. Become an embedded team member
Functionally, finance may report to the CFO, however finance associates that are accountable for financial forecasts must work directly with their operational business partners and be part of operational planning processes such as Integrated Business Planning (IBP) and Integrated Tactical Planning (ITP). With the finance team member embedded in the planning flow, they can evaluate thinking around the plans in real time, as opposed to waiting to receive plans from functional owners and evaluate the impact of changes each month.

2. Understand critical plan assumptions, vulnerabilities and risks
The focus for finance professionals needs to shift from line-item analysis to understanding the critical success factors that drive the plan, along with opportunities that could be further exploited, while managing underlying vulnerabilities that will need to be mitigated. This understanding gives the finance business partner the story of the activities that will be conducted in the future, to realize the organizations financial goals and evaluate their financial sufficiency and subsequent effectiveness as the plan is executed. By focusing on assumptions, finance can also use history to stress test the plan’s feasibility based on previous activity, as opposed to conversations focused on historical run rates that have little-to-no context on the business activities that led to those outcomes. Furthermore, if the evaluation of the plan shows a financial deficit, action can be immediately taken with the respective function to ideate options to close, rather than creating financial ‘plugs’ that don’t tie back to operational plans.

3. Finance business partner integration
To ensure the impact of changes from one function to another, core organizational plans should be quickly reconciled. Finance business partners need to play an active role in a weekly integrated plan reconciliation process. This ensures that plan misalignments can be evaluated and resolved in almost real time. in partnership with the operational teams, rather than seeing them through a monthly consolidation process right before a key submission deadline. For example, evaluating the impact of an approved change in the demand plan, prior to the supply review, allowing cost-effective options to meet the uplift in demand to be considered before the review for approval. This proactive management approach gives breathing space for teams to resolve issues and only escalate what can’t be resolved within team members’ delegated financial authority.

4. Actively monitor realization of the plans with integrated plans
Finance team members can proactively manage month end activities by monitoring the execution of the plans through processes like Integrated Tactical Planning. As the month unfolds, they will be able to see if key activities are transpiring as anticipated, and have proactive conversations with their stakeholders on how to manage deviations to the plan. With a proactive approach, activities such as variance analysis and plan rephasing do not consume all the team’s time in week one, and finance associates can focus on helping their stakeholders achieve their financial goals.

An integrated finance function is the essence of xP&A. Stakeholders of finance functions that embrace working in the operational planning flow will have the confidence to execute plans that delight the customer and deliver against the organization’s financial aspirations.

If your finance team is yet to commence their integration journey Oliver Wight is here to help. Email me directly or send an enquiry via our contact page.
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