Here are 5 key factors that if managed well, could help in creating a strong performance management framework within an organization:
- To understand what the Business wants & provide relevant Management Information
- To determine the right frequency of reports: Timing is most critical
- To institute 'One version of Truth' across the organization
- To create a performance management culture
- To analyze numbers and enable business understand the "so what" of the numbers
Timing of Management Reports is most important. The right frequency of the management reports needs to be established in discussion with business. In other words, what is needed on a daily, weekly, monthly or quarterly basis would be useful to establish for each business that the CFO's team is supporting. The finance unit can then organize themselves in a way that will enable them to produce the agreed standard reports every month. At the same time, finance team should be alert to proactively point out any exceptions or abnormal deviations during a given month to trigger suitable actions by business.
For instance, take the example of the Cards business in a bank. If the fee income is trending low at mid month versus a similar month in the past, it is more useful for the business to know about it at mid month itself, even if based on a rough estimation, rather than knowing about it post facto, i.e. at the end of the month. With two weeks to go in the month, the Product Managers would have an opportunity to initiate say a marketing program, to positively influence fee revenue for that month.
One version of Truth: Consistency of numbers across the organization is key. For instance, the Sales reports and the Finance reports have to be totally aligned on what the revenue for the month is. Often, it has been found in organizations that the Sales personnel are driven by Sales reports, which record sales revenue numbers differently than finance. This can happen due to many factors relating to timing or accounting. The onus is on Finance to set this right by creating a consistent set of definitions and socializing it within the organization. Further, the standard reports produced every month should be made available to every key function across the organization. In addition, the CFO would do well to educate the functional heads (Sales, Product, Marketing etc.) on accounting requirements and standards that influence revenue or cost figures in the financial statements. This will go a long way in winning business credibility while also ensuring that any performance discussion with the Business head(s) is focused around core business issues rather than number reconciliations.
Creating a Performance Culture. A discipline of monthly performance reviews with all stakeholders is most critical. The review should include not only the Business Head, but also the product head(s), sales head, marketing head and other relevant stakeholders. Such a review helps in establishing a common understanding of the financials and their interpretation. Another advantage of getting into this monthly routine, is that it helps create ownership. The CFO can highlight the key issues related to financial performance and agree suitable remedial measures with the concerned unit head(s). Agreed action plans are reviewed for progress at subsequent meetings until closure. The CFO's team helps track these on an ongoing basis. Monthly reviews help dispel the implied notion, if at all, that the onus of delivering the overall financial targets is solely that of the Business Head along with the CFO.
Analyses and Meaningful commentary: Instituting the right performance tracking tools to be able to provide relevant analyses to business is important. At the same time, care should be exercised to ensure that there is no 'information overload' in the monthly reports. Ratios, trends, per unit metrics, flash & exception reports, driver trees are some of the tools available to the finance team in order to dissect the numbers meaningfully. Interpreting the numbers is perhaps the single largest responsibility of the finance function. The Business Head rightfully looks to the CFO for obtaining this. Yet, it is the aspect that receives the least attention in terms of time spent. This is because a vast amount of time is generally spent to produce the management reports, leaving little time for analyses or insights. Investing time to get to the bottom of the numbers is paramount to understanding business performance well, which in turn can help the finance unit have meaningful discussions with business.
The finance team would do well to do their homework right, before performance discussions with the business, so that numbers can be interpreted in the correct way, appropriate conclusions drawn, the right issues raised and the right accountability fixed. Whether it is a Sales issue or a Product issue, a Sourcing issue or a Credit issue, is something that can be clearly established by correctly interpreting the numbers.
Also published in CFO innovation magazine. Click the following link.