Many organizations believe that they have good visibility into their costs and that they are managing them in the best possible manner. The truth could be far from what is apparent on the surface, though. The iceberg analogy is a good one in this context. What happened to the Titanic should alert businesses about what could go terribly wrong if you do not see beneath the surface to identify – and deal with – hidden' costs.
In today’s highly competitive world, revenue is never certain, while costs are generally a given, whether or not we like it. Revenue is uncertain amid heightened competition, with more players vying for the same pie and with ever compressing revenue margins as the market place matures. However, people, premises and technology costs, which form the bulk of an organization's cost base, are generally fixed.
The effectiveness of business decisions is dependent on the management information flowing to business from the CFO's team. If the business does not have access to relevant, accurate information on which to base the decision, then there is risk of inappropriate decisions being made.
The CFO and finance team constantly interact with the rest of the business on a variety of matters. This could range from topics such as monthly results, performance reviews, forecast discussions, board meetings and budget meetings to new product launches, cost cuts, investor meetings, regulatory changes, accounting changes and strategic vision.
The budgeting or planning process is an integral part of an organization’s performance management system. Yet not all companies manage to get it right. More often than not, there is a large amount of time – sometimes more than four months – that is invested, involving valuable time of management, that of the CFO and the finance team, and also that of the rest of the business.
Ramesh Narasimhan is the Founder and Principal of Singapore-based Value Consulting Asia, which provides CFO advisory and related services. He is also a Senior Consultant with StraitsBridge Advisors, a specialist firm providing advisory and execution support for CFOs in banks and financial firms.