CFO need-to-know in a digital world:
How can the finance department use analysis to promote and drive business development? It is all about utilising the goldmine that is data in a smarter way. Key performance indicators play a decisive role in realising analysis that creates more value.
Analysis is central to the work of every CFO. I would suggest, however, that around 75 per cent of analysis – and the advice based on analysis and reports – in a finance department focuses on relatively simple key performance indicators such as operating margin, cash flow, indebtedness, equity/assets ratio, etc. In addition, some of this basic analysis also involves looking at the efficiency of the finance department. How quickly can we produce our annual accounts? Could we cut this time by a day or two? Analysing the department’s own processes is important and streamlines the finance department’s own work, which means that the business and management receive supporting data for decisions sooner – boosting confidence in the organisation's CFO.
The CFO as a partner to operations
And what is the remaining 25 per cent of analysis used for? Around 20 per cent points of this analysis is used by the operations management as a control mechanism and is based on data that does not really pass through the finance department, or at least not in a structured format, such as invoices, interest information and account information, exchange rates, etc. Instead, the data may come from partners, retailers and customers. This means that the finance department, given adequate supporting data, also can produce reports that provide direct, operational support for the business. This could range from analysis of pricing strategies in different markets to identifying various factors that could cut margins, checking how customers appear to perceive quality in various parties and retailers, and much more.
Naturally, this kind of analysis creates large value for the organisation's business activities. Of course, in many organisations, analysis is also carried out at local level within various functions and/or business areas. Sales departments, for instance, always have analysis tools and methods for measuring/rewarding salespersons. Nonetheless, the finance department can add large value both by collecting information from various parts of the organisation, and – as mentioned – from external sources in the form of, for instance, partners and customers. In this type of analysis, the CFO acts as a form of partner to the organisation’s operating activities.
What about the future?
So this leaves 5 per cent. What does this analysis focus on? Well, on something we don't really know anything about: the future. Advanced modelling means that you can see the impact on the business of various different factors. It goes without saying that these kinds of analyses and reports are hugely valuable. I usually say to my customers that when they have progressed to the stage where they are expected to provide insight into future performance, they have achieved a Thought Leadership position in the organisation.
It may seem difficult to build a finance department of such high quality that you are in demand by senior management as someone they can bounce ideas off. The fact is that the structure I described in my last blog post (link to business development, Part 1) – efficiency, predictability, development of key performance indicators as control mechanisms, and global standardisation as well as consolidation – is organised so that you solve the problems one by one. Several steps, particularly efficiency and predictability, also reduce the organisation's costs in the long term, simply because so many routine tasks can be automated. So, the things you have to do to improve efficiency and predictability also lower your costs. Your staff can instead focus on analyses that create value, for instance by developing key performance indicators to help manage the business.
Define your key performance indicators
How will you achieve all this? A lot of the work required to actually introduce these key performance indicators in the organisation also requires input from others in the finance department. You need help from IT in order to develop analysis tools, consolidate data, secure data flows, facilitate integration of different systems, etc. And you also need HR to help you train users.
The finance department could start by defining the key performance indicators they need. Here are a number of questions the department should ask itself to help with this task:
Once you have completed this task, you should contact the IT department for discussions on how to build, in purely practical terms, the applications and reports that will feed this information into your organisation’s operating activities.
First, however, you have to start with the basics, which as I pointed out will also help you save money. If you don't start by looking at how to standardise reports and automate processes, as well as improve the quality of all the routine tasks performed by the finance department – well, then you might as well forget about becoming a Thought Leader for the business in all the difficult decision processes they have to deal with every day.
Responsible for Cognizant’s Business Process Services in the Nordic region.