Best Practice in Financial Performance Management

WHAT THE EXPERTS SAY...


These days, we hear a lot about the need for resilience. Organisations are constantly being told about navigating uncertainty and adapting quickly to changing conditions - almost as if it was a new approach.

For the typical finance department however, when was this any different? 

Disruption - whether economic, political or sector-specific - is not new. This is not the first time that finance has faced major hurdles in planning for the future. The coronavirus pandemic is similar to other major events (the 2007 financial crisis, for example) in that it forces finance leaders to refocus and review their priorities. 

Mike Jeffery and Mark White of MHR Analytics make the case for getting back to best practice principles, and examine how these principles can help you improve your financial performance management processes.

 



What are the elements of best practice? 

For the mechanics of planning and forecasting, best practice is organisation-specific. Indeed, much of our work involves helping customers develop an approach that meets their particular goals and preferred way of doing things. 

But when it comes to fundamental planning capabilities, we believe that certain universal elements do apply. At MHR Analytics, we find it useful to refer back to the framework proposed by IBM’s Innovation Center in collaboration with Steve Player and Steve Morlidge, authors of Future Ready: How to Master Business Forecasting (Wiley, 2010). 

This approach starts with a basic premise: no company, and no individual can predict the future with certainty. It follows that when making decisions, organisations cannot rely solely on information about what has happened in the past. Instead, companies need information about what might happen - information that is generated through forecasting. 

The objective of forecasting should be to become “Future Ready”. For this, businesses need the ability to systematically and rationally assemble information that gives managers forward visibility regarding a vast range of likely outcomes.



1. Managing Risk

In normal operating conditions, it is natural to make certain assumptions. For instance, you might reasonably expect the cost of overheads to remain within a particular bracket, or for an established sales pattern to continue. But even here, there is still an element of risk that needs to be factored into decision making. In some cases, this risk might warrant a more rigorous analysis of costs in specific areas, or it might simply involve building in a percentage contingency. 

At other times (including at present), costs and revenue streams which are usually fixed and stable become a lot more uncertain. For many organisations in the current climate, virtually all aspects of cost will be tagged as ‘volatile’, creating the need for constant review and monitoring. 

So how should businesses approach planning? Much of the historical data drawn on previously is likely to be redundant, in which case a return to zero-based budgeting may be called for. This approach encourages organisations to look afresh at current revenue and spend drivers and assess their validity for the future, which should identify some areas of risk that can be mitigated. 

Managing risk demands the ability to create multiple scenarios, covering multiple combinations of events and courses of action. Zero-based budgeting scenarios, predicted versions, models created both top-down and bottom-up all need to to be considered together. An event-based approach to re-forecasting which assess the likelihood of each customer or supplier interaction actually taking place may also provide insight. 

Particularly in this age of big and sudden government announcements, it is vital to ask ‘what if’ and have answers you can rely on. Assuming that you have a planning solution that allows for driver-based forecasting, it becomes much easier to evaluate macro-driven risks, such as interest rate changes or currency fluctuation.



2. Use of technology and modelling

What exactly makes some companies better at managing risk in uncertain times? In one big study, researchers analysed 4,700 listed companies to see how they fared in the major recessions of 1980, 1990 and 2000. 17% of these went bankrupt, went private or were acquired. At the other end of the scale, 9% of companies flourished. 

The high performers tended to have some things in common. They were not merely “switched to survival mode”. Rather, they had the ability to think through alternative scenarios and make contingency plans. 

We’ve seen this in action recently as companies respond to various government initiatives. The furlough scheme is a prime example: the rules and reliefs have chopped and changed, culminating most recently in the launch of the Job Support Scheme. Thanks to our Salary & Compensation Accelerator and while the scheme was still hot off the press, we were able to take the details of the scheme - i.e. duration, sliding-scale entitlement, employer/government apportionment - and integrate this into a new model.

Thanks to this type of capability, organisations have been able to respond to government directives and other changes on an ongoing basis. Underpinning all of this is the right technology. Rapid-action reforecasting is almost impossible to do within a spreadsheet environment. 

The imperative during uncertain times, is to take the time to review and understand where current drivers are redundant, and may have been superseded. The right technologies give you the capability to quickly create and compare ‘what if’ scenarios and alter the drivers, without the risk of data errors that too often occur with spreadsheet-based modelling. 

Finally, on the subject of technology, a word about ‘predictive analytics’. We are seeing that many vendors are incorporating predictive capabilities into their planning solutions. They promise a lot, and we do not doubt the value that these algorithms can, under many circumstances, add value to an organisation’s planning processes. 

Nevertheless, a ‘sense check “is always required and the results should not be viewed in isolation. “Mutant Algorithms” have hit the news recently over algorithmic-based marking of A-level exams. In planning terms, for the finance manager, predictive modelling of Coronavirus outcomes for the business is also challenging due to the almost total lack of now reliable historical data. Algorithm generated scenarios should always be contrasted against multiple other versions of data.



3. Getting the organisational culture right

The right culture helps to accelerate the successful application of planning technology. It helps you extract maximum value from new technologies and processes. Crucially, it also helps steer organisations away from risky outcomes. 

So what does the right culture actually look like? As a start, it is important that the finance team is given enough time to both gain insight and sense-check the models used to support executive decision making. Are these models still valid? What are the drivers we should be focused on? An ‘open culture’ is vital: one that supports the questioning of information used in making key decisions. 

Collaboration is also vital. It is unlikely that he responsibility for planning will reside solely with the finance function. As such, the planning process should be opened up to include the ‘right’ people in the organisation who can add perspective from their departments.



4. Time horizon and measurement

In the past, reporting in a typical organisation tended to be viewed as a set, monthly process, while reforecasting was timetabled as a quarterly task. Increasingly though, big organisational decisions have to be made more frequently. The upshot is that traditional reporting cycles should never be viewed as set-in-stone. If you think that more frequent reporting is required to support decision making, then make the shift. 

Secondly, the time it takes to complete a planning or reforecasting process should also be considered. You may conclude, for example, that weekly or even daily monitoring and reforecasting cycles are required for especially volatile areas of this business. This is going to have a significant impact on the people within the finance function who are responsible for it. Care should be taken to ensure they have the right technical support for the collection, collation and analysis of extra volumes of data. 

In addition, new key performance indicator (KPIs) may be required, or at least evaluated, to keep a finger on the pulse. Key finance functions should be measured and monitored to give insight into further changes that may be needed in future cycles.

Although there are undoubtedly major changes ahead for perhaps all businesses - including those who thrive - there is an opportunity to re-evaluate key processes, adapt to some of the challenges and consider developing some of the practices we have outlined. At the very least, these are the types of changes that can reduce the cost of existing processes and help ensure that your reporting cycles match the need for rapid and frequent data-driven decision making. Crucially, the right changes can also help to create a valuable competitive edge.


The MHR advantage

Bringing many years of experience of working in finance teams like your own, combined with expertise in financial planning software, we work with finance departments to implement technology-based best practice financial planning solutions. 

Our Financial Planning and Analysis Accelerator allows finance professionals to get started with using IBM Planning Analytics for reporting, planning, budgeting and forecasting; and then move to more advanced functionality to support your strategic decision-making. 

MHR’s solutions provide better visibility of, and trust in finance data across the department and wider business, with one single process and source of truth. This is especially important during the COVID-19 crisis.

Next steps

Please join us on our Financial Planning & Analytics webinar at 10am on 22nd October. We'll discuss the key points in this blog and next steps that your company can take on your journey to better financial planning. You'll also hear first hand how Action For Children implemented a planning analytics solution and how that has transformed their business.

Mike Jeffery

Head of Financial Performance Management, MHR Analytics.


With a background in both accountancy and software, Mike has over 30 years’ experience in transforming clients’ reporting, planning and consolidation processes. Over the course of his career, he has worked in both the private and public sector, using a variety of Financial Performance Management technologies. Most recently, Mike led IBM’s European Performance Management Technical Professional team.

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