A corporate finance function plays two distinct key roles in an organisation. The first role is as the external reporter. As the external reporter, accountants are the conduit between reported historical performance and financial strength through the prism of general accounting standards to external stakeholders, namely financiers and government agencies.
The second key role is as the internal performance advisor. The internal performance advisor is the objective arbiter of progress, a facilitator of actions via the strategic allocation of resources. The role involves looking at the business through the lens of customers, suppliers and all the distinct internal stakeholders to enhance decision making. The second key role of a finance function requires the combination of technical expertise with business knowledge, skill and nous. There are 5 common finance team dysfunctions that take place on a regular basis when attempting to fulfill the second role.
1. Last year’s actuals inflated
When setting a budget or forecast and under time pressure it is easy for the finance team to succumb to the practice of last year’s actuals inflated and rolled forward. Last year’s actuals may have no relevance to what may transpire 12 months later. Product mix, key clients, staff, contracts, projects and equipment may all have changed. As a result the goal posts have moved and you can’t provide a like for like variance analysis although some finance teams convince themselves they can and as a result nobody is listening.
2. One dimensional communication. Who is the client?
When communicating with internal stakeholders, the finance team can forget who the client is and the language they speak. Instead of providing proactive insights for problem solving and decision making by speaking in terms that are commonly used by operational managers. The finance function creates additional work for internal managers by asking for explanations of financial reports in financial terms.
3. Interrogator vs facilitator
Professor Robert Anthony of Harvard University will tell you management control systems are for the detection of controllable variances, understanding the effect and providing the appropriate feedback. However finance functions can focus on the ‘detect’ and often neglect the facilitation of a positive effect, a bit like a golf swing with no follow through.
4. Control vs catalyst
A side effect of finance functions with a strong emphasis on detailed control is the tendency to build a bureaucracy, creating administrative road blocks and bottle necks. Budgets and forecasts that are created for cost control rather than sign post for strategic progress can choke initiative, creative thinking and innovation. More important is the management of key business ratios, observations of trends and the development and implementation of the operational action plans that flow from the analysis. Budgets and forecasts may act to underpin the ‘sign post’ ratios of strategic progress however the insights from the ratios and trends are of a higher order.
5. Disconnect between numbers and actions
The use of standard accruals, depreciation and amortisation, department cost allocations to cost centres in the goal setting process often without the agreement of cost centre managers can frustrate operations. Distrust can build with operations managers where cost allocations are considered head office adjustments which are out of their sphere of influence and where assumptions are updated too slowly and infrequently to reflect changing operational realities. In this circumstance, operational managers stop engaging with the finance function in a proactive manner. In the mind of the cost and profit centre manager, there is little connection between the actions taken and the numbers reported.
To master the second key role of the finance function as the internal performance advisor you must avoid these 5 common dysfunctions.
You can read more about Professional Advantage and budgeting and forecasting here.
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