Wednesday, March 2, 2011

Finance Function Performance Management


A good performance management framework should align corporate vision and strategy with business and departmental objectives.  As the global economy rebounds and companies begin to migrate from sustaining strategies to growth strategies, now is a good time for finance leaders to re-evaluate their group strategies and set their future plan.  A key component in this process is linking the group strategy to the performance management function.

Finance Function Strategic Plan

A well thought-out and executed performance management function begins with understanding the strategic plan for the organization as a whole and its impact on the finance function.  While different companies use different frameworks to define their strategy, every strategy addresses the following elements:

Strategic Plan Element
What question does it answer
Vision
Where is the organization going?
Strategy
How do we get there?
Critical Success Factors
What do we need to “do well”
Key Performance Indicators
How do we measure how well we are doing?

For the finance function to have an impact and support the overall company strategy, the finance function needs to have its own vision, strategy, set of critical success factors and key performance indicators.  In developing your key performance indicators, make sure you are balanced between leading and lagging indicators.

Goal Setting

Once the finance function strategy is set, finance function team members need to set their goals against this strategy.  Goal setting at the business area, department or individual level should encompass objectives or measures for results (what actions or outputs need to be produced) and skills/behaviors (how actions are to be performed).

Measures and targets from an effective performance management system should be SMART:
          Specific: easily understood and agreed upon by managers and staff
          Measurable: able to be quantified and updated regularly
          Actionable: within the control of the business area/individual
          Realistic: be achievable
          Time-bound: i.e., within a certain time period

In addition, goals should balance financial and non-financial measures and link the strategic to the operational.

Why do measurement efforts fail?

Peter Drucker said “If you can't measure it, you can't manage it”.  The corollary to that is “You get what you measure”.  In order to develop into a leading finance function, the importance of measurable goals at the group and individual level cannot be over-emphasized.  Of course, there are several reasons why organizations fail to deliver.  These include:
          Lack of alignment with strategic business objectives
          Dependence on lagging, not leading, indicators
          Poor integration with other information (internal and external)
          Heavy reliance on financial measures

Finance Specifics

There are a few areas in the strategic development and goal setting process that are specific to Finance.

Organization

The primary goal for most finance functions at public companies is to align the finance function under the CFO with primary responsibilities being financial statement production and audit support, with secondary responsibilities being financial management support.  The organization should be measured on the drive toward common accounting policies, common accounting processes used across the business, and providing better insight into corporate performance through management reporting.  If not already for global companies, a goal to consolidate the number of support functions to a cost-effective location would be appropriate.  This will help to save costs, improve efficiency, standardize processes, and enforce internal control.

Measurement

Production of accurate and auditable financial statements is key.  The finance function should have goals around driving common data standards through the use of a common chart of accounts and common financial management measures.

Process

Goals here should be to improve operational KPIs in the key functional areas: payroll, accounts payable, billing, accounts receivable, collections, credit, consolidation and reporting, inventory, fixed assets, and treasury.  They key is to develop a list of KPIs specific to each area, review 3-5 year operational data to develop insight into trends and develop initiatives to improve the measures.

Controls

Key measures should exist around the control environment through the annual SOX certification process for public companies.  If warranted, measures around the updating of internal control documentation should be development.  Controls related measures should also include the number of controls automated and the number of controls moved from detective to preventive.

Technology

For most companies, much improvement can be made without the implementation of new technology.  For technology-related projects, formal portfolio and project management measures should be used: # of projects supporting the corporate vision, # of projects on-time and on-budget, etc.  Other measures, in conjunction with the other areas above, can measure the amount of technology-enablement that will occur in the next year: number of A/P invoices accepted electronically and so forth.

 


3 comments:

  1. hello

    i have never thinking about al these kind of stuff but i really appriciate to all the reader of this blog because they all have great mind to think about this major topic in financial field thanks to share thier expirances with us.


    Depository trust & clearing corporation

    ReplyDelete
  2. Very insightful Mr. Jonathan Collins. The SMART approach is really essential for good management and efficiency. It is necessary to reduce the expenditure first rather than just trying to reduce the cost!

    ReplyDelete
  3. Very insightful Mr. Jonathan Collins. The SMART approach is really essential for good management and efficiency. It is necessary to reduce the expenditure first rather than just trying to reduce the cost!

    ReplyDelete