By Andy Burrows, 22 October 2018
During my career, I’ve sometimes worked at the top level in Finance, and had the privilege of sitting alongside other functional heads in the “Senior Management Team” or “The Exec”, or even “The Board of Directors”.
Obviously one of the chief ways we stayed in touch with each other, and with what was going on, was to have “Management Meetings” on a regular basis. Normally, the main meeting would be once a month, centred around the management accounts. And sometimes we would also have weekly, less formal meetings.
When you’re more junior, you see the FD or the CFO going off to these meetings. And you have a picture in your mind of what goes on. You picture high powered discussions, with quality arguments and analysis, talking strategy and making sensible decisions.
The reality is often quite different. The meetings are often frustrating, boring and nowhere near as useful as they should be. Discussions over “matters arising” or “actions brought forward” go off at tangents, and you run out of time for quality consideration of important decisions. More like a “bored meeting” than a Board Meeting!
But bad time management is not the only common problem. Here are a few Finance-related things that contribute to making a lot of management meetings almost useless.
Some of the most fruitless discussions happen over the “wooden dollars” – recharges and allocations.
I’m not talking about passing costs from one cost centre, or business unit, to another when they’ve been coded to the wrong place. The whole “cottage industry” (as I’ve heard it described) involved in moving costs around, and the question of the inefficiency and lack of value in that process, is a different issue. And I’m not talking about transfer pricing recharges for tax and regulatory accounting purposes. At least the reason for such “recharges” is rational.
What I’m talking about here is the allocation of indirect and central costs to anything, from business units and products even down to cost centre level.
In my first Finance job outside of public practice, it took me a few months to realise just how much time was spent discussing the fairness of the allocation basis. Our monthly management accounts pack had full P&L statements for each major product, so that the pages added up to the total business P&L. Some of these products continually showed losses or marginal profits when overheads were allocated.
The owners of those products were always keen to know the breakdown of the allocated overhead. Was Finance under or over budget? Why did they get so much allocation of HR costs? And management discussions would descend into debates over the relative merits of different allocation bases, or would be deflected from product performance onto picking apart overhead departments.
The thing is, overhead allocation means NOTHING, whatever basis you use! It’s arbitrary. The reason they’re called overheads is because they’re not driven by products or customers or sales turnover. If you had just one product, there could be the same Finance function costs whether you sell $100k or $1m.
Lesson: Changing an allocation basis is not going to change the basic performance of any of your products. Your total business profit will still be the same. And making decisions about investing in products based on fully absorbed costing can lead the business into a downward spiral – kill a product because it’s marginal, which then means the same overhead costs have to be allocated to less products… which then makes another product go marginal… kill that one… you get the picture!
Solution: After a while I stopped the allocation of overheads for anything but regulatory purposes. Certainly, in the management reports and budgets, we changed product P&Ls to stop at “Contribution” level. And we added in new pages to analyse overhead costs in their own right.
Without allocations to argue about, product owners then started talking about what they should have talking about – product performance.
Another life-sucking discussion that doesn’t help anyone – but happens every single month anyway, even though everyone recognises the futility – is the argument over conflicting data.
For me, that arose over order volumes and staff numbers.
We had order volumes for the different products in the monthly management accounts pack. And from those and our financial numbers, we derived average order sizes. The Finance Director would turn up at the monthly management meeting, and be told by the Ops Director that his figures were wrong. A debate would then take place over whose figures were correct. By the time they both agreed to “take it offline” they’d waste a quarter of the meeting. And of course, they didn’t discuss it outside the meeting, because they never had time, and so they had the same discussion at almost every single meeting.
What transpired eventually was that the Ops area’s data collection method was to have their teams manually write their daily order volumes on the whiteboard next to the warehouse lobby. The Ops Director’s PA would then write them down in her notepad and then type them into a spreadsheet... and then use a calculator to add them up and enter the total into the spreadsheet (yes, really! And I bet you’ve seen people do this yourself!) Of course, they ignored any cancellations and amalgamated any big orders that had been split for processing purposes.
On the other hand, Finance took their figures from the system – the number of unique non-cancelled order numbers.
You can see already that the differences were probably partly due to human error in Ops and the differing definitions of an “order”.
There were similar issues with the staff numbers. Finance and HR took figures from systems that were updated at different times in the month. And the definition of “Full Time Equivalent” (FTE) was always creating debate, along with whether to include temporary staff, people on long term sick leave and people on maternity leave.
The solution was for Finance and HR to get together and agree which system to take data from and agree a set of definitions. Once they described that to the other senior managers, there was no need for time-wasting discussions.
Lesson: Data and KPI definitions are important, and can affect the interpretation and consequent actions. And on top of that, having different sources of data can turn the problem into a political debate (“my data’s better than yours!”).
Solution: First, be clear why figures are being presented, and agree the exact definition of what each measure or KPI means – what it should include and exclude, etc. Then you will have criteria against which to judge different data sources. Be open, and seek the data source that best fits the criteria from your definition, is most automated and most reliable… even if Finance don’t have ownership of it.
Okay, rather embarrassingly, I have wasted time myself at management meetings by presenting financial reports containing rogue figures. The situation used to go like this:
Board meeting 1 – Chairman asks why Distribution costs are so high while order volume has not increased. I say it was because of low average order size, leading to a higher number of packets sent.
Board meeting 2 – Chairman asks why Distribution costs are so low while order volume has increased. I say that higher order volume means that Ops can often put multiple orders in the same packets, so it’s not a straight relationship.
Board meeting 3 – Chairman asks why Distribution costs are significantly over budget. I say that unfortunately it’s because we underaccrued in previous months.
Board meeting 4 – Chairman asks why Distribution costs are significantly under budget. I say, with a red face, that it’s because we actually overaccrued in previous months. “Yes, I know we said last month that we’d previously underestimated, but it was actually over.”
Of course, by that stage I look like I don’t have a clue what I’m talking about. The words “get it sorted” are etched in my memory! The truth turned out to be a combination of rubbish data, duplicate invoices and Ops mistakes… And, of course, the Ops Director didn’t really care about those mistakes because the consequences were in the Finance numbers. And everyone knew I wasn’t going to “drop people in it”!
Lesson: I learnt the hard way that it really pays for the Finance Director to have a detailed knowledge of how the numbers come together, and to check the recs and controls. Otherwise, you risk useless discussions, and being asked questions you don’t know the answer to, which undermines confidence in everything else you say.
Solution: Treat investigating and fixing accounting anomalies as a priority. Confidence in the numbers that come out of Finance is high priority, because if Finance can’t get the numbers right what are we here for? Dig, dig, and dig further, into strange numbers until you and the team know what the causes, parameters and pitfalls are. And if the anomalies are due to bad processes or controls in other areas such as Operations, IT or Sales, don’t shy away from telling it as it is.
Here’s another thing I used to find myself saying a lot, even in month two of a new financial year – “this is different to budget, because the assumptions were wrong – well they were right at the time, but things have changed.” And then every month it was the same explanation, because the budget was always the same budget with the same outdated or incorrect assumptions.
What a waste of time!
And to be honest, even if the assumptions were correct, why is a comparison to budget treated like the be-all and end-all anyway? Why is it bad to overspend on IT development if you’ve just approved a project that pays for itself in staff cost savings within the first year? And why is good to be 10% over budget on Sales even if that’s 10% above last year. Your competitors may have all grown the top line by 20%?
Lesson: Talking about figures compared to the budget is a bit questionable to start with. It becomes more and more a complete waste of time as the budget becomes further and further out of date.
Solution: Think radically about how you can replace the budget with something more useful. Perhaps comparisons to last year are more relevant. Perhaps full year rolling forecasts compared to the previous year are more relevant. If you can’t do that for political reasons, maybe just stop talking about budget comparisons and keep talking about the things that really matter – growth rates, margins, etc.
And after you’ve spent the majority of the meeting talking about wooden dollars, arguing over inconsistent data, explaining accounting errors, and trying to convince each other that the budget is still relevant… the thing that quietly drops off the agenda is strategy.
Strange, isn’t it?! The CXOs who are supposed to be oh so strategic, the big thinkers, leading the business through turmoil and trials, thick and thin, sit there arguing about trivia and don’t get round to talking about what they’re employed to talk about – strategy. Or perhaps that’s why they have to have “strategy days” offsite – at the golf club with the smoked salmon and champagne dinners – where they might actually have time to do their jobs.
This is probably the biggest thing that makes management team meetings almost useless. To know whether we have a good strategy, whether the strategy is being executed effectively, and whether it’s being successful, we need to focus on it with specific measures – KPIs. And it is those KPIs that should be reviewed regularly and discussed in management meetings.
Lesson: As I’m fond of saying: “Every management meeting should be a strategy review meeting.”
Solution: In some ways, I’d suggest that it might be better to keep the P&L out of the management meeting completely! Why not let the CFO and his/her team keep the accounts clean, and let the business managers own and manage just the KPIs? That’s just food for thought. The main point, though, is that you should find ways to make the regular business performance reports direct discussion towards the issues of strategic importance. Measure what matters, and ditch the rest if you can.
I hope that has given you some ideas for improving the effectiveness of your management meetings. If you’re an FD or CFO, have you any other examples of the points above? Are there any other things you’ve seen that distract discussion in management meetings, and make them boring and ineffective? I’d love to know. Add them in the comments below!
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