By Andy Burrows
I’ve worked as a senior leader in many Finance teams. And over the years I’ve noticed several things that we do that really hamper our effectiveness.
‘Effectiveness’ can be defined as the extent to which we’re achieving our mission.
I’ll come to that mission more specifically at the end of this article. But for now, let’s just take it in general terms that we exist in the business to help the business. We don’t do anything for its own sake, just to satisfy ourselves as accountants. We don’t produce reports just to be able to admire a nice report. We don’t do analysis just so that we can admire a financial model that balances. All the things we do should help the business.
And so, I want to talk about things I’ve come to see as unhelpful. Some of them we take for granted. We just do them, we accept that they exist and we perpetuate them. Some of them almost have the status of sacred cows that we don’t feel able to question.
I hope that in the process of highlighting these things that I can transform your mindset. I hope that you come to see a new and more effective way to help the business.
And I do this from the perspective of someone who has spent years sitting in Exec meetings and senior management meetings. And I’ve noticed where the things the Finance team does can have a huge impact on the quality of discussions and decisions.
Some of the most fruitless discussions in management meetings happen over the “wooden dollars” – recharges and allocations.
Now, 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. That’s a question of process inefficiency. 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 - business units, products, customers, even cost centres – for the purposes of performance reporting.
In my first Finance leadership role, my Finance team used to prepare a monthly management accounts pack that contained full P&L statements for each major product. Overheads were allocated to all products so that the profits and losses on the product pages would add up to the total pre-tax profit. Sound familiar?
Some of these products continually showed losses or marginal profits when overheads were allocated. The owners of those products went straight for the breakdown of the allocated overhead. Every time. Was Finance under or over budget? Why did they get so much allocation of HR costs?
And discussions in management meetings would descend into debates over the relative merits of different allocation bases, or would be deflected from product performance onto picking apart support function expenditure.
The thing is, overhead allocation is, in essence, arbitrary. The reason they’re called overheads is because they’re not driven by products or customers or sales turnover.
Changing an allocation basis is not going to change the basic performance of any of our products. Total business profit will still be the same, however we slice up the overheads.
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!
Eventually, I stopped the allocation of overheads for anything but regulatory purposes.
In the management reports and budgets – for performance reporting - we changed product P&Ls to stop at “Contribution” level. And we added in new pages to analyse overhead costs in their own right, to maintain visibility.
Without allocations to argue about, product owners then started talking about what they should have been talking about – product performance. And we were able to have sensible discussions about support function expenditure in its own right.
Another life-sucking discussion that doesn’t help anyone 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 we derived average order sizes. Great!
But I’d turn up at the management meeting, and be told by the Ops Director that my figures were wrong. A debate would then take place over whose figures were correct. That obviously deflected discussion away from performance.
What transpired eventually was that the Ops area’s data collection method was manual (figures submitted by team leaders and added up on a whiteboard, then transferred to a spreadsheet, neglecting to adjust for cancellations etc).
On the other hand, Finance took their figures from the system – the number of unique non-cancelled order numbers.
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.
Of course, the first solution was to get together and work out which figures to use, so that we all agreed what should be reported.
But, there’s a deeper need.
We have to be clear why figures are being presented. Because often we find that the figures being presented don’t really tell us much about performance.
What did ‘headcount’ tell us about performance? If you need additional data to know whether something’s bad or good, and what actions may be required, then you’ve only done half the reporting job.
What did ‘average order value’ tell us about performance? It’s not something we could influence. So, was it a driver of operational efficiency? Was it to explain the headcount fluctuations? If so, could we design a more appropriate measure – maybe, orders processed per operational FTE?
We don’t just need consistent data. We need to be clear what our performance reports actually say about performance.
Thirdly, whilst no-one intends to make mistakes, we have to acknowledge that they do hurt our credibility.
I remember all too well a time when we battled with errors in the accounts. The discussions in the monthly management meetings went a bit like this:
Month 1 – When asked why Distribution costs are up while order volume is flat, I explain that the average order size was low, leading to a higher number of packets sent.
Month 2 – We have the opposite situation. I explain that higher gross order volume means that Ops can put multiple orders in the same packets, so it’s not a direct relationship.
Month 3 – Distribution costs are significantly over budget. I say that unfortunately the Finance team had found we’d underaccrued in previous months.
Month 4 – 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 erroneous system data, duplicate supplier invoices that took time to identify and sort out, and Ops mistakes!
I learnt the hard way that it really pays for the Finance Director, and the Finance team, to have a detailed knowledge of how the numbers come together, and to identify and control risks of errors.
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?
Investigating and fixing accounting anomalies is a priority. Dig, dig, and dig further, into strange numbers until you 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.
Another thing I used to find myself saying a lot, even in month 2 of a new financial year was:
“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 I was stuck with the same explanation, because the budget was always the same budget with the same outdated or incorrect assumptions.
What a waste of time!
Talking about variances to the budget is a bit questionable to start with. It becomes more and more a complete waste of time as the budget gets further and further out of date.
That was 25 years ago. My concern is that there are Finance teams out there that still do this, even though we’ve had great FP&A thinkers talking about Beyond Budgeting etc for decades.
We need to think radically about how we can replace that useless traditional 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. Maybe just stop talking about budget comparisons and keep talking about the things that really matter – growth rates, trends, margins, ratios, KPIs, etc.
After senior managers have spent the majority of their key monthly meeting talking about wooden dollars, arguing over inconsistent data, accounting errors, and a budget that probably isn’t relevant… the thing that quietly drops off the agenda is strategy and business performance.
And that’s not just sad. It’s potentially disastrous. And I feel bad that it’s the CFO and the Finance team that have a hand in perpetuating these unhelpful things.
Our mission as a Finance team should be to “drive business performance”. That’s our definition of effectiveness.
And we drive business performance through holistic, coherent, business performance management. That’s how the Finance team and the CFO can help the business more.
So, if I’ve challenged your thinking on some of the things we regularly get caught up in as a Finance team, perhaps the next question is what should we do instead?
Well, firstly, change your mindset to think of whatever we do in the Finance team in terms of whether or not (and how) it helps the business.
And, secondly, download my free short guide – How Finance Can Drive Business Performance – for a full paradigm shift in the way we need to think to help the business most.
Andy Burrows is a popular writer and speaker on a wide range of topics in Business Finance and Accounting. He provides online training and coaching, through the unique My Finance Coach service from Supercharged Finance.
He was named as one of the top voices on LinkedIn in 2019 in Finance, Accounting and FP&A.
Qualified as a chartered accountant, Andy has worked in many senior Finance roles over the last 20 years, including Finance Director at one stage, across many different sectors in a variety of companies.
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