Moving from the Past to the Present
December 12, 2014
Backward-looking:
I once worked with a bunch of accountants who only cared about what happened to the Company last month. They never knew what the next month would bring. Like kids waiting to open presents, they were surprised by the accounting results every month.
Not that there is anything wrong with that; the department was delivering exactly what management wanted. Consequently, this accounting group was stuck in Stage 1 on the continuum of a good financial reporting package: Reliable Historical Financials.
At another company, a very capable Controller reported to me. He knew exactly how much each profit center should earn on a monthly basis. He knew what the revenue should be, given the activity level. He knew what expenses should be based on the standard costs. He used his detailed knowledge of the business as a basis for follow-up to determine why monthly results lagged or outperformed.
He would determine the qualitative and quantitative drivers of that month’s results and report variances to me before I had time to ask for them. He might not have known what to call it, but he had established an informal Financial Planning & Analysis (FP&A) process, which is Stage 2 on the continuum.
Stages 1 and 2 form the foundation for any good financial reporting process. Like learning to crawl before you walk, and learning to walk before you run, they are also the necessary precedents to Stage 3: Dynamic Forecasting.
What happened?
Accounting systems are usually designed to provide reliable backward-looking financial results. The people, processes and systems are all oriented toward the past and are focused on answering the question, “What happened last month?”
Some companies close their books in 5 business days or less, which is a reasonable timeframe. They are able to quickly provide “flash” numbers to management. These accounting groups spend the rest of the month determining and explaining the variances to budget.
This perspective is perfect for investors and lenders who want to know how the company actually performed. The problem it presents to operations and the senior management team is that the information is already stale.
For the people whose necks are on the line to deliver growth and operational excellence, real-time information is needed so they can change this month’s results before they become history. In order to deliver predictive results—while performance can still be changed—a different mindset and special tools are required.
Your Company is getting the results it deserves. Having access to those results earlier in the month won’t change anything unless management is committed to taking meaningful action based on what it sees.
What’s happening right now
Good dynamic forecasting gets the interim results in the hands of decision makers while there is still time to influence the outcome. Think of a scoreboard, which shows the score and the time remaining in a game. With a good accounting and operational “scoreboard,” management can take action to affect monthly results before month end.
So, “How do we develop one of these scoreboards?” you may ask. First, adjust your mindset. Your Company is getting the results it deserves. Having access to those results earlier in the month won’t change anything unless management is committed to taking meaningful action based on what it sees.
Secondly, if you’ve developed a dependable FP&A process and you know what your Key Performance Indicators (KPIs) are, then you already know what “moves the needle” when it comes to your Company’s financial performance. Management has control over some of those key drivers of performance. Examples include sales promotions and discretionary expenditures—anything that affects near-term results. Those drivers are the ones that should be tracked on an intra-month basis.
Next, you should develop the tools and processes to collect and report these drivers during the month. Some interim information can be easily extracted from your ERP system or from workforce automation software. On the other hand, you might have to schedule periodic review meetings to identify, collect and assess any key information that is not readily available from the software systems.
The final step is to share the information with your management team. Reporting can range from an informal meeting to a formal report. However you report the information, its context needs to be clearly understood by the decision makers. Most of your efforts should be directed at producing substantive, actionable information. Be wary of placing too much emphasis on the format/presentation of the information. After all, it’s intended only for internal consumption.
Pulling levers
After just a few months, you should start to see results. Management will learn what to look for. And employees will anticipate what actions are expected of them to bring results back into line.
Another benefit of the dynamic forecasting approach is the ability to speak intelligently about how the month is shaping up. Being able to provide general earnings guidance to key stakeholders ahead of final results should garner their respect.
It’s time for financial reporting and accounting to evolve. Backward-looking, historical financials serve an important purpose; however, operations and senior management have different needs than the other stakeholders. Putting actionable information into their hands will help everyone achieve success.