Learn to notice certain signals and what your finance CPM system is trying to tell you
If you read external financial reports such as SEC FORM-10K and FORM-10Q you probably noticed an interesting phenomenon (or is it the norm?): Bad or negative financial results are communicated by using creative and carefully crafted language, giving plausible explanations and using purposely selected financial comparisons that seem to reduce the effect of the negative results, as communicated just by the numbers.
I was an SEC filer myself years ago and can certainly understand the motivation behind the language and explanations given in these reports. After all, the true numbers are there and the reader always has the opportunity to read, understand and make their own decisions based on the data. The minimum disclosures are also there for everyone to see. Management wants people to hold the security and trust them that the company is on the right track.
I also know well from experience that these filings have been fully reviewed by these companies’ legal departments or by outside counsel and the vast majority of them don’t have any disclosure issues, at least not from a legal standpoint. This is supported by a required framework of internal control over financial reporting, attested to by an external auditor (for annual filings) that ensure that financial statements and disclosures are free from material errors.
I interviewed many top executives in companies that are SEC filers and in privately held companies that are required to provide financial statements and other reports to various users of these statements. Most seem to have difficulty admitting that their companies have not delivered the expected results; after all, the disclosures and explanations to filed financial statements and specific schedules do not show the results as being too negative; these, in fact, may look quite encouraging when someone outside the company bothers to read and understand the details conveyed in these filings.
Are these managers (CEO, CFO) in denial? Do they truly believe that their companies are doing just fine? Or maybe they don’t have the real picture surrounding their organizations’ financial well-being and especially their companies’ future financial outlook. This can be a serious problem because not knowing where the organization is headed financially and well in advance implies that certain signals will be ignored, decisions will not be based on solid data and mistakes are likely to occur.
Can finance be blamed for this? After all, they are the function that provides senior management with the data needed to make timely and informed decisions. As it turns out, finance, always pressured to deliver results, sometimes under unrealistic deadlines, and almost always understaffed, works with available tools, common methods and techniques. Their tools are not always state of the art and there is very little time for them to conduct research to see what new solutions are available to companies their size; so they are usually left to work with whatever tools and methods the company possesses and change is not something they look forward to.
However, this does not have to be that way. There are finance solutions (the names CPM, EPM, Planning / Budgeting plus Analytics are used interchangably) that are designed to make life easier in finance, and ultimately provide upper management with the data they need, when they need it.
One of the most pressing changes required is for companies to budget and periodically reforecast their balance sheets. The software must be able to do this using posted transactions driven by the budget and not a crude approximation via using some modeled formulas or global assumptions as some of the present day solutions are designed to do. These balance sheets are far from complete and accurate and may actually mislead their users. Only a general ledger based system incorporated into the CMP solution (totally independent but linked to the actual ERP GL) is going to be an acceptable solution to this challenge. Fortunately, this technology is available now.
This is going to be a paradigm shift for many finance organizations, but those that already embraced it don’t ever look back. I believe many more organizations are going to follow this trend in the next few years.